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Double insolvency threat

May 29, 2012

Dirk Messner, director of the German Development Institute and acting chairman of the German Advisory Council on Global Change (WBGU), sees a danger in letting the economic crisis eclipse sustainability issues.

Dirk Messner: The double insolvency threat to the world economy
Image: picture-alliance/dpa

The world economy is again teetering on the edge of disaster just four years after the Lehman Brothers insolvency, which precipitated a global economic crisis. In the USA, the Obama administration is battling against high unemployment, enormous public debt and an equally troublesome trade balance deficit.

Europe, meanwhile, is fighting battles on a number of economic fronts: against Greek insolvency and against a culmination of crises in Spain, Italy and Portugal. Previously unimaginable, some have discussed the end of the euro, which could mean the collapse of the European integration project.

In Asia, Japan is grappling with a new start in energy policy following the 2011 Fukushima disaster. The goal is getting the economy back on its feet.

The major US bank JP Morgan announced on May 10, 2012 that it had blown 1.5 billion euros ($1.9 billion) through high risk speculations; the Wall Street Journal calculated that the damages would amount to around 3.5 billion euros ($4.4 billion) in the end. The global casino is still open for business.

A number of Organization for Economic Cooperation and Development (OECD) member states find themselves in a truly difficult situation. They stand at the center of global economic fault-lines and are dependent on financial inflow from newly industrialized countries. Europe needs the help of the International Monetary Fund (IMF) in order to stabilize the southern European crisis states.

The West is in an insolvency crisis. Who would have imagined where we stand today when the Berlin Wall fell in 1989 and Western market economies emerged as the sole victors of the Cold War?Rio+20 in the shadow of economic crisis

Dirk Messner of the German Development Institute warns the world could face a double insolvency crisis
Dirk Messner warns of a double insolvency crisisImage: Deutsches Institut für Entwicklungspolitik (DIE), 2009

Now a Rio summit is due to take place in June 2012, at which worldwide environmental protection and sustainable development are to be discussed. But does anyone think they can afford serious interest in these issues in the middle of an economic crisis?

The leaders of the OECD member states seem to think not. At the G8 meeting in Camp David and the summit of EU member states and their respective leaders at the end of May, "hard economic issues" were the topic of conversation. The Rio conference was barely mentioned. German Chancellor Merkel had already rejected her invitation to the conference at the beginning of May.

In the shadow of the West's economic crisis, it appears that the economy takes precedence over all else: How can debt reduction be combined with a revitalization of the economy in order to avoid a global economic crash? Nothing will succeed without growth, but in which areas should growth be promoted? Should we continue with the galloping consumption of resources, rising greenhouse gas emissions, dangerous levels of climate change and the degradation of the ecosystem?

These are the themes of the Rio Conference, about which state and government leaders would rather sweep under the rug for the moment. The majority have chosen to send their relatively powerless environment or development ministers instead of attending themselves. But Rio's message is clear and should be of interest to heads of states and governments.

USNobel Prize-winning economist Michael Senge summed the situation up in one sentence: "In view of the global population reaching the 9 billion mark and the growing affluence in Asia, Latin America and even in parts of Africa, we cannot maintain and scale up current production and growth patterns."

Going that route could lead us into a second insolvency crisis - namely, the insolvency of ecosystems.Old habits die hard

The natural and environmental sciences have made big advances since the first Rio conference 20 years ago. Researchers have mapped out the limits of the ecosystem as well as the tipping point that will be reached in the coming decades so long as the world economy dose not change course. Were the state of the ecosystem to be rated, we could expect a grade of CCC - the same level as Greece, with the danger of a credit default.

The world economic crisis occupies the attention of state and government leaders more than ...
The economic crisis tops government agendas...Image: Fotolia/Dan Race

The Earth's natural capital is in danger and threatened with complete exhaustion. Humanity must now learn to achieve prosperity and social security while working within the ecosystem's limits. This can only come about if worldwide climate-friendly and resource-saving development measures are introduced within the next 10 years.

Western governments' strategy of first tackling the financial crisis and then - perhaps - attending to the environment is understandable, but it is also doomed to failure. The longer old growth patterns are maintained, the more expensive the eventual transfer to a sustainable prosperity model will be.A circular approach

The world economy is stuck in a double insolvency dilemma. Heaps of debt and the troubled state of world ecosystems have escalated to levels that bring systematic risks for all countries. The burden of our debt and use of natural resources today will be borne by future generations.

Aereal view of an area deforestated by soybean farmers in Novo Progreso, Para, Brazil, in this September, 2004 file photo. Deforestation in the Amazon rain forest in 2004 was the second worst on record, figures released by the Brazilian government showed. Satellite photos and data showed that ranchers, soybean farmers and loggers burned and cut down a near-record area of 26,130 square kilometers (10,088 square miles) of rain forest in the 12 months ending in August 2004, the Brazilian Environmental Ministry said Wednesday.The destruction was nearly 6 percent higher than in the same period the year before, when 24,600 square kilometers (9,500 square miles) were destroyed.
... while threatened ecosystems garner less attentionImage: AP

Those who want to fight the monetary debt crisis with increased borrowing or the old patterns for growth will not only damage the stability of the global financial system but also fast-track the exhaustion of natural resources. Financial insolvency could then lead straight into resource insolvency. To avoid that outcome, it is up to the current generation of policy-makers to be less complacent.

Economic policy needs to be reconfigured according to environmental needs. Containing debt, fostering a dynamic economy and restructuring in favor of climate-friendly and low resource consumption are all part of the recipe against a double insolvency crisis.

Roadmaps to sustainability

The German Council of Economic Experts proposed the idea of a debt repayment fund for Europe in order to stabilize the eurozone and create a bit of leeway for investors.

British economist Lord Stern outlined how regulatory policies and programs for the renewal of European infrastructure should look in order to combine debt management with eco-friendly economic growth. He did so at a conference hosted by the German Advisory Council on Global Change (WBGU) on the subject of "Perspectives on Environmentally-Friendly Prosperity" in Berlin at the beginning of May, which Angela Merkel also attended. The conference hosts also showed which investments, innovations, institutional reforms and international partnerships were necessary to usher in the transformation to a climate-friendly European and global economy.

Despite harsh economic conditions, there are trends and initiatives heading in the right direction. The ambitious switch in energy policy in Germany, as well as in Denmark and Sweden, shows that economic power can go hand-in-hand with sustainability. By 2011, 70 percent of investments in the EU energy sector were made in renewable energy infrastructure.Viewing limitations as opportunities

The number of natural diasaters worldwide increased dramatically between 1980 and 2011
The number of natural diasaters worldwide increased dramatically between 1980 and 2011

Worldwide investors pumped over $215 billion into renewable energy providers in 2011, five times more than in 2004. High investment in climate-friendly cities and energy systems in China provides the biggest potential for change.

Leaders have recently sought to reach out directly to industry. A summit of major African state and government leaders together with the chief executives from big global businesses in Botswana at the end of May, where concrete initiatives for green investments were agreed upon, showed that new paths can be found even in relatively poor countries.

The UN Secretary General Ban Ki Moon is currently seeking to organize a meeting with representatives from the world's leading energy companies in order to establish agreements for the transformation to green energy.

Author: Dirk Messner, Mirjam Gehrke / hw
Editor: Greg Wiser