Politicians for a Change
The global financial crisis was not merely a cyclical recession but a seminal historical event that drives a fundamental structural rethink about the values and assumptions around which our international and domestic economic and political systems are anchored. There are a few main issues with a tremendous influence on domestic politics which have been brought to the fore. These include reform to create a more robust financial system, whether a free market truly benefits society and should and how the state can play a larger economic role and lastly, how to deal with the European public debt crisis.
1. Financial System Reform
With various internationally renowned financial institutions such as Citigroup and American International Group requiring state sponsored bailouts during the crisis, the public has questioned whether the current financial framework “privatizes gains and socializes losses” to the benefit of the privileged few. Some executives at large banks and other institutions which faced existential threats pocketed excessive remuneration during the preceding market boom but held the taxpayer to ransom with their companies’ vital economic role. This has led the electorate to put greater pressure on national politicians to adequately address this apparently unfair socialization of losses. The Occupy Wall Street Movement in the United States, which inspired similar demonstrations overseas, is an embodiment of public unhappiness at the current system perceived to favor big banks and the rich at the expense of the masses.
There are various national political consequences of the vocal public outcry for reforms as politicians seek to appease the electorate and win votes. Firstly, they must devise credible economic and legal reforms which reduce the likelihood of systemically important firms running into difficulties and/or allowing them to be liquidated or restructured without threatening the entire economic and financial system with collapse. The ongoing financial reforms will likely lead to governments requiring greater liquidity and capital to be held at financial institutions while imposing restrictions on risky activities such as the proposed Volcker Rule that seeks to ban proprietary trading at some firms. Secondly, there is also pressure to control executive compensation at companies where the government is a shareholder. The largely British government controlled Royal Bank of Scotland for instance has been under public scrutiny to curb executive compensation as some believe it undermines a state’s financial interests.
2. Backlash against the Free Market
There has been a general backlash against laissez-faire or unfettered free markets after the global financial crisis with the public questioning if the free market truly creates more well-off societies and if and how the state can play a larger role in managing the economy.
2.1 Income Inequality
One political concern about free markets highlighted by the global financial crisis is rising income inequality. The more stressful economic situation brought about by the major crisis could have made the public less tolerant of the disparity in personal purchasing power. Due to the severe societal tensions that can result from income inequality, there has been an observable shift in domestic governmental policies towards counteracting or balancing free market forces with the aim of mitigating the income gap.
In the United States, tax reforms are being debated with proposals such as the Buffett Rule attempting to create a more equitable tax system. China is also increasingly concerned by the income disparity between cities and rural areas and the Eastern coastal cities compared with China’s Western interior. To mitigate these concerns, the government has sought to counter inflation by reducing its economic growth which helps the poor to cope with rising consumer prices. In addition, China has continued to promote the growth of the Western interior in order to create greater income equity.
These illustrations portray a global impetus for governments to act as a countervailing force to the free markets to achieve the social objective of greater income equality and perhaps more sustainable long-term growth. In other words, national politics is becoming more focused on the distribution rather than growth of a country’s economic pie.
2.2 Labor protectionism
Related to political efforts to handle the income disparity issue is greater labor market protectionism seen in many countries which restricts the free movement of labor, including well skilled talent. This change in political stance towards foreign labor can be clearly exemplified by Singapore’s recent adjustment to tighten its open labor policies despite it being a world leader in the attraction of international talent. There are a few reasons for the less welcoming political policies towards foreign labor.
Firstly, the global financial crisis has worsened the problem of unemployment. With jobs being scarce in some economies such as Spain, there is a propensity to restrict foreign competition for domestic jobs in order to provide a country’s citizens with more employment opportunities. In addition, with a less buoyant economy coupled with a large pool of low-skilled cheap labor that has become more mobile with globalization, lower wage workers in society also face greater difficulties in attaining employment. Thirdly, the greater income disparity that globalization brings could also encourage politicians to enact protectionist labor policies to mitigate this problem by raising the incomes of the lower wage earners.
2.3 Restricting Capital Movement
The near collapse of the financial system during the global financial crisis has also led some governments to limit the free flow of international capital into domestic financial markets. Brazil and some Asian economies have sought to employ capital controls or other means to curb the inflow of “hot money” to prevent their economies from being destabilized by the creation and subsequent bursting of bubbles. Such restrictions on capital movement show that politicians may take a more proactive role in managing monetary flows after the crisis.
3. Managing Europe’s Sovereign Debt Crisis
Arguably, the global financial crisis did not merely encompass the sub-prime mortgage crisis or the collapse and near-death experiences of major financial institutions. The cheap credit that helped to inflate the United States real estate bubble also encouraged governments, most notably those of southern European nations, to borrow huge amounts at fairly low interest rates. As such, an analysis of the effects of the global financial crisis must include an examination of the unfolding sovereign debt crisis in Europe.
The European debt crisis has become a major political and economic challenge. A major difference in philosophy amongst European political leaders lies in the belief that the debt crisis should be predominantly solved through austerity or economic growth measures.
Public opinion on this issue of austerity versus growth will shape European national politics as political leaders seek to gain or retain political office by catering to the peoples’ wishes. France has already witnessed the election of Francois Hollande as president due partly to the growth centric beliefs he has. Likewise, German politicians need to ensure voters that Germany’s interests will be protected while balancing growing repulsion towards the austerity doctrine in some of its European counterparts and calls for the creation of Euro-bonds or debt that is collectively issued by the Eurozone.
A potential Greek departure from the Eurozone could lead to other highly indebted nations such as Portugal, Spain and Italy to consider leaving the currency union. The political impact of such potential Eurozone exits will be tremendous as processes for national referendums are executed, politicians voice arguments in favor or opposing Eurozone membership and plans to lead their countries out of economic troubles. A country’s political sovereignty could also be affected as the reintroduction of national currencies like the Greek Drachma or Italian Lira will enable nations to achieve monetary policy independence.
While proponents for financially weaker European states to leave the Eurozone believe that their debt woes will become more manageable with a weaker domestic currency and debt monetization, there are other observers who believe such exits could have dire economic consequences. Banks throughout the Eurozone will likely have to take significant write-downs in the value of sovereign and private debt lent to entities of exiting member states. Business and trade links could also be affected as goods and services cannot move as freely across national borders as before between countries that leave the Eurozone and member nations. Such potential financial and economic problems will impact domestic politics by raising contentious issues such as the need and desirability of bailing out domestic financial institutions with public funds especially those which pose systemic risk and how low growth and unemployment can be mitigated by governments.
The consequences of the global financial crisis will depend on how we respond to it. While the crisis was economic and financial in nature, its long-term effects will ironically be more heavily influenced by politicians than bankers and businessmen. Sensible financial reforms, policies which complement free markets and constructive measures to deal with the European debt crisis will encourage the economic growth and prosperity of nations. As the world emerges from the shadows of the global financial crisis, the spotlight will be on politicians to engineer positive economic change and to succeed where bankers failed.