by Frank Thomas and John Lawrence
a conversation follow-on to Frank's post, High Levels of Debt Threaten World Economy and Frank's and John's post, The Euro Zone Crisis
I've been thinking a lot about these issues but so far have not found the time to put my thoughts down. I think Europe has followed the US with the neoliberal (here called neocon) model involving privatization, austerity and kowtowing to the bond market and the large banks. I noticed today on the European news some kvetching about the fact that the US rating agencies are downgrading some European countries including Belgium and the fact that there aren't any European rating agencies.
The ECB is following the model of the US Federal Reserve which isn't allowed to loan money directly to the US government - only to the big banks. Similarly, the ECB isn't allowed to loan money directly to European countries. These laws or rules totally favor the private banking system at the expense of the taxpayers of the respective countries.
Once the banks get the countries in debt as they did in South America, then the IMF and the World Bank want them to institute austerity and privatization programs.
I thought the article I reprinted on the blog today was a good one about how the European philosophy has changed from Keynsian right after WW 2 to now neo-liberal, basically the same philosophy that's being implemented in the US - shutting down public institutions, austerity for the middle class and privatization to get money to pay debts on all levels - municipal, state and national.
Best,
John
John,
All the talk in so many circles that Europe is going down the neo-liberal route of the United States started at least 18 months ago and has been picking up steam lately in some provocative writings. For quite some time now, I too have been confronted with this fear by some Dutch people I have met in my lecturing and training sessions every week. Such talk has hit a crescendo lately because of the "tough love" i.e., austerity treatment that's being given to the financially bad performing countries.
As I''ve said to you before, without pretensions of perfect wisdom, I believe this fear is entirely overstated. WHY? Because the coalition governance systems prevalent in all EU countries will not allow such a neo-liberal transformation. Just yesterday, for example, the Dutch public voted the Socialist Party leader, Emile Roemer, as the most outstanding politician in 2010. Denmark's conservative ruling party coalition is expected to lose in next year's elections. So, as Steven Hill correctly noted and I have witnessed for over 35 years now, Europeans have the multi-party political, counter-balancing flexibility and institutions in place to adjust to new market/financial realities. And, they make adjustments when necessary, like in significant financial stress cycle we are in now -- a more severe recession followed by a financial crisis. BUT adjustments are not undertaken with the direct intention of impoverishing the middle class as is the goal of the ultra-extreme conservatism prevalent in the U.S. What's happening in Spain, Greece, Italy, Ireland, Portugal appears conservative, ruthless and mean only because these countries have sunk so badly deficit and debt- wise.
This has many causal factors ... some national, some EU related. EU authorities simply have never enforced the 3% of GDP deficit rule thereby allowing poorly managed countries to build up wild debts, low tax collection, corrupt budgeting and reporting processes, unsustainble retirement terms and pension plans. In addition, national rulers and financial authorities in the weak countries grew accustomed to living, spending, and speculatively investing beyond their countries' means resulting in a flood of evolving debt at both public and private levels.
Now the rest of the EU 17 countries --who generally followed financially responsible rules --must save the irresponsible countries and thus the euro. The well-run countries have already provided up to €100 billion euros so Greece and Ireland can pay their daily bills. BUT, the well-managed countries are correct, in my humble opinion, to insist on disciplined reforms and budget austerity for all High Debt and High Deficit members to master control of the very deeply infiltrated causes of their financial breakdown. Otherwise, the money that is currently being sent to Greece and the others and more that will be sent will simply be money down the drain for Dutch, French, German taxpayers, etc. If financial discipline doesn't take root, the financial breakdowns will repeat themselves, and that could well bankrupt all EU countries. So, the near term approach to the financial crisis is "tough love" as the Frances, Germanies, Hollands know how serious the financial consequences will be if Greece, Italy, Spain, Portugal, Ireland all at the same time were left to survive on their own without the euro currency. Might one or two of these countries ultimately willingly or forcibly be required to leave the eurozone? Yes, of course, but the goal for this to happen must be organized in an orderly way, much like any company bankruptcy.
Another WHY neo-liberal transformation of EU is an overdone misplaced popular cry of researchers and pundits (especially from left-leaning economists in U.S.) is that they fail to understand that -- with exception of the weak EU countries that have put themselves in a dangerous financial situation over the last 20 years -- the strong countries have the Margin of Financial Cushion in their social nets and budgets to Squeeze their fiscal budgets in response to new market realities of a rapidly expanding aging of society exploding retirement/health care costs, and the slower GDP growth prospects given scarcity of basic resources and extreme, often unfair competition of China and India. BUT the mature EU countries will undertake a multi/task approach to austerity that includes progressively raising taxes and investing so as not to impoverish the middle class as America as been doing ... where social nets are ALREADY BAREBONE and yet are being cut further!! As I said in a prior writing, our social-economic situation is not too dissimilar from how the America team of brave soldiers summed up their situation and mission in the "Saving of Private Ryan" ... "FUBAR."
So, I sense the austerity situation and impact of same between the U.S. and the EU 17 healthy nations is entirely different and does not warrant the general claim that Europe is going down the socially destructive neo-liberal track America has followed the last 30 years. This apocalyptic assumption is also wrong because it fails to recognize that the EU states -- in terms of labor mobility, inherited cultural habits, norms, nationalism -- are all uniquely and light years historically different compared to the 50 U.S. states. This means each EU coalition government has always been, by necessity and by general public and cultural accomodation, first and foremost focused on an equitable and fair distribution of capitalism's rewards and punishments. I don´t expect this heritage to change. That's WHY EU democracies are referred to as "Social Democracies" which are slightly right, left or center. This is in sharp contrast to America's "Winner-Takes-All" in a die/hard liberal vs. conservative name calling democracy where quality of life, income and wealth levels
are at other extremes from the European patterns.
I'm not trying to say that all is perfect with Europe's struggle to save the euro, to sacrifice some sovereignty to achieve an independent oversight of national fiscal budgets. The struggle to go from monetary to include fiscal union where nations retain bulk of their sovereign decision power is by far not over. Nearly 50% of the ECB's capital reserves come from Germany and France, the most influential eurozone members ... both of whom are putting the brakes on opening the money printing press for expanding the European Financial Stability Facility (EFSF) from planned Euro 750 billion level to at least Euro 1 to 1.5 trillion, as some are recommending. This can be seen as a weakness of the ECB since it is not completely independent from the most dominant EU members. This can also be seen as an obstacle to be overcome for other EU members to have an equal voice in the final fiscal austerity mechanisms, and the effective implementation and operation thereof.
In my over 30 years of living and working in Europe, in my view what's going on now is Europe's usual pragmatic, step-by-step adjustment process to new challenges and market/financial realities. The adjustment task is slower and much, much grander this time ... more seriously testing EU unity given the interlocking depth of the financial breakdowns in weaker EU member countries. I have greater faith Europe will overcome the obstacles than I do that Republicans and Democrats will ever come together to solve our own equally, if not worse, financial and job development crises in a sane, constructive, fair way that brings ALL Americans foreward as opposed to only the top 1%, 5%, 10%, 20%
Time will tell who´s right about the claim Europe is also moving towards the kind of destructive, money-only-counts casino capitalism and oligarchic rule that has already taken over our democracy.
Best,
Frank
John,
Easing of the euro and credit crunch crisis by the ECB's just announced $639 billion loan liquidity offer -- at a very low benchmark interest rate of 1% and loan terms of 3 years -- to over 500 EU banking institutions BUYS TIME to solve longer-term issues such as:
- reducing very high government or household debt among EU member countries noted in TABLE 1
- achieving real EU 17 and EU 27 fiscal unity including: consistentcy and harmonization in financial reporting, transparency, and effective operation/enforcement of EU rules for government deficit and debt levels
- implementing Basel III stricter capital (equity) reserve requirements for banks of 3% of total assets among other provisions
Concerning debt levels, the Dutch have come up with a thoughtful idea. Authorities are now serioiusly considering offering new and existing homeowners an income tax benefit if their home mortgages are paid off more quickly. As TABLE 1 shows, the Netherlands has an excessive level of household debt amounting to +-130% of GDP.
Over thirty years living in the Netherlands has taught me never to give up on the Dutch multi-party coalition governance to ultimately reach balanced solutions to serious societal challenges -- like the Dutch multi-faceted strategy approach to the current financial crisis of CUT, REFORM, RAISE TAXES, and INVEST. And the goal is to try to undertake these actions simultaneously so as not to create a long period of "stand-still" growth as the Japanese experienced in their 1992-2002 self-inflicted prolonged economic
stagnation.
Best
Frank
Frank,
Have you taken into account that the bond speculators are driving Greece into default by betting that they will default? This has nothing to do with how well European leaders respond to the crisis and everything to do with what international speculators may be doing to drive up Greek and Italian interest rates by shorting their bonds. Speculators prey on the weakest countries and can drive them into default by betting huge sums of money that they will fail. This is what caused MF Global to go bankrupt: they had bet their depositor's money that Greece would default, and then, when it didn't, they couldn't cover their bets.
There's still the business of naked shorts where the bettor doesn't even need to own any securities. I think the EU banking system is no different from the US banking system in the respect that it is private and not immune to the machinations of Goldman Sachs and the whole international banking crew and their mania for derivatives which can drive up interest rates for weak countries and ultimately could cause them to default. Huge sums of money are being bet on outcomes for Greece and Italy which could ultimately become self-fulfilling prophecies.
Is the ECB owned by the EU or is it private? Does interest accrue to the EU or to private bankers for the money it loans?
More next week...
Regards,
John
John,
I'll spare you before Xmas from a long email response about financial speculators. In short, suffice it to say one key goal of a financial transaction tax, I just wrote about at length, is to put a damper on all sorts of financial speculations and make them consummately transparent. It's a fast growing reprehensible out-of-control international activity close to or often actually being outright criminal. Sophisticated huge money players like Goldman Sachs and other greedy manipulators play the short and long speculation game.
George Soros, who I happen to admire, made billions as a speculator among other ways. Financial speculation has been around since stock/ bond/currency exchanges have existed. The ugly excesses and abuses are still ineffectively controlled. Recently though, I've noticed EU authorities are getting more and more behind a financial transactions tax, hopefully in spite of Geithner's opposition. It will be interesting to learn what the recent Basel III meetings and discussions have concluded, if anything, about this deeply-rooted problem that's just another form of casino capitalism benefiting the wealthy and powerful.
Will converse more with you on this subject later.
Peace, my friend!
Frank
