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The Progressive Economics Forum

A New Round of Euro Austerity

The Euro deal at least averted an immediate banking crisis and induced temporary market euphoria, but it is not going to provide a lasting solution to the euro sovereign debt crisis because it will block  any lasting recovery for the euro economy.

It is worth reading the text of the deal,  which represents a major victory for the European “austerians.” It calls for an intensification of defict reduction and structural reform in the high debt countries like Italy  (#4); imposes continuing on the ground “monitoring” of the Greek government (#10); imposes strict conditionality in any new aid packages (#7); calls for balanced budget legislation as recently introduced in Spain (#26); and requires pre examination of the national budgets of high debt countries by the euro area authorities (#27.) In short, it anticipates  major new belt tightening measures and renewed austerity for a euro area which is probably already in recession, according to Bank of Canada Governor Mark Carney.

The deal also (#2) endorses continued  ECB purusit of the goal of price stability, rejecting some calls for a reversal of recent increases in ECB interest rates, and anticipates no major role for the ECB in backing the expanded bail-out fund. That means that government debt will actually have to increase as the stronger countries buy up the bonds of weaker countries through a levered up EFSF.  And, on top of that, some countries will have to assist banks in raising new capital to pay for the cost of the 50% write-off on Greek bonds.

Writing just before the deal was struck, ETUC economist Andrew Watt argued for an expanded role for the ECB to back stop all euro area sovereign debt, and less rather than more fiscal austerity.

Instead, the German prescription of “sound” finances; tight money and “disciplined wages” is being imposed on all of Europe. Germany has indeed been able to export its way to growth by keeping wage growth very low in relation to productivity, but how can all of Europe do the same? It just doesn’t add up. And that impossibility will soon be reflected in national politics, not least in France and Italy where the left just may be able to regain some momentum.

Enjoy and share:

Comments

Comment from Paul Tulloch
Time: October 28, 2011, 11:20 am

One of the things I have to admit I am not real happy with is the direction Germany has taken with the ECB. However, that said, I do want to point out one thing- at least they joined the monetary union- which is more than we can say for the British. If Britain were to have joined I do think the whole would have been a lot more leveraged to manage the weight of such a crisis. So as much as the financial ivory towers try and blame on Germany and France, I do say we need to look wider. We also need to look more into the private banks both in the EU and elsewhere for their continuing muttering that this is a soveriegn debt issue. We need to either grow out of this or a whole lot of very big haircuts are needed by both private and public banks. And it cannot be voluntary half measures.

There are quite a few opinions out there but here is one that waded through the facts.

http://www.social-europe.eu/2011/10/more-half-measures-for-the-euro/

Comment from Purple Library Guy
Time: October 29, 2011, 12:40 am

Hrm. If everyone else had emulated the British and not joined the monetary union, Europe wouldn’t be in this mess. Hence I’m not sure what’s so “at least” about joining it. On the other hand, let’s face it, if the British were in they’d probably be calling for even stupider policies if anyone could dream any up, so it may be a mercy even for everyone else that they’re not in.
I do think it’s fairly ridiculous that the politicians seem to have decided it’s better for countries to fail so banks can stay solvent than the other way around.

Comment from Paul Tulloch
Time: October 29, 2011, 1:33 pm

ahhh PLG, not sure what your point is, the monetary union has been a watershed in allowing so much more than just economic integration, so much more — period. Sorry if you do not get that.

Paul

Comment from travis fast
Time: October 29, 2011, 6:13 pm

Paul wrote:

“ahhh PLG, not sure what your point is, the monetary union has been a watershed in allowing so much more than just economic integration, so much more — period. Sorry if you do not get that.”

I rather thought that was his point! Seriously Paul you might want to stop talking in an “in theory kind of way” and just deal with what monetary union actually looks like in practice in the case of the EU. And I do not buy the line that it was policy mistake the way it was designed. We are seeing what its architects understood to be a feature not a bug.

Comment from Purple Library Guy
Time: October 29, 2011, 6:32 pm

The economic integration part seems to have caused more problems than it solved. And many other things don’t actually need monetary union to happen. The two functions for the EU that I’ve seen having an impact are first, that it acted as a standards body (which sounds like a small thing but is surprisingly important) and second, that it operated to promote pan-European neoliberalism.

The second was helped along by the monetary union and I kind of could do without that function. The first is useful but does not require monetary union.

There may be a lot of other stuff . . . but here it’s I who must be left uncertain of your point, not so much because it is unclear as because you chose not to make it, instead simply alluding to its existence somewhere . . . period.

Comment from Paul Tulloch
Time: October 30, 2011, 7:52 am

You both are not getting it. I am 1) not talking theory 2) i am saying the eu has been a positive not a negative.

If any of these countries would have had to face this crisis on their own the imf would have did exactly what they did to similar countries through history that are smaller. Don’t tell me that on their own they would have faired better because that is not what history has shown. Maybe you have forgotten history?

Comment from travis fast
Time: October 30, 2011, 8:11 am

Greece would have devalued via its currency and that would have been far less painful. That is the lesson history teaches. Go read Krugman, it is one of the things he has been particularly good on. Oh and for the record the EU existed before the EMU.

Comment from Paul Tulloch
Time: October 30, 2011, 10:27 am

you believe devaluing would have saved the situation? and then italy, portugal… i think you are being a bit simplistic here. and yes i have read krugman, but i dont agree. yes the eu has been around longer, but the emu is when things started gettiing real.

unification of living standards is a little difficult in such a small space when devaluing.

it would be a good study but i think i would be on the side that ends on top here.

Comment from Purple Library Guy
Time: October 30, 2011, 3:44 pm

Well, I suppose one question is, before the EMU, what was Greek debt normally denominated in? (and Italian debt etc.)
The third world countries tended to get hooked by the IMF loanshark because, devalue or inflate though they might, their debt was mainly denominated in US dollars. Meanwhile, the price of third world resource-type goods was trending down compared to the price of first world manufactured goods.
If Greek debt was in US dollars, or deutschmarks or what have you, then devaluation might not help them much immediately, although it would help their export/import situation, yes? But if it was mainly in drachma . . .
Meanwhile, the lack of a native floating currency, the inability to devaluate (combined with intra-EU low trade barriers), as I understand it contributed significantly to the deterioration of local Greek manufacturing industries. It would have been worth their while to devalue long before the crisis set in, so as to help preserve the competitiveness of local industry. Of course, if their governments were as clueless as the Harpercons, they might have decided not to do so anyway. But if they did do it, the basis of the economy would have been stronger to start with . . . I’m not clear a crisis like what we’ve got would have hit in the first place, but if it did they would have been in a position to make policy adjustments well before it got out of hand.

The more I read about what’s going on, the more the Euro seems weird. In a certain sense, it is not a true fiat currency. Private banks can make more of it the way they can with any other money, “stroke of a pen” and all that. But the issuing power apparently cannot, which is the core weakness the traders are exploiting.

Now, if the EU were a democracy I might favour responding to the current situation by going further, making the Euro a real currency and the ECB a real bank. But it’s not, it’s a technocracy run by neoliberal ideologues who apparently cannot be effectively controlled either by the member states or the European parliament. It’s a Soviet-like system. At this point I’d rather see what kind of projects the individual countries can do than pursue the pan-European experiment further.

As to unification of living standards . . . what unification of living standards?

Comment from Paul Tulloch
Time: October 31, 2011, 11:01 am

@PLG

I think we are close, and I guess in many ways, the holistic view of the Unification projects poignant point is it at does offer an alternative super structure or umbrella against the globalized forces. And I will hand it to you, the decision making has been tending towards the neo-con flavour, especially during this crisis. It is the building of the potential for alternatives and what has been accomplished in regard to gravitating towards a unified living standard that I make some claim to. And yes there is a long stretch of highway to get through for unification in that regard. But ultimately that is what the quest for unification was about- reducing inequity amongst a quite contaminanted history, within a quite distinct polictical and geographic space. Thewre has been some great work in labour standards and other measures, but sadly in the monetary Unification scheme, it seems as though adoption of a common currency and a few other minor policies was about as far as they went.

And again, I would argue, it was specifically democracy within the member states that prevented the EMU from engaging any more power away from the member states. But where to from here is the question, and I think abandoning the unification project is not a progressive goal that we want given with what that space will most likely be replaced with, a shattered political spectrum with more power to forces that separate rather than unify.

I do take note though on many of your thoughts and respect them. A great topic for a quite long book I would think.

Comment from Andrew Jackson
Time: October 31, 2011, 11:13 am

I think one can draw a distinction between the EU and the Euro Area. There has been a social democratic political project for the EU articulated by those in the Delors tradition which has been reflected in a limited way in social directives, labour standards etc. But, the Euro area institutions were and are deeply neo liberal, especially as shown by the constitution of the ECB and by the original fiscal austerity rules (albeit that they were broken pretty quickly and easily.)

I am unconvinced that Greece could pull off an Argentina type default without sinking their banking system and economy, which would be a disaster if they could not get some sort of foreign assistance. Argentina had a viable real economy that could lever off devaluation and lower debt. On the other hand, the current Greek situation is a disaster, so that is why I am unconvinced.

Comment from travis.fast@rlt.ulaval.ca
Time: October 31, 2011, 5:24 pm

Andrew could you clarify:

“On the other hand, the current Greek situation is a disaster, so that is why I am unconvinced.”

I think they could have precisely because a return to a national currency and a refusal to pay in any thing but Drachmas could have kept their national banking system in tact and forced a de-facto haircut on the bond holders.

Comment from Paul Tulloch
Time: November 1, 2011, 9:49 am

There is a potential pathway for greece, but the question is at what cost for the rest of the eu.

Couple of things seem to up,

Looks like Greece has funally said enough is enough, we are goingto have a referendum, we all know that i not the democracy the wider eu wanted to hear. Somebody is not listening to geeece.

You got to wonder is this all by design? It’s like a game of chicken with the eu. Greece wanted some protection, and it obviously being held up as the sacrficial lamb, the beach
head, the canary, they have been abandoned. So with that kind of response from the wider eu, what country would not be better off on their own.

The question is why the lack of hand holding? Fiailure must be the goal, how do we explain such nonaction? The machinery for action is there, that is what the whole emu was all about.

Is this about the euro replacing the dollar as world currency and ended the american printing press? Or potentially china emerging as the new financial center? Is this about more than some euro debauchery. I do have my suspicions.

Comment from Andrew
Time: November 1, 2011, 10:09 am

Travis ….devaluation might be the best option but the immediate impact would likely be very high inflation given the level of imports and the need to print drachmas to close the budget deficit. That would also mean a sharp decline in living standards. But perhaps there would at least be light at the end of the tunnel.

Comment from travis fast
Time: November 1, 2011, 2:36 pm

Andrew agreed. Sad thing is it took two world wars broached by a great depression the last time elites had become so captivated by the Manchester school.

PS could you do me a favour and take my email address off my previous post. The error was mine.

Comment from Paul Tulloch
Time: November 3, 2011, 7:26 am

I think this thread has resonanted fairly well with what seems to be going on in the EU.

THe focal point though now seems to be democracy versus the markets. Here is a good article from the nakedness of naked capitalism, that highlights some potentially opening threats from the markets and what they might do if democracy gets in their way. Watch out 99% the banks will shrink themselves rather than tame themselves,

Attention Karl Polanyi- you were so so right about ‘self regulating’ nonfree regulated by the 1% market forces.

http://www.nakedcapitalism.com/2011/11/is-the-eurobankster-well-shrink-our-balance-sheets-threat-largely-empty.html

Comment from Paul Tulloch
Time: November 3, 2011, 8:16 pm

Ohhh wow yeah democratic notions, you shall kneel again to the master – markets needs accomodation, bankers need to be paid, people need to expect their expectations to whither, oh democracy you are an evil beast.

Score another one for global market forces , the troika or whatever you fancy as the markets again won over democracy forces in the Greek tragedy played out today.

Hopefully they can leverage a better deal but sounds like the same austerity will be forced onto the populace of a once fine economy that was destroyed by forces external to the population.

Comment from Paul Tulloch
Time: November 4, 2011, 9:30 pm

okay help me here please

we know that ausaterity is leading to more recessionary pressure and given that, govt revenues decline, and govt transfers increase. So deficits rise. Yet those with the power say increasing deficits are reasons why we cannot spend to minimize the recessionary forces because it is a waste of money. Yey, recessions unchecked lead to depressions, which open up whole new terrains of human and ecological injustice, which decrease govt revenues even more, while also raising govt transfers ever higher.. And we know the instabilioty caused by depression is the single biggest danger to life that we have experienced in the history of the world.

So the circular vicious cycle never resolves until order breaks down and costs become so huge that it makes deficits of the current orders of magnitude trivial.

SO what is the reason for not stimulating right now? Why let the EU fade away in some trivial costs. Is there a greater reason other than the tiny costs back stopping some soveign nations against some nasty filthy banksters and speculators. Look at MF global- you tell me those guys and gals are stellar individuals all caught up in nation buildling and solving world problems with their market profit maximizing behaviour. Call me a fucking idiot, but what the hell is going on in this profession we call economics. Are we dead? HAve we ever been alive? Is there a reason for chopping these trees and spreading ink and electrons with these symbols? Future mega historians will surely be shaking their heads. All this writing and thinking, yet the outputs so clearly against everything that ever made sense. My my my we are an embarrasing profession.

Out of whack, not organized and the majority bought off with a few small trinkets. If you have a phd in this profession you need to have your head examined- what knowledge are you chasing after?

Comment from Paul Tulloch
Time: November 4, 2011, 9:51 pm

so given the facts above- we must conclude the following- we are phracked, not only did the neo-con refuse labour power in the mid 70’s and gain controls within the global order that they have. We now know, without a doubt that deficits and austerity will be the solution, rather than more deficits.

Why you ask- the 1% will never ever give up power and at all costs, even if it means jumping into the abyss, they push the 99% right off the edge rather than lose power in some kind of new deal motion.

Now is there a new challenge that can take the power and force the 1%. I guess if we destroy the financial casino that increasingly generate the profits, and force them back into traditional production, than other than somekind of international movement demanding a whole new level playing field, then we will not get change., Is the occupy enough, can it mature and become a serious politcial challenge or is it a fledgling wishful thinking nexus of good intentions. I am thinkking the latter. It does at least have potential which cannot be said for anything else.

nasty thought from my head on a nasty friday – in the office chair way too long today.

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