Cost cutting is wrong way out of crisis: United Nations

“A number of developed countries are shifting too soon from economic stimulus measures to government budget cuts,” the United Nations Conference on Trade and Development (UNCTAD) said in a summary of its Trade and Development Report 2012.

Speaking to reporters, Heiner Flassbeck, a former German finance minister and director of UNCTAD's Division on Globalization and Development Strategies, blamed markets for giving the “wrong signal” to governments that wages should fall further.

What is needed is for governments “to give a strong signal that this must change,” he said, adding that more cutbacks when the overall economy is in recession will only increase government deficits in the long term.

“If you cut wages further it will further destabilize the market and it would go into further recession,” he said.

Indexing wages to productivity and inflation targets could serve as criteria to boost incomes, he said.

One of the main problems was the lack of investment by governments afraid of getting into debt, Flassbeck said, likening the current economic situation to that of 1990s low-growth Japan.

European countries had built up a “mantra of austerity” led by Germany and other countries in the eurozone were following suit, with fiscal deadlock the result, he said.

Even monetary policies such as Quantitative Easing — the injection of cash into the economy by central banks — had not overcome the standstill, said Flassbeck, who added that the world had “maneuvered itself into a trap” of believing that high unemployment meant that wages should fall.

With German borrowing rates hovering around the 1.5 percent mark, he said, “there cannot be a better signal to governments to spend ... If Germany is going to save now, who is going to spend?”

Because of the economic impasse, Flassbeck said the U.N. expected “stagnation starting from now,” with growth at about 1.5 percent for 2013.

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