More austerity won't solve European crisis

A new UN report has warned that the fiscal austerity policies pursued by the EU are fuelling a global economic downturn.

Carlota Cortes

THE increasingly precarious financial situation in Europe remains the biggest threat to the world economy, warns a recent UN report.

The World Economic Situation and Prospects (WESP) 2012 mid-year update report released on 7 June focuses on the need to avoid austerity measures and promote growth and job creation.

Rob Vos, director of the Development Policy and Analysis Division of the UN Department of Economic and Social Affairs, told Inter Press Service (IPS), 'The debt problems and financial sector fragility in Europe, but also in the United States, continue to be a source of "de-leveraging" whereby businesses, households and banks are trying to restore their balance sheets, but this is holding back consumption and investment demand as well as normal credit flows.'

Vos told reporters that Europe is struggling with a 'vicious circle' based on high unemployment, banks' exposure to sovereign debts and fiscal austerity. 'The situation is very fragile and we could fairly easily fall into a trap,' he said.

On 9 June, Spain accepted a $125 billion bailout from the European Union to rescue the failed banking system. It is the fourth country in Europe to accept emergency assistance, after Portugal, Greece and Ireland. In March, Spain's unemployment rate was a whopping 24.1%.

However, Europe is not the only region facing these challenges. Although there has been some economic improvement in the US, the world's biggest economy, the unemployment rate remains over 8%, according to the report.

'Developing countries are already being affected through slower trade and more volatile capital and commodity markets,' Vos told IPS.

The 48 least developed countries (LDCs) grew almost 2 percentage points less than originally projected in the WESP report of January 2012, making the growth rate 4.1%.

Emerging nations are affected by the weakening of international trade not only from developed countries but also among developing countries.

'World trade growth already started slowing in 2011 and this slowdown has continued this year. Manufacturing production in China is already showing signs of stagnation over the past few months and this is also bringing trade among developing countries to a halt,' Vos said.

To all of this is added uncertainty in markets and political instability in areas such as the Middle East, which creates a risky world economic situation.

The report concludes that the current policies chosen by the developed countries, especially Europe, are heading in the 'wrong direction'. The fiscal austerity programmes implemented in several European countries are ineffective to help the economy emerge from crisis, it said.

Jomo Kwame Sundaram, UN assistant secretary-general of the Department of Economic and Social Affairs, told reporters on 7 June, 'There is a strong recognition all over the world that fiscal austerity pursued by many governments has been the main cause for the protracted economic downturn.'

The updated report recommends avoiding fiscal austerity measures and encourages policies that help to create direct jobs and promote green growth. - IPS

*Third World Resurgence No. 261, May 2012, p 19