Thursday, July 2, 2015

Austerity aids who?

...Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds...
In my previous post, I had argued that austerity would only lead to further austerity as it shrinks the economy. Keynesian Theory of economics is a classical theory that every student of economics would come across. Then, why are the EU nations and IMF administering the hard-pill of austerity on Greece. Why UK administers austerity when it has only increased poverty? Why is Canada administering austerity, when it claims to be well-off in the media? Why is US administering austerity? Some one should be benefitted by it, right? Who gets benefitted by austerity and who loses?

Runners first

During the European Debt Crisis in the later part of 2008, many European countries assumed the indebtedness of their banks to prevent them from failing. This left many of the European countries in debt to the extent they were not able to pay their debts without assistance from third parties such as EFSF (European Financial Stability Facility), ECB (European Central Bank) and IMF (International Monetary fund). Since many of these organizations require austerity as a part of their bail-out programs, countries are forced to impose austerity measures. 

For example, Ireland imposed austerity measures when it assumed the debts of its private sector banks and had to be assisted by the EU and IMF. While Ireland eventually recovered and ended its austerity in the 2015 budget, the impact of austerity was substantial. Property values collapsed making people pay mortgage more than what their property worth.  The economy shrunk resulting in widespread employment which rose from 4.2% in 2007 to 14.6% in 2012. Ireland also saw huge emigration with around 34500 people leaving Ireland between 2009 and 2010. However, the impact of these measures were felt most by those who could not bear it

Similarly, austerity measures imposed by UK due to its bank bail-outs were also affecting the poorest population who could hardly bear the impacts. As of 2014, close to a quarter of the UK population are in poverty. Unemployment rate rose from around 5.7% in 2007 to over 8% in 2012. However, since 2012 unemployment rate has shown gradual decrease. However the austerity was again found to affect the poorest of population

Though here two countries are taken as an example, we could make a point that the poorest of poor are those who'd be affected the most, the losers to austerity. This is also because the poor are the biggest consumer of public services, which takes the major hit due to spending cuts. If people tend to commit suicide  then austerity is effectively eliminating poor instead of poverty

Winners next

Naturally, those who hold and control government debts gains the most. When the governments bailed the banks, the investors benefitted from the austerity as their assets grew while the poor suffered as it is their jobs and earnings which was taken to pay for bailing out the banks. Naturally, investors and the wealthy were the big winners. 

Further, when the governments cuts its services and shrinks its work force, the private sectors see a increase in the supply of labor. Most of these labor could be acquired at low cost, particularly for short-term. Temporary workers are neither paid on par with the permanent workers nor have the benefits of the latter, in many countries. Further, their employees could be forced to put on more hours at work with the threat of lay-off. In other words, austerity helps big corporations and the wealthy to exploit the labor of the poor. 

Naturally, the rich-poor divide has grown sharply since 2007 with many billionaires seeing large increase in their wealth


Clearly, Austerity aids the rich, corporations and the investors...

There are many studies hailing the rich and the reason for the growth of their wealth as due to their wise investments. However, these studies/articles carefully "forget" to mention that poor and middle class don't have enough disposable income to invest, in the first place. Further, while the rich may have their investment knowledge transferred from their parents or bought, the poor and middle class are left in the dark. 

Further, I believe the system itself is designed to aid the investors. While I cannot say for every country, I could about India and Canada. In India, the rich has the money to buy the Govt. officials and vital information to make informed decisions on their investment, though illegal. In Canada, the start-up visa program, I believe, was designed with the interest of the investors (venture-capitalists) in mind. For example, it wouldn't include crowd-sourcing opportunities to raise capital. The system provides little opportunities for immigrant researchers for entrepreneurial pursuits though, those pursuits could create more jobs for Canadians... Rich again has an opportunity to get a investor visa or buy a business...

This makes me wonder, if the Governments real intentions are to help its people or only a section of its population. I'm afraid, the Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds. However, what I don't understand is why people don't realize this and why they are falling prey to politicians' lies...

Tuesday, June 30, 2015

Grexit: World may suffer with Greece

Currently, the world is going nuts over the Greek dilemma. The surprising move by the President of Greece, Mr. Alexis Tsipras to call for a referendum on EU bailout conditions, have stumped many of the EU's leaders that they have started to openly vilify Mr. Alexis Tsipras. While the world would know Greece's decision by the start of next week, in the mean time Mr. Tsipras has closed the banks and stock-exchange to prevent financial collapse

Greece's bold move

In my previous post, I had argued that austerity is likely to lead a country into a vicious cycle. As austerity tends to reduce disposable income, people may tend to be frugal which could further aggravate the problem. Austerity is also likely to cause unsurmountable hardships to the citizens of the nation. Hence, I regard Mr. Tsipras move for a referendum bold and creative. Apparently, the move have stumped the EU leaders' expectation that Mr. Tsipras could be pressured to submission as is apparent by their open personal attacks on him. If anything, he might be on the right track.

Greece is not without precedent. Many countries have defaulted and have recovered from the financial crisis in the wake of such default to become strong economies. In case, on July 5th, Greece rejects EU's proposal it may its exit from EU. In such case, Greece is at liberty to issue its own currency. Though the currency might start on par with Euro, it would soon be devalued which may increase inflation sharply. However, such devaluation may also turn out to be a boon as it could boost exports there by setting Greece on its path to recovery. The period of intense economic hardships due to inflation would have severe effects on the lives of the people. However, I hardly doubt if the situation would be any different if Greece accepts EU's proposal.

However, Greece should guard itself against continuing to commit the mistakes that had led it into the crisis - corruption and tax evasion. If the tax is not friendly or is felt unjustified, it is likely to encourage corruption and tax evasion. With increasing tax evasion, the country is unlikely to increase its revenue, which is critical for its recovery from the debt-trap.

Greece Exist cost more to EU

I believe Greece's exist from EU is likely to affect the other nations in EU more than the Greece itself. Greece's exit would mean a fracture in the political union of Europe. It is likely that other countries like Ireland and Spain may follow suit plunging Europe into financial crisis, affecting markets and resulting in financial instability whose effects would be felt all over the world. Euro would lose its value plunging EU into high inflation.

A fractured EU would likely see EU's influence diminished in the World politics. Greece is already trying to woo Russia to invest. In such case, the NATO allies may not be particularly comfortable knowing the growing influence of Russia in their backyard. In addition, China is also buying off Greece's debts, which would likely increase China's influence in the region.

Greece's exit at this juncture would also be inopportune as UK is in the process of conducting a referendum to decide whether to continue with EU or not. In case of Greece's exit, the anti-EU parties' claims could find support, which may further weaken EU.

Hence, Greece's tragedy is likely a EU's tragedy and may likely to lead to many set-backs, economic and strategic. I'm sure the EU leaders are not oblivious to the reality but their dogged insistent ofn austerity makes anyone wonder the reason behind their insistence...

In any case, the world would know Greece's verdict by Sunday evening...