Spending cuts and the threat to democracy

What America should learn from Europe and the Middle East.

The "sequester", which began on 1 March, is the American form of austerity, or cut-backs in government spending during a recession. Austerity, or stingy government in Europe has kept employment extremely depressed compared to what it would have been with government stimulus, as Paul Krugman argues.

On Saturday, there were massive protests throughout Portugal against Scrooge policies by the government, which have so destroyed the country’s economy that 2 per cent of the population has fled abroad for jobs in the past 2 years alone. On Friday, Greek workers staged a huge general strike. In Italy, anti-austerity feeling made grumpy comedian Beppe Grillo and his party the swing vote in the new parliament. Grillo may single-handedly destroy the eurozone. European newspapers rather amusingly demanded that Grillo now "take responsibility" and "tell us what he wants". He is a contrarian comedian. It would be like having Robin Williams or Tracy Morgan as the swing vote in Congress, with the press hounding them for their agricultural policy and asking them about the dangers of deflation. But Grillo's ascendancy, while less alarming than the resurgence of the Greek far right, is a manifestation of the rejection by the Italian public of the long dreary road prescribed by the "troika", (The International Monetary Fund, the European Union, the Central Bank), of further government cut-backs, reductions in minimum wage, high unemployment, no hope.

While for some odd reason the Middle East does not usually get analysed with the same social science tools as Europe, the political crisis in Egypt is related to the Muslim Brotherhood government’s austerity program. The latter, as Samuel Knight argues, is being pursued under pressure from the International Monetary Fund. Secretary of State John Kerry is in Cairo, also urging acceptance of the austerity program. Austerity is estimated to have reduced Egyptians’ real income by 3 per cent in January alone. Tunisia is doing better than Egypt economically, but the parliament, dominated by the religious Right, is also tempted by austerity measures, seeking to trim a point off the budget deficit this year while seeking 4.5 per cent growth. While letting the value of the Tunisian dinar fall would hurt consumers with regard to imported goods, it would make Tunisian textiles and tourism more affordable for those abroad. Tunisia's exports are hurt by European economic problems, and the country would do well to develop more Asian customers (Brazil has had success reorienting exports to the Pacific Rim). Likewise, although Yemen's economy improved in 2012 after a 10 per cent drop in the revolutionary year of 2011, if anything the government budget deficit of 5.5 per cent is not big enough to stimulate the economy properly.

Reducing the state budget at a time of economic contraction is the opposite of what the great economist John Maynard Keynes prescribed. When the economy is in the doldrums, the businesses are skittish about investing their money, and so keep it in the bank. The only force, Keynes argued, that can and will risk putting a lot of money into the economy during a deep recession is the government. Of course, the government has less money at that point, too, since tax receipts are reduced. So it will simply have to spend money it doesn't technically have, i.e. go into deficit and print extra paper money. The extra paper will, obviously, lose some of its value. But that loss can have benefits, too, since it will make the goods produced by the country less expensive abroad, and spur exports.

This argument is straightforward for most countries, and it is mysterious why European and some Middle Eastern governments reject it. It is complicated in the US by the position of the dollar as a reserve currency and by the fall of manufacturing to only 20 per cent of the US economy. The former means that large budget deficits don't necessarily reduce the dollar's value significantly, because the US only holds about a third of the world's dollars and there is a lot of confidence in its value. The latter means that even when the dollar falls against the yen or euro, the jump in exports is limited to a fifth of the economy and domestic services don’t get much of a boost. But actually these peculiarities of the US economy are not arguments for austerity; on the contrary, the reserve dollar allows the US to do stimulus without as much pain as one would otherwise expect.

Instead, the Tea Party has forced the US into an artificial crisis with the "sequester", taking $100bn a year out of the economy for the next ten years, which will cut half a point of economic growth and harm workers, keeping unemployment high – not to mention the harm it likely will do to medical research, higher education, etc. That this austerity is being pursued by the GOP in part in hopes of disillusioning voters with President Obama in his second term is fairly obvious, but it is also in order to protect the 2003 Bush tax cuts for the wealthy, 80 per cent of which have been retained. Sequester, as usual with these things in the US, is actually a tax on the middle classes to benefit the wealthy, since it preserves undeserved tax cuts for the latter by reducing government services for the former.

That austerity does not work economically should be clear. But that it creates populist discontents that are shaking southern Europe and could derail Middle East democratisation is even more alarming. The world needs stimulus, not Scrooge government if it is to pull out of the crisis kicked off by corrupt bankers in 2008.

This is a cross-post from Juan Cole's blog Informed Comment

Barack Obama holds a cabinet meeting at the White House on 4 March. (Photo: Getty.)
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Battle for Mosul: will this be the end of Islamic State?

The militant group's grip on power is slipping but it has proved resilient in the past.

The battle for Mosul is the latest stage in the long struggle to defeat Islamic State. The group has been around since the late 1990s in one form or another, constantly mutating in response to its environment. Undoubtedly its ejection from Mosul will be a significant moment in the group’s history, but it is unlikely to be its final chapter. The destruction of the group will only be complete when some fundamental changes occur within Iraq and the war in Syria comes to an end.

IS’s roots go back to a training camp established by the militant Islamist Abu Musab al Zarqawi in the late 1990s in Herat, Afghanistan. Founded as an army to overthrow the apostate regimes of the Levant, it fled to northern Iraq in the wake of the US-led invasion of Afghanistan post-9/11 where it re-established itself as a force alongside Ansar al Shariah, a hardline Salafi jihadi organisation.

As American attention shifted from Afghanistan to Iraq, the group was ideally placed to become one of the leading lights in the post-Saddam Iraqi insurgency. Brutally announcing itself to the world in August 2003 with successive attacks on the Jordanian Embassy in Baghdad, the UN headquarters and a Shia shrine in Najaf — the latter being the deadliest attack in Iraq that year with a death toll of 95 — the group grew to assume the mantle of al-Qaeda in Iraq. By 2006 this brand had become somewhat damaged through the brutal sectarian campaign the group waged, and when its founder, Zarqawi, died it sought to reinvent itself as the Mujahedeen Shura Council. This incarnation did not last long either, and eventually it assumed the title of the Islamic State of Iraq (ISI), alongside a more Iraqi leadership.

This was the start of a diffcult period in the group's history. Its excesses in Iraq (including indiscriminate slaughter of Shia Muslims to stir sectarian hatred and filmed decapitations of prisoners) lost it local support and led to the tribes in Sunni Iraq rising up and supporting the government in Baghdad's fight back against the group. By 2009, when the west abruptly stopped paying attention and withdrew from Iraq the group was largely perceived as in decline, with the Shia Muslim-led Iraqi government appearing to slowly assert itself more effectively across the country.

The terrorist attacks by the group continued. And the new government started to advance an increasingly sectarian agenda. These two played off each other in a downward spiral that was given a fresh boost of blood when the civil war in Syria erupted in 2011. Drawing on its existing networks (that were leftovers from when Syria was used as a staging point by the organisation to launch attacks into Iraq), the leadership sent a cell to Syria to explore what opportunities existed within the emerging fight there. This cell became the seed that grew into Jabhat al Nusrah and ultimately IS – a label the group adopted when in June 2013 IS leader Abu Bakr al-Baghdadi decided it was time to reveal this link between his Iraqi group and Jabhat al Nusrah. This led to divisions and the breaking up of the two organisations.

For IS, however, it was the beginning of an upward trajectory, building on this division to grow itself substantially in Syria (with Raqqa as its capital) and in 2014 taking over Iraq’s second biggest city of Mosul. We then reach the apex of IS’s success and the biggest expansion of the group yet.

It now seems that this growth had a shelf life of just two-and-a-half years. As the group appears to be losing Mosul, it is likely that we will see the beginning of a period of retraction. But this will not be its end – rather, it will flee back to the hills and the ungoverned spaces in Iraq and Syria from where it will continue a persistent terrorist strategy in both countries. Here it will bide its time until the moment presents itself to rise up. Waiting until the governance in Iraq and Syria fails its people again, the group can paint itself as the protector of Sunnis and once more build on that group's disenfranchisement to win supporters and occupy a space vacated by local governments.

IS's grip on power might currently be slipping but as history has shown, it has waxed and waned depending on the context it is operating in. We are now going to see a period of withdrawal, but unless attention is paid by the global community, it will expand again in the future.

Raffaello Pantucci is Director of International Security Studies at the Royal United Services Institute (RUSI). Visit his website at http://www.raffaellopantucci.com