Unemployment storm far from over

Uncertainty in economies across the globe is still very much the order of the day and likely to remain for some time to come in the wake of the financial crisis of 2008/09 and the sovereign debt crisis that came to light earlier this year. “The cost of this crisis will be with us for a generation,” Governor of the Bank of England, Mervyn King said last week as others foresee widespread social unrest and possibly even the end of the free-market system of capitalism.

Addressing the United Kingdom’s Trades Union Congress King said “the road ahead is unlikely to be straight. There is considerable uncertainty about the prospects for both the United States and the euro area …”

Using the sober rhetoric to be expected of a central banker he warned that “of course, no-one can forecast the gusts – or indeed storms – the economy may face looking ahead”.

Addressing the sovereign debt crisis he said it is vital for any government to set out and commit to a clear and credible plan for reducing the deficit. On the other side of the Atlantic in the United States there is, however, a rising lobby to first prioritise restarting production and the markets via more stimulus packages, that some say could swell to $23.7 trillion.

King in his address warned that “market reaction to rising sovereign debt can turn quickly from benign to malign, as we saw in the euro area earlier this year”.

He admitted that “there was nothing fair about the financial crisis. It was caused not by any problems in the real economy; it came out of the financial sector. But it was the real economy that suffered and the banks that were bailed out. Your members, and indeed the businesses which employ them are entitled to be angry,” he told the trade unionists.

Dangerous levels of unemployment

Disturbing unemployment figures across the globe, where some are describing the modest growth there has been as jobless growth, is crystallising as one of the most pressing challenges lying ahead.

A joint report by the International Monetary Fund (IMF) and the International Labour Organisation released last week stated: “The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies.”

Dominique Strauss-Khan, the IMF chief, said at a jobs summit in Oslo that “the labour market is in dire straits. The Great Recession has left behind a wasteland of unemployment”.

The European Commissioner for Employment and Social Affairs, Lazio Andor, said 2010 has so far been an annus horribilis for unemployment, warning that, “if we fail to act, 2011 may still turn out to be the annus horribilis for social cohesion”.

The Independent in the UK reported that cuts in the civil service in Britain will inevitably lead to higher unemployment and according to the Organisation for Economic Cooperation and Development the total of unemployed for all 27 EU nations has already passed 23 million – up nearly 36% since 2007. The challenge of reversing this trend could stretch Europe to its limits.

According to a report in The Washington Post about 44 million people in the US are now living below the poverty line. Employment figures there are also far less than encouraging.

Free-market capitalism under threat

Analysing the effects, origin and implications of the economic crisis King said “we cannot just carry on as we are. Unless we reform our economy – rebalance demand, restructure banking, and restore sustainability of our finances – we shall not only jeopardise recovery, but also fail the next generation.”

He explained how in the post-Cold War years developing countries like China built up huge holdings of foreign assets, running into trillions of dollars, matched by equally huge debts in the deficit countries. “Such massive imbalances were never likely to be sustainable, and so it proved.”

To his mind, “a market economy and its disciplines offer the best way  of raising living standards. But a market economy cannot survive on incentives alone. It must align those incentives to the common good. It must command support among the vast majority who do not receive the large rewards that accrue to the successful and the lucky. And it must show a sense of fairness if its efficiency is to yield fruit.”

Ian Bremmer of Political Risk Research and influential economist Nouriel Roubini, however in the September edition of Institutional Investor argue that the free-market system of capitalism has been so damaged by the recent financial crisis that the US, Europe and Japan face a future in which they will struggle to keep pace with “deep-pocketed developing nations like Brazil, India, China and Saudi Arabia. The result could be a world in which the Western political and economic dominance that existed prior to the crisis is gone, with little hope of coming back.”

They also argue that in a new global economy in which countries compete for market share on almost everything, national self-interest and protectionism is likely to flourish. “An era of state-driven capitalism has dawned, one in which governments inject political calculation into the performance of markets,” they write.