ONE of world’s most vocal economists blames the critical state of the global economy on a failure to learn from past mistakes.
Former US Federal Reserve chairman Alan Greenspan criticises bail-out methods used to address the European debt crisis.
“You do not solve excess deficits by funding them. The long-standing culture of intra-Eurozone lending from the north to south has not changed,” he told a recent Australia-Israel Chamber of Commerce
“Saving rates are much higher in northern Europe while debt in Greece is about 120 per cent of its gross domestic product – the highest in the European Union (EU). It is hard to resolve such imbalances until there are significant changes.”
Greenspan warns climbing debt will steer the global economy into a new credit crunch unless EU member states take action.
“International Monetary Fund studies show developed countries tend to resolve crises by raising taxes, which has a negative effect on economic growth. However, cutting spending has a lesser adverse effect,” he says.
“It is possible to reduce costs with a permanent merger between governments or eliminating the euro currency altogether. Political union is the least bad option.”
However, Greenspan describes downturns as inevitable in cyclical market economies.
“In 2008, we had an international lockdown of the stock market, money, mutual funds and global trade credits. We have not experienced such a breakdown of financial institutions since 1907. The global financial crisis was the worst the US had ever faced," he says.
“However, unless you change human nature, this will continue to happen when dealing with a market economy.”
He warns Chinese currency revaluation and political pressures will impact on Australia’s resources boom, predicting a high Chinese renminbi (RMB) will intensify economic contraction and political unrest.
“China is being pressured to allow the RMB to rise, but the Communist leadership fears it will bring significant contraction in job creation,” he says.
“The allure of party ideology is long gone, leaving the leadership with only prosperity to offer the people. Unemployment often creates political instability.”
Such developments would reduce demand for iron ore, forcing producers to sell at more competitive prices. Greenspan believes Australia could follow the example of Norway, which established a sovereign wealth fund (SWF).
“The danger lies in how there is no way to sterilise adverse effects such as rising interest rates. Norway successfully avoided this scenario despite continued oil production in the North Sea by channelling proceeds into a SWF,” he says.
Proceeds from SWFs can be used to fund better health services for the ageing population, natural disaster-proofing, Indigenous Australian initiatives and offsetting the new carbon tax.