Tag Archives: greece

The end of insolvency

10 Jan

An arresting fact published yesterday in the Financial Times: the lowest rates of insolvency in Europe in 2011 were in Greece, Spain and Italy, the countries that faced the brunt of the Eurozone economic crisis. The newspaper continues: fewer than 30 in every 10,000 companies fail in these three countries, at the same time as nearly one in three companies is loss-making. There couldn’t be a clearler proof of the fact that Schumpeterian creative destruction has taken leave of Europe.

There are various explanations for this. For instance, the low level of corporate insolvencies is partly a reflection of government action: companies that might otherwise have gone bust have been able to borrow from their governments at very low rates, making refinancing of existing loans possible. Fearful of the political fall-out from lots of businesses going bust, governments have kept them alive. The broader climate of cheap borrowing, made possible by central bank action, has also played its part.

According to the FT, however, action by public authorities is only partly to blame. The real culprit appears to be the banks. Faced with so much pressure on their balance sheets, and saddled with bad loans, banks have been very reluctant to force businesses into insolvency or restructuring procedures. Rather than take the hit, they have preferred to hang on, letting the bad loans sit on their balance sheets. This has been the case particularly in Spain, but also elsewhere across the continent. Here we obviously see the underlying causes of the crisis working their way back into its resolution. Central to the debt-financing that occurred prior to the crisis, it is the same debt that prevents a more decisive resolution of this crisis.

We should, of course, be wary of bullish talk about the constructive effects of insolvency. The FT quotes one company chairman who laments the fact that all the company’s revenues are being taken up by pension payments to retired employees. “We are unable to invest in new growth areas”, he complains, because of these pension obligations. One wonders what his solution would be: renegue on the payments and ask the pensioners to find alternative sources of income?

Clearly, the idea of creative destruction works less well in an age when corporations have welfare obligations. But is also rests upon an expectation that public authorities command enough authority to be able to weather restructuring storms. Evidently in Europe this is not the case. Alongside a fear of social unrest is also a fear and hostility towards change. In countries like Greece, Italy and Spain, and certainly in France, governments talk about supply side reform and a fundamental transformation of their economies but there is little idea of where they would like to go or of what they would like to do. This political impasse is matched at the corporate level. Creative destruction after all rests upon an optimistic attitude towards the future: something new can be built, new energies can be released if the old is torn down. Restructuring is often driven by hedge funds looking to buy up assets cheaply and sell them on for a profit. But in Europe’s current predicament, we also see hostility towards change present across the political and corporate elite. And the banks, supposedly the most gung-ho and reckless of the lot, are the most cautious of them all.

Aglietta on the crisis

26 Sep

In a comment last week on George Soros’ well-publicized essay on the Eurozone crisis, we noted his fixation with the European roots of the present crisis. In his view, the combination of the Eurozone’s curious institutional design (a common currency without a fully empowered central bank) and the overly cautious approach of European policymakers together explain the European sovereign debt crisis. Whilst there is a specific European dimension to the crisis, we argued that it is also a crisis of capitalism, not just of the Euro.

In a piece published in the New Left Review in May 2012, the French economist Michel Aglietta gives his account of the European crisis. His account is more general and wide-ranging that Soros’. His explanation of the debt build up in Western economies is tied to the emergence of a new “accumulation regime”: one that demands a maximisation of returns for shareholders and downward pressure on labour costs. The gap between stagnating wages and the demand needed to maintain growth levels is provided through credit. The availability of credit in Western economies was made possible by various factors, including financial innovations and the recycling of large dollar surpluses built up by East Asian economies. These surpluses were an outcome of the East Asian crash of the late 1990s: a traumatic event that pushed governments in the region to insulate themselves from further instability by focusing on export-led growth.

Whilst generating a great deal of liquidity within the global financial system, these developments in East Asia also help explain why European economies failed to capitalize on the boom years of the 2000s when borrowing rates across the continent fell steeply on the introduction of the Euro. Aglietta notes that the intention in the early 2000s was that the mobility of capital within Europe would lead to a convergence of national economies. Productive investments would be sought out and the differences between national economies would slowly disappear. Capital certainly flooded to those countries that had the highest interest rates prior to 1999 – Greece, Spain etc – but there was no evening out of competitiveness across the region. In fact, as Aglietta notes, divergences grew. This was because at the same time as capital was moving into Europe’s periphery, so were East Asian economies beginning a concerted export drive as a response to their 1997-1998 crisis. Unable to compete with these imports, industrial activity in Spain, Portugal and elsewhere shrunk. Capital was channelled into a property and services boom, with growth becoming dependent upon rising house prices. In a better starting position and not faced with the temptations of sudden influxes of capital, countries like Germany and the Netherlands faced up to East Asian competition and were able to generate their own export surpluses. Aglietta also notices that given the poor performance of the German economy in the first half of the 2000s, the country was not sucked into the property boom that affected countries like Ireland and Spain. Divergences within Europe are thus not only an internal European story but have a global dimension as well.

Aglietta makes a number of other important points. His discussion of the options open to Greece and to Europe makes for interesting reading. He notes that Europe cannot really afford a Japanese-style era of deflation and high public debts. A reason for this is that Japan has a large industrial sector and is in a very dynamic part of the world. Aglietta also observes that Japanese debt is financed by Japanese savers, meaning that the risk of spiralling debt refinancing costs is kept low. In Europe the situation is different on all counts, making it difficult to replicate the Japanese model. On Greece, Aglietta gives a detailed breakdown of how “Grexit” would work, arguing that the long-term benefits outpace the short-term costs. Argentina, he argues, did the right thing but it did it badly. Greece could learn lessons from it and exit the Euro in a more orderly manner.

For all the elegance in his exposition, Aglietta’s solution to the crisis is surprisingly apolitical. He argues that “the euro must be constituted as a full currency, which means it must be undergirded by a sovereign power” (p36). This means transferring competences to the European level, fiscal union, and a long-term development strategy based on the idea of permanent transfers from one part of Europe to another. Aglietta’s recommendations are obvious but the problem today is that public opinion across Europe is moving in the opposite direction, against the idea of further transfers of power to European institutions. In practice, pursuing Aglietta’s recommendations means deepening the gap between national politics and European-level policymaking, thus compromising democracy in the name of economic emergency. Whilst that may provide some palliative to the economic crisis, it will only make the political crisis even greater.

Still no alternative to austerity

24 Aug

An interesting post on austerity over at the Economist’s Free Exchange blog. It makes the point that British business – generally in favour of austerity measures when they were first introduced back in 2010 – is now beginning to change its mind. It’s not difficult to work out why: Britain is facing a third quarterly decline in GDP, with a 0.5% contraction in the British economy expected for the second quarter of 2012. For the UK this is particularly galling given the fiscal boost of the Olympics and the expectation that this would mean a heady summer for at least some British businesses. Perhaps it is true that as many people left the UK as entered it for the Games, making the net effect close to zero.

The Economist’s post suggests that the tide is perhaps turning in the UK, with austerity giving way to a new consensus around pro-growth measures. It notes that Cameron’s government is considering an “economic regeneration bill” for the Autumn and that Boris Johnson – with an eye perhaps on the Tory leadership – is talking up the need for big government infrastructure projects (based around London, of course).

The difficulties faced by the UK economy should give food for thought to those arguing that the route to economic growth lies via an exit from the Eurozone. One might have expected the UK to boost competitiveness through cheapening its currency but – on the contrary – the British pound has become something of a safe haven for those with lots of cash. Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy. The debt burden for individuals and businesses, incurred in the heady pre-2008 years, is still depressing growth and holding back new investment plans.

The idea that the tide is turning at the level of elite opinion is difficult to substantiate. There were always voices calling for moderate fiscal stimulus alongside cuts in government spending. Back in 2010 the debate between the Tories and Labour was not about whether the government should drastically reduce spending – both agreed that it should – but it was all about timing. Shock treatment versus gradual reductions eased along via some discretionary spending. Austerity was the backdrop with the debate focused on how, not if. Little, it seems, has changed.

As noted on The Current Moment last week, the debate in the US presidential campaign is also about how the government’s deficit can be reduced, with both camps fighting over who is more credible in their deficit-cutting plans. In France, a government was elected with an ostensibly pro-growth agenda. In his campaign speeches, Hollande regularly fulminated against austerity politics, claiming he represented an alternative. And yet – bar the few measures introduced that are intended to put a little more money in people’s pockets – the real challenge for the Hollande government is the 2013 budget and finding the money to meet its balanced budget obligations. Much to the chagrin of the left of the Socialist Party, Hollande has signed off on the EU’s fiscal compact with little regard for the growth measures he had promised. Budget cuts will be financed in part via higher taxes but also via spending cuts. The Greek premier, Antonis Samara, is about to undertake a desperate trip to Paris and Berlin where he will ask for a bit more leeway in his efforts at balancing the Greek deficit. Merkel and Hollande are shifting all responsibility for the decision on whether to grant Greece an extension to the Troika, as if the issue was a technical one to be decided by accountants from the European Commission. From the US through to Europe, there is little evidence that the tide is turning.

Even though economies are stagnating under the burden of austerity measures, the intellectual case for an alternative still needs to made. Until then, it will be more of the same.

The problem with Eurobonds

7 Jun

As the Eurozone crisis deepens, some new ideas are emerging. Some have been aired for a while but are only beginning to be taken seriously. In this post, The Current Moment considers the issue of Eurobonds. In future posts, we will consider some of the other solutions being suggested, such as the idea of a banking union, the plans for which have been recently floated by the European Commission.

 

In a continued deepening of the Eurozone crisis, attention is focusing on Spain. Rather than investing in production during the boom years, bank capital in Spain was mainly channelled into property development. As the bottom fell out of the property market, Spanish banks have been left with worthless loans on their balance sheets. The regionalized nature of its banking system has made these problems less transparent than elsewhere and the scale of the problem has only recently emerged. Even now, there is considerable speculation about exactly how much it would take to stabilize Spanish banks. The IMF’s most recent estimate is that Spanish banks will need at least 40 billions Euros of new capital. In the meantime, loans are drying up for business and Madrid is being shut out of the international bond market.

There is some debate about whether in the longer term the Spanish economy will be able to raise competitiveness levels. The boom years were not entirely devoid of productive investment and optimists point to a weaker Euro boosting the country’s exports. Portugal, according to the FT (29/05/12) specializes in high end shoes and black toilet paper. Spain may find some of its exports benefiting from a falling Euro. But these competitive gains are not shared across the Eurozone as a whole: countries dependent on exporting to within the Eurozone will not benefit from a falling Euro. Any Spanish gains in competitiveness in the medium to long term are likely to come at the expense of the French, the Italians and other Eurozone member states.

For many, this all points to Eurobonds as the solution to the crisis. Far from exaggerating the differences between national economies within the Eurozone, Eurobonds are seen as a way of mobilizing these differences (especially German competitiveness) for the common good of the Eurozone as a whole. The basic idea of Eurobonds is that instead of national governments issuing bonds, the EU as a whole would do so. Those countries currently facing punitively high interest rates on new bond issues would find their borrowing costs falling. German bonds, currently serving as safe havens for international investors, would see a rise in interest rates, costing the German taxpayer but stabilizing the Eurozone as a whole. This idea was raised back in 2010 by the Bruegel think tank with its blue bond proposal. The idea here was that a Eurobond could be issued for debt of up to 60% of GDP for Eurozone members. Debt in addition to that would have to be financed by purely national government bonds. This would mean lower rates for sustainable debt levels and higher rates for excessive debt levels. The idea was batted away by Chancellor Merkel as a poor substitute for supply-side reform in crisis-stricken countries.

As opposition to austerity politics as strengthened, consolidated in recent months by the election of François Hollande in France and the inconclusive Greek elections, Eurobonds have come back onto the agenda. The term is used by Hollande as a rallying cry and as a measure of his success in Europe: if he is able to get the topic onto the EU agenda, he will have won his battle of wills with Merkel. Ever supportive of measures that may increase its own powers, the European Commission supports Eurobonds, as do leaders such as Mario Monti in Italy.

The more technical discussion about the exact modalities of any Eurobond issue asides, there are two major problems with this idea. The first is that as a solution to the Eurozone’s economic crisis, Eurobonds essentially rest upon the idea that borrowing more money can help Europe grow out of its current recessionary state. Given the performance of this particular growth model, that seems unlikely. As already argued on The Current Moment, Europe faces an impasse on growth: stuck between Hollande’s European neo-Keynesianism and Merkel’s insistence on national supply-side reforms, there are few alternatives to these two positions, neither of which inspire confidence.

The second problem is that Eurobonds present us with a direct clash between technocratic rationale and political reality. From the technocrat’s perspective, Eurobonds appear as a sensible solution to a thorny problem. Politically, they run against almost all the trends in place today in Europe. They would imply wealth transfers across national boundaries, something that is firmly resisted by national publics who would be expected to pay more. They would require considerable institutional strengthening at the European level in order to put in place the mechanisms needed to make decisions about how Eurobonds should be issued and how the funds raised should then be distributed. This comes at a time when the EU, according a recent Pew poll, is experiencing a “full blown crisis of public confidence” (see here for an overview of the poll).

Eurobonds would only exacerbate the democratic failings of European integration whilst at the same time they fall short of answering key questions about Europe’s growth model.

The Greek Left

15 May

Attention has turned back to Greece. The results of the May 6th elections have made it difficult for any party to form a coalition. The pro-EU/IMF bail-out parties lack a majority, as do the anti-austerity parties. After attempts by the first three parties in last Sunday’s poll to form a coalition, new elections look most likely. And as polls give the radical left party, Syriza, around 27% of the vote, making a Syriza-led coalition possible, many have begun to look in detail at the modalities of a Greek exit from the Eurozone. The Financial Times is running a series of articles this week on the topic of “If Greece goes…”.

In a thoughtful piece, Paul Mason recounts the emergence of Syriza from the fragmentation of the traditional Greek left. After a definitive split between Stalinists and Eurocommunists in the early 1990s, Syriza has emerged from the combination of the latter wing with a bundle of other groups and interests. Benefiting from the radicalisation of young people during the anti-globalisation heyday of the late 1990s and early 2000s, Syriza has managed to sustain its momentum. It mobilized around anti-government protests in Athens in 2008 but its main gain has come from the crisis itself. The mainstream centre-left party in Greece, PASOK, committed itself to the EU bail-out in a way that opened up space on the left for Syriza. Something in between PASOK and Syriza was formed two years ago: the Democratic Left, a small parliamentary group that had been supported by some PASOK members and which won 19 seats in the recent elections. However, as the split between pro and anti-bailout positions deepens, Syriza is picking up the most votes.

Given this history, Syriza’s position on the current crisis is a curious one. It seems that Syriza leader, Alexis Tsipras, is not advocating a Eurozone exit for Greece. Rather, he claims that what is being demanded of Greece by its creditors is unacceptable and should be replaced with far more lenient terms. His criticism is of the austerity measures and his position does not extend to a wider criticism of the Eurozone as such. As Mason notes, many Syriza supporters are in fact strongly attached to the idea of a “social Europe”; what they are unhappy about are the measures being implemented in Greece today. Tsipras’s strategy is in essence one of calling Merkel’s bluff: rather than letting Greece leave the Eurozone, he thinks the Eurozone’s main creditors would rather soften their austerity demands and cut Greece some slack.

As a political position, there is a lot to criticize. For a start, it seems curious to be vehemently against the EU/IMF bail-out agreements and yet to support Greece’s membership of the Eurozone. The bail-out agreements are after all consistent with the underlying philosophy of the Eurozone: balance budgets, maintain competiveness through internal devaluations when necessary, and achieve long-term harmonization of the Eurozone economies through structural reform. The bail-out for Greece is thus a concentrated and speeded up version of the Eurozone’s basic principles. Secondly, there is something spineless about Tsirpas’s position. It seems that if Syriza were to come to power and form a coalition, and if it were then to fail to renegotiate the bail-out terms with the EU and the IMF, it would eventually oversee an exit from the Eurozone. But this would appear – from Syriza’s point of view – as evidence of their hand being forced. They didn’t want to leave the Eurozone but their hand was forced by evil creditors. Equally, from the side of the remaining Eurozone member states, the story would be one of Greece being given all the chances of remaining within the single currency zone but choosing in the end to jump. The Greeks would say they were pushed; the Eurozone members would say they jumped. Greek exit would thus happen rather in the manner of the Czech-Slovak divorce of the early 1990s: accidentally, with no one claiming responsibility for what happened. Or as the FT puts it, “In a game of brinkmanship, neither Athens nor the rest of the Eurozone would want to take responsibility for a Greek exit from the single currency. Recriminations would fly”.

A more consistent position for Syriza would be for it to assume fully its criticism of austerity policies. This means arguing for a Greek exit from the Eurozone and proposing a clear growth plan after the exit. At the moment, Tsirpas is playing a dangerous game of assuming that Greek membership of the Eurozone is important enough to the country’s creditors to force a revision of the bail-out terms. There is little in that position beyond opportunism and Tspirpas may find himself presiding over the consequences of his own miscalculation.

End of austerity Europe ?

7 May

The victory of François Hollande in the second round of the French presidential election, combined with a very strong showing for the leftwing anti-EU bailout Syriza party in Greece, has led some to believe that austerity Europe is coming to an end. In France, some believe that Hollande’s victory has “strong echoes of 1981”: the year François Mitterrand was elected. The elections on the 6th May were preceded by a series of reports suggesting that the austerity policies enshrined in the EU’s fiscal compact were increasingly seen as inadequate by those who had promoted them so vigorously only a year earlier. The head of the European Central Bank, Mario Draghi, made a speech to the European Parliament where he explicitly called for a growth component to be added to the fiscal agreement – a proposal that was already at the heart of Hollande’s electoral programme.

Though the election results are significant, it would be wrong to suggest that this signals any definitive shifting of political tides. Firstly, what the French and Greek elections demonstrate more than anything is the strength of anti-incumbency feeling in Europe. Sarkozy was the 11th leader in Europe to lose his place at the head of government since the beginning of the economic and financial crisis of 2008. Anti-incumbency, however, is ideologically indeterminate. In Spain, it brought a rightwing party to power. In the UK it threw up an unhappy liberal-conservative coalition. In Greece, the election results point to a collapse in the basic contours of Greek political life but in a way that has swelled support for both the radical left and the radical right.

The dynamic is thus one of disintegration, with diverse ideological effects depending on the national circumstances. Current elections in Europe express frustration with existing governments more than the dawning of a new political moment. This was most evident in France: anti-Sarkozy feeling was the motif of the campaign. It was the building bloc for Hollande, who in many respects embodies the adage about “being in the right place at the right time”. And it galvanized an otherwise fissiparious left. The far left party, Front de Gauche, led by the charismatic Jean-Luc Mélenchon, told its supporters all to vote against Sarkozy in the second round. Mélenchon pointedly avoided mentioning the Socialist Party candidate by name. Much of the forward momentum for Hollande is thus really the flipside of a movement against Sarkozy. This suggests that Hollande may struggle to maintain momentum once he takes over the presidency and it makes the upcoming legislative elections much less of a shoe-in for the Socialists than we had come to expect.

A second reason is that there is no real intellectual alternative to austerity being pushed by these new leaders and parties. What might otherwise have been a great opportunity for genuine political renewal has in fact contributed little by way of new ideas. The socialist campaign in France was focused on Sarkozy’s record as president. Its own economic programme was far weaker. The main thrust was to halt reform at the domestic level, bringing things back to the status quo ante, and to kickstart growth at the European level by using the credit worthiness of Germany to fund a new round of government borrowing. Hollande himself did not contest the need for cuts in government spending, he merely disagreed on the timetable according to which the cuts should be made. What was left unaddressed was perhaps the major question of our time. Since the collapse of the postwar Keynesian consensus in the 1970s, European societies have relied on either public sector borrowing or on borrowing by private individuals in order to maintain their basic social contract. The crisis since 2008 has fundamentally challenged this model and yet no real alternative to it has emerged. New governments in Europe, including the French Socialists, are relying on yet more borrowing to promote growth. This is not the end of austerity Europe so much as a continuation of the underlying trends that brought about the crisis in the first place.

Yesterday’s elections continue the theme of anti-incumbency sentiment in Europe. They do not signal a fundamental ideological shift as ideas do not emerge, readymade, out of frustration or dissatisfaction with existing governments. Judging the new arrivals by this standard, rather than just celebrating the exit of chastened leaders, there is little reason to celebrate.

Europe’s implementation problem

26 Apr

In recent days, we have seen an unravelling in the political foundations of the Eurozone’s fiscal compact. The most recent casualty was Mark Rutte’s government in the Netherlands. Precarious at the best of times, the government’s proposed budget cuts of up to 16 billion Euros failed to win over the Freedom Party leader, Geert Wilders. Wilders withdrew his support for the government, leaving it to rely on a spattering of small parties across the Dutch parliament. Rutte claims that the country must pass the new budget by the 30th April, the deadline given to the Hague by the European Commission, the latter donning its hat as agent of budgetary approval for national governments. Many in the Netherlands disagree and any election is likely to be cast as a referendum on the Euro.

In France, the success of the far right National Front in the first round of the Presidential elections last Sunday has put France’s role in Europe under the spotlight. One of Marine Le Pen’s most publicized demands was that France leave the Euro. Turning their attention to National Front supporters, both second round candidates – Nicolas Sarkozy and François Hollande – have taken the anti-EU sentiment on board. Hollande promises to redesign the fiscal compact so that it focuses more on growth and job creation. Sarkozy has begun to speak about politically controlling the European Central Bank and has taken a tough line on Europe’s immigration laws.

In Ireland, as a referendum on the fiscal deal approaches, a large part of the population is undecided. Recent polls suggest that up to 40% of the population is unsure how it will vote on the 31st May. And in Greece, the forthcoming elections may well challenge the political consensus built up behind the country’s deal with its creditors.

This unravelling of political support for Eurozone agreements is not just a product of a far right surge across Europe. Many of the criticisms of the austerity measures reflect divided opinion at the very top of public life. That more austerity only leads to lower growth, which in turn leads to higher debt levels and thus a need for even more austerity, is recognized by many as a downward spiral associated with extreme cost-cutting by governments. The IMF has for a long time warned against draconian cuts in government budgets that could stifle rather than encourage growth. In Greece, we have heard this argument coming from the opposition for some time and in the UK the Labour and Conservative Parties agreed in the run up to the 2010 election on the need for balanced budgets but disagreed about how quickly budgets should be brought back into balance. Elite opinion lacks consensus on the modalities of austerity policies and today’s disagreements reveal some of the problems with the deficit-reduction assumptions of the EU’s fiscal compact.

It is also clear that implementation problems are an inherent feature of European governance. Taking the case of the Eurozone, the fiscal compact reflects the way in which political decision-making has become separated from the ugly business of implementing unpopular policies. EU crisis management concentrates policymaking powers within the hands of executives. In the form of agreements between heads of state, brokered behind closed doors and in ways that are intended to mutually support each other in the difficult task of ruling in uncertain times, these policies are then passed down to the level of national ministries where the cuts and belt-tightening takes effect. And it is not coincidental that the focus at the EU level is on government spending. The far more difficult and longer term task of raising competitiveness is left up to national governments.

Such a radical separation between the decisions made and their implementation is evidence of the weak authority national governments command across Europe. They hope that by presenting at the domestic level something that has already been agreed by most member states, implementation will be made easier. The pan-European nature of the deal thus reflects the crisis in authority felt by national governments. They need this separation of policymaking from implementation in order to make implementation easier at the national level. We are seeing today that it does not always work.

Interview with Hillel Ticktin

5 Apr

Following up on last year’s Current Moment interviews, today we are publishing an interview with Hillel Ticktin, Emeritus Professor of Marxist Studies at the University of Glasgow. An internationally renowned Marxist scholar, Professor Ticktin co-founded in the early 1970s the journal Critique.  He has published numerous books and articles over the years. In 2010, Critique published a special issue on the current crisis to which Ticktin and others contributed.

Eurozone leaders are going on record saying that the worst of the sovereign debt crisis is over. Are they right to be so optimistic?

No. But then, the Eurozone country politicians are not going to tell the truth as to what they think, as it would spook the markets. Without growth, it will be impossible to solve the indebtedness problem, and Germany is insisting on harsh terms for giving loans, so harsh that there will be negative growth. This is clear in the case of Greece, where the newspapers are talking of the need for a future Third Bailout. But in reality it is highly likely that other countries will require further substantial loans. While Portugal will not be too much of a problem, a Spanish or Italian bailout cannot be financed on present Eurozone funds.

Yields have fallen on sovereign debt as the European Central Bank (ECB) has injected over 1 trillion Euros of liquidity into the European banking system in the form of longer-term refinancing operations. How has the crisis changed the ECB and has the ECB been the saviour of the situation?

The ECB has clearly put off the day when the crisis will have to be faced down. Banks have acquired sufficient liquidity to avoid problems and have invested money in their governmental bonds. The rational solution would have been the issuance of sufficient Eurobonds which would be used to fund the various countries involved. Since the Eurobonds would be backed by the successful Eurozone countries, investors will buy them. The ECB has produced a temporary measure but the amount of money involved is insufficient. Until the ECB can act as the Central Bank of an independent country in order to issue as much liquidity as it sees fit, and can help to issue Eurobonds, it is not fit for purpose.

The European approach has combined the backdoor provision of liquidity to its banking system with a frontdoor assault on government budget deficits and on national labour markets. What is your assessment of this approach overall?

Crazy. It is not really a European approach so much as a Conservative policy supported by the UK Conservative party, the Christian Democrats and Free Democrats in Germany, the Republican Party in the USA etc. It is not supported by the social democrats in France or Germany. Hollande has made that very clear. Of course in practice the social democrats do not live up to their promises, but they would ease the situation and might be pushed further by popular pressure. The question is why such a policy is being adopted at all, given that it cannot possibly work, and indeed is not working. It looks as if a section of the bourgeoisie has decided to take the opportunity to attack the working class so far that they would end up with a 19th century approach to social relations. That, in turn, would ultimately destroy the social democratic parties and replace them with revolutionary left wing parties. Whom the Gods would destroy they first make mad.

A feature of the politics of the Eurozone crisis has been the replacement of democratically-elected governments with technocrats. This occurred in both Italy and Greece. Does this signal a trend of some kind, that economic imperatives are being placed above political ones for instance? And does it suggest that European integration today is really about preserving the Euro?

This is an inevitable feature of the present. Once the majority of the population began to turn to the left, as in Greece, the capitalist system itself began to be threatened. The use of the army is not possible at the present time. Nor is a far right popular movement based on the so-called ‘middle class’, So they have had the ingenuity to invent a new undemocratic category of a non-political government,  which makes a mockery of the Parliamentary system.  This is much like the idea that US judges of the Supreme Court are above politics when they pronounce on political measures, even though they have been specifically appointed for political reasons. It does not fool the working class but people may be grateful that it is not worse. Since it will not work, there will have to be even more undemocratic solutions. In the UK during the Great Depression, there was a National Government. In effect a coalition of all the large parties. The fact is that the Parliamentary system was already cracking, so this is another stake in its heart.

There is no question that ‘economics is being placed above politics’. The only rational way to run a union with a common currency is to accept that the richer areas will help fund the poorer areas, in order both to help them catch up but also to maintain cohesion, based on principles of human rights. European countries usually accept such obligations, unless they accept that parts of their country will break away. After all, Germany taxed the West Germans to help the absorption of East Germany. Today, however, the ruling parties in Germany, the Netherlands and Finland appear to reject such an approach. The reason ultimately lies in the fear of instability in those countries. So, economics is not really being placed above politics, depending on one’s definitions of politics and economics. Instead one politics is replacing another. The reason is discussed in the answer to the next question.

Is there an alternative to this approach of national budgetary austerity combined with a pan-European fund intended to offset any threats to Europe’s banking system.

As the current approach is being widely applied and is widely distrusted, and can only fail, there has to be another alternative if humanity is to survive, whether in or out of the Eurozone.

We are in a downturn of depression proportions. The last Great Depression only ended with the World War. War, on that scale, is however, excluded at the present time. The only way out of the present impasse is for a rationally planned economic reconstructive process, with governments playing a leading role. As the ruling class supports small government and the extension of private enterprise, it will oppose any such move. On the contrary, it is afraid that any attempt to go for reflation with government participation will lead to a political upheaval. In my view, they are right that the population will demand increased economic and political participation under conditions of full employment. That is in effect the immediate alternative, which is why the ruling class wants to take the opportunity, instead, to achieve a defeat of the working class of epochal proportions. Looked at this way, the policy of austerity is a defensive measure to preserve capitalism. Seen this way the policy is not crazy but rational, even if its application is mad.

The future is not as apocalyptic as it might seem from that last sentence, since the most likely result for the present is that the austerity policy will be pulled back, even if only by social democrats. Growth will be low, poverty increasing and discontent rising. Ultimately there will be a denouement, but when is not yet clear.

A European approach to the crisis

30 Mar

Largely because of electoral reasons, French President Nicolas Sarkozy has suggested recently that Europe is “turning the page” in its financial crisis. At a European summit at the beginning of March, he declared that it was the first summit since August 2011 not to have been a “crisis summit”. A few days ago, he declared the financial crisis over.

There is certainly a sense that the urgency and the gloom of 2011 has lifted in early 2012. The risk premium demanded by investors to hold the government bonds of countries like Italy and Spain has fallen considerably and stories of bank runs and Eurozone atrophy have fallen away. It is worth asking then what has been Europe’s approach to its crisis and whether we right to think it has been an adequate response.

Two features stand out. The first is the emphasis – policed by European institutions and formalized in the EU fiscal pact – on budgetary austerity and labour market reforms. Cutting government spending has become the prime goal of national governments across Europe, closely followed by reforms of national labour markets. Budgetary austerity runs across all the Eurozone: from the Netherlands where pressure to cut budgets looks like it will bring down Mark Rutte’s coalition government, to the UK, France and elsewhere, not least in Greece where it has been the basis for a fundamental assault on the country’s social fabric. National labour market reforms have been pushed mostly in the southern European countries: Greece, Italy, Spain, Portugal. There has been some change in Northern Europe: in France the retirement age was raised and the Sarkozy government has argued for shifting the burden of social security contributions from employers onto taxpayers in the form of a “social VAT”. Elsewhere, labour market reform is deep and painful and may yet lead to an unravelling of the alliance between national technocrats and EU-backed reform. But the sense in Italy, where Monti is fighting the unions, and in Spain where Rajoy faced down a general strike yesterday, is that changes will go through.

The second feature is the backdoor use of taxpayer Euros to prop up the continent’s financial system. Whilst the public assault on spending programs and on labour market regulation is an explicit policy of European governments, this latter feature is more hidden. It is nevertheless a key element in the European approach to resolving the Eurozone crisis. It has two elements to it. One is the commitment to European sovereigns in the form of the “bailout bazooka”. In an angry letter to the Financial Times last Wednesday, Klaus Regling, chief executive of the Luxembourg-based European Financial Stability Facility, took issue with the description of his Facility as a “toy gun”. He pointed out that in fact the sum of the bailout provisions provided by European governments is considerable: almost 1 trillion Euros in total has been disbursed since the start of the crisis. This includes the two bailout packages for Greece, the write-down of Greek debt (the so-called Greek private sector involvement operation), the Irish and Portuguese bail-outs, the European Central Bank’s secondary market purchases, 250 billion Euros of uncommitted EFSF resources and promise of 150 billion Euros to the IMF.

The second element is something Regling didn’t include in his list, namely the ECB’s longer-term refinancing operations (LTRO). These operations have been in two stages, first last December and again in February of this year. In essence, LTRO has involved the ECB in providing cheap three year loans to banks. This was intended as a way of injecting liquidity into the European banking system so as to avoid any bank collapsing altogether. Over time, the hope is that this liquidity will work its way into the real economy in the form of bank loans to business. The amount of liquidity provided by the ECB is huge: 1.019 trillion Euros in total.

Taken together, the European approach to the crisis has been to mix frontdoor assaults on government spending and labour laws with a backdoor taxpayer-funded bail-out of banks and of embattled sovereigns. There are two, deeply troubling elements contained within this approach. The first is the hypocrisy: a focus on austerity on the one hand and the provision of largesse on the other. The only way to understand this is as a massive wealth transfer away from taxpayers. It isn’t as simple as saying that cuts to social security provision are being used to fund the bail-out of banks since some the bail-out money has gone to pension funds who have faced serious losses on investments in southern European countries. But there is a wealth transfer at work that reflects a balance of forces within society and the transfer is not towards European labour.

The second is the doubt about whether throwing more money at the financial sector can really solve a more endemic problem. Debt-fuelled growth was a characteristic of the years leading up to the crisis: either government-debt in the case of southern European societies or private debt in places like the UK. The idea that issuing more debt can lift Europe out of the crisis seems ungrounded. More likely is what we are seeing: banks that have taken up the offer of the ECB’s loans have parked them back at the ECB rather than using them as a basis for a renewed round of lending to business. The economics of the European approach seem naïve, the politics are just plainly anti-labour.

Guest Post: Europe’s Soft Coup d’Etat Part 2

21 Feb

Editor’s Note: This is the second of a two part analysis of the politics of the euro-crisis by James Heartfield. Part 1 found here.

In this current moment some of those who are standing up to the EU’s austerity packages have shouted about the attack on democracy. They think that the EU is attacking democracy so that it can push through its spending cuts. So it is. But much more so it is using the debt crisis to push through the abolition of national sovereignty. So often it has.

Two and a half years ago a very prescient sociology professor Ulrich Beck wrote ‘The crisis cries out to be transformed into a long overdue new founding of the EU’. Beck went on: ‘until now there has been no joint financial policy, no joint industrial policy, no joint social policy – which, through the sovereignty of the EU, could be pooled into an effective response to the crisis’. The only real barrier, thought Beck was ‘the national self-delusion of its intellectual elites’ who ‘bewail the faceless European bureaucracy’. (Guardian, 13 April 2009)

December’s Brussels summit, drawing its moral imperative from the sovereign debt crisis, ended with a commitment to create a much-greater coordination of economic and financial policy. Under the agreement national governments must submit balanced budgets, and face ‘automatic penalties’ if they do not. The thesis behind the agreement is that the southern European countries’ spending and indebtedness has undermined confidence in them and because of that in the Euro.

Shifting the blame onto Greece, Spain and Italy for the Euro crisis twists the truth. Throughout the buoyant years of the noughties the success of the European periphery was cited proof that the European Union was working. More, exporting countries, including Germany, were glad that easy credit boosted Greek and Spanish buying of their goods.

Apart from the economics, though, the important shift is towards ‘stronger economic union’. When the crisis began Greece’s troubles suggested to many that the European Union would ‘fall apart’.Professor Beck’s intuition that the crisis would drive the greater integration of economic policy proved to be as insightful as the fears that the whole thing would fall apart. Where he misleads us is in portraying this movement as a greater democratisation ofEurope. On the contrary, the trajectory is towards a much-diminished role for democratic oversight, and a much enhanced role for unelected officials dictating terms to elected governments. ‘Automatic penalties’ is European code for ‘not subject to political negotiation’.

The reason for the ‘automatic penalties’ is that as national elites European governments do not have the authority to see through tough measures. For many years now, governments have leaned on the European Union as an extra-national source of authority. Governments that are not willing to make the case for tighter budgets honestly in their own terms, have hid behind the claim that they must make adjustments to meet the external restraints imposed by Europe.  That is what Italian Minister Guido Cali meant when he said that ‘the European Union represented an alternative path for the solution of problems which we were not managing to handle through the normal channels of government and parliament’.

Not just Italy or Greece, but Britain and Germany sought again and again to ‘tie’ or ‘bind’ themselves into European Union rules that would limit the political temptations of excessive spending. Quite why sovereign states should choose to bind themselves and their successors in obligations that they cannot change or renegotiate is a conundrum for students of international relations. The answer to the puzzle is that these elites no longer derive the same authority that they used to from national electorates or constituent assemblies that once they did. Instead it is in the international summits, most notably the European summits that leaders feel secure, bound together in their mutual fear of the unruly electorates.

Fear of economic crisis is driving the integration of European policy, and it is not being consolidated as a democracy, but as a technocracy, where officials follow procedures, rather than make policies. Six years ago the voters of France and Holland voted down the centralisation of Europe under its then proposed constitution – which was abandoned soon after. Now, using fear of economic collapse, European elites have talked themselves into submitting to a more onerous set of impersonal and bureaucratic rules.

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