Economic turmoil means we all must face reality

Economic turmoil means we all must face reality

The US is temrinal, Europe is dysfunctional, and 'she'll be right' can no longer stand.

In early August a heart-stopping crisis ensued. No, not Afghanistan or Zimbabwe, or all countries through the alphabet under siege. This is normality, and the suffering is done by others.

Rather, the Western financial markets suffered a bout of hysteria. The media augmented the temperature.

Will the real Australian economy follow its stock market sensitivity and burn with the conflagration hitting the US and Europe? The rational response would have been to go camping. Unless you happen to be up to your eyeballs in speculating on margin.

For the sane among us, this short-term stuff is white noise.

The long term is a different matter. The US's condition is terminal. The US is addicted to empire but can no longer afford it. Both the US elite and its corporations decline to fund the affairs of state from which they are the major beneficiaries. The European Union is structured on an unsustainable contradiction, indeed several. The EU was constructed to eliminate Franco-German enmity, but also to keep (West) Germany in the Western camp. Thus Germany became the premier industrial exporter to the rest of Europe, but the quid pro quo for all EU members has never been established. EU funds for lifting its backward regions have atrophied. Meanwhile German surpluses poured into dysfunctional outlets in the now excoriated PIGS (Portugal, Ireland, Greece, Spain), yet the causes of the inevitable collapse are sheeted home to only one side of the transaction.


Later extension of EU membership has been misconceived, compounding the imbalances. Greece is a convenient purchaser of German military hardware, but has little to sell to the EU - even its tourist revenue is heavily siphoned off by outsiders.

Moreover, the Brussels infrastructure comprises the negative components (a repressive central bank, the Maastricht Treaty fiscal restraints) but none of the positive components (industry policy) essential for functioning economies. Brussels was constructed from an orthodox mindset, with German austerity as a seeming model, but its creators never acknowledged the complex sources of the German industrial powerhouse.

To this adverse background add the comprehensive fiasco generated by the US and European finance sectors. The US finance sector (including its ratings agencies) is corrupt. Major European banks (Deutsche Bank, Socit Gnrale) have transcended their moorings, mimicking their American counterparts. Nothing has been altered in this system that brought us the 2008 crisis, save for a massive drain from public exchequers in propping up the sector.

The finance sector is perennially referred to as ''the markets''. By a linguistic miracle this collectivity of incompetents and spivs is imbued with a transcendent rationality. This is the mob now demanding blood sacrifices from hapless European populations, bystanders to the crisis. Of what relevance is this trans-Atlantic imbroglio to antipodean Australia?

At first sight, optimism regarding relative disconnection seems warranted. In 2010, Australian exports to the US were a mere 4 per cent of total exports (so much for the bounty promised from the 2005 Australia-US Free Trade Agreement), and 8.9 per cent to Europe (6.7 per cent to EU countries). Asia exports to the troubled US and Europe and Australia exports to Asia, but there is no automatic downside to this linkage. Australian banks may face higher overseas borrowing costs, but they can afford to absorb them.

In its economic development, White Australia confronted first the necessity and then the benefits of global linkages, but also its perils. The heavy dependence on rural exports was always a problem, both for the dramatic instability of income and for the inadequacy of the employment it generated. Hence the development of structures recognisable under the label of the post-Federation 'Australian Settlement'.

Although a colony for long catering to the mother country's imperatives, Australia extracted its pound of flesh from the relationship. Post-1945, Labor and Coalition governments leveraged the boom period and its relatively permissive political opportunities to good effect. But then came the discoveries of massive coal and iron ore deposits.

From the late 1960s, the money was on deregulation and unhindered globalisation.

The major sectoral beneficiaries have been resources and finance. The perils of global economic linkages became yesterday's pathology.

It has been a cargo cult mentality ever since. Dig it up, ship it out, with a succession of developing Asian countries happy to oblige. Meanwhile, the engorged finance sector has luxuriated in destructive self-indulgence, creaming off the fat of ever-expanding financial arbitrage.

Australian policy makers and opinion makers live in a contradictory world. The lucky country is our motif and laissez-faire is our modus operandi. Yet every frisson from abroad brings panic. The contradiction is resolved by the fact that the panic is short-lived. We worry perennially that the China growth express will splutter, but do nothing.

In late August, BlueScope Steel announced that 1000 workers were to be retrenched. There followed a flurry of media attention to the latest manufacturing crisis. But elite opinion is that we lack a ''comparative advantage'' in manufacturing, and political opinion puts the crisis deep in the too-hard basket. Two weeks later, repose has been restored. The real threat of ongoing US and European turmoil is the awful prospect that Australia might have to revisit its credo that one can coast along, no worries, into a comfortable future.

Someone in authority might examine the current account figures, typically in deficit at greater than $50billion per annum.

Last financial year, the deficit was reduced to a mere $33.6 billion, due to unprecedented resources exports. But resources exports, laissez-faire in practice, will never bring the current account into balance.

What would the Australian economy look like if the country had not possessed its cornucopia of natural resources?

This is the hypothetical environment desirably assumed as a strategic basis for confronting the perennial destabilisation to be expected from an integrated and hypertrophic global economy.

  • Evan Jones is an Honorary Associate in Political Economy at the University of Sydney.

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