Budget Savings for 2009: A Wrong Measure at the Wrong Time

The upcoming recession is a time when government spending should more than ever stimulate production and employment. Savings can be harmful

From panic and the brink of collapse to euphoria and relaxation. This could be the shortest description of the last week in Croatia. By the weekend, dramatic news about the collapse of world stock exchanges and money markets, as well as the collapse of the Zagreb Stock Exchange, caused panic among savers. No matter how responsible the media were this time for not checking how many people were withdrawing their savings from the bank, the situation was becoming increasingly dramatic. After EU leaders agreed on coordinated state interventions to ensure that no European bank would go bankrupt, calm returned to Croatia.

Now an effort is being made to create the image that everything is as it was before. Daily newspapers are bursting with headlines about the return of stock market euphoria, announcing a beneficial six billion kuna payout from MOL to previous shareholders of INA, and the government is committing to guarantee every citizen not 100,000 but 400,000 kuna in savings. The good news is that the global and local collapse has been avoided at this moment. The bad news is that this has eliminated at most five percent of the total risk created by global financial engineering. Regardless of the fact that the fire was extinguished through a coordinated action that could also be called a ‘world government in formation’, things have actually just been swept under the rug.

All those thousands of billions that world governments will intervene with to save bankers—moral hazard creators—actually do not exist. They will be spent in these weeks, and then for years to come, the bills will arrive for taxpayers to pay. Simply put, it’s as if someone asked citizens: ‘Would you like to pay for the crisis all at once or in installments?’ Of course, they chose to pay in installments.

To the same extent that the Croatian National Bank, led by Governor Željko Rohatinski, is managing well in these crisis times (if he had such ambitions, the governor would have a good chance of winning many votes in future presidential elections), the government once again shows that there is no deep reflection on economic strategy in the Banski dvori, especially not in times of shocks.

To be fair, it should be acknowledged that the government at least listens to advice from the HNB. At the same time, it copies, of course with a delay, some moves from faster colleagues in other countries, primarily regarding the increase in the amount of guaranteed savings.
It should be realistic. The fact that the state takes on the guaranteed return of 90 percent of citizens’ savings is more of a psychological than a financially grounded obligation. If around 120 billion kuna of guaranteed savings were to come due, it would require spending the entire annual state budget! More importantly, as Governor Rohatinski conveys in an interview for today’s Lider, it is crucial to ensure liquidity in the banking system.

Unfortunately, according to all indications, the truth is as follows: we all in Croatia must be happy that a financial and economic collapse has not occurred. Although until yesterday we all feared a recession, now we should be looking forward to it. It will be great if it does not turn into a depression, and then into a long and deep crisis. The epilogue will depend on global events, but also on internal Croatian developments and moves. When looking at what the Croatian government is announcing, apart from the previously mentioned increase in guaranteed savings, the only move that has been announced was Prime Minister Ivo Sanader’s order to his ministers to start looking for savings in the budget.

At first glance, it sounds logical. In a crisis, one should save. But is that really the case? The government has a refined sense of making wrong moves at the wrong time. Instead of the state monitoring its spending in good times, it is now announcing that it will do so with a delay and with dangerous consequences. The next year will be marked by reduced investments in the private sector. This will decrease demand for many products and services. There will also be fewer tourists who will spend less.

If the recession is to be mitigated in such times, it is precisely the state that must invest through the budget. Of course, the structure of budget spending should be reconsidered, but swinging from one extreme to another guarantees chaos greater than necessary.
Moreover, as soon as the danger of collapse diminished, the unity of the Central and commercial banks began to be undermined. Soon, large companies will also get involved. The first episode of the crisis has only just ended.