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World Economic Forum’s heavy hitters fail to grasp the nettle

Davos 2012 may have been dominated by Europe, jobs and equality, but solutions were notable by their absence

Three big themes have dominated this year’s Davos: Europe, jobs and inequality. While it would be comforting to think that the considerable brainpower assembled 5,000 feet up in the Alps has come up with solutions to these problems, that would be stretching the truth.

Tackling inequality will require more than the motherhood and apple pie solutions trotted out by the majority of those attending the World Economic Forum. Sure, education is important and so is training. Technological advance and globalisation mean skills matter more and more. But it is not as though governments have been ignoring these issues over the past decade or more, a period when inequality has increased markedly in many countries. The evidence is that inequality is lowest in countries where there is solid growth, strong collective bargaining and supply-side interventions. The high-tax Scandinavian model, in other words. Few of the heavy hitters in Davos are signed up for that.

Similarly, there was a failure to acknowledge the real cause of the global unemployment crisis: a lack of effective demand. Growth in the developed west is depressed, partly as a result of the legacy of debt and partly because of self-defeating austerity programmes. The United States, where unemployment is coming down, is the notable exception to this rule, but even in the world’s biggest economy the recovery from the slump of 2008-09 has been patchy and slow in historic terms. Sooner or later, policymakers will understand that the real threats are mass unemployment and deflation, not inflation and the size of budget deficits.

Finally there’s Europe, where – ostensibly at least – there does appear to have been some progress. Olli Rehn, Europe’s economic and monetary affairs commissioner, was upbeat on Friday about the possibility of a debt deal with Greece’s private sector creditors within days. George Osborne was cautiously optimistic that there would be an agreement to increase the financial firepower of the IMF.

But a sense of realism is required here. As Simon Smith, chief economist at FxPro noted, the phrase “under-promise but over-deliver” is not one with which European policy makers are familiar. On the contrary, they have tended to talk big and then allow matters to drift in the hope that something will come up.

The good news is that, as a result of the willingness of the ECB to provide unlimited quantities of dirt-cheap money to European banks, policy makers now probably have quite a long breathing space in which to deal with some of the eurozone’s structural problems. The bad news is that this respite looks like being squandered.

However, Greece’s problem is not going to be resolved simply by forcing private sector creditors to take a big “haircut”. Avoiding a Greek default will require public sector creditors to accept losses too. Rehn, Mario Draghi, ECB president, and Angela Merkel are in denial if they think otherwise.

Sovereign debt is a symptom of a deeper problem: the gap in economic performance between the rich north and the poor south of the eurozone. Fixing that problem requires more than just austerity, it requires closer political integration and the floating of Europe-wide bonds in order to transfer resources from north to south.

George Osborne believes this is the way ahead but Wolfgang Schäuble, Germany’s finance minister, poured cold water on this idea. It is indeed worrying that a Eurosceptic chancellor of the exchequer of a country that has no intention of joining the single currency has a better notion of what needs to be done to save the euro than the finance minister of its most powerful member. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds