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Credit crunch hits political reputations

The financial crisis has already changed the face of the political world. It decisively tipped the U.S. election in Barack Obama’s favour, tarnishing John McCain with the brush of Republican economic mismanagement. It brought the British Prime Minister, Gordon Brown, back from the political dead, making him appear statesmanlike, assured. It helped Nicolas Sarkozy turn his approval ratings round, as he too sought to offer crisis leadership and this week produced a package heavily larded with populist measures. A handful of other leaders around the world are having a “good” crisis, most notably Brazil’s President Luiz Inacio Lula da Silva, another economic populist, who is basking in 70 per cent approval ratings.

But across much of the world, it has been hard to avoid one of the intractable laws of politics — when the economy goes south, the people in charge get the blame. Canada’s Prime Minister, Stephen Harper, is feeling the pain most acutely this week, but just about everyone running a substantial economy anywhere must now be worrying about their own job security. That goes too for those untroubled by the necessity of holding elections. Popular wrath has other ways of making itself felt.

It wasn’t much of a protest: 100 factory owners and employees, demanding help to collect debts from a bankrupt company. But the gathering outside government offices in Guangzhou on Friday was the most recent in a spate of incidents. And while demonstrators did not blame the government for their woes, they expected it to do something about them.

No wonder Chinese authorities are expressing real alarm about the world’s fourth largest economy. The World Bank predicts 7.5 per cent GDP growth in 2009 — the lowest rate for 19 years, after half a decade of double-digit expansion.

With other nations in recession, that doesn’t sound so bad. Yet China is still a developing country, and 8 per cent growth is thought necessary to provide enough jobs for the expanding labour force.

Above all, the government’s legitimacy rests largely on its remarkable success in raising living standards. If progress falters, it will find it harder to explain why people should trust their leaders — and not try choosing their own. Most Chinese follow officials in blaming the U.S. for their travails. And they applaud a 4 trillion yuan stimulus package, although it has proved less generous than first thought.

But President Hu Jintao warned that the downturn was so severe it challenged the government’s grip. “Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development ... is a test of our party’s capacity to govern,” he cautioned, according to official media.

That does not mean the party expects to be overthrown. But implementing policy and keeping order is tough at the best of times in a vast country with 1.3 billion inhabitants. Zhou Tianyang, a leading Communist party scholar, warned this week that mass unemployment could dramatically increase theft and robbery and other “menaces to social stability.” He added: “This is extremely likely to create a reactive situation of mass-scale social turmoil.”

Russia’s leaders are likely to face a sharp decline in their popularity next year as the economic crisis bites and the living standards of ordinary Russians fall, experts warned.

Prime Minister Vladimir Putin enjoyed extraordinarily high ratings during his eight years as president, against a backdrop of rising prosperity and oil-fuelled economic growth.

But the global economic crisis threatens to dent Mr. Putin’s reputation, experts suggest. During a televised phone-in on Thursday, Mr. Putin insisted that his government had the resources to deal with the crisis — and promised that wages and pensions would even go up by 12 per cent.

In reality, however, Russia faces severe problems because of the collapse in the price of oil from $147 in July to $41 on Saturday. Government revenues have slumped. The falling oil price has also increased pressure on the rouble — which is being surreptitiously devalued, falling 1 per cent on Friday alone.

Russia’s large foreign currency reserves provide some insulation, but they have dwindled from $580bn to $450bn as Russia’s central bank has propped up the rouble.

On Friday Ronald Smith, head of research at Moscow’s Alfa-Bank, said it was “realistic” for the Kremlin to maintain its current spending plans in the short term — but not indefinitely. “The question is whether it’s sustainable. They can do it for a little time and hope that the oil price picks up or they find some other sources of revenue.”

He added: “Under Putin disposable incomes have gone up by 25-30 per cent a year. But when this stops they [Putin and Russia’s President, Dmitry Medvedev] are going to face declining popularity of some sort.” A change of leadership in the Kremlin was improbable though, he added.

When Taro Aso became Prime Minister in September he promised to act quickly to prevent the financial crisis unfolding in the U.S. from spreading to Japan. Two months on, mounting economic problems are threatening to topple his Liberal Democratic party (LDP) from power for only the second time in more than half a century.

The Nikkei stock index has sustained dramatic losses and exports have suffered from weak demand in the U.S. and the yen’s relentless surge against every other major currency. Last month, Aso’s worst fears were confirmed with the news that Japan, the world’s second biggest economy, had slipped into recession for the first time in seven years.

The government’s response to the financial crisis has been dismissed as muddled, and discussion of an extra budget to fund a proposed five-trillion yen stimulus package has been delayed until early next year. Saddled with the biggest public debt among industrialised nations, Aso has come under intense pressure from LDP colleagues to dispense with fiscal prudence and spend more on public works and welfare.

When he took office, Aso was expected to capitalise on an anticipated honeymoon period and call an election within weeks, but he quickly ruled out a snap election to focus on the economy.

That gamble now looks almost certain to backfire. Though a general election is not due until next September, speculation is rising that he will find the courage to go to the country in April, despite polls showing that more than half of voters want an election in the new year.

Regardless of the timing, the LDP now faces the very real possibility of being turfed out of office for only the second time in the past 53 years. Polls released this week put support for Mr. Aso’s cabinet at around 30 per cent.

Canada’s Prime Minister narrowly escaped becoming the first leader of a major industrialised country to lose his job because of the economic crisis. Stephen Harper, who leads a conservative minority government, took the extraordinary step of seeking the suspension of parliament until next January to head off a confidence vote he was bound to lose.

The governor general granted his request on Thursday.

Mr. Harper is now under immense pressure to show he can deliver economic relief when parliament resumes on January 26.

He has said his “first order of business” will be a new budget that he hopes will satisfy the Liberal and New Democratic Party opponents who wanted to vote him out.

Other measures may include more infrastructure spending on transport and waterways; money for housing construction and retrofitting; aid for manufacturers and forestry firms; and eased restrictions on employment-insurance.

However, Harper may struggle to satisfy his political opposition or Canadian voters.

The opposition formed a coalition to vote out Harper after he produced an economic plan which contained no stimulus measures but would have deprived Canada’s political parties of state funding.

The plan was seen as dangerously ideological for a time of economic crisis. New figures yesterday showed Canada suffering its worst month of job losses since 1982, raising the unemployment rate to 6.3 per cent. Ontario, the country’s largest province and its manufacturing base, was especially hard hit.

Meanwhile, the Canadian-based arm of Chrysler has said it is seeking a $1.5bn government bailout to keep it from shutting operations.

All is not lost for Harper. One poll conducted for the national broadcaster CBC before Canada’s political drama came to a head showed Harper on 44 per cent support, a rise on the 37 per cent he won in elections last October.

The Prime Minister was also more trusted on the economy than his main opponent, the Liberal leader, Stephane Dion.

Another poll for The Globe & Mail newspaper also showed a majority wanted Mr. Harper to stay on — but 55 per cent of those polled felt the country was on the wrong track.

Chancellor Angela Merkel has been thrown on the defensive by the economic crisis besetting Germany. Opponents, allies and some European partners are furious that she is refusing to adopt the same fiscal largesse that Britain, France and others are pursuing to spend their way out of recession. On Friday, Berlin had to play down reports that Merkel had been excluded from a London crisis meeting next week involving Gordon Brown, Nicolas Sarkozy and the European commission head, Jose Manuel Barroso, along with business leaders.

Ms Merkel’s response is that Germany has produced a big stimulus package — €31bn — which will come into effect next month. However, she has gambled by rejecting lower taxes, arguing that huge investment programmes in the country’s infrastructure would be more fitting as a way of boosting the economy.

German consumerism is healthier than it has been for a long time, following a recent wave of wage rises.

The German economy differs from some, like the British and American economies, in that it is not linked in any significant way to a housing market because so few Germans own their homes. Neither is personal debt a big problem with many averse to credit cards and loans.

Of more concern — and of political importance, with an election looming — is how Merkel’s government can protect workers, 700,000 of whom are predicted to lose their jobs over the next two years.

Around 1.5 million workers are employed in the stricken car industry. And with polls showing that three-quarters of Germans believe the economic crisis is about to get much worse, the chancellor will be forced to prove her mettle.

She has seen her popularity ratings drop by 17 per cent within the last month to 51 per cent, the sharpest fall since she came into office in 2005 and one she will hope to stem with an election coming up in less than 10 months’ time. — © Guardian Newspapers Limited, 2008

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