Make a Virtue of Necessity

How to use the world economic crisis for solutions that point the way ahead


January 6, 2009

Whereas globalisation during the past 20 years has been a powerful engine of growth, we now experience the downside of the worldwide interlacing of the markets: a global recession. In Europe, North America and Japan - still the centres of world economy - economic output shrinks and in the new booming economies of Asia and Latin America at least the growth rates are shrinking. Europe's economy is by no means separated from the US-economy. This became clear already during the financial crisis that spread quickly from Wall Street to the European banking system. Also China needs the support of the world economy since its growth has been mainly driven by exports to the USA and its gigantic trade surplus has been invested in US government bonds. The same applies for the Indian software industry and the countries depending upon the export of resources - their incomes dropped to rock bottom quickly.

Since mutual dependence now involves the entire world economy, it will be decisive that the main actors launch a concerted action. Without including China, India, Brazil and other emergent nations in an agreed crisis management the danger of even severer problems will grow. Already now it is obvious how protectionist and multilateral strategies for coping with the crisis are competing. How will China react if the USA cause a Dollar-inflation (or at least accept it) for providing fresh money for the economic cycle, making their exports cheaper and - just by the way - devalue their foreign debts? A devaluation race of Dollar and Yuan would be as dangerous as the creation of protective fences around the traditional industries in Europe and the USA.

Cooperative Crisis Management

Meanwhile its common sense that a major conclusion to be drawn from the economic and political disaster of the world economic crisis of 1929 is to counteract depression with lower interest rates and an expansive budgetary policy. But the second main lesson to be learned is that all depends upon the creation of a cooperative crisis management. A disastrous competition among national states to overcome the crisis at the expense of all other states must be prevented. The UN-institutions in their current state are not very suitable for such a task. World Bank and International Monetary Fund are indispensable elements of a global anti-crisis strategy - yet, they suffer from deficits with respect to legitimacy and operation. This makes new forms of "Club-governance" like the G 20 more important. They promote political coordination among the involved actors and facilitate joint action.

However, it is still the governmental institutions of the nation states that provide the basis for international networking. This applies even for the internal structures of the European Union. Here, too, the national governments bear primary responsibility for actions and it is the national governments that coordinate their anti-crisis policy more or less efficiently. They acted quickly and effectively for stabilising the European banking system. Coordinating an anti-cyclic budgetary and investment policy turns out to be much more difficult. In this case it seems that the differences in the economic structures - e.g. between the UK and Germany - and also the different economic mentalities make it difficult to achieve a concerted action.

Yet, since it is a matter of fact that the markets are interdependent, there is no rational alternative for an enhanced transnational coordination of monetary and trade-cycle policy. What is currently required is not a withdrawal from globalisation but to enhance political cooperation so that it reaches the same level as that of economic interaction. The EU would be rather short-sighted if it would now go back from the degree of coordination it has reached with its Stability Pact to a national race for expanded budget deficits.

Making a virtue of necessity means to use the crisis for implementing solutions that point the way ahead. In Europe and the USA, in China and Latin America governments are launching gigantic trade-cycle programmes. The new US-administration is preparing a package of 700-800 billion dollars - financed by loans - for the purpose of preventing a core meltdown of the US-economy. Obama has announced public investments for creating (or maintaining) two or three million jobs. In China the provincial governments have more than doubled the 470 billion dollar trade-cycle programme of the central government. There is hardly any disagreement about the necessity of anti-cyclic measures - however, their extent and especially their orientation are still disputed.

Impetus for a Green Industrial Revolution

The range of measures that have been considered or even approved includes the reduction of taxes and levies, the increase of social benefits, the distribution of vouchers for consumption or the provision of a bonus payment to all citizens. At the same time governments provide financial support for specific industries - mainly the automotive industry -, infrastructure programmes and more investments into education and science. Which criteria should be used for finding a way in this maze of sometimes imaginative and always expensive proposals?

The rule of thumb should be: if a frightening public debt is necessary for stopping the downward spiral of world economy, it must pave the way for sustainable growth. I use this term in its economic, social and ecological meaning. State programmes for overcoming the crisis must enhance the sustainability of economy and society. This is also an issue of justice among the generations. If the state debt is now increased for buffering the recession, this must not reduce the opportunities for future generations. The decisive criterion must be which measures will be effective quickly and at the same time yield the highest sustainable profit. It is absolutely no use to get into debt for creating only a short flare-up of consumption.

By good reasons the German constitution states that debts must be made only in connection with public investments that create added value for the time when the debt must be paid. If it is correct that currently three essential challenges are to keep the climate change to tolerable levels, to maintain the basic resources for a quickly growing world population and simultaneously to counteract the shrinking of the population in Europe, the programmes that are being launched now must be able to solve these tasks. Loans for simply preserving the status quo are a waste of money.

What we need is the allotment of finance to the overdue restructuring of economy and society. We must use the crisis for making our educational system fairer and more efficient and for creating the foundations for a green industrial revolution. Investments into education and science as well as efficient use of resources, renewable energies and environmentally friendly technologies are the dictates of the moment. If the European Union under pressure of the economic crisis should water down the targets of its climate policy, it would fail in tackling the main challenge - using the hundreds of billions of euros that Europe currently mobilises for trade-cycle programmes for structural investments.

For the automotive industry this means: no payment subsidies for just maintaining production lines that are not sustainable - neither from the ecological nor from the economic point of view. If the state has to help companies like Opel to survive, the state must link this help with demands that aim at converting automotive industry, e.g. reduction of vehicle weight and environmentally friendly drives with drastically reduced output of pollutants.

The opportunities for a great jump ahead are lying in the street:

  • a major subsidy programme for improving heat insulation of old buildings and for the installation of energy-efficient heating systems;
  • improved opportunities for depreciations for investments into environmentally friendly processes and technologies;
  • provision of venture capital and state guarantees for founding innovative new companies;
  • enhancing the federal and state research and development programmes;
  • developing an efficient European power grid that allows for combining wind energy from the coasts with solar energy from the south and biomass-power from the vast agricultural areas in central Eastern Europe;
  • higher federal subsidies for modernising public urban and regional transport;
  • exempting rail transport from value added tax payments;
  • developing and extending the entire European railway system so that more goods transport is switched from road to rail;
  • extending the capacities for teaching and research at the institutes of higher education.

Parallel with the above we have to renew the foundations of our educational system:

  • extension of the number of child-care places for children aged one to three years;
  • more finance for creating all-day schools;
  • more staff at schools in areas with major social tension.

It has been stated repeatedly that the current crisis has reached a dimension that occurs only one in every generation. That may be true. At the same time the extraordinary financial efforts that are made now open up unique opportunities for paving roads into the future. If we make good use of them, the crisis may give rise to something positive.