The Global Move towards Austerity as a Solution to the Economic Crisis

Because of the global economic crisis, governments around the world are resorting to austerity and fiscal discipline as a means to stave off bankruptcy.

Right from the United States to the Europe and including India, the ruling powers have been advising people that the only way out of the ongoing economic crisis is to tighten one’s belt, curb spending, and live frugally.

The recent address to the nation by the Indian Prime Minister where he stated, “money does not grow on trees” is a perfect example of how governments around the world are resorting to tough measures to raise taxes and increase revenue.

Even in Europe, the governments are proposing budget cuts and increased taxes to beat the global economic crisis. However, the people in all countries are not taking kindly to these measures by their governments and are protesting in full vigor.

The response of the people is not hard to understand. For the past few decades, countries all over the world have been liberal with their largesse to their citizens and have got them used to the easy life by showering them with subsidies, cheap credit, finance led boom that produced an illusion of growth, and finally, globalization that produced aspirations to western style of living among the people.

These factors taken together created a “perfect storm” of humungous proportions that resulted in the implosion of the global economic crisis brought about due to cheap credit and financial illusion rather than actual growth.

As any economist would tell you, unless there is real growth in terms of manufacturing and agriculture output and until the “real economy” grows and not speculation led growth, the consequences are going to be painful.

In addition, this is what is happening in the present scenario where the chickens are coming home to roost with the speculative frenzy exploding into pieces and the people being forced to pay the price.

Most of this could have been avoidable if in the heydays of the boom, governments had taken the right steps to ensure growth in the real economy and not speculative growth alone. Though China and India did indeed take steps to ensure that growth in the core sectors takes place, they were not immune to the global headwinds of speculative finance and hence the flows of hot money into these economies made them vulnerable to finance led booms.

Further, given the nature of the political economy in these countries (especially India), populist policies that showered subsidies on people were the norm. Hence, the combination of easy money and preferred treatment proved to the cause of the present disaster where India is standing on the edge of the “fiscal precipice” as the just released Kelkar Panel report states.

The solution to this mess can be through austerity and an emphasis on real growth in the core sectors. For this to happen governments have to take unpopular decisions and the people have to cooperate accordingly. Whether this is actualized in practice remains to be seen in the coming years. What is clear is that the writing on the wall is there for all to see and only a blind person would be unable to read it correctly.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.