Confusion: Stumbling from the Current Crisis into the Crisis of the Future

Anti-recessionary Rashomon. Without short-term measures, we will struggle to survive the crisis, and without long-term measures, we will stumble from this crisis into future crises. If we cannot do this ourselves, we are left with the IMF

writes Dr. Žarko Primorac
[email protected]

The announcement of the abolition of the second pension pillar was just one in a series of counterproductive moves in the conception of anti-recessionary policy. Here are some more: while all countries affected by the crisis are reducing all consumption, especially public spending, we are increasing salaries in the public sector. At the same time, an unrealistic state budget is being adopted – in size and structure. Furthermore, a law banning Sunday work is being passed, which will result in the loss of hundreds, if not thousands, of jobs.
While other countries are alleviating the burden on the economy by reducing taxes, we are announcing an increase in VAT. The government has decided to ask the Economic Institute to develop an anti-recession program, which is certainly a positive step. It is a rare precedent in our political practice to seek the opinion of a qualified institution on a strategic issue. However, even these reasonable but insufficiently strong proposals from the Institute are being dismissed in advance.

Ignoring the Danger Several of the above examples show that either we do not understand or ignore the danger of recession. If it is a matter of misunderstanding, and there is some of that, the case is easier than if we are facing the most severe economic challenge with a casual attitude. In this context, it is worth mentioning one positive move: by increasing the threshold for insured deposits in banks, the government has sent a strong signal of support to savers, which has probably saved the banking system from collapse.

After the aforementioned illogicalities in crisis management, it is time to ask ourselves what situation we are really in?
All serious estimates show that Croatia is strongly affected by the crisis. GDP growth rates and industrial production are in negative territory, illiquidity is rising, lending to the economy is becoming increasingly difficult, borrowing opportunities abroad are very limited, the state budget is not being filled at the expected pace, the government is having difficulties refinancing foreign obligations, and exports, employment, and domestic demand are declining. We do not know what else needs to happen for us to believe that we are in a recession.

EU Fiscal Stimuli For a successful fight against recession, a strategic program is needed, similar to those adopted by all more developed countries. EU member states are, according to Joaquín Almunia, European Commission Commissioner, focused on fiscal stimuli to increase competitiveness, encourage bank lending, and provide any other support to companies to maintain production.

In addition, programs for reducing public spending have been adopted, and ultimately direct state intervention through recapitalization and takeover of banks. It is estimated that the European Union has already engaged about 20 percent of its annual GDP for various anti-recession interventions. The same estimates indicate that about seven percent of the world’s GDP is, in some way, pledged to address the financial crisis.

As seen from the introduction, there is still considerable confusion in our country; we are far from adopting an effective program to combat the recession. The government is obviously struggling and finding ‘salvational’ solutions in the form of establishing an Economic Council, dragging out discussions, and various hesitations.

The Solution in Production No matter how complex this crisis is, the fundamental solution lies in production and saving jobs in the short term, along with a thorough restructuring of economic policy and priorities in the long term. Everything should be subordinated to this. There is no point in lamenting whether this is a recession or not, or whether the exchange rate should be adjusted.

When it comes to the exchange rate, of course, little can be done in a one-off manner. Especially if there is no consensus on the need for a strong turnaround in public spending policy. However, it should be known that the exchange rate cannot be stable if the relationships between production and consumption, exports and imports, foreign debt, and foreign exchange reserves are disrupted.
In the end, a program of anti-recession measures – both short-term and structural – should be adopted as soon as possible. Without the former, we will struggle to survive the current crisis, and without the latter, we will stumble from crisis to crisis in the future. If we cannot do this ourselves, we are left with only one solution – the International Monetary Fund.