By: Dr. Mike Campbell
Governments act in the name of the people that they serve. Whilst nobody is actually suggesting that the vast debts that most governments have accrued in our name were in any way fraudulent, the average man on the street feels (understandably) that the problems of sovereign debt are not of their making. This has led to a very significant disconnect between the people and the governments elected to serve them and has manifested itself in the fall of governments and/or leaders in Greece, Ireland, Portugal, Spain and Italy. So far, the greatest expression of popular anger at the situation that people on the sharp end of austerity measures find themselves in has been in Greece which has seen rioting, destruction of property and even loss of life.
The same governments which regularly admonish citizens to “live within their means” and avoid excessive personal debt have been putting things on the slate for years, amassing huge debts which attract very substantial interest payments to service them. All this was fine until lenders got cold feet about the prospects that debtor nations would be able to continue to meet their obligations, particularly in the cold light of the post global financial crisis dawn. Ratings agencies have lost confidence in the certainty that some nations can continue to do so and have down-graded their credit ratings accordingly – this pushes up the yield on the government bonds which are issued to meet obligations and fund other projects, making the likelihood of a default greater and fuelling a vicious circle.
The only course that governments can follow is to reduce outgoings by making cuts in expenditure – the dreaded austerity measures – which are very unpopular with the electorate who, of course, bear the brunt of reduced benefits, higher taxes unemployment etc. However, if the cuts are deep enough to be credible and effective, they are likely to hamper economic growth, leading to higher unemployment, risking higher levels of protest on the streets. Spanish unions called a general strike yesterday which was supported by tens of thousands of protestors in Barcelona and Madrid. The government is set to announce further debt reduction measures in an austerity budget later today.