Alexander Mirtchev and Norman Bailey, Thursday, March 31, 2011
Dr. Alexander Mirtchev, President of Royal United Services Institute for Defense and Security Studies (RUSI) International and Board Director of the Atlantic Council, analyzes the extent to which the deteriorating global debt situation is undermining efforts to return to sustainable economic growth worldwide. It appears that the debt problems of the developed countries have gathered an unstoppable momentum, prompting divergent reactions and proposals that are often inadequate to the scale of the problem. On the surface, the policy preferences focus either on austerity measures or further stimulus packages. Both seem to ignore significant aspects of the economic problems that are coming to the surface in particular in the developed economies. In effect, policy decisions often boil down to a choice between the least damaging option, as both stimulus and austerity entail added strain to government budgets. Yet, stimulating growth is unsustainable as it exacerbates the issue of global debt weaknesses, and austerity is deemed counterproductive in a period of recession. Furthermore, hoping that stimulating growth would generate sufficient revenues to bring government budgets back into the black relies more on chance than on fundamentals. The debt burden and stagnating productivity of a number of economies is due largely to the existence of extensive long-term commitments that are at the core of the overall social contract prevalent in the Western world and beyond. That in mind, it is increasingly evident that grand plans and declarations are not deemed sufficient by the markets. Instead, it is imperative to address the underlying cause of the debt crisis – weakening solvency, predicated on unsustainable economic relations and undertakings. That entails a redefinition of what is essentially the social contract among the government, Main Street and Wall Street, with the current circumstances being a vivid reminder of the precursors of the Magna Carta. A redefined social contract would enable addressing the distortions caused by the interactions between governments, populations and markets that impose growing restrictions and market involvement by states endeavoring to combat the effects of the global economic downturn. However, it does not appear that a new “Magna Carta” is on the cards.