The implosion of southern EU states' political systems

 March 14, 2016

The EU’s macroeconomic indicators for 2015 – the growth rate standing at 0.3 percent, the inflation rate at 0.2 percent – paint the picture of a continent severely affected by what economists call “secular stagnation“.

Secular stagnation is afflicting not only the EU but also Japan, and in the years ahead it will most probably end up engulfing the United States as well. Until recently, the only growth engines for the global economy were the BRICS countries. The slowdown in China and the economic woes experienced by Brazil and Russia have, however, reignited fears that the world economy is about to go off the rails, as the latest IMF warning clearly states.
The dire consequences of secular stagnation for Western economies could have been mitigated, if not reversed, by higher levels of public spending on infrastructure and on health and education systems. Instead, most EU countries under German leadership opted for the implementation of harsh and totally counterproductive austerity policies, which made matters worse.

Nowhere is the destruction of social fabric and political systems more evident than in the southern half of the EU. Greece is yet to register any signs of economic recovery after five years of the harshest austerity policies ever, while Portugal, Spain and Italy show only minor signs of recovery and stubbornly high levels of unemployment and social misery. Even Ireland, until recently deemed to have benefitted from austerity, has seen its political system unravel after the latest elections.

The danger in the political implosion of the above group of countries is real, as elections in 2015 have demonstrated. Neither Greece, nor Ireland, Portugal or Spain have returned traditional parties to power – a situation that has created political deadlock and instability, risking to make these countries ungovernable. Extremist and nationalist forces thrive in such an environment, further complicating matters for Brussels and for more stable (until now) northern members of the EU.

Weighing in on the dire political situation of southern EU members like Greece, Portugal and Spain is these states’ recent political history. Until the 1980s, they had been ruled by dictatorships and subsequently made enormous efforts to democratize their political systems in order to join the EU. Nowadays, the same union that bankrolled their valiant efforts during the last decades of the 20th century is imposing austerity policies which are in fact destroying both their societies and recently democratized political systems. For a majority of southern European citizens, the EU has failed to live up to their expectations and has become the problem, instead of the solution, to their plight.

Development Eurobonds and Economic Growth

 March 31, 2012

The harsh austerity measures afflicting southern EU members like Greece, Spain, Portugal or Ireland are generating massive unemployment and negative economic growth, not to mention the type of social turmoil that can conceivably degenerate into civil war. As the European Union is far from a truly federal structure, fiscal transfers from economically viable member-states to distressed areas of the Union are currently out of the question. Still, policy measures aimed at reversing the negative trends in economic activity and employment should become the top priority both for Brussels and EU national governments, if the deterioration of economic conditions is to be prevented from spreading.

The amounts needed to kickstart economic growth in the south and to drastically reduce unemployment, to be sure, would have to be in the vicinity of 1 trillion euros. These would fund EU-wide mega-infrastructure projects in transportation, energy generation and the maintenance of adequate provision of education and healthcare services. Unfortunately, most EU governments are now locked in a battle to reduce their fiscal deficits, in a vain effort to appease restless international financial markets and speculators. One of the few solutions advanced by – among others – Jean-Claude Juncker, the president of Ecofin, is that of issuing eurobonds, although the idea was flatly rejected by Germany and France.

The European Commission lacks the financial muscle to undertake such projects. To overcome that, it should, however, be enabled to issue a batch of one-off eurobonds earmarked for financing development and economic growth projects in distressed regions of the EU. Issued over a period of five years and sold exclusively to EU nationals, by a banking system that owes a lot to states and depositors alike, these eurobonds with long maturity dates could be an adequate financial instrument needed to raise large amounts of money in these times of huge economic stress.

By putting the European Commission in charge of the proceeds, the projects to be undertaken will not only benefit the countries most in need, but the European Union as a whole. As matters now stand, the alternative is to use crypto- financial transfers from northern countries to the South, which would result in higher taxation levels affecting the rich as well as the struggling European middle classes. The eurobond solution could also prove instrumental in redeeming the badly tarnished image of EU authorities, who are currently being perceived as a mere conveyor belt of highly unpopular austerity policies dictated by the financial markets.

"It's Economic Growth, Stupid !"

 March 28, 2012

Over the last two weeks, economic discussion among EU leaders has revolved around two main topics: austerity and increasing to 1 trillion euros the money available to the ESP. Few of the current leaders, if any, are concentrating on finding solutions to the real economic challenge facing the Union, that of kickstarting economic growth on the continent. As Barry Eichengreen argues,

“Though no one can say for sure what Tobin would have thought of Europe’s crisis, his priority was always the pursuit of full employment. One suspects that he would have urged European policymakers to dispense with their silly fixation on a financial transactions tax and instead repair their broken banking systems and use all monetary and fiscal means at their disposal to jump-start economic growth”.

With the exception of a few EU members (Germany, Finland, Austria, Denmark), growth is stagnant, or negative (in Greece, Portugal and Ireland, for example) and the average rate of unemployment has crossed the psychological threshold of 10 percent. Whilst countries like China have spent close to 1 trillion USD in 2008-2009 in order to maintain employment and growth, the EU is envisaging to invest a measly 100 billion euros to the scale of the continent, if that. To compound economic woes, aggregate demand in deficit EU countries is about to suffer further shocks as a result of the unwise implementation of draconian austerity measures.

According to Jean-Claude Trichet, former ECB director, the average budget deficit within the EU is 70 percent of the aggregate GDP. That compares very favourably with Japan’s 212 percent or with the US’ 100 percent public debt ratios. Maastricht Treaty “fair weather” provisions notwithstanding, most EU member countries could add a few percentage points to their deficits in order to adequately finance growth and employment investment schemes coordinated by Brussels. To avoid pressure from international financial markets, national governments could – as the Japanese have always done – sell their treasury bonds to their own citizens, vital stakeholders in a solid economic recovery.

Whether our political leaders realise it or not, the only way out of the current crisis is by spending close to 1 trillion euros over the next few years on various development and infrastructure projects. The EU’s energy security, for example, does need the Nabucco project to go ahead in order to diminish our dependence on Russian oil and gas and pipelines. Although the European Commission is trying to allocate money for other much- needed infrastructure projects, the EU budget is at the mercy of member states’ contributions. That brings into question Brussel’s ability to adopt and implement the pan-European growth agenda we need.

And yet, a comprehensive pro-growth strategy is essential, if both the employment and current sovereign debt crises are to be overcome. To get to it, national leaders should, however, do away with their fixation on golden rules and austerity measures, and start investing massively in projects that will slash the current unemployment rate, taming it to the levels experienced by Germany, Austria or Finland. The urgency of such an investment and spending agenda is, unfortunately, recognised only by economists. Unable to deliver the right mix of economic policies, EU politicians have found it more expedient to give in to xenophobia, racism and nationalism, some of them for electoral reasons.

Whilst populist discourse might in normal times prove helpful in winning elections, in the current economic climate it could only aggravate matters and prolong the crisis. In fact, voters in major European countries are more concerned with their diminished purchasing power and job prospects than with illegal immigration and/or security issues. Any politician or their advisers who fail to grasp that should make an exit from the political game. (sources: Project Syndicate, Le Monde, Reuters, Deutsche Welle, Xinhua)

The EU's Austerity-induced Recession

 March 1, 2012

The eurozone’s unemployment rate has reached 10.7 percent in January, meaning 16.9 million people out of work, of which 5.5 million young people under 25. If we add to these figures the 2.7 million people unemployed in the UK as well as another few million jobless in the other EU member-states, we can understand why the European Union is now being viewed as the biggest recessionary threat to the world economy. Countries in the eurozone’s southern periphery, like Greece or Spain, are afflicted by 19.9 percent and 23.3 percent unemployment rates respectively. By contrast, Austria, Luxemburg and the Netherlands enjoy a jobless rate of 4 to 5.1 percent according to Eurostat. Even more alarming, the eurozone’s manufacturing sector has entered its seventh month of contraction, pointing to an EU-wide recession for 2012 and possibly beyond.

In denial about the economic consequences of their actions, the eurozone’s leaders will meet in Brussels this weekend for the signing of a new fiscal pact, whose stringent conditions are at the root of the current economic problems. Nobody that’s anybody in the economic profession still supports the view that the austerity measures – as implemented unwisely over the last two to three years – could improve the economy. Draconian austerity measures could only lead to negative growth, mass unemployment and a wave of unprecedented social unrest across Europe.

Aloof German politicians and bankers, however, are currently attacking the ECB for lowering interest rates and for providing fresh liquidities to the banks in order to spur economic activity, even as the German export engine itself is showing signs of sputtering.

Ideologically motivated national leaders from most other European countries are towing the austerity line and cutting expenses in health, education and essential social services to the bone, further depressing aggregate demand in their own countries.

Together, all these policies will in time provide the fuel for social revolutions, as stressed-out wage earners and the working poor can barely tolerate the harshness of the measures aimed at reducing private and public debt in eurozone countries. Meanwhile, labour union leaders have all but given up hope of making politicians gauge the gravity of the mega social crisis unfolding under our own eyes. One thing is certain, however. Brussels’ summitry is not expected to make a significant contribution to improving Europe’s growth prospects or to reducing unemployment anytime soon. (sources: The Guardian, Reuters, Deutsche Welle, Le Monde)

Two-speed Europe

 October 31, 2011

The decisions agreed upon by EU leaders during the 26th of October summit – the leveraging of EFSP, the “voluntary” 50 percent reduction of Greece’s debt, improved coordination of fiscal policies within the eurozone countries, the appointment of a super-commissioner with fiscal oversight responsibilities – have all been judged as steps in the right direction by the financial community. Stock markets have reacted positively and so have a few major rating agencies.

Less enchanted with the outcome are, however, the leaders of the ten EU countries which are not currently part of the eurozone. As a result, the summit was the scene of harsh verbal exchanges between David Cameron and the French president, for example, but tensions were equally evident among the Swedish and Romanian delegations.

The non-members of the eurozone feel that the Union is heading towards a two-speed Europe. In other words, its core is made up by the 17 eurozone member countries, headed by Germany and France, whilst the rest are relegated to the periphery, geographically as well as economically. The UK’s chief concern, as the leading financial centre of the Union, is the insistence of eurozone member countries on introducing a financial services tax which could cripple the activity of the City of London. Romania, on the other hand, has expressed reservations about the measure to recapitalise EU banks with large exposure to the Greek, Italian or Spanish debts. As most of its banks are foreign-owned, that might lead to a drastic reduction in lending to local companies. All the other leaders feel already excluded from the important decision-making process, which will take place in the first instance within the euro-club and only afterwards discussed with the rest of the EU’s political representatives.

The emergence of the two-speed Europe could have been avoided by the northern kingdoms if they had agreed to join the eurozone from day one. At the time, countries like the UK and Sweden, for example, sported healthy finances and a fiscal discipline which were in accordance with the criteria established at Maastricht. All is not lost, however. Membership of the eurozone is still open to them in the future, if only they could overcome their reluctance to join. The newer EU members, such as the Czech Republic, Poland, Romania and even Bulgaria are all making strenuous efforts to reduce their budget deficits, improve tax collection and prepare their economies for becoming full members of the eurozone in the years to come.

Viewed in this light, the existence of a eurozone core that could act as a catalyst for change upon the “periphery” is not altogether as negative a development as some EU political leaders wish to present it to their electorates. (sources: Der Spiegel, Reuters, Le Monde, The Economist, The Guardian)

"The Real Global Economy is Intact"

 October 9, 2011

In an unprecedented development, on the 8th of October the three most important business associations in Europe – the French MEDEF, the German BDI and the Italian Confindustria – have launched a joint appeal calling for a deepening of political and economic integration among EU member countries.

The business leaders signing the appeal are thus taking the lead for further EU integration from politicians- the traditional promoters of European unity up until now. In a desire to restore economic growth within the Union, the authors of the appeal consider that a new EU treaty should replace the current one. The work on the new treaty should start in parallel with current efforts to replace the European financial stability facility (EFSF) by 2013. It should provide for further political and fiscal integration, with a view to improve stability and growth, as envisaged by the Maastricht Treaty. The aim of the proposal is to render the EU economically prosperous and politically strong, by improving the performance of all member countries.

The new permanent mechanism due to replace the EFSF by 2013 should, in the authors’ view, be an independent institution capable of assisting EU countries, subject to strict conditions. The competitiveness of EU economies would be improved by a thorough process of economic reforms, avoiding the piecemeal approach that has been the norm so far in countries from southern Europe.

By pointing out that the real world economy is actually intact, the business leaders are convinced that there is no reason to let it slide into another bout of recession, or worse, if only corrective action is taken by politicians in a timely and resolute fashion. Judging by the fact that unemployment in Germany dropped to 6,5 %, the lowest level since reunification, they might have a point (source: Reuters France).

Hungary Bucks Austerity Trend

 

November 30, 2010

In 1956 the Hungarians rose in revolt against the excesses of Soviet communism. During the 1980’s, the Hungarian society was already making the transition to what we now call the post-Soviet era and its communist politicians opened the country’s borders to East German refugees fleeing to the West . These days, Viktor Orban and his Fidesz Party have rallied the Hungarian public opinion against the excesses of a global economy gone astray, introducing additional taxes on global players operating in Hungary.

The so-called “crisis taxes” were introduced in order to narrow Hungary’s budget deficit. The novelty of these extra taxes, which will raise 520 billion Ft (or 2.67 billion dollars), lies in the fact that they are levied exclusively on banks, energy companies, the telecom and the retail sectors. Thus the telecom tax is expected to bring an extra 61 billion Ft, the energy sector to contribute with 70 billion Ft, whilst the retail sector to kick in 30 billion Ft. Introduced for a limited period of three years, the new taxes will help the Hungarian government avoid IMF / EU bailouts or the imposition of unpopular austerity measures, now very much in vogue in most European Union countries.

When communism fell, Hungary found itself without home-grown tycoons or, to use a Marxist cliché, a “capitalist class”. The void was filled by global companies, which during the 1990s acquired large chunks of the Hungarian economy via privatisations. After years of upsetting state authorities with their peculiar ways of syphoning off profits abroad and minimising their tax bill (by methods which I have described in my Asian crisis ebook), they are now called upon by the Orban government to give something back. Companies like Vodafone (telecommunications), Tesco (retail), Gaz de France or E-On (energy) and the banks will thus pay the bulk of the new “crisis taxes”. Needless to mention, Orban’s crisis policy enjoys huge public support.

To be sure, this is an unheard-of – even if fully justified – approach to raising the extra money needed to close the country’s deficit gap. Unlike the European conservative group of parties, of which Fidesz is a member, the Hungarians have decided that this time around it should be the rich global companies, and not the poor, that have to foot the bill for the damage caused by the financial and economic crisis. Why, even socialist governments in power in some EU countries – notably Greece or Spain – were strong-armed into adopting neoliberal austerity measures, which have sent their economies into the red, generated widespread unemployment and affected the incomes of millions.

During a recent state visit to Malta, Orban has declared that the measures undertaken by his government have brought back “national self-confidence” and that the 7 percent budget deficit inherited from his socialist predecessors will be cut to 3.8 percent next year. He has also told his Maltese host that an economic recovery happening only on paper, that does not reduce unemployment, is not worth having.

In many ways, Orban’s approach in dealing with the ill effects of the economic crisis is as revolutionary as the Imre Nagy – led uprising against the Soviets. Fortunately, Hungary is now a member of a different union, and Brussels is unlikely to send the tanks rolling into Budapest, although a speculative attack on the forint cannot be ruled out. Whilst neighbouring countries like Romania are unnecessarily subjecting their citizens to austerity measures which have been judged by experts as both unwise and much too savage, Orban and his team are cushioning the Hungarian nation against economic destitution. However salutary though, Orban’s novel way of solving his country’s budget woes is going to be lost on Bucharest politicians, who over the past three decades have developed the unhealthy habit of vampirizing their own conationals. (sources: The Economist, The Malta Independent, Magyar Hirlap, The Budapest Sun)

Towards Bretton Woods III

 November 9, 2010

The US Federal Reserve’s second round of quantitative easing has prompted near-universal condemnation by the financial leaders of Germany, China, Brazil, the ASEAN and the EU. From The People’s Daily to Der Spiegel, newspapers are full of criticism and dire predictions of an impending international currency war, which is bound to result from the flooding of the American banking system with largely un-needed liquidities. On the positive side, however, the Fed ‘s move has also accelerated calls for the replacement of the current international monetary system, also known as Bretton Woods II, with a less volatile one, which for convenience’s sake we might call Bretton Woods III.

Under the original Bretton Woods, the fixed exchange rates mechanism was anchored to the US dollar, which in turn was tied to the price of gold. In 1971, the gold standard was abandoned and exchange rates were allowed to float, an arrangement known as Bretton Woods II. The US dollar remained the world’s reserve currency. Floating exchange rates provided ample opportunity to speculators to bet against the fluctuations in the values of different curencies, or – as it happened in 1998 during the Asian financial crisis, to attack weaker currencies like the Thai baht or the South Korean won, halving their value.

The wisdom of having only one reserve currency underpinning the value of all other currencies, and floating exchange rates based on one currency alone has first been challenged by EU countries through the adoption of the euro. Its introduction has immediately lowered interest rates and eliminated the possibility of speculating the euro’s exchange rate in member countries, thus largely undermining the concept of the float.

The 2007-2008 financial crisis and two rounds of quantitative easing by the Federal Reserve have accelerated moves towards the demise of the current dollar-based international monetary system. Indeed, with only 25 percent of the world’s GDP, the US economy is already hard-pressed to provide enough reserve assets, mainly US treasury bonds, to finance world trade. According to the IMF’s projections, if current trends are any guide, the ratio of issued reserve assets, currently at 60 %, would increase in 10 years’ time to 200 % of the US’ GDP, which would greatly increase the risk for major holders of US assets, such as China, Japan or the ASEAN countries.

Floating exchange rates, on the other hand, beside generating volatility, have led to the hoarding of US assets, especially in the wake of the Asian financial crisis. Thus Asian countries hold in excess of 6 trillion US dollars and treasury bonds, which they feel they need for open-market operations aimed at stabilising the exchange rates of their currencies and safeguarding their exporters. The current crisis has proved them right, as countries like China and Brazil have fared better than countries with less adequate US dollar-denominated reserves.

The Chinese central bankers would like to see the dollar replaced with an artificial asset created in the post-WWII era, the SDR (special drawing rights), whose administrator is the IMF. The Economist has even suggested the possibility of replacing the dollar with the euro as the world’s reserve currency, taking as a guide the way in which the British pound was replaced by the American dollar in the 20th century.

Finally, Robert Zoellick, the director of the World Bank, has lobbied in The Financial Times for the replacement of Bretton Woods II with a multiple currency system (the dollar, the euro, the yen and possibly the yuan, if and when it becomes fully convertible) to be based on the price of gold. Gold, as Zoellick points out, has already become a parallel reserve asset as a result of exchange rate volatility. In other words, the new international monetary system will have, in broad terms, the essential features of Bretton Woods I.

As the value of dollar-denominated assets worldwide stands to be heavily diminished by the Fed’s easy money policy, and as the floating currency system generates asset bubbles and financial instability for many nations, there is an urgent need to replace the current system with one more credible, more stable and less crisis-prone. Already, during last week’s talks in Paris, Presidents Sarkozy and Hu Jintao have agreed to put the reform of the international monetary system at the top of the agenda at the upcoming Seoul summit.

It seems that in future no one country will have the privilege of issuing reserve assets to back the world’s currencies. The new system will most likely be based on the assets issued by a group of economically powerful countries and will feature managed, as opposed to floating, exchange rates. (sources: Le Monde, Deutsche Welle, Financial Times, Reuters, The Economist)

Author : Spotlight on Geopolitics
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Austerity, QE2 and the Global Economy

 November 2, 2010

Last week’s top-level political meetings which took place in Brussels and Hanoi ended up with similar calls on the US to avoid stimulating the American economy by printing more dollars. Trying to stimulate growth by flooding the American banking system with liquidity is only of marginal importance to the US economy’s woes. Yet this is exactly the measure that the Federal Reserve is contemplating this week, one known euphemistically under the name of QE2 – which stands for the second quantitative easing. The measure involves the spending of minimum 500 billion US dollars by the Fed to buy assets like treasury bonds back from banks and thus infuse more liquidity in the banking sector, ultimately benefitting potential borrowers.

The “easy money” measure bears all the hallmarks of Friedman’s monetarist theories. According to him and his followers, a financial crisis is aggravated by a lack of adequate liquidity within the banking sector. Tackling the liquidity problem is deemed to reignite economic growth.

The Fed’s move will further lower the exchange rate of the US dollar and cause the appreciation of other currencies worldwide. Already, the Japanese yen is at a 15-year high against the dollar. In the past few months, the Thai baht has risen by 11 percent, the Philippine peso by 7 percent and the Brazilian real has acquired the unenviable reputation as the most over-valued currency on earth. Since this summer, the euro has also risen by 9 percent to 1.39 dollars, badly affecting exports and the feeble economic recovery of 2009-2010 as well.

The draconian austerity measures recently adopted within the EU, combined with a printing of money by the United States are thus further endangering an already anemic economic growth in the West. The situation is so serious that even a publication like The Economist has felt compelled to finally incriminate austerity and money-printing, as the wrong policies for leading the global economy back to a sustained growth pattern :

“there is a danger of overdoing the short-term budget austerity. Excessive budget-cutting poses a risk to the recovery, not least because it cannot easily be offset by looser monetary policy. Improvements to the structure of taxation and spending matter as much as the short-term deficits.”

Fiscal stimuli, not austerity, and changes to “the structure of taxation” (!) are therefore the policies needed to bring the global economy back to 2007 output and performance levels (which, by the way, The Economist does not expect to happen before 2015 !).

As worried central bankers from Frankfurt and Tokyo will also meet this week, it will be interesting to see what countermeasures, if any, they will decide upon in response to the Fed’s expected QE2 decision. Unfortunately, even central bankers disagree when it comes to measures like austerity, fiscal stimuli and changes to taxation levels, let alone Western politicians under pressure from their electorates to cut taxes further or to reduce the size of government payrolls. With an expected Republican win in the US midterm elections and with conservative politicians in power in the EU’s leading countries, the outlook is rather gloomy. The continuation of current policies will see the Western world condemned to a Japanese-type decade of economic stagnation or, at best, sluggish growth.

Meanwhile, the Chinese economy will ring up another decade of stellar growth rates, if current and past trends are any guide.