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UPDATED: July 26, 2010 NO. 30 JULY 29, 2010
Embracing a New World
As Europe readies for deep financial cuts, the international community must also prepare

For all the talk of efficiency being the key to delivering cuts, the vast bulk of UK government spending goes not to defense, or education or running courts, but to welfare and health spending. These alone take up over one third of all UK government expenditure. It would be a similar figure across the EU. And these are the budget areas where politicians, in the end, have to direct their most sustained attack. No one underestimates the problems this will cause. Both of these areas affect people directly. They impact, for instance, how much people get in allowances if they cannot work or when they are retired, or the kinds of treatment they can get in hospitals.

One immediate target has been pensions. Both in France and in the UK, the retirement age is now being revised. France wishes to raise it to 67. The UK is now talking of people needing to work long past the current limit of 65. The generous final salary-linked packages that people got after retiring, usually at 60, from government or civil service jobs are likely to soon become a thing of the past. Teachers, civil servants and others who are employed locally or nationally by the state will need to contribute far more into their pension schemes. There is simply no longer the money to fund massive, generous state pensions. Companies are also tightening their restrictions.

As it becomes clearer where cuts are going to occur, the likelihood of public anger spilling over into protests is going to rise. Already, there is widespread anger in France over the planned changes to the retirement age. In the UK, while there has been much talk about cuts, so far none have been implemented. When they are, the real impact will start to be seen. It will no longer be a theoretical debate, but something that is happening in the real world. We then have to get ready for protests, mass incidents and increasing challenges to government authority. This happened over cuts to public expenditure in Greece, where several died in protests in June. Governments need to communicate clearly to their populations why the cuts are happening and how they will lead to better times. Failures here could lead to major unrest. It is perfectly possible that we may see the fall of governments in the era ahead if this hugely controversial and difficult process is mishandled. The bottom line is that never before has any European government needed to undertake cuts anything like the magnitude being talked of now.

International impacts

Internationally, there are two big impacts. They both have a direct bearing on China and other developing countries. The first is that most developed countries are pinning their hopes on growth to exports. This is one of the main areas where they see things they feel they can be optimistic about. And inevitably, the vast potential consumer markets in China and India figure large in their thoughts. While consumption has risen in China in recent years, as a proportion of the GDP, domestic consumption is still only 37 percent, compared to figures over 60 percent for the United States and the EU. The emerging Chinese middle class is of great interest to Western companies, as potential customers and as a major source of likely growth. We are therefore moving from an era in which goods were sourced by multinational companies within China for export, to one where Chinese customers themselves become the target for foreign sales efforts. This is only going to grow more intense as the years progress, simply because there are few other areas of potential growth anywhere near as large as China. If economies like the UK or France or Germany, or for that matter the United States, wish to export themselves back into healthy growth, they will have to find ways to crack the Chinese market.

The second point of international impact is longer term and more profound. As Stephen Green, Group Chairman of the HSBC Holdings Plc., made clear in a recent book, the world has changed fundamentally over the last three years. We have moved from one in which 12 percent of the world's population live in developed countries, but consume, spend and use energy per capita many times that of people in developing countries. Things have changed. Their governments have the major debt problems outlined above. They are facing increasing competition in the global marketplace. They no longer have the kind of systemic advantages that existed in the past. This is not to declare that the old world is passing away, and that in the new world a whole new group of countries will be dominant. But it is to say that the world has become more complex, and that every country is going to have to think hard about its main advantages and work within them. Worryingly, the UK slipped from sixth to seventh place as a global exporter in early 2010. It has to work harder to be a major exporter again. Reliance on service industries has been misplaced. Now there is a need for a balanced and mixed economy.

The era of deep cuts in public expenditure in the EU, and possibly, the United States, is also the start of a period of a new kind of economics. This is what countries are working out at the moment. Old frameworks are disappearing, with new ones coming into existence. As Green says in his book, this is not something that developed countries need to despair over. It is a natural development. But it is something they need to work with, and find a strategy to deal with. No one wants the world that replaces this to be as full of inequalities and unsustainability as the old one. With the right kind of policies and a new global approach, the world may well be more stable and more prosperous after going through these last few years of uncertainty and pain. And that hopefully will have meant that all of this finally served a positive and useful purpose.

The author is a senior research fellow with the Royal Institute of International Affairs in Britain

(The viewpoints in this article do not necessarily represent those of Beijing Review)


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