Evasive policies will keep crises coming

There are many things for which Angela Merkel, the German chancellor, can be justly criticised. Her argument that private sector bondholders should have to accept losses is not one of them.

Many European leaders attacked Merkel for precipitating the latest Irish crisis with her remarks. It would be more accurate to say that politicians and the markets get spooked at the prospect of any move that might lead to economic restructuring. The problem is that the more that necessary actions are postponed the more pain the economy is likely to suffer.

Western economic policy has long been based on evasion. Difficult problems are avoided whenever possible. Significant decisions are usually made in reaction to external events – and then the most difficult challenges tend to be sidestepped.

The policy of bailing out bondholders is a good example. Such moves make it easier for companies to evade the restructuring that could pave the way for higher output. This could take the form of the original company becoming more productive or of new firms taking their place.

”Until western economies embark on a new round of investment and innovation it is likely that crises will simply re-emerge in new forms”

This aversion to tackling the weaknesses of the productive economy is manifest in many ways. Quantitative easing – pumping a large volume of money into an economy to maintain momentum – is one example. It should be seen as a way of bolstering the demand side of the economy without tackling the problem of inadequate supply (see November 8 comment).

The emphasis of many western leaders on increasing exports is another evasion. Naturally there is nothing wrong with exporting in principle. The problem is that in the context of the present discussion it tends to be a way to avoid tackling challenges at home. It is a policy pursued in the hope of other countries picking up the slack rather than facing up to domestic weaknesses. (article continues below)

Even cutting public spending can be a form of evasion. Simply reducing state spending will not in itself generate a dynamic economy. The free market economists’ contention that it will magically liberate the domestic economy to thrive is naïve.

Until western economies embark on a new round of investment and innovation it is likely that crises will simply re-emerge in new forms. Existing areas of output need to be strengthened and new points of production established.

To embark on such a path means shifting economic discussion from its emphasis on such factors as inflation, interest rates and demand, towards production and innovation. It also necessitates a willingness to face tough choices rather than evading them.

Ferraris For All, Daniel’s book defending economic progress, was published recently. His personal ­website can be found at www.danielbenami.com.