The credit crisis that swept through the banking world in 2008 may have started on American shores, but it quickly found its way to all corners of the globe, sending tremors through economies that thought themselves impervious to shock.
We know the U.S. wasn’t. Neither was Europe. In truth, they hadn’t been shockproof for some time, if ever, but we continued showing an impressive ability to convince ourselves otherwise in the absence of a crisis to correct us.
In 2010, the need to deal with flagging economies took on new urgency. What multiple governments have learned in the past two years is that a crisis can arrive suddenly, and when it does, it can be extremely difficult to overcome. There were repeated attempts to prevent Europe’s most advanced nations from suffering severe slowdowns, as those countries borrowed against the future and bet that time was an ally, but in 2010 the bill came due.
Overburdened pension plans, difficulties making timely debt payments, and struggles to keep supplying long-standing services to the people forced leaders and legislatures from the most developed, Western-style capitalist economies into serious re-evaluations of their spending habits.
Ultimately, the situation boiled down to one word: austerity.
A serious description for serious times. Spain, Greece, England, Germany, and France were among the nations imposing new measures to keep their budgets in check through austerity programs. Sometimes, though, those responses brought an entirely new set of problems.
In Greece in May, protesters took to the streets after the government said it would cut spending to address a debt crisis. And in France in October the masses marched after a proposal to raise the retirement age to 62 from 60.
Seeing live televised footage of revolt on display is troubling, to say the least, as it inevitably leads to the question of whether modern, supposedly civilized societies could truly see their economies collapse and their governments crumble. However unlikely that outcome may be, what comes to mind when you see rioting, bonfires, and looting? Remember, we’re not talking about the 18th century: This is the modern day.
If Europe didn’t already have enough to worry about, in November Ireland made its own austerity proposal, after its financial system teetered on the edge of collapse and threatened to destabilize the European Union.
Fortunately, the U.S. hasn’t gotten to the point of violent protests over proposed government cutbacks. But it has certainly seen its share of anger, though in contrast to Europe, not because of austerity but the lack of it. Hence the inroads made by the tea party in the midterm elections.
Axel Merk, president of Merk Mutual Funds, is on the side of those who believe that Europe’s approach to rein in government expenditures is the proper one, while Washington is failing to take the needed steps.
“In the Euro zone there’s a sense of urgency and problems are being addressed. We see austerity measures being implemented … and market forces imposing discipline,” he says. “In the U.S. we have quantitative easing; we bail everybody out, and we don’t engage in any reform.”
A new Congress might finally settle on a direction. But until then, the debate will rage on about what to do next: spend or pull back.
“We can’t afford not to have a stimulus,” says Columbia Professor and Nobel Prize winner Joseph Stiglitz. “You have to spend it well, [but] the right kind actually improves our national balance sheet.”
Not so fast, says Peter Orszag, former White House budget director. “It’s unlikely additional stimulus will reduce the deficit,” he says. “It’s not free.”