A great European

In his speech at the European Parliament five days ago, President Napolitano made a passionate plea for Europe as well as for his country, Italy. In times of growing euroscepticism, he said, citing Altiero Spinelli, that " nothing can make us turn back from Europe". Yet he addressed the current problems of Europe and the need to reinvent Europe. 

The crisis of the European Union lies in the "deterioration of the living conditions" which is currently affecting a wide share of the population and the most striking factor is the rise in unemployment and the sharp increase in youth unemployment". It is therefore impossible to rely solely on restoring public finances and that more flexibility is needed. He also said that "austerity policy at any cost no longer will work". “Sustained, qualified growth clearly requires reform, but besides simply referring to clear parameters, we also need a great attention to be paid to the effective conditions of debt sustainability in each country and, connected there too, we need to be flexible enough in terms of the ways and the timing for bringing about further financial re-balance.” This was a clear message for Italy (and thus other 'peripheral' countries) to get a margin of  flexibility in their budgets to allow for investments programmes for boosting their economy (the so-called 'investment clause'). 

President Napolitano dedicated large part of his address to defending Europe, against populism and anti-European movements.. While the President was condemning “the destructive agitation against the euro and the European Union,” the Italian Northern League MEPs stood up wearing their green scarf, whistling and showing “No Euro” signs. According to Napolitano, “there is empty propaganda and little credibility from those who have spoken out” against the history of European integration. 

“How can people talk about the end of the European dream claiming that the end could involve the abandonment of euro to save the Union? The traumatic consequences and the feasibility of doing that are seen with terrifying simplicity by some people, and really, that would be such an improbable change,” added President Napolitano. “This moment of truth must be lived the fullest, with all its implications,” said President Napolitano, referring to the forthcoming European Parliament elections. 

A great European in the line of Adenauer, De Gasperi, Spinelli or Delors.  

The Metamorphose of the Crisis

Six years after the start of the Great Recession, the world is not any better. The outlook is gloomy despite  signs of recovery that some economists claim as a demonstration of success of austerity policies. During these years, capitalism  has undergone an intense  restructuring with dramatic cuts in wages and social services.  But large firms have restored their profits and banks are cleaning up their balance sheets. 

The Economist  (Dec.7) devotes a special issue to Blackrock, the largest investment fund in the world.which is the first shareholder in half of 30 biggest multinational corporations. It represents it as a black rock hanging over a background of blue sky, which reminds a painting of Magritte. Its power relies on managing other firms' money and controlling their investments in bonds, commodities or other assets. 

There are other examples of 'financiers' who are now returning on the scene, such as Icahn, a raider who became famous for his take over on the US airline company in 1985 but who challenges Apple for being responsible of  having too much liquidity without distributing profits to shareholders. A big sense of the general interest? Those investment funds can own anything. There is one called Marathon Asset Management which has taken control of an entire city, Scotia, at 250 km from San Francisco. This may pave the way for other cities like Detroit, where even museums will be sold in an auction. 

The question is whether their dominance is a problem? The return of the 'masters of the universe' is seen by big magazines as a sign of dynamism of capitalism. .Remember what Adam Smith used to say his classic 1776 treatise on capitalism, the Wealth of Nations : " All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind. Crisis, what crisis? Not for the super-capitalists.

The contradiction  is that capitalism cannot continue with the same model of growth and rules which prevailed before the crisis. This means the pursuit of the 'financialization' of the economy, with the concentration of economic power in the hands of few large corporations and investment funds. Furthermore, it would represent a continuing widening of social inequalities, with gains of growth still flowing to the richest part of the population. A recent research study of the Washington University suggests that top 5%  has too much saving while the bottom 95% is forced to reduce their savings to offset the worsening of their living standards.

Did we learn something from the crisis ? In a recent speech at the IMF, Larry Summers, the former President adviser, has warned against the risk of prolonged stagnation and deflation. These are the words he pronounced on Nov.8: "my lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential"

We are perhaps at the end of a capitalist era, but we do not know how the world in which we are living will look like in the next ten years. From his prison, the Italian philosopher Antonio Gramsci, wrote : "The old world is dying away, and the new world struggles to come forth: now is the time of monsters"

How to get out from the debt crisis ?

The American anthropologist and  activist  David Graeber  proposes a simple solution: cancel debt. Well, his book " Debt: the first 5000 years " published in 2011 (Melville House)  is worth reading for the deep historical research and original ideas. 

His thesis is that cancelling partly or wholly public and private debt has been recurring in history of societies over the last 5000 years. Adam Smith said , a few centuries before, that no State had never repaid its debts. Why should this time be different?  Graeber argues that  this solution would be preferable to offset rising inequalities rather than introducing a set of tax measures on the rich. . But in his view, this will imposed through debtors' action or movements (such as Occupy Wall Street in the US) not by public institutions.  

The partial debt write off (or 'haircut') imposed by the Troika in March 1992 is somewhat different from what Graeber has in mind. This forced agreement has been conditional to severe austerity measures which constitute a grave violation of economic, social and civil rights of the Greek people. It has in fact worsened the economic situation of Greece while allowing foreign banks (mainly French and German) to limit their losses and Greek banks being recapitalized at the expense of the Greek Treasury . The Greek public debt represented 130% of GDP in 2009 and after the 'haircut' reached another peak in 2013 at 175%! The unemployment rate rose from  12,6% in 2010 to 27% in 2013 (reaching more than 50% for the young unemployed). In the meantime, the Troika has durably reinforced its domination and Greece' loss of  sovereignty has paved the way for the rise of far right extremism. Who will pay for these mistakes? Debt write off or payment suspension has to be decided by the debtor country unilaterally to give some relief (as Argentina did between 2001 and 2005 and Ecuador in 2008-09).  

The debate on inequality has revived recently and as Krugman said (using the words of Pdt Obama) it has become "the defining challenge of our time". Experts like Th. Piketty will argue that the main political goal is to address the issue of wealth inequality rather than public debt. He is right but there is also an issue of private debt which is far more important because of  loss of middle classes income and unemployment increase and its dramatic rise during the crisis is also largely explained by the conversion of private debts, primarily of banks into public debts.   

We are talking about a more fundamental problem which affects the entire economic system. Measures such as capital taxation, write off of illegitimate debts and more progressive taxation on high incomes are just part of a plan designed to  change the current economic model. Such a program  which should have a genuine European dimension, should include the abandonment of austerity policies, the reduction of working time and wage increase for low income workers, a public service oriented reform of the banking sector, a global tax reform, more equality of opportunity for women and migrants in particular as well as  public measures to foster the transition to a low carbon economy. 

Graeber puts a strong emphasis on debt cancellation as a mobilizing goal, but he acknowledges that this measure will not suffice to promote a radical change. Taxing capital to redistribute wealth is a valuable goal to safeguard democracy.  We all aspire to a better and more equitable sharing of wealth , but  these will not fundamentally change the nature of the current economic system which does not respect people nor public goods and accelerates inexorably the destruction of our planet. 

The current crisis has revealed the predatory nature of the financial system. Given its overwhelming control on the state of affairs, can we realistically imagine that any government or any supranational institution such as G-20 will decide on the introduction of a global tax on capital ?  As Bob Dylan said  " the answer, my friend is blowing in the wind". 

Public debt, private wealth

The world is threatened by a huge mass of debt which has enormous consequences on the lives of  people and businesses. The central issue that needs to be addressed urgently if we want to restore growth is to escape from the debt economy. Many governments being confronted with this problem introduced austerity policies with severe cuts in public spending, particularly in basic social services, and tax increases. These policies have failed but no alternative policies have been found to date.

One possible solution to alleviate the debt burden is to introduce taxation on big fortunes rather than on high incomes (as proposed by President Hollande in France). This measure would introduce some social justice as it would not affect those households who have invested their savings in banks and hold a large part of the national debt. This is what the French economist, Thomas Piketty, an expert on income  inequality has recently proposed in his book 'Le capital au XXI siècle'. 

The basic rationale is that inequalities in income do not capture the reality and extent of the problem. The stress should rather be put on progressive taxation on capital, the big fortunes - the  richest 1% which according to Piketty own more than a quarter of total wealth in Europe and the US. The one-off tax would allow to repay total public debt. Subsequently, a strongly progressive taxation on income and capital would offset the reconstitution of wealth inequality. 

P.Krugman  has recently explained in his blog why inequality matters and should be treated as an urgent priority, not just as a subordinated issue to restoring growth. The cost of inequality (for middle classes) is as high as the effect of the great recession : the income share of the bottom 90 per cent has fallen dramatically, between 0,7 and 0,9% per year to less than half of total income. 

However, a mere redistribution of income will not solve the issue of mass unemployment since unemployed have no income from labour. But if there is  a significant shift from the wealthy to the middle classes and the poor, there will be room for governments to stimulate the economy while paying less for the unemployed. The problem, though is that there will be strong resistance from conservative parties. This is a battle for democracy not class warfare. 

One Human Family, Food for All

Pope Francis' gives his blessing to Caritas Internationalis' first ever global campaign against hunger. "We are in front of a global scandal of around one billion people who still suffer from hunger today. We cannot look the other way," .

Tribute to Nelson Rolihlahla Mandela, 1918 – 2013

Nelson Mandela passed away last night at 95. He was one of the greatest men of History alike Ghandi and others. He achieved peace without violence with those who kept him in prison  for 26 years. What is more important than giving hope to his people, oppressed by one of the worst regimes ? 

But we should also value peace not just for moral reasons but also because it represents a motor of progress. As Europeans we know what this means and how peace and reconciliation gave rise to an unprecedented era of prosperity.  In South Africa,  living standards have improved substantially for all, but the balance is still disproportionately in favour of white population and Asian South Africans.

As the Economist points out: "Under its own majority rule, the lot of the ever-growing black population—today forming over three-quarters of the national total—has been notably poor. Misguided governance, low-quality education, skills shortages and massive unemployment levels of around 40% have left it more disadvantaged today than when Nelson Mandela was still behind bars. Black income has virtually flat-lined, betraying tremendous gulfs between the wealth of the different racial groups. Sadly, the nation Mandela leaves behind today remains one of the most unequal in the world".

Mandela has paved the way to democracy and human rights in a divided country. He left a better world for all of us and for his country but there is still a long way to equality. As he wrote in 1970 during his imprisonment, " social equality is the only basis of human happiness.”   

Rest in Peace

  

Another Icelandic lesson

In 2008, Iceland was a default country as their banks went bankrupt due to debts totaling 100 billion euros, a figure equal to 10 times its national GDP. The government intervened with a suspension of the Krona, closing banks and imposing the cost of repayment of the debt to foreign creditors  as well as austerity measures to citizens. The plan seems to have worked better than the austerity programs imposed to Greece and Portugal. In 2011, Iceland had a positive growth rate (2,9%) which continued in subsequent years. Unemployment has decreased from 10% in 2009 to 5,7%. 

Four years after, the Progressive party (which is a centre right party) has unveiled a four year plan to  reimburse part of the price indexed mortgages contracted by households up to a maximum amount of 24 thousand euros. The devaluation of the currency caused by the banking crisis has led to a significant increase in prices (+37% between 2007 and 2010) and high borrowing costs. This operation will amount to around 900 million euros. But despite the protests of Wall Street and other international organisations , the government pushed ahead the plan whose cost will be borne by banks and hedge funds through tax increases and write offs of old debts held by speculative finance.  

The rating agency S &P  downgraded Iceland's long-term credit rating to negative from stable. Even the US government which helped Iceland with a loan of 4,6 billion dollars  warned that the recovery is still weak to give those gifts to the population. According to the IMF, Iceland has “little fiscal space for additional household debt relief” , while the OECD stated that Iceland should limit its mortgage relief to low-income households.  

In fact,  the impact on public finance will be minimal according to official sources. The plan also includes tax breaks to encourage Icelanders to use their pension funds to reduce their indebtedness. This  means a debt relief plan of 1,6 billion , more or less 15% of the national income. This would equal 300 billion euros in a country like Italy or 1,500 billion at the level of the whole euro area. If households pay less interests, this will stimulate demand and help boost economic growth. As a result, these measures will bring gradually  the deficit down and restore financial sustainability.  

If we want to build a viable alternative to financial capitalism, there are a lot of lessons to be learnt from Iceland on the way the crisis must be handled. The fact is that the recovery has been more successful here than in other countries depending on foreign borrowing such as Greece, Portugal or even Ireland or Latvia. If this is regarded as a case for instability, let's just do it rather than just surrender to stability programs.  Let's stop listening to the Cassandras  of  IMF and S &P.