Global Policy Forum

We Can't Grow Ourselves Out of Debt, No Matter What the Federal Reserve Does (September 3, 2012)

What does it mean for countries to be broke? Why does it keep happening? Who should bear the cost? Jubilee Australia’s new report “Alternatives to Debtors' Prison: Developing a Framework for International Insolvency” examines the history and key patterns of international insolvency. It denounces the Bretton Woods Institutions for their history of poor policy advice and financial mismanagement, which should clearly bar them from setting lending standards. The report proposes to introduce an International Arbitration Mechanism that would prioritize governments’ obligations to meet the essential needs of their citizens, introduce a modicum of accountability to financing decisions, and elevate debt renegotiation decisions to a neutral and legitimate forum. (Jubilee Australia)

Efforts may be underway to regulate the financial industry all over the world, but the estimated 700 financial lobbyists meeting with European Parliamentarians in Brussels around the clock serve as a reminder that really implementing change is a different story. Backed by an estimated 400 million Euros in funding, the gulf between the financial lobbyists’ influence and the poor understanding of finances of most politicians poses a real threat to democracy. To counter this problem, “Finance Watch,” an organization, backed up by 40 European organizations, including unions, consumer-protection groups and think tanks, was established in Brussels. Its goal is to advance the interests of society as a whole, rather than the financial industry's. (Spiegel Online)

Euro-Zone countries have provided guarantees worth €780bn to the “European Financial Stability Facility” (EFSF). It already appears, however, that the EFSF could be too small. How then, can the reach of the euro backstop fund be maximized? Euro-zone leaders are considering turning the EFSF into a kind of first-loss insurance. Instead of buying sovereign bonds itself, the EFSF would attract private investors to buy indebted Euro-zone countries debts. In return, the fund would insure a certain portion of the investment against losses in the event of a partial insolvency. Such financial tool would buy countries such as Greece more time to repay their debts. It would not, however, free them from following slow and painful austerity programs. (Spiegel Online)

On July 21, 2011, Euro-Zone leaders decided to lower the interest rates of “bail-out” credit-lines granted to Greece, Ireland and Portugal to approximately 3.5%, and provide more flexibility for the European Financial Stability Facility (EFSF). Measures of this kind were long overdue economically, yet precarious politically. In this article, journalist John Palmer outlines his predictions that such measures will lead to “further and deeper European integration”, most notably in terms of fiscal policy. However, such a future is anathema to fiscal conservatives at the EU-level who insist that fiscal policy should remain to be the prerogative and responsibility of national governments. To them, Palmer replies that the costs of not helping countries on the brink of default will outweigh those of doing so – if only to save the Euro. Assistance requires the collective underwriting of newly issued Euro bonds and so makes further integration imminent. (Open Democracy)

Neoliberal economists have claimed that community-orientated economic policies result in protectionism and economic decline. However, governments should recognize policies with a small scale perspective as serious alternatives for sustainable development and protection against future financial instability. Where there are environmental and social benefits in producing on a smaller scale, local trade and food production should get support. (Share the Worlds Resources)

The World Bank chief economist Justin Lin explains why countries should diversify their industries if they want to keep pace with the global economy. Referring to India and China, Lin argues that nurturing industries in line with national advantages such as cheap labor and rich natural resources, developing countries can adjust to post-crisis economy dynamics. Governments' capacity in taking countercyclical measures plays an important role as well. (The Times of India)

Having grown up in severe poverty and dropped out of school in fourth grade, President Luiz Inacio Lula da Silva has made Brazil a success story. Among BRIC nations, Brazil has the highest growth rate, surpassing Russia. Since China has replaced the United States as Brazil's biggest trading partner, the world financial crisis has not seriously affected the Latin American giant. Brazilian banks are strong and stable. The National Development Bank (BNDES) has provided more loans than the World Bank Group. Although some criticize Lula for being a patriarch, Lula believes in government-controlled economies to take early actions in times of financial crisis. (Spiegel)

The world financial crisis has changed the nature of the relationship between China and the US. China has launched the world biggest economic stimulus package and kept the country growing. About two-thirds of China's foreign currency reserves are in dollars and serious fall in the dollar could harm the US economy. China is challenging the US as the Chinese Air Force General Xu Qiliang announced that China plans to become a world power by the mid-21^st century. The Obama administration is keen on starting an age of cooperation with the Chinese. (Spiegel)

Although the global financial crisis hit the developing countries the most, Bangladesh has coped well. Government restrictions on investing in foreign financial assets prevented infection from the US mortgage market. In addition Bangladeshi migrant workers kept sending money home and the Bangladesh export market grew 10 percent in sales of lost-cost knitwear and woven garments. (YaleGlobal)

Economic crisis has not only affected the financial world but also has resulted in rising unemployment in both developed and developing countries. Unemployment has aggravated poverty and hunger, especially for already vulnerable populations. This briefing paper by Friedrich Ebert Stiftung promotes the concept of "social floor" to be implemented in countries with minimal social protection. Social floor helps governments to keep the vulnerable population above the poverty line by providing social security, in cash and kind aid, as well as unemployment payments. This strategy enables governments to cope with current and future economic crises. (Friedrich Ebert Stiftung)