T N Ninan: Facing the consequences

The European Union has done a fix on its sovereign debt crisis, and the United States has brokered a deal with itself on its debt crisis. Result: the stock markets are crashing, gold has soared, and the Dow Jones Industrial Average is lower than it was when Lehman Brothers went down nearly three years ago. Conclusion: no one believes that either the European Union or the United States has fixed its problems. The United States seems to be headed for a double-dip recession, and house prices are lower than they were nine years ago. But the government finds no weapons left in its armoury because too much public debt has already been piled up, and the agreement with Congress is to (of all things) cut spending, ie the opposite of a fiscal stimulus. Talk of pro-cyclical policy making a business cycle worse.

Rewind to 2003. US public debt at the time was $6.4 trillion, or about 60 per cent of its GDP in that year. By 2008, public debt had climbed to $10 trillion, and now it is $14.2 trillion, or about 98 per cent of current GDP. Such trends have complex causes, but two events occurred between 2003 and now. One was the Iraq war, which, Joseph Stiglitz and a co-author reckon, has cost the United States some $3 trillion. Not all of that shows up in public debt, but a good deal does. Then, after the financial sector was allowed to run away with the real economy and cause the collapse of Lehman Brothers in 2008, the desperate effort to prevent a second Great Depression contributed to the addition of $4 trillion of public debt in the last three years. Among the large economies, the US now ranks third on the debt-to-GDP ratio; only Japan and Italy are worse off. The short point: decisions have consequences. What you do today could come back to haunt you years down the road.

Ditto with the European Union. Some wise voices warned in 1999 that coupling very different economies to a common currency without a parallel mechanism for fiscal transfers was a recipe for disaster. Europe’s leaders went ahead regardless, and now they can’t go forward or back. A Greece tied to the euro is a non-viable economy, and the deal on its debt does not change that. At some point it will have to abandon the euro, because the rest of Europe has no alternative solutions to offer. The anticipatory tremors are already being felt in the much larger economies of Spain and Italy.

All of this will hasten the re-ordering of global power. China has its problems, like the housing bubble, but its global ascendancy is unquestioned. Indeed, it will gain momentum because the United States and the European Union will struggle for many years to cope with the problems caused by decisions of the last decade. These are the consequences of human actions. It was not pre-ordained that the United States would become a declining power, or that the European Union would be caught in a hopeless tangle. And just as China’s rise is not pre-ordained, India is not guaranteed the actualisation of its potential, as is becoming increasingly clear. In the latest instance, the government’s extended policy paralysis has forced the deputy chairman of the Planning Commission to concede that nine per cent growth in the 12th Plan, which starts in April, is no longer feasible. Only four months ago, India’s prime minister had set a target of nine to 9.5 per cent. Now if Parliament is reckless in legislating unaffordable entitlement programmes, there will be even more consequences to face up to in the coming years. We live in dangerous times.