The problems are simple the solutions not
After all the economic analysis I read lately about the global economy, I would like to simplify the European economy problems and its solutions that exist, but need political courage to implement them.
The most significant problems are;
1. Youth unemployment mainly in Spain, Portugal and Greece, but also in other European countries;
This structural unemployment is not only damaging to the unemployed youth but also to the economy, since the potentially most productive part of the labour force is excluded from employment. It is not accident that the biggest debtors have also the biggest problems with the youth employment.
The solution is to abolish all the legal and institutional obstacles that were created during the years of plenty. It needs to fight the unions? Yes that’s why it needs political courage.
2.Unsustainable current account deficit (the deficit that had to be covered by loans) created within years unbearable debt and is still creating them. If you look at the next chart;
The trends since 2008 are positive, yet still a lot has to be done to balance the current account between the borrowers and the debtors. Unfortunately there is no other way to solve the current account deficit, and the foreign debts, but by creating current account surplus, and it can be done only by reducing imports or by increasing exports (alternatively it can be solved by creating attractive investment opportunities, but it comes only with perspectively competitive economy).
Public and Private consumption as % of GDP
In USA, the private consumption is about 71% of the GDP and adding to it the public consumption and almost no positive savings was left in the last years. Interestingly even if not surprisingly, the general consumption (Private and Public) is the highest in Greece and Portugal, while relatively low in Germany, reducing imports in the countries with high deficit can be done mainly by reducing the consumption there. But this means reduction of cumulative demand and with it comes necessarily the negative economic growth. This means the potential of creating economic growth with additional consumption can’t work, since the countries with big foreign debt and current account deficit like USA, Greece, Portugal are already consuming to much.
Conclusion? If to solve the big foreign debt and current account deficit, without to create huge deflation and unemployment it has to be by increasing the export to countries with low foreign debts. So the solution is to create demand for consumers goods and investments in the countries with low debt which are the Asian and Oil exporting countries;
Current Account Balance — G–20 Countries (USD)
3. The obvious solution is to create demand in the Asian and the Oil exporting countries. It is again political issue, yet while the Chinese seem to do gradually their share in the demand creation, other Asian countries, namely Japan, S.Korea, etc. have to follow. As to Oil exporting countries, their relatively low population, prevents from them to create significant demand, but they could invest their financial resources in other Muslim countries without oil, with huge population and huge investment needs, like Egypt, Pakistan, Bangladesh, Indonesia, etc. It is also the interest of Saudi Arabia and other oil producing Arab countries, to support economic growth in the new democratic Arab countries, to prevent their political radicalization. Again it is up to the world leaders to explain to the Saudis, that if cleverly done, it could be the very best investment for them.
4. For years the developed countries propaganda was to help the under developed countries. Now the chance had come to turn the unused production capacities of the developed countries and use it for increasing investment and consumption in the less developed countries, that as it happened have also the lowest indebtedness. In principle what is needed is to transfer liabilities and subsequently assets from the rich but heavily indebted Europeans and USA to the poor but not indebted Asian countries.
5. The main problem to this scenario can come out of limited row materials and production capacity. Since in indebted European countries and USA the consumption will have to decrease, enough production capacity will be released, yet if economic growth has to excess the existing production capacities, row materials namely energy recourses will be needed for economic price. The latest new natural Gas field discoveries, seems came in the right moment.
6. The last but not the least, investments in scientific and technological research and in economic development has to focus on alternative solution for energy, and solving the environmental problems. This needs to channel the finances and the management effort of the most talented into the sciences and technology and not to finances, law or marketing. Direct involvement of governments in supporting this trend would be very welcomed.
Since the economic crisis is global, its solution has to be global, and again I have to speak about political leadership, who has to be committed to long run tasks and not only to the short term once.