I discarded an earlier draft of this article as I felt that events were moving too fast in the eurozone for me to write sensibly. Now, upon rereading it three weeks later, I find that not that much has changed. The level of threat to the euro remains high in spite of the "conservative" party's victory in the Greek elections. Prior to the elections, President Obama went on a charm offensive with Chancellor Merkel of Germany -- but it accomplished nothing more than pleasantness. "Madame No" is still firmly in power, able to call the shots for the future of the euro.
The continual gatherings of heads of state, such as the one just concluded in Rome of Germany, France, Greece and Italy, reassure us that the euro will be saved. But the means to do so seem to be as elusive as ever. According to The New York Times, Madam Chancellor was firm in her position:
Ms. Merkel answered that solidarity was possible only with serious controls and collective oversight and that "we have existing treaties and they must be respected."
The bailout funds are "instruments of solidarity," but "you cannot have guarantees without control," Ms. Merkel said tersely.
Mrs. Merkel remains unmoved even after the euro zone finance ministers' meeting in Brussels saw the director of the International Monetary Fund, Christine Legarde, call for the countries of Europe to move rapidly toward a fiscal union. That would mean a radical change in the institutional responsibility for bailout funds, giving the European Union much more authority. Her plea was met with little enthusiasm or discussion. Although the finance ministers agreed to work more closely together, they carefully skirted any mention of national sovereignty.
Ms. Legarde, a former French minister of finance -- hardly a left-wing radical -- sees the EU financial crisis as being at a critical stage. Her assessment, a neutral one from an experienced bureaucrat, is important and prescient amid the restricted role-playing of national leaders who have many political considerations preventing them from acting decisively. Ms. Legarde speaks to the problem; they will smother it with words when the euro-zone heads of state meet in Brussels at the end of this month.
A move toward fiscal union would probably be blocked by more than Germany alone. National sovereignty is at stake. The prime ministers of Britain, Spain and Greece all head conservative parties at home for whom sovereignty is a sacred thing. To seriously consider Ms. Legard's proposal would arouse huge internal debates in many European countries. This will be plain for all to see in Brussels on June 28th and 29th. How much courage will we see displayed by our political leaders?
The important new face on the scene, François Hollande, the newly elected president of France, is the only one advocating the modification of the austerity programs now in place and the introduction of major stimulus programs such as those the New Deal introduced to the United States in the 1930s in response to the Great Depression. But given the position of strength Angela Merkel possesses, not only personally but financially, Hollande has little chance of achieving much success.
Paul Krugman, Robert Reich, Joseph Stiglitz and other American columnists are spot on when they point out that without substantial stimulus programs -- along with budget cuts -- purchasing power will not be available to do its job of pushing the economy forward. Instead, the imposition of strict austerity measures will actually prolong the crisis. Review the present economic scene in Ireland, Portugal, Greece and Spain; they illustrate the limitations -- indeed, the disastrous effects -- of a regimen of sustained austerity.
The crisis is not new. Last spring, the New York Times editorial page gave a bleak forecast:
Spain could be the next European economy brought down by German-led mismanagement of the euro-zone crisis... Austerity, the one-size-fits-all cure prescribed by Ms. Merkel, is not working anywhere. After weeks of misleading calm, and despite huge injections of liquidity by the European Central Bank, countries are slipping back into recession, unemployment is climbing and deficit forecasts are worsening.
Robert Reich predicted this outcome way back in November 2011, when Congress's supercommittee was discussing the budget (emphasis added): "Washington is on the road to making budget cuts that will slow the economy, increase unemployment and impose additional hardship on millions of Americans. The real question is how to stop this austerity train wreck."
But timing is important; the financial crisis is now right on top of us.
My own question is whether the proposals coming from President Hollande and Ms. Legarde, the first economic and the second institutional, will be seriously considered so long as the discussions remain at the level of "What might happen if... ?" rather than recognizing that the crisis is already upon us. My guess is that national positions will remain fixed. It is hard to take seriously guarantees such as "The euro is here to stay, and we all mean it!" -- words spoken recently by Marion Monti, the prime minister of Italy, and widely reported -- when the appetite among governments for creating a real union of European states is nonexistent.
As it stands, the European Union will continue to patch the crisis with financial manipulations to prolong the life of the euro, and will perhaps do so several times as we bump from one member's financial crisis to the next. Tit-bits of national sovereignty will be given up, but not enough to accomplish the major reforms necessary to stave off the eventual collapse of the euro. This collapse, it should go without saying, will have serious consequences for the rest of us in the global economy.
Behind my pessimism lies not only observation of the limitations of our national leaders (even when they recognize that Spain is "too big to fail") but an assessment of the many other financial variables that could be triggered by the private sector. At this juncture we should expect our banks and investment houses to consider broad objectives rather than focus exclusively, as is their wont, on financial profits. But if history is any guide, the private financial institutions will want to continue to plunge ahead, fighting against any encumbrance from government regulations that, they argue, would inhibit their "entrepreneurship." And, sad to say, our own Secretary of the Treasury, Timothy Geithner, pays lip service to this spurious notion.
Given the conservative political climate in Washington, effective restraints for the "free market" are not high on the policy agenda for either the Democrats or the Republicans. Whether the crisis ravages European countries first before arriving on our doorstep -- as the Great Depression did -- be sure that it will be only a matter of days or a few weeks before the effects are felt among us. And it won't mean simply our banks needing another bailout; it will mean a disaster that will worsen existing unemployment and cause pain for all of us. It will be like 2008 all over again. Perhaps worse.
Krugman said it all back in April:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should -- by spending more to offset falling private demand -- but with fiscal austerity...
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the "austerians" insisted that the reverse would happen.
I admire Chancellor Merkel as a politician and as a political leader who holds her ground. But the future of the European Union and the euro are very much in her hands. She may soon be faced with the choice of being a hero in Brussels and, at the same time, being spat upon in the boardrooms of Germany's banks. She may have to choose between being saint or martyr or both. When the recession arrives, from whatever source, she may go down in history as just being stubborn.
- cuts to social programs: very common. Cuts to education and health services result in a less-educated and less healthy population (and less employable), and the civil servants that get fired add significantly to an already high unemployment.
- privatisation of public assets: privatization is most often linked to massive layouts in the privatized companies. It will take a long time before the target country can rebuild those assets.
- free movement of capital: allows the rich in the target country to leave with their money, leaving an ever shrinking middle class to shoulder the tax burden.
- free trade: kills local production except for a few export items. More layoffs.
The end result is an even more impoverished country forced to reduce the quality of services to its population, and with a smaller tax base to finance its programs. This is made even worse by people turning to the black market economy for survival reasons.
This is what is happening to Greece right now. And while debt write offs and privatization money will reduce the debt some, the relative burden will not change much for a much poorer Greek government.
The idea that Germany is a holdout to an eventual EU revival is illusory. There is a lie that has been propagated in the media that Germany possesses the fiscal depth to make the eurozone whole again. With a debt/GDP of 80% plus? and growing, Germany has the ability to keep funding the eurozone in the short term, but it does not maintain the economic power to rescue it long term.
In addition, the author promotes the need for greater fiscal integration at any cost, correctly seen as a cause for the crisis. However, the solution 10 years ago is no longer sufficient today, now that the system is more highly leveraged. The EU becoming entirely fiscally integrated does not solve the lack of COLLATERAL in the system backing the total debt now. If Germany, the solvent member of the EU with capital left, cannot rescue it now, it will not be able to rescue it in a more integrated EU that is insolvent.
There is an old rule about debt that no amount of financial chicanery can hide: one day, some day, somebody must pay. The only question left to answer in the EU is who that will be.
“advocating the modification of the austerity programs now in place and the introduction of major stimulus programs”
These days “courage” means ignoring the views of the voters who elected their supposed representatives; while “austerity” means spending somewhat in excess of revenue and “stimulus” means spending massively in excess of revenue. Here’s an idea: if you want to display real courage as a democratic leader; try getting elected on a permanent policy of spending far more than you raise in bad times and more than you take in even when times are good. Once you get elected on that platform; then proceed to carry out the voters mandate rather than by showing the courage to ignore the voters wishes.
Europe was once meant to give free people a free choice on life. And that is constantly frustrated, sometimes even blocked. By politicians who felt that people could not handle such a choice. And so we got no referendum on the euro, no referendum on EU treaties. And the outcome of any referendum that we have had got thrown in the trash. Denmark arguably being the sole exception for sticking on to its own currency.
Lest we forget, the US grew from a nucleus of states, and expanded westwards. A bottom up growth, contrary to the top-down approach now pushed upon us.
Few of the European technocrats, if any, seem to understand that every layer piled on a previous layer of management of societies that themselves are increasingly becoming more and more complex will yield no other extra control on account of diminishing returns. Many civilizations in history such as the Roman Empire have collapsed from that very form of overstretch.
President Van Rompuy writes in his plan public support for further integration of Europe needs to be worked on. But this contradicts the proposals he does. Public support for undemocratic measures? Does he really believe that people will accept this?
We are tired of always having to rescue banks that are now "too big to fail ' with socialized losses and privatized profits, especially as that problem is not adressed. Across the eurozone, we are held hostage for each other's banks and their potential losses, while the control is removed and in the hands of uncontrolled technocrats. To quote Monty Python in this: "you can't wield executive power, just because a watery tart threw a sword at you!"
One aspect often overlooked is the cynism among people caused by all this, which plays straight into the hands rightwing nationalist groups, such as France's Front National.
European cooperation must be nurtured and maintained. For that democratic rule remains as necessary as ever.
A Dutch newspaper headlined "about us, but without us". Only too true.
First, because at all important talks the Netherlands are not invited. But also because people are not involved in Europe, giving public support for European cooperation a snowball's chance in hell. This situation is only marginally different in other European nations. The real anti-European parties are those with an agenda for a Big Bang push for the United States of Europe.
This now seems to happen, at least if all those ideas are to be believed. The euro countries face loosing control over their budget and their banks to "Brussels" and the ECB. There's mention of a European Ministry of Finance, which will decide on national budget. And even so-called 'eurobonds' are lurking, meaning having to contribute to the problems other countries cause. This is the new Europe of EU president Herman van Rompuy.
(continued)
Right now, there are maybe a couple of months' time to make a choice. Either Rich Europe eats Greece's debt (and Spain's bank-liquidity problem), with the benefit of staving off crisis and preserving the trade benefit of an undervalued currency, or Rich Europe trips the bomb which will do immense and unpredictable damage. Greece is nearing a point where the society can't take any additional stresses. All it would take is a no-confidence vote to bring down this government and force new elections--AFTER Greece complies with the rules long enough to get the current bailout package. That will leave hundreds of billions, if not trillions, in euro-denominated debt landing on Rich Europe. Worse, it will trigger crisis in Spain and Portugal, very probably in Italy and Ireland, and possibly also in Cyprus and Hungary. Belgium is another potential problem; the economy is stable in national terms, but the Fleming/Waloon divide makes Belgium's high debt vulnerable to market whims. The volatility can be avoided if Rich Europe accepts that it has to pay the way for right now. Rules will have to follow. Germany doesn't want it, but a trillion-euro debt bomb landing on Germany would prompt a whole new level of crisis.
sarc
http://marginalrevolution.com/marginalrevolution/2012/05/how-savage-has-european-austerity-been.html
How do you call that austerity?
That's just a chart of spending. It doesn't break it out into programs. It doesn't disprove the notion that the EU countries are going through austerity. Would be useful if the graph showed program spending; ie. how much is going to debt service, how much to public services.
Without details, the graph is misleading at best. Also, it shows decreasing or flat overall spending in all countries but France.
"Substantial Stimulus Programs" and "budget cuts" are antithetical to each other. Stimulus literally means the government spending whatever cash it takes to force the conomy to move forward. Budget cuts mean the opposite.
Bottom line, what if the stimulus does not work, and then we are in debt to, say, 125% of GDP? What then? Another round of stimulus? Its not that I think the simulus CAN'T work, I'm just not convinced its ASSURED to work. Heck, it might not even be LIKELY to work. what then?
Stigi, Kruggybear, and Reich are unable to do the simple math, and ignore the last 30+ years of stimulus. They also ignore that during that 30+ years, debt has increased at a fast pace than GDP. This will not be sustained.