Surviving five years of economic uncertainty

Last week marked the fifth anniversary of the onset of the credit crunch that has crippled most economies in the western world. On August 9, 2007, the European Central Bank and the Federal Reserve reacted to the banks’ reluctance to lend money to each other by injecting $90 billion into financial markets.

The capital expenditure priorities are arguably not what they should be- John Cassar White

While this measure avoided the immediate collapse of the financial system, no one can really claim that western world economies are now back to normal. Several banks in most EU countries have had to be nationalised as they found themselves in great difficulties following a downgrade of the loan books. Others will have to be rescued in the future. Adam Applegarth, the boss of Northern Rock that at the time was facing a run by depositors, called August 9 “the day the world changed”. Many are now questioning whether western economies will ever return to the normality they were used to until 2007.

Economic uncertainty has been the hallmark of the last five years, even if politicians have tried their best to talk their economies out of the present slump. The former British prime minister Gordon Brown in 2007 was quick to insist that the UK economy was “as good a shape as could be to weather the storm”. Britain today is in one of its longest recessionary periods and the UK economy is currently about four per cent smaller than it was in the third quarter of 2007.

Share prices have disappointingly not recovered to their former levels. The FTSE 100 today is still eight per cent lower than its close on August 9, 2007. This fall in value was experienced despite multiple attempts by Central Banks resorting to printing money (quantitative easing), several interest rate cuts and direct lending by the ECB to banks to provide liquidity.

What is more depressing is that no serious economic analyst today believes that economic normality is about to return anytime soon. Countries like Ireland, Portugal, Cyprus, Greece, Spain and Italy are still in serious trouble. Some had to be supported by EU taxpayers’ (mainly German) money to avoid bankruptcy. Others may need similar support very soon. Total debt – meaning government, household, financial and corporate debt – is higher today than it was in 2007.

Governments are caught up in a conundrum: they need to take measures to reduce their national debts while they need to stimulate economic growth that entails more borrowing for infrastructural projects. Because debts cannot realistically be reduced in the short term, it may take a decade or two to really start hoping for a return of normality. In the meantime, millions of workers, especially young people, remain without a job. Governments are running out of ammunition. There is obviously no magic bullet. Interest rates cannot be reduced much further. The restructuring of the EU economies to make them more competitive will take several years to bring about the desired results, especially if the price of oil continues to be stubbornly high.

At the local level we still face formidable challenges. The financing of our health, education and social services systems is still not sustainable. Our educational achievement levels, despite improvements, remain disappointingly low. Services provided by public corporations are not up to scratch and, as the European Commission and rating agencies have remarked, the high cost of these services may be hindering our competitiveness.

We pride ourselves with having one of the lowest unemployment rates in the EU, but mostly ignore the consequences of having the lowest employment rate in Europe – a serious handicap for economic growth that is so badly needed if we are to converge with the living standards of the best EU states.

Our infrastructure projects are often the balancing item in the government’s spending plans, rather than the planned economic enablers that will speed up economic growth. The capital expenditure priorities are arguably not what they should be. Our national debt keeps growing and its servicing is becoming a matter of great concern as it is siphoning off valuable resources at a time when we need to finance higher bills for public services like education and health.

We are undoubtedly sailing in uncharted waters. Despite reassuring comments made by our political leaders, and even the leaders of EU institutions like the ECB, no one really knows how long this slump will last.

In the meantime, most people are changing their styles of life to factor in lasting economic uncertainty.

johncassarwhite@yahoo.com