Crisis Response in Developed Countries – The Right Way To Do It

Since the global financial crisis hit in 2007, most developed countries have tried to put in place measures to overcome its effects. From ignoring its existence to stating that there is nothing to worry about, governments have lagged in pushing forward the appropriate measures, mainly for reasons of popularity (nobody wants to be the “bad guy”).

The crisis hit Europe hard in 2008-2009 (immediately after hitting the USA), with national economies on the  verge of bankruptcy (Iceland went bankrupt in 2008) and hundreds of thousands of people losing their jobs in days.

The crisis response models that were imposed on the European Union Member States (EU 27), many said that they came from the so-called “Troika” (EU/ECB/IMF), were actually made worse by the national politicians’ reluctance to implementing them (not because they didn’t want, but because they didn’t want to lose votes) and made “near fatal” by a lack of thinking of alternatives (to austerity).

What could have been done better?

There were three main measures that all countries took (among others):

– Support was given to the financial sector (Bail outs for banks);

– Public sector jobs and salaries were cut down in order to reduce deficit (The public cut-off);

– State-owned companies were privatized in order to raise capital to fund investments (The sell-off);

As even the IMF (through Christine Lagarde) and the European Commission (through Jose Manuel Durao Barroso) recently admitted, austerity measures didn’t work and “perhaps we should have tried another approach“. But it seems that the “troika” considers that once we have started going down a path (even if it’s wrong and they guided us that way) there’s no way back or no chance of reaching a crossroad to change the road we are treading on.

Instead of austerity, here is what the governments should have proposed:

– Bail outs for banks -> Banks should have merged in order to remain competitive (Independence of the financial system from political influence);

– The public cut-off -> Resources should have been reallocated, not terminated, as a mean to make the public sector more cost efficient (make job descriptions efficient, re-route employees to other institutions or regions that lack people with those skills etc.);

– The sell-off -> Keep all your assets in a time of crisis (when their value depreciates) and try (perhaps with the resources you need to reallocate) to make them more valuable and efficient.

What should governments do now that they have accepted austerity?

Because they already accepted to go down the austerity path and employees have been fired, salaries have been lowered, companies have been sold, governments cannot back down. A 180⁰ turn would deepen the crisis at this time.

From my perspective, as a citizen of the European Union, governments have several options:

– With an unemployment rate of 10.5% in 2012 (21% youth unemployment), a first concern must be reducing the number of jobless (not only by adjusting the calculation method). Governments should try the following: apprenticeship programmes, internships, renewal of curricula (from primary school to higher education), 0% taxation for start-ups in their first year of activity, reducing bureaucracy for starting a company or even allow the creation of new public-private companies in order to reduce unemployment and increase the GDP;

– Research, innovation, education: governments should invest in public research centres and research-oriented universities; they should also expand fiscal facilities awarded to private innovation companies (especially in sectors such as ICT, biotechnology, renewable energies etc.) and should promote linkages between the job market the education system. A responsive educational system will create employees that are quickly integrated onto the job market and who create a greater added value;

– Infrastructure vs. governance: governments should invest in better infrastructure. But when developing an investment plan for infrastructure, the needs and demands should be weighed carefully. For example, Romania has a huge agricultural potential, but imports 70% of its food because agriculture isn’t supported (lack of infrastructure, lack of fiscal facilities, lack of..pretty much everything). But Romania has also a huge amount of services based industries (especially linked to ICT). Should the infrastructure development plan be linked to the demands of the agricultural sector or that of the services sector? A short-term plan would say that the best investment is in the ICT infrastructure, followed by a medium and long-term investment in agricultural development.

As an overall advice, I would say that governments need to find creative solutions to the crisis. And the best way of doing this is simply by asking.