The Profound Institutional Crisis of the West

The world has been left stunned by a series of events that have recently unfolded in the West: the United States’ credit rating has been downgraded for the first time ever; the sovereign debt crisis in European countries has continued to worsen; scores of people were left dead or injured by the brutal shootings and bomb attack in Norway; and the United Kingdom has been hit by the worst street riots for decades. The emergence of various difficulties and chaotic occurrences serves to indicate that Western countries are currently in the midst of a profound institutional crisis, one that has been triggered by the heavy blow of the international financial crisis.  


Occupy Wall Street protesters marching through New York’s financial district on September 29, 2011. / Photo by Xinhua/Reuters

The persistence of economic woes

Three years after the outbreak of the financial crisis, Western economies aren’t only struggling to recover, but are also knee-deep in trouble. What’s worse is that no resolution or way out is currently in sight.

The brunt of the impact has been the dire debt situation. In the wake of the financial crisis, the fiscal deficits and sovereign debts of developed countries rose to their highest levels since the Second World War, with the debt to GDP ratio shooting up almost 21 percentage points.

According to research by ratings agency Moody’s, the balance of global public debt increased by about US$ 15.3 trillion between 2007 and 2010, with debt from the G7 accounting for 80% of this increase. The International Monetary Fund (IMF) has warned that levels of government debt in the developed countries of the G20 may be as high as 118% of GDP by the year 2014.

The U.S. national debt hit the limit of 14.29 trillion dollars in May this year. The fiscal deficit of the U.S. currently totals 10% of the GDP, while the total national debt has reached 100% of the 2010 GDP. In a bid to ease short-term worries over a debt default, President Barack Obama has signed into effect a bill to increase the debt limit and cut the fiscal deficit, only to result in long-term worries in the market over whether the U.S. will actually be able to cut its deficit.

More than half of U.S. states are in serious debt. Some are even teetering on the edge of bankruptcy, and have been forced to rely on borrowing to get by. California, who is facing a dire financial situation, has been forced to release more than 40,000 prisoners in advance, while some cities in Michigan have laid off one third of police officers in a bid to cut expenditure.

In the Euro area, the sovereign debt crisis is continuing to spread, with Italy and Spain, the third and fourth largest economies in Europe, joining Greece, Portugal and Ireland on the list of countries thought to be in danger of a debt default. The debt risk in France is also worrisome. According to projections by economists, developed countries will continue to face the risk of high debt for the next 20 years.

In fact, the U.S. and Europe have long been deeply reliant on government borrowing as a means of promoting economic growth, and their only means of solving economic and fiscal problems is by incurring new debt to pay off the old debt. The U.S. has consistently relied on a monetary policy of quantitative easing as a means of addressing the debt crisis.

This has resulted in a serious excess in global liquidity which has increased the risk of an asset bubble in emerging markets, something which is not conducive to the recovery of the world economy.

The “jobless recovery” is an after-effect of the crisis which is being commonly experienced in Western countries. The U.S. GDP grew by just 1.3% in the second quarter of this year. Personal consumption expenditure decreased by 0.2% in June, while the increase in personal income dropped to 0.1%.

Unemployment data for July was better than expected, but still remained high at 9.1%. Some scholars say that the rate of unemployment in the U.S. is actually higher than official figures, citing the irrational and impractical statistical model used by authorities as the reason. The rate of unemployment in Europe is still around 9.4%.

Unemployment is at 7% in Germany, 21% in Spain and Portugal’s economy is still experiencing negative growth. According to former British Prime Minister Gordon Brown, Europe and the U.S. will face enormous unemployment problems over the next decade. The economic recovery is failing to stimulate employment and consumption, and low consumption is holding back the economic recovery.

Moreover, this vicious cycle has been worsened by the spending cuts that governments have adopted in order to overcome the crisis. This is the dire economic situation that Western countries are struggling to shake off.

Alan Greenspan, the former Federal Reserve chairman, admitted that while the large banks and high income individuals have felt the effects of the “economic recovery,” small and medium-sized enterprises and a large proportion of the work force in the real economy have been unable to break free of economic difficulty, and are continuing to struggle. In fact, the phenomenon referred to by Alan Greenspan actually reflects the nature of the economic system in Western countries.

Political deadlock

It is a plain fact that levels of support for governments in almost all Western countries have dropped in recent years.

The world was left shocked by the “pain, divisions, and the lack of coordination” exhibited by the Democrats and the Republicans in the debate over raising the debt ceiling. The subsequent downgrading of the United States’ credit rating has also sent shockwaves around the globe.

President Obama said that there is nothing wrong with America, but there is something wrong with American politics. He has urged Congress to save the economy, and has called on political leaders to focus on the next generation, and not the next election.

In a statement, Standard & Poor’s cited increased uncertainty and declining confidence in U.S. decision making as the reason for its decision to downgrade the United States’ credit rating. CNN presenter Fareed Zakaria said that the capacity of the U.S. political system to solve problems has decreased significantly.

There has also been a strong global reaction to the conduct of the Democrats and the Republicans, with public opinion regarding the events in Washington as a crisis as much political as it was economic.

People also believe that the two major parties in the U.S. put partisan rivalry before the safety of the world economy and the interests of world nations, not only damaging America’s image, but also rattling world confidence in the U.S. political system.

Commenting on the countermeasures taken in response to the crisis, a former high-ranking European official stated that European politics have been hijacked by electoral politics. Governments give far too much consideration to political and electoral factors in the formulation and implementation of policies, neglecting objective economic laws and the long-term needs of the country.

 The German media have also commented that government leaders regard “securing another term in office as being more important than their responsibilities.”

Prior to the debt crisis, European nations acted blindly to increase welfare and push up debt in a bid to win over voters. After the outbreak of the debt crisis, political conflicts within European countries and policy clashes between member states and the EU resulted in a slow response to the crisis and a lack of public trust in the current political structure and doubts over the efficiency of the political system.

In Belgium, political deadlock rendered the country unable to form a new government for more than a year. An article by Time magazine entitled “Can democracy solve the West’s economic problems?” made the following comments:

“The core of the political problem on both sides of the Atlantic is the same – the demands of electoral politics in a modern democracy,” “the politicians of the West are choosing the narrow interests of electoral victories over the greater, long-term good of their nations. Rather than focusing on closing deficits, improving economic competitiveness or forwarding the dream of European integration, they’re looking no further than the next vote count.”

The following is another example from slightly further back: California’s deficit reached several dozen billion dollars in 2009. In a bid to ease the fiscal crisis faced by the state, California put a total of seven ballot propositions to the vote on May 19 of that year.

Of these propositions, six involved tax increases, while the other involved suspending pay increases for public servants. In the end, the only proposition to be adopted was the one suspending pay increases for public servants. This begs the question: what can such a “democratic system” hope to solve? I hope that the U.S does not hold a referendum to decide whether or not to pay off its debts.

Social unrest

Much as the U.S. government gets by on borrowing, the majority of U.S families have long been accustomed to spending on credit. Americans, who typically have little in the way of savings, are poorly equipped to endure an economic depression, and the onset of recession has quickly led to social dissatisfaction.

With no end in sight to economic woes, 70% of Americans believe that their country is on the wrong track, and almost two thirds believe that America is on the decline.

New York Times columnist David Brooks says “Americans have lost faith in the credibility of their political system, which is the one resource the entire regime is predicated upon. This loss of faith has contributed to a complex but dark national mood. The country is anxious, pessimistic, ashamed, helpless and defensive.”

In Europe, the combined effects of the financial crisis and spending cuts have intensified long-term problems over welfare, employment, and immigration. As people stream onto the streets in protest, Europe’s social stability and multicultural integration are coming under threat. Governments in Europe have been under pressure to reform their welfare systems for years, and the added blow of the financial crisis has made the continuation of such welfare systems even more difficult.

In response, various countries have taken measures to reduce welfare, but this move has resulted in a backlash of public dissatisfaction.

A series of large-scale protests have taken place in Europe since 2010:

in Greece, protests and disturbances erupted over government spending cuts;

in France, hundreds of thousands of people marched to protest the raising of the retirement age, while a number of industries went on strike;

in the UK, people took to the streets over a hike in tuition fees;

in Spain, people have protested about the high rate of unemployment;

and throughout Europe, large-scale demonstrations have been held in protest of welfare cuts.

These protests are about more than just welfare cuts and falling standards of living; they are about opposition to social inequality, and opposition to “letting ordinary people foot the bill for the greed of capitalists and the incompetence of governments.”

Employment has always been a serious problem in Western society. A French scholar once affirmed that capitalism will collapse if a solution to the unemployment problem cannot be found. Tight fiscal policies have led to a major increase in unemployment, especially among the lower and middle classes and young people.

According to reports in the German media, more than 5 million people between the ages of 15 and 24 were unemployed in the EU countries in June 2011, with the average rate of unemployment of young people being 20.5% while the figures in Spain and Greece being as high as 45.7% and 38.5% respectively.

A large amount of young people are unable to find work. They are discontent with society, disappointed with their governments, and confused about the future, and this is something that can easily lead to social unrest. The large-scale disturbances that recently broke out across the United Kingdom have left Western society stunned.

The problem of immigration has also been highlighted by the financial crisis and economic woes. European countries have long engaged in efforts to achieve social and cultural diversity in order to demonstrate the superiority and inclusiveness of the European social model.

However, spiraling unemployment and the reduction of welfare have led to a general increase in anti-immigrant sentiment in recent years. France has deported Roma in a high-key fashion, Belgium and other countries have passed laws prohibiting people from wearing Muslim veils in public, and German Chancellor Angela Merkel has declared that attempts to build a multi-cultural society in Germany have “utterly failed.”

The shootings and bomb attack in Norway have shown us how prominent social conflicts and the rise of radical and xenophobic sentiments in Western society are providing a breeding ground for extremism and terrorism.

Increasing pressure to change

In fact, the financial crisis has presented the Western world with more than just an economic problem. It has also raised issues pertaining to politics, society, and the direction of national development. The blow of the financial crisis has taken the shine of the Western model of economic, political, and social development, a model which Western countries pride themselves on and spare no effort in promoting to other countries.

According to Western scholars and former high-ranking officials, the West is currently suffering from a lack of officials with strategic foresight, a lack of thinking and planning of a systematic and comprehensive nature, and a lack of major philosophical ideas, “all aspects of society are brimming with shortsightedness, utilitarianism, and superficiality.”

In fact, Western society is seriously confined by the shackles of its own ideology. Few politicians and scholars are able to look at the problems of the Western institutions and systems with a relative degree of objectivity.

Few are able to rationally analyze the situation that the West is currently in or consider what can be learned from other countries. And the “leaders are infatuated with their superficial edge in the balance of power, and do everything they can to cater to the self-conceit and fears of the Western public.”

Rigidity of the mind will inevitably lead to rigidity in systems. The current predicament of the West reflects a loss of vitality in its systems.

The fact is the shortcomings of Western economic and political systems have been fully revealed by the financial crisis. An increasing number of knowledgeable people have voiced the following opinions: the capitalist system has veered too far astray, resulting in a structural crisis.

In turn, this will spread economic, political, social, and cultural chaos, spelling the end of the line for the current system; the financial crisis has ended the dominance of the “Washington Consensus” by highlighting the inherent instability of the capitalist system.

American style capitalism has fallen out of grace; capitalism, which seeks to maximize profit through the accumulation of capital, has become stranded; the five “ways out,” namely, neoliberalism, globalism, borrowing, fiscal deficits, and military expansion, have not only failed to bring about success, but have actually intensified conflicts.

In some ways, capitalism has reached its limits. The hegemony of the Western political model and ideology has come to an end; the rise of China and other emerging countries is about more than just the emergence of new economic and political powers, it also involves competition between ideas and models across international borders.

It is undeniable that Western countries are coming under increasing pressure to change their systems.


by Guo Ji

From: English Edition of Qiushi Journal

Vol.3 No.4 October1,2011 | Updated:2011-12-29 14:24


(Originally appeared in Qiushi Journal, Chinese edition, No.17, 2011)

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