Massive government spending to support financial institutions in countries including the US, United Kingdom, France, Italy, Spain and Australia will significantly further damage the weakening global economy, especially if, as predicted, China suffers a sharp slowdown this year. Those are not my words but come from an organisation that speaks for the major global corporations.
The World Economic Forum (WEF) is deeply concerned about the prospects for 2009 and beyond – and it shows. Its new report, Global Risks 2009, highlights the interconnectedness of financial, economic, environmental, social and political risks.
The WEF’s real worry is that the political response is inappropriate and too short-term, thereby adding to the long-term consequences of the global economic and financial crisis. There are also warnings that the worsening crisis will have multiple adverse impacts on the environment, food security, health and political stability with dire consequences for the half of the world’s population already living in areas of high water stress.
In a reference to the countless billions thrown at the banking system – another $20 billion was handed over to the Bank of America last night while everyone was asleep – the WEF warns: “It is dangerous to address immediate concerns without remedying the root causes of the problem, or sowing the seeds of new ones whose impact will not be immediate but may be strongly felt at a later date.”
Adding to existing debt, the key to the rescue plans promoted by Gordon Brown and Barack Obama, will intensify the downward spiral, the report says. Global share values will be driven further below the already steep drop-off of more than 50% on average as massive selling floods the markets.
The report dismisses deflation as a “short-term risk” and then forecasts that state pump-priming to try and rescue the global economy can easily lead to rapidly rising prices and adds: “Economic history is littered with periods during which governments reduced their debt burden through inflation.” Are the authors referring to the Weimar Republic in Germany in the early 1920s, whose collapse created conditions for the Nazi Party to flourish? We don’t know.
The WEF’s warnings coincided with a severe deterioration in the credit ratings for Greece only days after it was placed “on watch” following weeks of unrest. In the past week the ratings agency S&P also reviewed ten other high-rated industrialised western countries, warning Ireland, Portugal and Spain that their ratings are under threat too. Thomas Mayer, chief European economist at Deutsche Bank, said: "The downgrade of Greece is a wake-up call to everyone that there is a price to pay for taking on big levels of debt."
Ironically constituted as a non-profit foundation, the WEF is the collective voice of the global corporations with more than 1,000 member companies, typically with a turnover of more than US$5 billion. Its annual meeting in Davos, Switzerland, is designed to set the agenda for the world’s political leaders who revel in the luxury and limelight offered by the glittering event.
The crisis has changed all that and the language of the risk report is intended to convey a deep concern, reinforcing the public face of its headline commitment to “improving the state of the world”. It clearly reflects the concern in the corporate community that short-term actions by governments like New Labour do not address the problem of restoring profitability, which is the sole criterion by which capitalism judges itself.
Two things are implied here: governments are a hindrance rather than a help in this crisis and massive cuts in state spending are required to get capitalism back on its feet. We have been warned.