Last week, the French cabinet was dissolved for the second time in just two years. This time, the cabinet resigned amidst much vocalized dissentions concerning the economic policy directions of the state. Contrary to the norm, the criticism came from within the ruling government: the Economy Minister, Arnaud Montebourg, in criticizing the President’s economic stance called the “forced deficit reduction” “an economic aberration because it aggravates unemployment, and a financial absurdity because it makes stabilizing public accounts impossible”. “The whole world is begging us to put an end to these absurd austerity policies which are burying the Euro zone deeper and deeper in recession and which will soon end up with deflation”, he further said.
Its economy, in trying to align itself with expenditure-cutting measures put forward by a German-backed ECB, is still struggling to find its feet.
France, the Eurozone’s second largest economy after Germany, has lingered in recession, with no recovery signs on the horizon. It consecutively recorded zero per cent economic growth for the two most recent quarters. Unemployment in France stands at more than 10 percent – twice as high as in Germany. Its economy, and that of much of the Eurozone is still being bogged down by excessive state welfarism, high state indebtedness, and a scarcity of business investment to propel the private sector. And the blame is all on Francois Hollande.
The country has lost much of its competitiveness, further dispelling away businesses. Some big hindrances to competitiveness include its 35-hour workweek, minimum wage, and the low retirement age. In Italy, the rigid labour market is the concern.
Although Montebourg isn’t totally liberalist in his economic approach, his criticism highlighted some salient points: firstly, the government’s unwillingness to spend was crimping growth; also, the government had failed to institute sweeping reforms that will serve to make the country competitive again. In trying to shore up the economy, the now ousted economy minister attempted to veto any foreign investment if it threatened to worsen the labour situation of the country by shipping jobs away to other countries. GE’s imminent purchase of the ‘nation’s industrial jewel’ Alstom was high-jacked by him in a bid to ensure that the management of the industrial giant didn’t get carted away to GE’s headquarters in the US, thereby leaving France and its workforce at the mercy of Jeff Immelt’s cost-cutting measures. He also secured an agreement from GE that it would not trim the company’s labour force for a number of years, and that GE would maintain the Alstom name, to preserve the dignity of the French giant.
In Germany, the star of the Euro, recent trade data seem to be taking a negative turn as its neighbours, neck deep in debt, can scarcely afford its exports.
In the Eurozone, the SME sector is still struggling to lift off the ground. Though the European Central Bank has crashed rates to the ground to ensure the flow of liquidity to the sector, the move is being checkmated by a fragile and weak banking sector that has refused to lend sufficiently.
The US Federal Reserve, as well as the Bank of Japan have now been struggling with a diminished effectiveness of its monetary policy even as tapering looms. Cheap liquidity, though preventing a full scale meltdown in 2008 has also resulted in major adverse effects. Increasing indebtedness of both households and the governments have ensued. Consumers, in taking advantage of the dirt-cheap liquidity have racked up consumption and piled up debt. In the capital market, waves of cheap Quantitative Easing money have been fuelling asset price bubbles. Last Tuesday, the S&P closed above the 2000 mark for the first time in history. Housing prices have also been on the up again. Asset prices have increasingly been diverging from the underlying asset values. Needless to say, the markets will soon be due for a correction.
The pace of global economic recovery has been very sluggish, and that has been largely the result of mishandling the preceding crises by policy makers of major economies. Evidence is ample that buttresses the fact that there has been a major shift to discretionary-based policies, rather than rules-based policies. The increasing complexity of the situation means that the trend is set to linger some more.
Nigeria still far off from the trend?
As can be learnt from the Euro crises, government deficits can plunge an economy into a negative spiral. When there a huge deficits, government spending will have to be cut. And when government spending is cut, economic growth opportunities will invariably be cut short, leading to first, a stagnation, and then to a recession. The trend reinforces itself. Nigeria narrowly overcame a debt overhang problem in 2005 when it received a debt pardon. Though Nigeria doesn’t currently have a budget deficit problem, measures should be taken to cut dead weights that pose inflationary pressures on government spending. Expenditure heads like subsidies and empowerment programmes will have to be effectively put in check.
There is also the crucial need to shore up tax revenue early enough, as a significant contributor to government revenues. Dwindling oil-related revenues is fast becoming a reality. Energy independence is also becoming a reality for the US, as well as the oversupply of oil. OPEC production figures as at Friday showed that output is at a one-year high. John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, says ‘we’re heading for a definite downtrend in prices if these volumes hold up’
Impediments to the competitiveness of the economy have continued to go largely unaddressed. Progress made has come at a very slow pace. In an era of lean management, only the most competitive places get to receive investment. Overall, there is time for the house to be put in order.
