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Committee Opinion | Doc. 12299 | 21 June 2010
The political consequences of the economic crisis
(Former) Committee on Economic Affairs and Development
A. Conclusions of the committee
(open)The Committee on Economic Affairs and Development congratulates the rapporteur, Mr Zingeris, and the Political Affairs Committee on this important report which it fully endorses. The committee believes that the scale and political consequences of the economic crisis demand swift and sound economic responses which preserve citizens’ economic and social rights in the face of all the challenges facing the Council of Europe’s 47 member states. The responses to the crisis cannot be national or even European. They must be global. In this respect the committee calls for a paradigm shift in the management both of financial flows and of public finances, and stronger policies for stimulating employment. The Committee on Economic Affairs and Development welcomes the proposal put forward by the Political Affairs Committee to organise a joint hearing on the political impact of the economic crisis on the European society.
B. Explanatory memorandum by Ms Lilliehöök, rapporteur
(open)1. Introduction
1. The financial and economic crisis which started in
the United States in 2007 before spreading to the entire planet,
including the Council of Europe’s member states, has been the most
striking development in economic terms in recent decades and since
the 1929 crisis. It triggered a serious world recession which is hitting
national economies hard and whose impact can be felt on economic,
monetary and also social policies, given the rise in unemployment
and the austerity plans which have been announced. More serious
still are the first signs of political protests, which mean that
extreme care will have to be taken over the coming months and governments
will have to be made aware of the importance of the solutions to
be adopted in managing the crisis.
2. The Political Affairs Committee’s report clearly highlighted
the advances made by various extreme right parties in recent elections,
for instance Jobbik in Hungary, which now has 47 members of parliament.
This success is one of the first political consequences of the economic
crisis, which once again reflects the response at the ballot box
of people who have been hard hit by the economic effects of the
crisis and who lay most of the blame with the incumbent governments.
3. From a strictly economic point of view – even though economics
and politics are increasingly interlinked – the political consequences
of the crisis stem from rising unemployment, the freezing of public
sector pay, declining purchasing power and pessimism about future
developments. There are continuing questions about the solvency
of states in spite of the various measures taken at European level
and about the long-term political ability to create frameworks for
balanced and sustainable economic development in many countries.
As the effects of the crisis on employment represent a particularly
serious risk of political unrest, it is necessary to strengthen
public confidence in future economic development with a prospect
of more and better jobs.
2. Phase 1: excessive household debt
4. The economic crisis began with the now infamous sub-prime
crisis, which was brought about by banks and other lenders granting
mortgage loans to individuals without properly checking the latter’s
ability to pay them off. These toxic loans were subsequently reinvested
in other financial institutions. The system collapsed when the loans
could no longer be honoured, leading to the bankruptcy of many financial
institutions.
5. The crisis quickly had an impact on the public because of
the resulting credit crunch. As consumption and investment collapsed,
the impact of this initial phase in the crisis was felt in the employment
market (rising unemployment) and the operation of public services.
To prevent bank failures, the authorities bailed out financial institutions,
reallocating funds from other projects while also nationalising
some banks.
6. However, governments were confronted with rising public debt
while having no immediate possibility of increasing revenues. Several
countries were faced with stock-market speculation against their
debt which was believed to be safe but in reality was not. As this
situation became clear, some of them were downgraded by the rating
agencies because of their limited ability to repay funds borrowed
on the markets that were needed to finance their public debt. Several
countries with high budget deficits in relation to their GDP therefore
ended up facing the possibility of being overwhelmed by their debt
burden.
7. The Committee on Economic Affairs and Development has lost
no time in looking into the issue of the political consequences
of the economic crisis, both in previous reports and in those currently
under preparation such as the one on “Over-indebtedness of states:
a danger for democracy and human rights” (rapporteur: Pieter Omtzigt,
Netherlands, EPP/CD). Moreover, its report 
debated during
the plenary session of the Parliamentary Assembly of the Council
of Europe in January 2009 underlined that “governments should be reminded
that, despite financial difficulties, citizens’ social, economic
and human rights must be safeguarded in order to avoid undermining
the very foundations of democracy”.
debated during
the plenary session of the Parliamentary Assembly of the Council
of Europe in January 2009 underlined that “governments should be reminded
that, despite financial difficulties, citizens’ social, economic
and human rights must be safeguarded in order to avoid undermining
the very foundations of democracy”.3. Phase 2: excessive government debt
8. At the start of 2010, the economic crisis entered
a second phase involving a development that is much more critical
as regards the democratic stability of the various Council of Europe
member states and has much more worrying political consequences:
excessive government debt.
9. The G20’s declarations on regulating international finance
were not followed by action and many banks and financial institutions,
which had been bailed out with public funds at very low interest
rates, believed there would be a return to “business as usual”.
However, this was to ignore that the crisis would reveal the mismanagement
and the imbalance of public finances which was highlighted by the
rating agencies. Consequently, countries such as Greece, Spain and
Portugal, and then the whole of Europe, were plunged into a state
of anxiety which, in many places, turned to public anger.
10. For although international finance had been an ideal scapegoat
– sometimes rightly so – for the 2008 financial crisis, political
leaders in problem economies could no longer hide the imbalances
and poor long-term economic policies built up over the last twenty
years. The current economic consequences have highlighted the dangers
of short-sighted and risky economic policy management where inadequate
tax policies are combined with overspending (that is, as regards
expanding social benefits, underfunded pension schemes, excessive
increases in numbers of public servants and extravagant public authority
management). Insufficient attention to policies for sustainable
growth in jobs and economy to secure private income and fiscal revenue aggravated
such imbalances. This shows the importance of good governance and
basic frameworks for fiscal balance at national level, such as the
criteria fixed by the European Union’s Stability and Growth Pact.
As the earlier-mentioned report by Mr Sasi points out, sound macroeconomic
policies that help to resist economic crises can be an important
factor in how the functioning of democracy is perceived.
11. Whereas, for electoral purposes, many European leaders often
used to attack the “diktats” of the European Union and the European
Central Bank (ECB) concerning the Stability and Growth Pact, which
limited public deficit to 3% of GDP, and the single currency, they
are not shouting out now. Once the sacrosanct rule of the stability
pact had been flouted, public expenditure took off in many countries,
even though the economic growth needed to offset public debt is
still failing to materialise as a result of the recession triggered
by the sub-prime crisis in 2008.
12. These economic policies led many Council of Europe member
states into a vicious spiral that was reflected in economic terms
in increased requests for support from the European Commission and,
above all, the International Monetary Fund (Hungary, Ukraine, Iceland,
Latvia, Romania, Poland, Bosnia and Herzegovina, Serbia and Greece).
In monetary terms, for the countries using the euro, the steady
decline in the currency – which fell under the US$1.22 mark on 19 May
2010 – caused worrying falls on stock markets and is severely penalising
exports. In other countries, the slide in currencies such as the
Hungarian forint and the Icelandic krona resulted in devaluation
and a sharp rise in inflation rates. In Iceland, inflation rose
to almost 14% in October 2008 and the country was obliged to borrow
€4 billion from the Russian Federation in order to increase its
exchange reserves and stabilise its currency.
13. Apart from the impact of these monetary problems on individuals’
purchasing power, these excessive government debt levels have prompted
the rapid implementation of austerity policies affecting people
already suffering under the difficult economic conditions. In some
countries such as Spain, for instance, unemployment is touching
20%.
4. Austerity policies and political conflict
14. Many demonstrations against the austerity policies
have been held. Thousands of people demonstrated against “capitalism”
in Madrid on 16 May 2010. In Greece, several days of strikes and
demonstrations led to clashes with police in Athens, where three
people died in a bank which had been set on fire by an angry crowd on
6 May 2010.
15. The various measures taken by certain governments (Ireland,
Portugal, Greece, Spain, Hungary, Romania, United Kingdom and Italy,
etc.) in response to the crisis include freezes or actual cuts in
public sector pay until 2013. Retirement pensions have also been
frozen, the retirement age has been raised and some child benefits
and allowances have been abolished. There have been widespread increases
in taxation, both direct and indirect (VAT), and budget cuts are
also affecting the areas of international co-operation, local government and
the reimbursement of medical expenses.
16. However, some economists have serious doubts about the appropriateness
of these austerity measures because they believe that they could
have irreparable social consequences and thereby lead to serious
political problems. All the more so since they would have a counterproductive
economic effect, as economic growth would no longer be stimulated
and debt levels would persist. Bankruptcy would only be delayed
and would take place in an extremely tense political and social
climate.
17. Lastly, according to the American economist, Nouriel Roubini,
“what is happening today in Greece is the tip of the iceberg of
rising sovereign debt problems” in many developed countries. In his view, a
global government debt crisis is possible. One can only imagine
the political consequences of such a crisis.
In his view, a
global government debt crisis is possible. One can only imagine
the political consequences of such a crisis. 18. The example of Argentina in 2001 should be taken very seriously.
It bears a number of similarities to what is happening economically
in Greece. As the public debt situation had deteriorated (almost
15% fall in GDP), the Argentinian Government, acting on IMF advice,
took drastic measures such as cuts in social expenditure and civil
servants’ salaries and the freezing of savings accounts, which resulted
in violent demonstrations in Buenos Aires. On 19 and 20 December
2001, a state of siege was declared after a security forces clampdown
that claimed the lives of 35 people and led President Fernando de
la Rua to flee from the presidential palace and then resign.
5. Conclusion
19. Economic crises always have political consequences
in the short, medium and long terms. The 1929 economic crisis was
one of the factors – but not the only one – that led to extremist
movements taking power, often legally, and European economies being
geared towards the preparation of a war which devastated our continent
and the whole world.
20. At a time when the choices that the various governments will
make to tackle the economic crisis will be decisive, Council of
Europe member governments must all join together in drawing the
lessons from a not so distant past to avoid repeating the tragic
mistakes of an era when an economic crisis triggered terrible political and
human consequences.