In Dangerous Times

Most of you (not too busy watching “Dance Your Ass Off” every night) has probably picked up on the notion among more and more experts that the financial crisis, currently residential of Europe, may result in  something far more serious than a long-time recession. At the moment some of us are sitting back  while we are watching the scenarios we have predicted for a long time unfolding before our eyes like a day-time soap opera. And we wonder…

“If we know anything from history, it is that long periods of economic crisis tend to lead not to more progressive politics but rather to its opposite; the right-wing politics of xenophobia.”

George Irvin

The most obvious parallel is the Great Depression of the 30′s and the run-up to World War II. Logical thinking tells us, however, that this is a so well-known story that our political leaders will simply not allow something similar to happen again. But does logic even matter in times like this? Well, that’s not the only  fundamental question that arise from this insecure  situation. Professor George Irvin points points out a few more.

Like: Is the financial market about to kill democracy? Or is it the other way around?

Honorary professor George Irvin at the Univerity of London argues that – for time being – it is the politicians who have failed, not the financial system. And he fear they will make even more and bigger mistakes.

This article was posted last month on professor Irvin’s blog at the EUobserver.com:

Politics and the EU financial crisis

The other day, I was asked in an interview whether finance was killing democracy. Judged over the post-war period, the answer must be a qualified “no”. But things at present are not looking good.

Finance has not killed politics – if anything, the ongoing financial crisis is lading to a reawakening of politics on a scale we have not seen in many years, particularly a re-awakening amongst young people. If the young are out on the streets demonstrating, it is for quite understandable reasons.

Most obviously, the crisis has illuminated the weaknesses of neo-liberal capitalism in a way many though inconceivable a decade ago.

Not only is neo-liberal ideology deeply misleading – the idea that ‘free markets are infallible and don’t require regulation—but the economics it has produced is disastrous.

Inequality is growing everywhere, particularly in the main Anglo-Saxon countries where it is higher today than in the 1930′s.Youth unemployment in the most of Europe ranges between 20- 40%, and we are at risk of producing an entire generation which is locked out of decent work and income.

European “austerity” is destroying the cornerstone of the post-war social settlement; ie, our welfare state.

As for democracy, we have recently witnessed the toppling of two governments by the bond markets, and doubtless there will be more. This is largely the fault of a political elite dominated by bankers which designed a Eurozone where each member- state’s borrowing was vulnerable to attack.

This “fragility” of the Euro zone - the lack of a common fiscal policy and a genuine Central Bank able to act as lender of the last resort – is leading to growing national antagonisms, the most obvious being between Greeks and Germans (a proxy for north v south Europe).

What is truly dangerous is that the financial markets’ notion of ‘common governance’ is all about “greater fiscal discipline,” by which is meant stringent enforcement of the 3% budget deficit limit, the 60% indebtedness rule and, most recently, the notion that all Eurozone countries should follow Germany in adopting a constitutionally binding ‘balanced budget’ (debt brake) provision.

Such views are based on the simple-minded premise that a national economy can be run like a corner shop, the ‘handbag economics’ preached by Maggie Thatcher and more recently by the Schwabian housewife, Angela Merkel.

Not only are such views wrong (they ignore basic national accounting definitions), but they can lead Europe into even deeper economic gloom.

As credit dries up, Europe is on the verge of a new financial crisis which will almost certainly lead to renewed economic depression.

Moreover, the costs of all this is being borne once more by ordinary workers, and increasingly by the middle class. Like markets in the general, the financial market can be a good servant… but it is proving to be a very poor master.

If we know anything from history, it is that long periods of economic crisis tend to lead not to more progressive politics but rather to its opposite; the right-wing politics of xenophobia.

Witness the German depression of 1932 under Chancellor Brüning which saw the extreme right rise from virtually nothing in 1929 to assume power in 1933. I am hardly the first to say it, but we are living in dangerous times.

By George Irvin

George Irvin is a retired professor of economics and for many years was at ISS in The Hague. He is now (honorary) Professorial Research Fellow in Development Studies at the University of London, SOAS.

Related articles:

• What really caused the eurozone crisis? (bbc.co.uk)
• European financial crisis: Is Europe a mess because Germans work hard and Greeks are lazy? – Slate Magazine (wpvins.wordpress.com)
• Inside the Crisis. With the Society of Jesus (chiesa.espresso.repubblica.it)
• The Far Right in Europe and the Eurozone Crisis (thehumantsunami.wordpress.com)
• What Lies Ahead For The Economy? (outsidethebeltway.com)
• ADB urges Asia to help rescue eurozone (cnn.com)
• Europe blunders into a blind, and dangerous, alley (guardian.co.uk)

Time For Some Uncommon Sense

According to Albert Einstein insanity consists of doing the same thing over and over again and expecting different results. By that definition, the third bailout of Greece should be classified as such. Martin Wolf at the Financial Times calls for common sense when dealing with Greece in today’s column.

“One cannot make the incredible credible by endless delay. One can only make the recognition of reality more painful when it finally comes.”

Martin Wolf

The only justification for providing another bailout package for Greece is that it is needed to play for time, prominent commentator Martin Wolf at the Financial Times points out in today’s column. Adding that this is a bad strategy, and that something more radical is required.

“The question about the prospects for Greece is not whether the country will default. That is, in my view, as near to a certainty as any such thing can be. The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it,” Mr. Wolf writes.

I belive his doubt is shared by many. The country seems just too uncompetitive, the damage too severe.

“A default is a necessary, but not a sufficient, condition for a return to economic health.”

However, as Martin Wolf rightly points out, Greek‘s performance under the programme agreed with the International Monetary Fund in May 2010 has not been bad.

But it has failed to return the country to solvency.

The spread between Greek and German 10-year bonds has gone from 460 basis points (4.6 percentage points) after the programme was announced to 1,460 basis points.

And much of  the same has happened to Ireland and Portugal, even Spanish spreads have reached 270 basis points.

Greece, Ireland and Portugal have no chance of being able to borrow in the markets at rates they can afford in the foreseeable future.

But what must be most frustrating for those involved is that these jumps in spreads have occurred despite reasonable performance.

In the original programme, Greek gross domestic product was forecast to fall by 4 per cent in 2010 followed by 2,6 per cent in 2011.

In the March 2011 review, this had turned out to be only a little worse, at 4,5 per cent and 3 per cent, respectively.

The general government deficit was initially forecast at 8.1 per cent of GDP for 2010 and 7.6 per cent for 2011.

This had only risen to 9,6 per cent and 7,5 per cent, respectively, in the March 2011 review.

Even on the current account deficit, the March review’s 10,5 per cent for 2010 and 8,2 per cent for 2011 was a  little worse than the initial forecasts of 8,4 per cent and 7,1 per cent, respectively.

Unfortunately, this does not nearly enough.

Martin Wolf identifies four reasons:

First, the debt profile has moved from horrible to still worse: in the initial programme the ratio of gross debt to GDP was forecast to peak at 149 per cent of GDP in 2012.

In the March review this had already jumped to 159 per cent.

Second, the economy looks extraordinarily uncompetitive.

The most telling indicator is the combination of the still huge current account deficit with a deep recession.

This external deficit cannot now be financed in the market.

Third, prospects for the current account deficit are seen to be deteriorating sharply: initially, the IMF forecast the current account deficit at 2.8 per cent of GDP in 2014; in the March review, it forecasts this at 5.5 per cent of GDP.

Fourth, without a surge in exports, it will be impossible to return to sustainable growth. But such a surge will require a big reduction in nominal costs.

If this is feasible at all, which I doubt, this will raise the ratio of debt to GDP still more.

The market’s scepticism about the ability of Greece to become creditworthy is warranted.

It rests on awareness of two facts: the massive indebtedness and the lack of competitiveness.

The fact that the Greek people are unwilling to bear the pain merely makes the already implausible quite inconceivable.

If this was the state of, say, Finland, one might just believe it.

Rightly or wrongly, few believe that today’s Greece is another Finland.

What is the case for persisting with lending ever more and, in the process, taking a larger proportion of the liabilities of the Greek government on to public sector balance sheets?

I see four arguments.

The first is that the strategy conceals the state of private lenders. It is far less embarrassing to state that one is helping Greece when one is in fact helping one’s own banks.

If private lenders have enough time, they can sell their loans to the public sector or write them off without capital infusions from states.

The second argument is that the strategy of delay allows other countries to get their houses in order before a Greek default and perhaps a disorderly exit from the euro. Should those events occur now, it is feared, there will be runs from sovereign debt and the banks in fragile countries, with devastating results.

The third argument is that it is possible that Greece will come good. Giving the country the maximum support makes that at least feasible.

The fourth argument is that Greece is forecast to run a primary fiscal deficit (before interest payments) of 0.9 per cent of GDP this year, by the IMF. Thus, the net transfer of resources is into the Greek public sector. So long as this is the case a default makes no sense.

These arguments are persuasive roughly in ascending order.

The first argument was used to justify the policies of denial that gave Latin America its “lost decade” in the 1980′s. It seemed immoral then and seems equally immoral now. Losses should be recognised and banks recapitalized.

The second argument assumes that the Greek position is still a mystery. It is clear, however, that flight is already under way from other fragile jurisdictions.

The third argument is not ridiculous, but such a happy outcome seems implausible, given the situation in which Greece finds itself.

The last argument is right. But it is one for a brief delay, not for struggling forever. When an outcome is inevitable, it is necessary to plan for it.

In this case, that outcome seems to most informed observers inevitable.

I can see little merit in having Greece default to the public sector years of agony hence rather than to the private sector soon.

The best policy is to act pre-emptively.

One aspect of such pre-emption would consist of acting to shore up other fragile euro zone members and financial systems more strongly than now.

In at least one case, Ireland, that might require debt restructuring.

This will also surely require a further move toward a euro zone wide financial system, with matching fiscal support. Yet the principal requirement now is to recognise unpleasant reality.

(More columns at www.ft.com/martinwolf)

Straight to the point, as usual when it comes to Martin Wolf’s commentaries and analysis.

“One cannot make the incredible credible by endless delay. One can only make the recognition of reality more painful when it finally comes,” he concludes.

Point being: The time has surely come to recognise the reality of the Greek predicament and act at once on the wider ramifications for its partners.

Well, the time has not only come to realize the reality: in this bloggers opinion that time is long overdue!

“Time for Common Sense on Greece,” the Financial Times writes.

With all due respect, Mr. Wolf, that ship sailed a long time ago.

Related by the EconoTwist’s:

• Deadline in Athens (Updated)
• EU Agree on 500 Billion Permanent Bailout Fund
• Credit; Cras Credemus
• ECB: “What We Are Doing Is Actually Illegal”
• EU to Greece: New Austerity Package or No Cash
• The EU End Game: “Sixth Set”
• Roubini and the Nonsens of Voluntary Bail-ins

Related articles:

• Postponing Greece’s Inevitable Default (thepressnet.com)
• Greece: You call that a vote of confidence? (theglobeandmail.com)
• ANALYSIS: Greek debt will be paid, but by who? (cbc.ca)

Call For Independent Audit of Greek Debt – Get Rate Cut Instead

A group of some 200 academics, economists, MEPs and other notables have issued a call for an audit of Greek debt, a demand that may be raised in the Greek parliament in the coming days and which has also been quickly embraced by Irish trade unions and development NGOs regarding Dublin’s public borrowing. Last night Greece was granted a 1% rate cut on its EUR 110 billion loan – Ireland was not.

“Such an audit would throw up some interesting questions regarding the legality – banks may have been lending in contravention of public debt rules of European debts.”

Nick Dearden

The group, which includes former UN assistant secretary general Denis Halliday, and ten left-wing and Green MEPs, on Thursday (3 March) argued for the creation of a debt audit commission similar to that established in 2008 by the Ecuadorean government that ultimately led to a repudiation of ‘illegitimate’ debt. The concept has since been embraced by Irish campaign groups and organisers hope similar pressure to launch forensic investigations will also be mounted in Spain and Portugal and other heavily indebted European states.

The idea comes from European debt and development NGOs, including Jubilee Debt Campaign, a UK-based Christian charity, and Eurodad, the European Network on Debt and Development, who have long campaigned for Western countries to cancel the debt of developing countries and are now turning their attention to the debt of peripheral euro zone states.

On Friday, Irish development organisation Afri, author Fintan O’Toole, a series of Irish economists and leading trade unionists backed the creation of a similar commission in their country.

An audit commission, composed of public auditors, economists, lawyers and other specialists, as well as representatives of civil society and organised labour, would look into why public debt was incurred, the terms under which it was contracted, what the borrowed money was spent on and seek to establish who was responsible for problematic debt agreements.

“Such an audit would throw up some interesting questions regarding the legality – banks may have been lending in contravention of public debt rules of European debts,” Jubilee Debt Campaign director Nick Dearden says.

The group of signatories, which also include British director Ken Loach, American linguist Noam Chomsky, Slovenian philosopher Slavoj Zizek and Indian economist CP Chandrasekhar, say that the commission should have full access to public debt agreements and documentation for the last four decades, including bond issues, bilateral, multilateral, and other forms of debt and state liabilities.

The commission would also have the power to summon public officials to give evidence and examine Greek and foreign bank accounts.

Should proof emerge of portions of Greek borrowing incurred for wasteful or corrupt purposes, such findings could then be used as the basis for a repudiation, or default, of “odious debt”.

Debts defined as illegitimate, odious or illegal could then be declared null and void and Greece could refuse to repay.

Odious debt a legal theory that posits that the national debt incurred by a despotic regime for purposes that do not serve the best interests of the nation do not have to be paid back.

The concept then began to be used in the late 1990s by development charities to argue that whether a government had been despotic or not, the debt burden forced on third world nations, particularly in Africa, was trapping countries in underdevelopment.

Core euro zone banks and Berlin and Paris would likely be against such a move, as, according to the latest government budget,

Greek public debt is expected to rise from €299 billion, or 127 percent of GDP, in 2009 to €362 billion, or 159 percent of GDP, in 2011. Any substantial repudiation of this debt would punch massive holes in the balance sheets of the banks in the core of the euro zone that performed much of the lending, mainly German and French institutions.

Similar effects would be felt by UK banks in the case of Irish lending.

Such a development could also precipitate a fresh revival of market contagion were it believed that international lenders could be forced to incur significant losses.

Initially promoted by leftist groups in Greece, the concept is now steadily gaining a wider hearing as a growing number of voices in the country begin to make the argument that the cost of paying back “illegitimate” debt should not be borne by the Greek people. Instead, they say, the burden should be shared by “predatory lenders”.

I hereby introduce the term : “Too Stressed To Test” as a substitute for “Too Big To Fail”

 

Greece Gets Rate Cut

What's taxes got to do with it?

In spite of the growing scepticism towards the Greek debt, the King of the PIIGS, was granted a 1% rate cut last night by the EU commission and an extension of the payment period from the current three and a half years to seven and a half.

Ireland was offered a similar reduction, but the country’s new prime minister says he could not accept the terms demanded.

“It was impossible to reach a deal for Ireland this evening,” Taoiseach Enda Kenny told reporters after an acrimonious seven-hour meeting of euro zone premiers and presidents in Brussels on Friday, according to the EUobserver.com.

“I wasn’t prepared to contemplate a common euro zone tax base,” he continued, adding that Ireland still intends to be “constructive” about discussions about EU tax policy as contained in a ‘euro pact’ agreed by leaders early Saturday morning, but that was as far as Dublin was willing to go.

He said that Ireland had been asked “to make a reference to our corporate tax rate.”

Referring to an angry confrontation between Kenny and French President Nicolas Sarkozy over corporate taxes, he said: “France has had very strong views on corporate tax rates for quite some time, but then so do I.”

Saying that Ireland unlike Greece had not asked for a loan extension,  insisting: “This country wants to pay its way. We seek no evasion of our responsibilities.”

“It will be difficult” to continue the discussions, he adds, “but I am convinced we can find a way.”

Sarkozy for his part noted that the issue is “very sensitive for our Irish friends.”

“There is a discussion that is progressing in one way or another … but there is no certainty,” he continues, asking for “at least a gesture.”

In return for Greece’s concessions, Athens has committed to a detailed fire-sale privatisation programme worth some €50 billion.

A nice Greek island, anyone?

(Real cheep, too!)

Related by the Econotwist’s:

• Greek CDS Blowout: Here We Go Again!
• New Violence Erupt In Greece – Policeman Set on Fire (video)
• Brussels Tells Athens To Shut Up And Take The Pain
• Greece About To Enter The Death Spiral
• Desperation Gets A Grip: Greece Puts Islands Up For Sale

Related Articles

• Support the campaign to audit Europe’s public debt | Costas Lapavitsas (guardian.co.uk)
• Euro Leaders Retool Aid Fund, Cut Greek Rescue-Loan Rates (businessweek.com)
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• EU Leaders Back Merkel Economy Pact as Crisis Endgame Nears (businessweek.com)
• Merkel and Sarkozy to Kenny : agree to change the Irish corporate tax rate/base by 25th March or we won’t reduce your interest rate (namawinelake.wordpress.com)