Tackling the Economic Crisis

Yesterday I took part in an interesting public debate in Dublin regarding the economic crisis and how it can be solved http://www.labour.ie/youth/. I participated in a panel discussion alongside representatives from Irish Labour Youth, Socialist Youth and Young Greens.

This post provides an outline of my position on the economic crisis and the issues that I raised during the debate...

The global economic system is always in crisis. It is nothing new. As long as there is poverty and social exclusion in the world then the economic system is failing. So what makes this current economic crisis exceptional? With the onset of globalisation this is the first real economic crisis that has affected the entire international community.

Economic pressures in the US have been massively exacerbated and exported to the rest of the world by the process of financial globalisation and the increasing integration of economic markets. What makes this crisis unprecedented is that it is truely global.

The current pressures on the economic system first presented itself with the rising price of oil and the subsequent inflation in the cost of living- with increased food prices in particular. Oil price increases have meant that farmers have to spend more on fuel for their tractors/machinery and this increase in production cost has been passed on to consumers with rising food prices a direct consequence.

The increasing cost of living was then compounded by the mortgage crisis that hit the US economy last year. The collapse of mortgage giants Freddie Mac and Fanny Mae came as a direct response to irresponsible and risky lending.

People who clearly could not afford mortgages for particular properties were given mortgages. When many of these people defaulted on their mortgage repayments or failed to afford the repayments then the whole system began to crumble.

The spectacular collapse of the mortgage system in the US rolled out into the global banking sector where many banks had bought mortgages during the good times and were now left with substantially toxic mortgage assets.

The collapse of banks such as Lehman Brothers, Northern Rock, and the Presbyterian Mutual Society here in the north, came as a direct response to banks having toxic mortgage assets. When banks struggled to sell these toxic assets from their books this impacted on their own finances and affected their abilities to lend to each other. Banks became cautious and did not want to particpate in any lending that had any element of risk attached.

With this mortgage crisis now in full flow, ordinary people are stuggling to buy and sell homes and young people in particular can not get their first step onto the property ladder- this has led to a crisis in the housing sector. With the collapse of some pension schemes people's key source of economic security was their homes and the rising values of their property.

With the bursting of the housing bubble- now they don't even have that.

With internal pressures within the banking system banks are tightening their belts and restricting loan facilities - not just between the banks themselves - but also between the banks and their customers. This has created a lending crisis for small-medium business- as many in this sector need these loans to support them during this difficult financial situtation. For individuals there is now no easy credit to make up for pressures on wages.

Here in the north the construction industry has been hit hard by the housing crisis. With a shortage in demand for new builds building firms have had to lay off staff. By October 2008 there had been 8,000 jobs lost in the norths construction industry. This figure has undoubtedly risen since then and will continue to rise with an estimated 20,000 due to be out of work by the end of 2009.

Unemployment is at 4.2% (October 200*) and this figure is rising at an alarming rate. Youth unemployment is increasing due to people living longer and retirement age increases - with older people staying in employment for longer - and nowhere near enough job creation at the other end of the spectrum.

With a shortage of new jobs being created many young people are having to do precarious work in order to get their first steps on the employment ladder. Many young graduates are having to work in non-degree related jobs in order to make ends meet. Often this work is low-paid, low-skill work with few employment rights, with many finding themselves with no other option but to work in the 'temping' sector where, under current labour market laws, they are routinely exploited.

The financial crisis must not be used as an excuse to dilute employment and therefore social standards. The increase in short-term contracts, agency work and sub-contracting has created a race to the bottom in social standards. This has denied many people, particularly young people, many employment rights and protections.

Those jobs that have been created have tended to be in the retail sector with the likes of Tesco and Lidl. Most of these jobs are low-skill, low-wage jobs and can not necessarily be described as 'new jobs'- as many of the vacances are filled by workers who have already lost jobs elsewhere - from the construction sector but mainly from elsewhere in the retail sector. There must be healthy competition on the high street to prevent this.

The increasing market dominance of large, stack-em-high-sell-em-cheap retailers is unhealthy. The collapse of retailers such as Zavvi and Woolworths and the collapse of the small to medium business sector has only added to the dominance of the likes of Tesco, giving them more of a monoply over the market (Tescopoly).

All this time, and with constant pressure on public finances, there remains a challenge to maintain existing levels of public expenditure and maintain service provision within healthcare, education and social security. The financial crisis must not be used as an excuse to cut public spending.

With existing levels of competition between states, or international regulatory competition, now being exacerbated by this globalised economic crisis- it is an increasing challenge for states to reconcile the need to increase social standards with the need to remain competitive and productive. Improving social standards will help tackle poverty and social exlusion and this will help create the necessary conditions for a competitive, knowledge-based economy firmly rooted in the Lisbon Strategy for Growth and Jobs.

A classic example of this competition presenting itself in Ireland is the recent decision by Dell to 'pick up sticks' and move its operation in Limerick to Poland- at the cost of hundreds of jobs in Limerick. Poland offers Dell the chance to reduce their labour and corporation tax costs- which Dell would see as necessary to compete in the pressurised economic climate. This is the reality of the localised and very real impacts of this crisis.

Ireland's over-reliance on international corporations (which have no local ties or loyalty) and foreign direct investment has come home to roost. If anything the economic crisis has taught us that here we rely too much on international corporations and we do not support local business enough.

There are however some reasons to remain optomistic. The credit crunch does present us with some really positive opportunities.

We can improve North-South cooperation to tackle the financial impacts on the island. The benefits of North-South cooperation were all too apparent in the successful resolution of the recent dioxic contamination in pig meat. This was a financial issue that threatened the future of the agricultural industry here and it was also an all-ireland issue as it affected the industry both north and south. The successful resolution of this crisis showed how all-ireland approaches to financial issues can work for mutual benefit.

The falling or deflation of the UK's currency has also allowed producers and business here to benefit. The lower value of sterling has meant that it is cheaper for the Republic / Euro-zone and other economies to import our products. This has helped to support local business but this must be capitalised upon by the likes of Invest NI. Cheaper imports from NI has also helped the Republic and other Euro-zone cut their business costs.

The economic crisis also presents an opportunity for a change of culture in financial institutions and in citizens. This can mean more responsible lending, cuts in city/bank bonuses, an end to rampant and irresponsible pursuit of profit; a change of direction in how we consume and how we as citizens approach issues such as personal debt. Afterall we have become generation-debt.

Value for money from politicans can present a positive symbolic signal to citizens. The recent moves by the Irish Parliament to cut representatives wages is something that must be positively acknowledged.

So how can we solve this crisis? Can we can truely solve a perpetually anarchic and volatile system that has proven itself time and time again to fall into crisis and then relauch itself?

I believe that traditionally recessions tend to last for years and realistically we can only hope to alleviate some of the impacts of this current crisis on the lives of people. The crisis cannot be solved overnight.

Here are a few positive steps that I believe can help soften the impact of the financial crisis:

Let's introduce the Euro in the UK; support the banks when needed in return for more democratic control over them; promote all-ireland infrastructure projects and other public work programmes that help get construction workers back to work; support small to medium enterprises and reduce our reliance on foreign direct investment; support moves to increase financial regulatory powers of international institutions- we live in a globalised world and can not stand alone during this crisis; invest in the green economy; resist privatisation and support employment by building strong social partnership- stronger unions means stronger employment rights that tackle poverty and maginalisation; finance social support measures and give redundant and unemployed workers a strong safety net- there can be no flexicurity/flexibility in labour markets (use of agencies, etc) without proper social security; develop progressive taxation measures; and develop the skills base in our workforce- let's give our workers a chance and make them more competitive within the internationalised labour market.