A Plan to Address the Debt Crisis

Adriana Castagnoli
Historian of Economy, editorialist of the daily Il Sole-24 Ore, former teacher in Contemporary and Economic History at the University of Torino, member of the European Business History Association and Business History Conference (USA)

Mohamed Rabie

The Global Crisis and Its Socioeconomic Implications. Creating Conditions for Sustainable, Peaceful, and Just World

Palgrave Macmillan, 235 pp., 2017

During the financial crisis of 2007-2009, the level of public debt of advanced countries increased by a third. Now, with the Covid-19 crisis, the International Monetary Fund predicts that, in 2020 alone, sovereign debt can jump from 105% to 122% of GDP in the most developed countries. In the United States, Oxford Economics recorded a deficit of $ 2.8 trillion in July, set to increase to $ 3.5 trillion by year-end in the absence of any Congressional stimulus. America can field strong defenses against a debt crisis because the dollar is the world's reserve currency, foreign investors buy its bonds and the Fed's interest rates are very low. Other states, although advanced, do not enjoy the same privileges. And the emerging nations risk paying the heavier consequences for having their debt in hard currency.

This essay is a call to governments and rulers to change course before it is too late. Through an extensive analysis of the factors that hinder economic growth in the world, Rabie explains the relationship between the global debt crisis and socio-economic inequalities, with their consequences of alienation, radicalism, terrorism. The weight of the public debt in the majority of nations is now such that it risks becoming unsustainable. Therefore, Rabie proposes a new strategy (the “Ramo Plan”) to free countries, rich and poor, from their debt burden, thus creating the conditions for them to face their citizens' pressing economic, social and security problems.

Globalization and the Information Technology revolution have brought about enormous changes both in economic structures and in production relations. So that now the nation-state has lost much of its power of control over the economy which has become a global, complex and integrated system, no longer functioning with the parameters of the past. The transition from the age of industry to that of knowledge, which began in the mid-90s, destroyed the world we knew by spreading a lack of trust among the people. Ordinary people are disoriented and live one crisis after another without much hope of regaining normality in the near future.

The triumph of economics over politics, which took place during the 1980s, was a setback for democracy and its principles of freedom and equality, as well as for capitalism, which lost its social function of promoting the national economy and the middle class connected to it. The historical evolution of capitalism has led wealth to become power, tout court.

In this context, the political process has gradually become a mere tool at the service of the elites, less independent and free, allowing money to determine what is right and what is not, what is in the national interest and what is not. Democracy has consequently lost its ability to do the things it should have to do in favor of the people, it has lost both its vision and its mission.

Yet, with the end of the Cold War, democracy and capitalism had emerged as the most promising, if not the only acceptable, economic-political system. It was expected that within the first years of the 21st century every state in the world would become a democracy in some way. But the past two decades have seen a reversal of that trend.

Some countries, like the United States, resorted to expansionary policies to reinvigorate their economic system, others chose austerity policies with spending cuts and deficit reduction. However, according to the author, both of these choices turned out to be disastrous: because they did not fully achieve their goals and in any case caused an increase in the debts of individual nations (actually, the IMF predicts that in 2023 the US debt will be at 116.9% of GDP). The public debt of the OECD member states has now exceeded 100 percent of their GDP and continues to grow inexorably. Furthermore, all of this happened at the expense of the middle class. One effect of quantitative-easing policies, for example, has been to lower interest rates for savers. And this, according to the author, is all the more immoral because it denies the right return to those who save for the future, allows governments to run more and more into debt, and forces future generations to pay the bill for the blunders of those who preceded them and should have protected them instead. The 2008 crisis dramatically aggravated this already negative picture.

It is hard to imagine how capitalism and democracy can be saved as debt continues to grow rapidly, unemployment remains high, the income and wealth gap between rich and poor widens, the middle class continues to shrink, poverty to spread, educational standards to decline and the fear of a decline in social expectations persists. No nation - Rabie warns - can live on borrowed money forever. Eventually each nation will have to make its economy grow and increase exports to generate enough revenues to rebalance its budget and pay off its debt.

Since the debt problem is not limited to the Eurozone and the US, but involves other states, the solution can only be sought in a global context. With the changes introduced into our lives by new technologies, the way in which business has been done and people have lived up to now is disintegrating. Therefore, the assumptions on which traditional economic and financial theories were based, according to the author, are now ineffective and obsolete.

The horizon looks really bleak. If the entire public debt is not repaid now - Rabie warns -, it will never be, because the size of the debt and its interests have greatly reduced the ability of all indebted countries to repay it. The economy's slowdown, stagnation and contraction threaten indebted countries. Even the IMF has recently warned against the protracted, stubborn growth of public debt around the world, and since 2011 it has admitted that it will not be in a position to predict or manage the next financial crisis.

Now the overwhelming majority of nations find themselves grappling with huge deficits and mountains of debt that inhibit their ability and initiative to steadily grow the economy in order to create jobs and help the poor.

Rabie proposes a new strategy, the "Ramo Plan", to get out of the debt trap, to manage the current global socio-economic crisis and the challenges and fears of change, as well as to seize the opportunities that change itself creates.

The pivotal idea of the Ramo Plan is the transformation of the IMF into a sort of global central bank, with the power to issue a new international currency, which should be called "Ramo", and bonds denominated in "Ramo", in order to finance itself and make loans directly to States in difficulties.

Freeing rich and poor nations from the burden of debt means addressing the public debt crisis in the short term and making it possible for States to gradually resolve their pressing economic, social and security problems.

It remains to be seen, however, whether governments and rulers really want to free themselves from the burden of national deficits, or they rather intend to continue to use them for short-term consensus purposes.

Translated by Lionello Casalegno