China Watch Blog has learnt that the United Nations economic think tank UNCTAD said in its annual report that the pursuit of austerity measures and deficit cuts in the US and Europe to please global financial markets is pushing the world economy toward disaster in a misguided attempt.
The report, entitled “Post-crisis policy challenges in the world economy,” savaged U.S. and European economic policies and called for wage increases, stricter regulation of financial markets — including a return to a system of managed exchange rates — and a conscious break with market-led thinking.
“The message here is very pragmatic: we need to reverse our course quickly,” said UNCTAD Secretary General Supachai Panitchpakdi.
Supachai, a former head of the World Trade Organization, said the policy response to the crisis, with an emphasis on fiscal tightening, was misconceived and inept.
The report’s lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario.
The current policies were a disaster, said Flassbeck, head of the globalization and development strategies division at the U.N. Conference on Trade and Development, and a former deputy finance minister in Germany.
“If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession,” he said.
“Unemployment depends very much on demand. And if you have no demand then you need government to step in with a huge program for stimulating the economy. This was the U.S. scenario in the past. Now it’s worse because wages are rising less than in the past so you’re going to need a bigger stimulus program.”
The recovery from the financial crisis was not only jobless, which was to be expected, but it was also “wageless,” he said, with Americans, Japanese and Europeans — 70 percent of the world economy — expecting their incomes to staga In its last report a year ago, UNCTAD said a premature removal of stimulus policies might cause a deflationary spiral with attendant slumps in growth and employment around the world.
“Let’s not fool ourselves. This is a realistic scenario for the whole developed world, if we do not understand the lessons now, and really quickly, because we do not have other instruments any more,” Flassbeck told a news conference to launch this year’s report.
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