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Jon-Christopher Bua

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Recession, Politics & The IMF

Posted: 21/09/11 10:20

This week the IMF lowered its forecasts for growth for both the US and Europe. The IMF expects growth in the developed world to expand at the unacceptably low rate of 1.5%

S&P flexed its muscles once again downgrading Italy this week.

This move follows on the heels of its downgrade of Greece and the US.

And with the troubles in Ireland, Spain and Portugal, there is real concern that the stronger members of the Euro Zone will not be able to help these EU member countries avoid default.

Once again with a stroke of the pen S&P has made it more difficult and more expensive to resolve these problems.

Although there has been an economic union among members of the EU for a very long time, there has never been a real cultural union of these countries - they have never unified on taxing and spending policies.

There could not be a wider gap between the savings and spending habits of countries like Germany and Greece especially in the way they handle social policy.

Fear is palpable on both sides of the Atlantic about just where the troubles in the Euro Zone will lead as we all stand on the precipice teetering between recovery and recession.

US bank exposure to European countries is not a fatal issue itself and is certainly not overwhelming considering the size of US banks.

However, if Europe cannot come together and straighten out its debt problems there may be a crisis of a different sort.

US banks and investors may be unwilling to lend to their traditional business partners - the European Nations.

This may mean less commerce and less trade from the US - which may make the global problem even worse.

This news of slow growth is probably not a surprise to anyone. Everyone is aware that the whole world is still slowly recovering from an almost total meltdown in 2007 and 2008.

Most Western Democracies have been struggling to try to find a balance between reigning in their debt and trying to spur economic growth at the same time. These goals are usually politically inconsistent.

Perhaps for the first time ever all Western Democracies are so intertwined in a global borderless economy that they can no longer go their own way or simply ignore one another.

Consumers and businesses who are the main drivers of the economy in the US and in the developed world, are concerned and uncertain.

They have no idea what changes government will make to cope with these problems and little confidence that whatever government does will be effective enough to turn things around.

They are hoarding whatever cash they have instead of spending it or investing it.

As a result businesses are not hiring and those who are employed are not complaining no matter how much they are asked to do - for fear of loosing their jobs.

Business productivity and profits are riding high on this universal fear.

All this uncertainty stems from the difficulty of finding the correct balance between austerity and stimulus.

It is not clear that these governments have the political will to do what is required.

Timing is everything!

And it is particularly unfortunate that at this critical time in the global economy - it is about to be an election year in the US.

Electioneering and good economics don't mix.

What is good for politics in the US is probably the worst thing for the US and the Global Economy right now.

The Republicans in Congress will not pass any legislation that includes any tax increases whatsoever and certainly no stimulus - this is their best route to re-election.

Perhaps most importantly, they do not want to do anything that could benefit the president - even if it might be good for the economy.

On the other hand Democrats will not allow the Republicans or the president, for that matter, to touch any entitlements - which is their best route to re-election.

Unfortunately all of this does not bode well for good and sound economic policy which seems hard to find this election year.

What does all this mean for institutions like the IMF who are funded by the richest countries - to help the poorest weather economic storms?

The news here is not good.

When all the wealthiest countries are having political trouble getting their own economic houses in order, the likelihood of providing the support that the poorest nations may need, seems like a very hard sell.

When the most fortunate societies are having trouble finding funds to pay for their own least fortunate citizens all charity may stay at home.

There clearly may be no political will for an increase in aid to these multi-lateral organisations like the IMF.

Unless the current trend is reversed, organisations like the IMF can look forward to austere times and missed opportunities - like investing in democratic reforms in countries like those who just experienced the Arab Spring.

This blog can also be read on Sky News