Creditor Crunch

Secondly, changing leaders will not alter market demands. Austerity was imposed to calm bond markets, not to punish the public. The markets have predictably begun to protest the shift of dialogue from austerity to growth as the euro hit a four-month low on Monday. However, the current crisis has been caused by deep-rooted structural problems that austerity cannot solve. Some southern European countries have had unsustainable levels of government spending for decades. On the other hand, ironically enough, investor panic about a EU break-up could actually cause it to happen by pushing government bond yield spreads to dangerous levels. In fact, after pushing Greece’s public to the brink by demanding shockingly severe austerity measures the real possibility of a EU breakup has actually been created after election turmoil led to neo-Nazis and extremist parties entering the country’s politics for the first time in decades.

This current path the EU has been forced on is clearly unsustainable; indebted countries cannot continue to be held to ransom by the markets as standards of living continue to drop as recession bites. Economies are meant to serve people, instead of the other way around. It is not simply a change of leaders and policies that the EU needs, but a re-think of creditors’ demands. In balancing austerity and growth, it is the time-frame of the deficit-cutting and how quickly creditors demand repayment that counts. Some creditors will ultimately have to accept losses no matter how harsh the conditions of austerity they impose and take responsibility for their decision to lend to these countries. As long as the EU does not break up, the markets must recognize there is no ‘silver bullet’ to the crisis and instead focus on making sure the indebted countries maintain fiscal discipline by making structural changes over the medium-term to long-term.


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Pushing Back Against Austerity

The EU debt crisis is more a crisis of how investors perceive debt than the actual debt levels of the countries itself. It is time the markets took a more long-term view of the problem to ensure a sustainable path of action.

The pushback against austerity in the elections held yesterday in both France and Greece is hardly surprising. Passing unpopular measures such as higher taxes and spending cuts is never easy in a democracy. Moreover, the measures imposed have been both too harsh and rapid, as Greek suicides, recession and rising unemployment levels in the EU have made headlines through the crisis. The people have predictably punished their leaders, just as creditors installed technocrats in place of elected leaders in Italy and Greece last year.

While Hollande, France’s first socialist candidate in 20 years, has famously proclaimed to be ‘pro-growth’ it remains to be seen how revolutionary his stance will really be. As the EU’s current economic strategy can hardly be called a great success, the discourse has already been visibly changing from that of austerity to growth. It is now widely agreed by most (including Germany) that the only sustainable solution to the crisis is to stimulate long-term growth and increase competitiveness. This is fairly obvious: countries cannot pay back their debts while they’re in recession or broke. What remains unclear is how this is to be done while cutting budget deficits.

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Re-thinking Borders

Immigration policy has become one of the cornerstone issues of recent elections in the West, and its slant has grown increasingly rigid; Denmark and Sweden’s policies are being hailed as almost draconian. In the U.K., the Tories popular tough stance on immigration has already resulted in the government scrapping a range of visas, and promising to cut immigration to ‘tens of thousands’ by 2015 despite strong protests from the business and education industries. Similarly, Arizona’s immigration law is currently making headlines across the US.

In a globalized world, as western economies slump and jobs grow scarce, people understandably want to protect their livelihoods. Yet, further analysis of the effects of immigration is strongly needed for a more nuanced debate. To begin with, studies have shown that 85% of the world’s population will not leave their home countries. Secondly, economists have long argued that immigration encourages innovation and creates jobs. Immigrants have started almost half of America’s venture-funded businesses; more than 40of the country’s Fortune 500 companies were founded by an immigrant or an immigrant’s child. Thirdly, when it comes to the argument of unskilled migrants and asylum seekers, 80% of asylum seekers are actually absorbed by developing countries, and not the EU even though the EU claims to welcome those fleeing persecution.

As economic power shifts to the East, and the West undergoes a long and painful deleveraging process while struggling with unfavorable demographics, the West needs to open its borders to encourage growth, not stymie it. It is also important to foster stronger communication between the regions by employing immigrants in order to strengthen trade relations.

There are already signs that the immigration trend has begun to shift the opposite way, as a series of articles points out the West is losing its best talent as reverse brain-drain occurs. People are moving to emerging markets to start businesses and take advantage of their booming economies as they fail to find employment in their own countries. The West must work harder to encourage immigration if it expects the East to welcome its citizens a few decades down the line.

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A Troubling Victory

The leader of the far right National Front, Marine Le Pen, winning nearly 20% of votes in the first round of the French election would be worrying in most circumstances. Le Pen, has pledged to cut immigration by 90%, to 10,000 immigrants, and pull France out of the Schengen zone — her party is against open borders, open markets, and the euro. However, her victory is all the more troubling given that Sarkozy has already taken a hawkish stance on immigration, and is pandering further to voters by promising to continue to tighten border controls.

Le Pen’s tougher stance on immigration policy clearly strikes a chord with people angry at the level of high unemployment. Both fear and frustration at the lack of options, and the stagnation of the economy, are enticing voters to look for new alternatives. In the midst of austerity and stalling growth, it is unsurprising that far right and populist groups are springing up across Europe.

And yet, Le Pen’s victory comes at a disconcerting time, just as the EU needs stronger fiscal union measures to stimulate growth. We have already seen what electing strong leaders that propagate xenophobia and segregation can result in during times of crisis: Germany elected Hitler as it struggled with hyperinflation and a humiliating defeat in the First World War. It’s time we learned from the lessons of the past.

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Beyond the Invisible Hand

We are now witnessing the detrimental effects of the reckless pursuit of self-interest in the midst of protests about the increasingly dangerous divide between the rich and poor. The ‘winners’ of the current system are separating from the rest, as the super-rich seem locked in a conspicuous consumption contest even in times of recession, and bankers compete for bonuses that seem ludicrous to the rest of the population.

In the face of rising inequality, unsustainable consumption and impending resource scarcity, we must pay closer attention to the lessons of nature; we can evolve as a group to survive. Hearteningly, a global movement that promotes social good is growing increasingly visible. Technology and peer-to-peer (P2P) communities are propagating collaborative consumption on an unprecedented level. The concept of the ‘sharing economy’ is growing increasingly popular as people choose to share, swap, rent and trade products instead of owning them. The rise of social networks is facilitating the greater sharing of ideas and resources, as a growing focus on reputational capital gains momentum.

We need to re-asses our assumptions about the nature of competition and altruism to consider the common good. There’s clearly more than one ‘invisible’ hand at work here.

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Cooperation & Altruism in Economics

The financial crisis and the inefficacy of conventional monetary tools in the West has sharply highlighted the weaknesses of our current economic models. But even as the left and right wing are locked in a seemingly insurmountable ideological debate about the nature of markets and the government, it is time we looked past traditional economic arguments and questioned our fundamental assumptions about the ‘the invisible hand’ of the free market.

Evolutionary economics is already part of mainstream economics, but Robert Frank, an economist at Cornell, boldly argues that perhaps economists have traditionally read Darwin’s theory wrong. In the study of both evolution and economics, competition is seen as key to natural selection and free markets; it is taken for granted that the ‘survival of the fittest’ leads to the greatest common good. However, Frank argues that in both cases, competition can also allow certain individuals to gain traits that are harmful to the group as a whole. Even more interestingly, Frank notes that evolution actually favors group selection in the long-term, and that examples of cooperation and altruism are repeatedly seen in nature as cooperative groups outlive selfish ones.

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Accounting for Social and Natural Capital

To begin with, we need to bring back the “social” aspect of the social science when it comes to modelling decision-making. We ought to accept our humanness and failings; we’re emotional, irrational, we make mistakes and our surroundings, environment, and peers heavily influence our choices.

This argument, of course, isn’t new — social scientists have heavily criticized economists for their misguided basic assumptions for decades. However, as a global movement that promotes social good is growing increasingly visible, the need to re-think key tenets is being starkly highlighted. Rising inequality is leading to an increasing amount of people looking to do meaningful work that has lasting impact. There is strong evidence that a whole generation is looking beyond personal gain and profit as social enterprises continue to blossom, fewer millennials apply for traditional banking and consulting jobs and an increasing number of MBA programs teach social enterprise.

In addition, financiers are acknowledging the limits of their models and looking for new solutions as well. Financial innovation is moving beyond trying to increase market “efficiency” and profit, and considering social and environmental impact. Social impact bonds that attempt to align private sector investment and public sector interests with desirable social outcomes are already in use in the UK. The field of impact investing is estimated to grow up to ten times in the next decade as philanthropists, venture capitalists and fund managers look to use their wealth to make a difference. In line with this thinking, the English government has just launched a £600m fund that aims to invest in charities and social enterprises to help grow the social investment market. Even a new currency that attempts to put a value on social capital is gaining momentum.

Hearteningly, there are organizations that already acknowledge the limits of our models and knowledge and are trying to remodel the field. The new economics foundation (nef), a UK-based think tank, attempts to do “economics as if people and the planet mattered” by working on projects that allow people to live better and healthier. Additionally, an innovative team of researchers from MIT is propagating the field of experimental economics, which encourages the testing of assumptions and models before using them in policymaking. The group has set up Abdul Latif Jameel Poverty Action Lab (J-PAL) to analyze human behaviour based on randomized evaluations instead of equations. Moreover, groups such as The Economics of Ecosystems and Biodiversity (TEEB) are trying to find ways to value ecosystem services to account for the loss of biodiversity in economic terms, in order to allow people to make more sustainable choices.

The field of economics originated in order to study the distribution of scarce resources. In the midst of population growth, climate change, impending resource scarcity and rising inequality the subject is more relevant than ever before. However, it must evolve as people’s behaviour and perceptions continue to change. It’s time we began to re-evaluate our models of limitless growth- perhaps beginning by putting a value on the future, instead of discounting it.

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Evolving Economics

An interesting debate in the New York Times dissects the failings of the way Economics 101 is taught in schools. Its participants concur that although the 2008 financial crisis has shaken our basic assumptions and sharply highlighted the failing of our economic models, we continue to mistakenly teach the subject as we did before.

However, not only do we continue to teach economics the same way, but also still rely on the subject to make key policy decisions despite the field’s obvious faults. The inefficacy of conventional monetary policy tools in the West has already highlighted how flawed our basic assumptions are. Even with most Western government’s central banks pushing the accelerator pedal, as interest rates near zero and central banks continue to pump money into the economy, they remain unable to stimulate growth or create jobs. We must acknowledge the limits of our models and rethink some of our fundamental notions, lest we continue to make the same mistakes.

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The Power of the People

We’ve reached tipping point; it’s time we recognized the immense power of collective action. Even while organizing to protest the power of the 1%, we fail to recognize the immense clout of the 99%. Things are the way they are because we choose them to be. Our leaders are in place because we give them power. Corporations are big and powerful because we buy their products.

If the economy is in recession, we can increase spending. If unemployment is high, we can create jobs. Events are not predetermined; the elite are as confounded by the economy as we are. Innovation and change comes in unexpected forms; people continue to surprise and disappoint us, good things happen when you least expect it, the best plans don’t always work. Instead pretending we can predict what happens around us- much less control it- let’s build on what we do know.

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Changing Investor Perceptions

While TCI has gone as far as to create a website ( to air its grievances against the company, the case has not received the attention it deserves. In fact, shares of Coal India actually rose on TCI’s announcement. Most investors agree that it is highly unlikely that TCI will win this battle, as Coal India is known to have strong ties to the government, with the majority of its board members being ex-bureaucrats. Additionally, it is key for the government to continue to provide cheap fuel to the country’s stressed power sector.

However, while the country’s state-backed companies are notorious for being uncooperative, the case could not have come at a worse time for the state. The Indian government is actively trying to encourage state divestment and foreign inflows to allow it to tackle an increasingly widening budget deficit, having dismally failed to meet its targets in 2011. Additionally, the coalition is already in a precarious position, weakened by its recent thumping in the state elections and the string of corruption scandals it has been internationally accused of.

Yet, while this case will no doubt make it harder for the country to attract foreign investment, it is positive for investors in the longer-term if it helps other groups demand more accountability from management.

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