Vicious cycle of austerity and unemployment

Updated 05 June 2013
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Vicious cycle of austerity and unemployment

Weak growth and rising unemployment in the euro zone is prompting a change in policy direction away from budget austerity, according to QNB Group. The euro zone economy has now been in recession for the last six quarters, contracting by 1.5 percent in real terms over this period. The contracting economy is providing fewer opportunities for job creation and pushing up unemployment, which reached 12.1 percent of the labour force in March 2013. Amongst under-25s, joblessness is even higher at 24 percent. Both measures of unemployment are now the highest on record.
A primary policy response to the 2008 financial crisis and the European sovereign debt crisis (which reached peak intensity in summer 2012) was to implement budget austerity measures across the euro zone. This involved a sharp drop in public expenditure growth, which fell from an annual average of 4.5 percent in 2007-09 to 1.2 percent in 2010-12. This meant that only 170 billion euros was added to euro zone budgets in 2010-12 compared with 570 billion euros in 2007-09, an overall slowdown of 400 billion euros.
The main areas targeted by governments to slow expenditure growth have been social benefits, public sector jobs and wages, and capital investment. Cutting government jobs and investment has a direct impact on growth and unemployment. Meanwhile, reducing social benefits at a time of hardship is leading to widespread dissatisfaction and protests. The high levels of sovereign debt in Europe have discouraged the counter-cyclical spending that government usually uses to rebalance their economies during recessions. Debt interest and capital repayments, which are not supportive of growth, were the only areas with higher growth in 2010-12 than in 2007-09.
Therefore, euro zone countries policy response has done little to tackle the unprecedented level of unemployment and weak growth, according to QNB Group. Officials increasingly appear to be considering a policy reversal. The target dates for reducing budget deficits below certain thresholds have already been pushed back in France, Spain and the Netherlands. In April, the president of the European Commission, José Barroso, said that Europe might have reached the politically acceptable limits of austerity, although he said he still believed cuts in budget deficits were needed. His comments were more in line with the view of the IMF, which has warned euro zone policy makers against adhering too strictly to budget deficit targets as this risks deepening Europe’s recession.
Budget deficits have fallen from 6.4 percent of GDP in 2009 to 3.7 percent in 2012. Government debt in the Eurozone has now risen from 80 percent of GDP in 2009 to 91 percent in 2012. Although debt levels are rising, there may still be room for manoeuvre. Increased debt-funded spending in growth-supportive areas, such as investment or intermediate consumption could potentially increase revenue and trigger further investment, helping to reduce debt in the longer term.

Heavily-indebted countries have, in the past, increased spending and exhibited strong growth as a means to repaying debt. The US and the UK in the 1950s both had debt in excess of 100 percent but high spending drove strong growth and enabled them to reduce debt to sustainable levels.
Reduced austerity in some of the larger countries could also help tackle unemployment across the region, especially if coupled with reforms to increase labour force mobility around the EU.
However, the overall debt levels in the Eurozone cloud a more nuanced picture among individual countries as both unemployment and debt vary considerably. Unemployment in non-core euro zone countries (Italy, Spain, Greece, Ireland, Portugal Cyprus, Estonia, Slovakia and Slovenia) is 17.7 percent while unemployment in core countries (Germany, France, Austria, Belgium, Finland, Luxembourg, Malta and Netherlands) is 7.6 percent.
Greece, Italy, Portugal and Ireland, each have debt levels of around 120 percent of GDP or greater, leaving them with little room to ease back on austerity. Greece is in the worst position with unemployment at 27 percent and 66 percent for under-25s while debt is 157 percent of GDP (although it is falling). Conversely, Spain, the other country with particularly chronic unemployment (27 percent and 56 percent among under-25s), may have room to borrow more to provide additional government support to the economy.
In addition to more growth focused policies, QNB Group argues that structural labour market reforms are still required. Investment in programs to get people back to work, adjustments in labor costs and greater labor market flexibility should all help. These policies are most needed in countries with high unemployment, such as Greece and Spain.


Malaysian playboy financier in cross-hairs after poll upset

Updated 27 May 2018
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Malaysian playboy financier in cross-hairs after poll upset

  • Malaysian financier has become lightening rod for Malaysian anger at the 1MDB mega scandal
  • New government wants to bring back Jho Low back to country for questioning

KUALA LUMPUR: Baby-faced playboy Jho Low, a financier at the center of Malaysia’s 1MDB mega-scandal, may find his days of hobnobbing with celebrities and splurging on property and art are numbered as the new government pledges to bring him to justice.

Suspected of being a key figure in one of the world’s biggest frauds along with ousted leader Najib Razak and his cronies, the chubby, bespectacled businessman has become a lightning rod for public fury at the controversy.

He led a high-rolling lifestyle after allegedly stealing huge sums from 1MDB. He hung out with celebrities such as Leonardo DiCaprio, partied with Paris Hilton, and reportedly spent vast sums in New York’s hottest nightspots.

As investigations into the controversy accelerated, the Malaysian took to a luxury yacht allegedly bought with stolen cash and sailed around Asia, until the vessel was seized off Bali recently as part of 1MDB-linked probes.

The Wall Street Journal reported that he was on the Thai holiday island of Phuket earlier this month awaiting the election results. His current whereabouts are unclear.

But time could be running out for the flamboyant 36-year-old after Najib’s scandal-mired coalition suffered a shock defeat at the May 9 poll in large part due to public anger at 1MDB.

The new government, headed by Najib’s ex-mentor Mahathir Mohamad, has reopened probes into the sophisticated fraud and wants to haul Jho Low — whose full name is Low Taek Jho — back to Malaysia.

Abdul Razak Idris, a former senior officer from the anti-graft agency which led probes into the scandal until they were shut down under Najib, said he believed Low was the mastermind.

“He must be arrested and brought back to Malaysia so that we can bring back all the money parked abroad,” he told AFP.

Low, who held no official positions at 1MDB but is believed to have exerted great influence over the fund, has previously denied any wrongdoing. He could not be contacted for this article.

In a first move aimed at pressuring him, Finance Minister Lim Guan Eng on Friday instructed tax authorities to probe Low and his family — many of whom remain in Malaysia — over 1MDB.

Malaysian social media lit up with delight at the prospect that a man who allegedly plundered state coffers was now being aggressively pursued.

“Jho Low is the key to all this 1MDB debacle,” read one post on Facebook. “Catching him is like catching the one ring that rules them all.”

Low’s current precarious position is a far cry from the image he once projected of an urbane, well-connected investment manager.

He was educated at elite British school Harrow, and during his time in England befriended Riza Aziz, Najib’s stepson, a friendship that helped him get close to Malaysia’s former ruling family.

He studied in the US and moved to New York, where reports of his profligate spending began to multiply.

The Department of Justice, which has launched lawsuits to seize assets allegedly bought with stolen 1MDB cash in the US, alleges $400 million from the fund was sent to America “for the personal gratification of Low and his associates.”

This is just one part of the vast fraud. The DoJ claims that some $4.5 billion was stolen from the fund, which was set up in 2009 and overseen by Najib. Najib and 1MDB deny any wrongdoing.

As well as the yacht, Low is alleged to have used stolen cash to buy artworks by Monet and Van Gogh, high-end real estate and to give gifts to celebrities including DiCaprio and Australian model Miranda Kerr.

They have both turned the gifts over to US authorities and are not accused of any wrongdoing.

In a rare media interview with Malaysia’s Star newspaper in 2010, Low complained of being depicted as someone who led “an excessive kind of lifestyle.”

“Ultimately, I am Malaysian,” he said. “I am one who does not forget my country and I think there is a lot we can do for Malaysia.”