The year ahead: What 2012 will bring
We have just come out of an historic year as far as the world’s political economy is concerned. 2011 saw the deposition of dictators, the introduction of austerity measures in the UK and across Europe , as well as a seemingly never ending Eurozone crisis. As we enter 2012 there are more questions than answers and we have a long way to go before we get out of the woods.
The crisis currently plaguing the Eurozone has been, if not the biggest story of 2011, certainly the most important. With continued procrastination from European leaders and no clear solutions to this gargantuan problem 2012 will probably see things get worse.
New Years Day is traditionally considered a time to turn over a new leaf, resolutions are made and fresh optimism emerges in the hope of a new beginning. Not this year though. New Year messages from all the key European leaders promised nothing but more pain with just a distant hope of light at the end of the tunnel.
In all likelihood Europe will plunge back into recession. This is all but a certainty for countries on the brink such as Italy. It is very likely that Britain will too. Not good news for anyone hoping to find a job, especially graduates with youth unemployment breaking the 1 million mark. The only country that appears anything like safe is Germany with recent figures showing unemployment at record lows.
So what will happen to the Euro? There are only three possible outcomes here. The one everyone in Europe is hoping for is continued unification. However, this is far from a certainty but still the most likely option. If 2011 taught us anything it is that our current EU politicians have found it incredibly hard to act quickly and decisively; attributes that may well be needed this year.
A breakup could come from two sources. One is a German led exit of the healthier economies, leaving the Eurozone composed of the weakest economies in the EU. This option is not beneficial for anyone bringing with it the risk that Europe could divide or even break up. Fortunately such an outcome is extremely unlikely and will not happen this year.
The other, more realistic option is the exit of beleaguered insolvent Eurozone economies, Greece being the first domino to fall. This would be painful, certainly in the short term. The panic that a Greek exit would cause in other weak economies could cause bank runs. This is most likely in Ireland and Portugal, however it is not hard to imagine it spreading to Spain and Italy too. If that were the case the devastation would be huge. Support for further liquidity injections would be hard to come by given the previous record of such action.
In blighted Britain, we face similar problems, although they differ in origin. Whilst the PIGS (Portugal, Ireland, Greece and Spain) are forcing austerity measures on their countries out of necessity, with the vice of the markets gripped too tight, the UK is not under such extreme pressure. Instead our austerity measures are self imposed, but they must continue as our fearful government are worried any deviation will be met by punishment from the markets.
The only respite is likely to come from the Bank of England and their quantitative easing programme although perhaps the word respite is being too generous; it has had little impact on helping those who need it most so far. Quantitative easing is carried out by buying assets from large companies using money effectively created out of thin air thus any benefits it provides come at the cost of inflation. Inflation is set to fall this year, close to the target of 2% (although with the demise of Europe I would be surprised if it didn’t fall further) which will give the Bank of England the political breathing space to continue their QE programme.
Given the fiscal consolidation currently underway, you could be forgiven for thinking mad the notion that the 50% tax rate could be scrapped if a report due soon finds that it has not raised enough money. Especially given that housing benefits have been capped at £400/month which could create an evacuation of the poorest households from expensive city centres, particularly London.
With all this doom and gloom, at least there are two pieces of good news that Britain can look forward to next year. The Queen will be celebrating her 60th Jubilee with the nation on 2nd June which looks set to continue the wave of monarchism currently sweeping the nation after the marriage of the Duke and Duchess of Cornwall last year. Even for the staunchest republicans (in the British sense of the word) the extra bank holiday will surely be welcomed, but don’t be surprised to see it blamed for our continued economic woes.
Only a few weeks later London opens its doors to the world hosting the 2012 Olympic Games. Boris Johnson, who famously missed out on tickets, may still miss out in his capacity as London mayor if he is not re-elected in May. No doubt he will sneak in somehow though.
The overthrow of dictatorships across North Africa and the Middle East, took many of us by surprise, indeed nobody could have predicted that 26 year old Tunisian Mohammed Bouazizi’s self immolation would spark a revolution that deposed dictators across the Arab world. Now we are faced with an unprecedented new opportunity. Libya, Egypt and Tunisia are now all looking at the prospect of new regimes, whilst Bashar al-Assed still clings on in Syria despite a continuing uprising. In the former countries, the most devastating, destructive and even exciting events are coming to an end, but the most important work has yet to begin.
The protests started as there was little hope for young people to achieve success and their voices were not being heard. They asked for opportunities to start careers, build their own businesses and enter industry but to little avail. The grip of dictatorship was too strong. What they have achieved by removing these leaders is hope for a better future. Nothing more.
What protestors need now is a basic system of capitalism; and they must do everything they can to get it. They face a once in a lifetime opportunity to make real progress and currently victory is far from assured. In short, we have seen the political revolution, now we need the economic transformation. They should be careful not to follow the corporatism of Europe and the US however, they must pave their own future.
The best way this can be achieved is by reforming local institutions. There must be effective tax collection, law and order and an effective legal system, which can enforce property rights and contracts. This will be difficult if they are left alone. As Professor Tim Besley of LSE argued “the international community should do whatever it can to reform local institutions so that these countries move onto the path of common interest and not the path of fragility.”
Political revolution has not spread to all countries though. As Syria, Yemen, Morocco and others continue to protest, there is a chance that dissent could spread further, especially if they achieve success. Sub-Saharan Africa may be next, the ingredients are in place, and all it appears to need is a spark. Angola for instance has a huge oil industry yet the majority of her population lives in absolute poverty. Leader José Eduardo dos Santos has been in power since 1979 and has done little to help the plight of his people. Indeed he is lucky to be alive after 2010’s foiled assassination attempt.
Whatever 2012 does bring it is sure to be an interesting year albeit not the most comfortable. Whilst Mayan predictions of the apocalypse this year will not come true, for many the reality may feel just as bad.
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Thanks Beowulf for your input on the LVT issue. I originally sided with the idea that the LVT shluod be done on the state level. I don’t think there would be a constitutional problem, but there would be a problem for the states since many states, with NH strictly relying on property taxes. That is why I originally sided with the idea that LVT shluod be done on the state level.I felt the national government shluod rely on MMT, excise taxes on natural resources or one less prone to political corruption, the flat and universal excise tax of a national sales tax made progressive with a citizen dividend to compensate for economic injustices.The reason why I switched my position after discussion with geolibertarians, is that fixing the monetary problem is equally important to fixing the land problem. Solving one problem would make the other problem worse.I felt monetary reform shluod be sold as a package of tax reform in a populist package of the single tax plus monetary reform. To make the LVT reform on the state level would require overcoming the tyranny of the many who are landed, though at this time it would be easier considering the landed majority have been handed losses due to land speculation rather than hanging onto undeserved income of increasing increments of land values.Considering your concerns, it might be best to find a way to find a mixed way of implementing LVT for both states and the national government or a way to push states towards LVT reform in a constitutional way.Monetary reform alone at the national level would alone allow us to get rid of the income tax. This would be quite an accomplishment. We would be left with corporate taxes and such, but the income tax would be history.I’m not sure of the solution and how to sell monetary reform and tax reform as a single package. I shluod probably leave the solution open-ended in a recent article that I wrote. Though Georgists would like to have LVT done on the national level, my original practical concerns are probably valid that it probably shluod be done on the state level.