Dr Kuntoro Mangkusubroto speaks with topic of Breakthroughs in Governance: Ushering in Reform in Indonesia at the USINDO (The United States – Indonesia Society) Open Forum at The Aryaduta, Jakarta

By Erwin Ramedhan
 
In light of the Greek bailout in the first week of May 2010 of  Euro 110 billion or more for the next three years by the European Union and the International Monetary Fund, the Economist’s recent warning (“Curb your enthusiasm” April 22, 2010) now seems too moderate on the pessimistic side, although the British publication did warn of the “dangers both for sluggish Europe and bubbly emerging economies’.
 
Southern Europe is in fact fast approaching a comatose economic condition with Greece leading the way towards economic stagnation and socio-political instability. The EU and IMF bill Greece has to pay for the bailout comes at the highest price. Prime Minister Giorgios Papandreou announced “great sacrifices (to) avoid bankruptcy” consisting of: reducing the budget deficit from 14% to 4% of Gross Domestic Product (Euro 245 billion). The contraction of the Greek economy is expected to reach 4% with drastic salary cuts for civil servants and pensioners, facilitations for company retrenchments of their work force, increases in sales taxes (+ 10% for fuel, alcohol, and tobacco) and property taxes, reductions in public health care, and eventual privatization of utilities and public transport.
 
The price Greece has to pay for the bailout is very steep and is the result of years and years of easy borrowing (and difficult repayment) on abundant money markets, grandiose projects (the Athens Olympics), corruption and tax evasion, as well as national statistics manipulations,   with some help from Wall Street operators. But first and foremost the Greek bailout is now becoming as societal, financial, and economic experiment in how far a relatively developed Western country can go in imposing sacrifices to a population without creating a social and political upheaval or explosion. Briefly said: a “societal experiment” that has never been tried before… Strikes and demonstrations have multiplied in Greece in spite of the moderating influence of trade unions and their support for the PASOK social-democrat government.
 
This experiment pertains to all of the PIGS countries, an unflattering designation referring to Portugal, Italy, Greece, and Spain to which should be added Ireland and Iceland (seeking EU membership) so as to become PIIIGS. PIGS countries had easy financial times (borrow now pay later) and are at present facing economic hardships with the downgrading of Portugal’s and Spain’s debts by Standard and Poors. These two countries now have to pay surging interest rates to borrow money. To overcome their present plight they may have to impose similar sacrifices to Greece. Spain is in a particular predicament with unemployment figures at 20% and the bursting of the bubble in the housing sector. Estimates on the amount needed to overcome the Southern European crisis are at Euro 600 billion and, according to some observers, “now we are talking real money”. Perhaps it is the “real money” for saving the Euro currency and, in the final analysis, for preserving the European Union from economic disintegration through a cascade of sovereign debt defaults by governments. This may explain Berlin’s change of mind, in light of Germany’s repeated refusals in bailing out the Greek economy previously.
 
But ultimately, what applies to the PIGS countries in societal and economic experimentation could also be true for the US and the United Kingdom where authorities also had to channel trillions of dollars of public funds to the financial and banking sector at the expense of  government spending on infrastructure investments, economic stimulants for industrial companies, education, health care, employment creation. In the US in particular some states are practically in bankruptcy while the southern part of the country is facing the catastrophic disaster of the BP oil spill in the Gulf of Mexico after Hurricane Katrina.
 
Hopes are therefore pinned on the “bubbly” economies or the countries least affected by the crisis – the so called emerging market economies. China’s economy is growing at double digit and India is expected  to grow at 9%, while Brazil is projected at 7%. Russia may be lagging but Indonesia, as a member of G20, is anticipating a growth rate at more than 6%.
 
IMF expectations are at 3% growth in the US (with a relatively weaker growth in the real sector compared to the financial), 1% in the Euro zone, and 1.3% in the UK. It may seem too weak for a strong world economic recovery and could explain the reasons behind the beginnings of a strategic repositioning of the world economy. Making cheap money available to stimulate growth in Europe and America has mainly resulted in the flow of that money to emerging market economies.
 
And faster growth in the BRIC + I  (Brazil, Russia, India, China + Indonesia) economies is facing the threat of inflation and bubbles. The government of China has for example taken stern measures to stop the surge in property prices and speculation and thus prevent enormous amounts of bank credits from eventually becoming worthless loans. Moreover, China’s (past) single minded export strategy to America and European countries is now diluted because of their weakened economies. The yuan could strengthen, the giant Chinese domestic might market grow, and exports could be reoriented more towards the markets of the emerging economies. India for her part is attempting to fight inflation by hiking interest rates, without too much success at present.
 
During this latest crisis economists have been wondering whether the crisis was V,U,W, or L shaped. The answer in fact depends on where the question is asked. V or U shaped for many Asian countries, it seems to have a bad W configuration for the US and European countries. The worst is perhaps globally for the industries and their workers where the L shape of the crisis can be seen in the stagnant or rising unemployment figures. And, as conventional economic wisdom has it, employment only improves five years after a crisis is over. This is all the more true when money, and not production, makes money.

The writer is lecturer at President University