A meeting of the SI Commission on Global Financial Issues was held on Poros, Greece, on 12 July, continuing the discussions held in New York on 19 June and examining recent developments in relation to the global economy, and the social democratic priorities following the conclusions of the G-20 meeting in Toronto. The meeting was hosted by SI President, Prime Minister George Papandreou, with the participation of Prof Joseph Stiglitz, Chair of the Commission; SI Secretary General Luis Ayala and Commission members Anatoly Aksakov, Member of the Russian State Duma, for A Just Russia Party; Eero Heinäluoma, SI Vice-President from the Social Democratic Party, SDP, Finland; Ibrahim Boubacar Keita, Former Prime Minister of Mali and Leader of the Assembly for Mali, RPM; and Antolín Sánchez Presedo, Member of the European Parliament, Spanish Socialist Workers’ Party, PSOE. Also attending the meeting as guests were academics from the United States Prof James Galbraith and Richard Parker, and British political analyst Peter Kellner.
The Commission members first recalled the conclusions reached by the recent Council meeting of the International at the United Nations in New York, in particular the Statement on the Global Economy, and reacted with some disappointment to the lack of a unified strategy emerging from the meeting of the G-20 leaders in Toronto, reiterating the call made in New York for multilateral solutions to what remains a global crisis. The position of the Commission that a too rapid exit from stimulus policies could lead to a return to negative growth was reiterated. The participants also turned their attention to the sovereign debt crisis, the latest manifestation of shifting economic concerns from private to public finances, and the role of ratings agencies and speculators.
A lack of aggregate demand at a national and global level was highlighted as the current driving factor behind the present phase of the financial crisis. When the private sector bubble collapsed in late 2008, government investment was needed to pick up demand, but in the current situation there is simply not sufficient global demand for all affected countries to export their way out of their predicament. Three mechanisms to increase aggregate demand were suggested. Firstly, a redistribution of income by such means as a bank levy or increased income tax on high earners that would move wealth from those who are not spending to those who would; second, a new global reserve system that could distribute money to developing countries, giving them purchasing power and helping to drive demand by using resources that would otherwise be idle; and third, as many of the banks are now saddled with past liabilities they cannot get rid of, it was proposed that new financial institutions such as development banks and green banks could create new credit mechanisms, enabling credit to flow once more and getting resources to public needs. The considerations of the Commission on ways to stimulate global aggregate demand were made within the perspective of a world where over 50% of GWP is already generated by emerging economies, which have the capacity to drive growth and demand through a period of recovery, if finance and resources to spend are made available.
Amongst participants there was also reaction to the latest wave of austerity measures proposed by governments across Europe, with the view emerging that the strategy of cutting a way out of the crisis would not work. The inevitable consequence of these measures is an increase in the already high unemployment levels, further reducing government revenues and risking opening the way for a return to recession. This collapse in revenues accounts for half of all the increase in budget deficits since the start of the crisis, with discretionary governmental stimulus policies making up only 7.5% of that increase. A further fall in revenues as a result of austerity measures would unquestionably exacerbate deficit problems; it was therefore felt that more realistic targets needed to be adopted for budget consolidation.
There was also agreement that a better system of global governance would be needed to safeguard against a similar crisis in the future. Such a system could ensure more transparency in the financial sector, with lessons needing to be learned from the aftermath of the bank bailout, when the funds made available were in some instances used in ways inconsistent with the reasons for which they were provided. For the economy to return to sustainable growth, it is vital that banks invest in the real economy and lend to small and medium-sized businesses rather than focussing on high-risk investments. It was noted that the global economy could be regarded as going through a period of reconstruction, and that civilisations have historically tackled the need to reconstruct themselves through effective institutions.
The role of social democracy in defending basic human values in such a time of cuts and austerity was also underlined, with many participants speaking of the importance of democracy, solidarity and strong institutions. Where once it was said in some parts of the world that democracy had to be sacrificed for economic growth and development, now vital institutions, jobs and pensions were coming under threat. The social democratic alternative had to be consistent with the basic social values of sustainable human and economic development, and the SI needed to be at the forefront of presenting this alternative to the narrative of cuts and austerity invoked by those who led the world economy into crisis, it was stressed.
In the past, many of those participating in the meeting had lived in states which were not models of democracy, but had been repressive and captured by personal interests. There was therefore a feeling that the debate should not be presented in terms of the state versus the market, but how to make the market serve the people. Global governance was worth fighting for, and it was promising that a growing consensus was emerging in favour of a financial transaction tax, an initiative promoted by the SI which would represent a way of redistributing some of the additional aggregate wealth created by free movement of goods, and using that increase in global wealth to provide people with more security and adequate social insurance.
Throughout the discussions, advancing a new financial architecture, increasing transparency in the banking sector and addressing the current phase of the financial crisis in a spirit of solidarity and sustainability were advocated by the participants. In the short run, the consensus was that the emphasis should be on growth, with public debts and budget deficits reduced in the longer term once the recovery is secure.