Growth and austerity: a complex policy mix

The World Economic Forum’s meeting in Istanbul attracted over 800 business leaders, politicians and bankers to consider the prospects to the region’s success and transformation. Among the participants was Ukrainian President Viktor Yanukovych.

The Middle East North African and Eurasia, which Ukraine borders, is one of the fastest growing regions in the world. However, the uncertainty over the performance of its near neighbour, the EU, currently throws a potentially dark shadow over the region’s economic outlook. The economic uncertainty at present lies around the future of the euro and the impact that the loss of any nation from the currency union could have on the European banking system and economic growth.

At a televised Bloomberg panel discussion the audience was pessimistic with 35% saying that the eurozone will not survive in its current form. One of their major concerns was that markets work faster than consensus based democratic decision-making amongst the 27 EU member countries and therefore often outpace the action of policy makers.

A new concept “growthsterity” was also discussed at the Forum. The phrase comes from the conjoining of two words, growth and austerity.  “Growthsterity” was used to sum up the required policy mix to get Greece and the eurozone back on track. In practice, it means the need to combine tough fiscal policies which reduce government debt, with policies which encourage growth. This is big ask and is now at the heart of European policy debate and, in particular, the policy discussions between Germany and France, the EU’s two largest and most influential members.

But how does uncertainly in the eurozone impact on the countries outside?   Well, Ukraine for instance is a very open economy with significant trade with the EU and eurozone countries. If growth in these countries remains low then it will have an impact here as there will be weaker export demand for Ukrainian produced goods and services that could slow growth.

What was clear from the Forum was that the limits of austerity are being reached in the EU and eurozone countries and that it is time for the smart targeting of policies which can reduce both government debt and can stimulate business to grow. If Europe is to pull itself out of recession then the focus must be on enterprise and generating employment and taxes and of course growth.  This will need to address the question of freeing up liquidity in the region’s banking sector the help finance business expansion and investment. If the EU does pull off the complex trick of growthsterity then its neighbours, including countries such as Ukraine will also be the winners.

Jock Mendoza-Wilson is the Director of International and Investor Relations at System Capital Management and a participant at the World Economic Forum on the Middle East, North Africa and Eurasia 2012.

Picture: A Greek flag flies behind statue to European unity outside the European Parliament in Brussels. REUTERS/Francois Lenoir.