Saturday, November 27, 2010

Put People First

In the streets of Dublin, people demonstrate against severe cutbacks and tax increases with the slogan 'People before profits'. They are right to do so, as the austerity measures raise equity issues. The Irish government plans to cut minimum wage and slash 25.000 jobs in the public sector. But low tax rate for business is sacrosanct in Ireland.

Most of the 15 billion euro cuts will come from the welfare State and the working class. But these measures will not touch large businesses like Microsoft, Intel or Pfizer - which is true, they contribute to create hundreds of thousands of jobs and fuel exports. In fact, some multinationals which operate under Ireland's tax regime use complicated schemes to shift profits into and out of subsidiaries, allowing them to lower their effective tax rates.

The Irish government, which has lost popularity and support from citizens, will cut its deficit to less than 3% of its GDP by 2014 from 32% this year, that is a reduction of ten times (!). Ireland's total foreign debt, public and private is about 10 times its GDP. This situation is exploited by global investors to drive up borrowing costs, which are unaffordable under current growth scenarios. But, why should the middle class suffer from irresponsible behaviour of the Irish banks which will be saved in any event?

The question is whether there are credible alternatives which might alleviate the social costs of the crisis. Ireland - like Greece- should be allowed to restructure their debts - by extending their payments or reducing the principal (which means forcing banks to accept some debt write offs). If it is not the case, the Irish economy, which, from a poor peripheral country turned into one of the richest economies of Europe, will be condemned to stagnate over many years.

P.S: P.Krugman wrote on NYT a passionate article on the Irish crisis:
Yesterday, the EU Finance ministers agreed on an aid package of 85 billion € conditional upon an austerity plan. Borrowing costs will amount to 5,8%, higher than Greece (5.2%). The novelty is that debt restructuring might eventually be allowed as a last resort measure (A.M. 29/11). 

Sunday, November 21, 2010

The failure of the G-20

After Toronto which marked a turning point toward fiscal austerity, the G-20 in Seoul focused on the so-called war of currencies.  The 4-page communique stresses the importance of "re-balancing" the global economy, "coordinating" policies and refraining from "competitive devaluations". Not a single word about the reevaluation of the yuan nor on the recent moves of the FED to inject money in the US economy (which reduces interest rates and renders the US market less attractive for global investors thereby lowering the value of the dollar).

China  and the US are the two big players in the current war of currencies. Neither of them is ready to make concessions. Other nations try to reduce the value of their currencies to stimulate exports and therefore create jobs. So the real problem is not just about global imbalances; it is mainly about imbalances between the US and China. In the US, income inequalities are rising dramatically, with more income concentrating at the top 10% and this reduces the relative income of the American middle class. This means more pressure on exports to fill the gap.

In China, an increasing share of income goes to the productive sector rather to Chinese consumers - just like Germany. this reduces the relative income (in terms of purchasing power) of the Chinese relative to scale of domestic output produced by the Chinese economy. This also means more pressure on exports to fill the gap.

Targeting currencies is not effective to stop trade imbalances. A reevaluation of the remimbi will have an effect on trade balance if China responds by reducing real interest rates or expanding credit - which in fact it did after the reevaluation of the remimbi in 2005 and which japan did after the Plaza accord. The expansion of cheap credit offset the impact of the appreciation of the currency and the trade surplus continued to grow. It would be much more effective to target current account imbalances to re-balance the global economy.

The broad agreement on global recovery is meaningless. The truth is that more needs to be done to ease tensions that are moving the global economy closer to the edge of irresponsible protectionism. The key responsibility rests with China and the US, and any move towards a new monetary order will depend on their respective economic policies.

Sunday, November 7, 2010

We should save the euro

Economic pessimism is spreading among the ideas of opinion leaders. In a recent article, N.Roubini* (called Mr Doom) predicts the collapse of the eurozone. He argues that the fundamentals problems of the euro - high deficits and stocks of debt, loss of competitiveness- are still unresolved, especially in the periphery with the possible default of Greece. He concludes: 

"So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies".'

Another influential economist, J. Stiglitz** asks whether the euro can be saved looking at the economic situation from a global perspective and warns on the dangers of fiscal austerity.

"For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints. As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery" (...)  The social and economic consequences of the current arrangements should be unacceptable. Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago"

Both are right in their analysis, but they don't have much to offer in terms of proposals to save the euro. The traditional measures such as competitive devaluations or appreciation of the euro are not achievable in current circumstances.  In fact, the European economy  is basically a market social economy ruled by strong supra-national institutions, including the ECB, cohesion transfers and an  internal market which needs to be reinvigorated along the lines of the Monti report. 

In Europe, all political leaders agree that the euro should be saved although they might differ on the solutions. The EU has taken steps for a permanent crisis resolution mechanism to rescue countries in great financial difficulties and will apply sanctions for countries with excessive  budget deficits. What is missing, in fact,  is a fiscal framework giving to the EU - now that it has stronger institutions with the entry into force of the Lisbon Treaty- the power to relaunch the European economy by means of a large infrastructure program which eventually will produce lasting impacts on growth and employment. The issue is again where to find the necessary resources without increasing the stock of public debt. Why isn't possible to create a special Fund with resources from international financial institutions, in particular the European Investment Bank, whose scope is  to contribute to the achievement of EU objectives?

The EU economic model is not flawed, as argued by many economists from the other side of the Atlantic. But it needs a much greater ambition to avoid a high price to pay in terms of jobs and human suffering. 

Monday, November 1, 2010

Italy has no future

Unemployment is a serious concern everywhere, especially among young people. In Italy, it affects over a quarter of the entire population, six percentage points above the European average. However, this has not led to any significant reaction of the society. In France, the pension reform - rising the retirement age from 60 to 62- caused a cycle of demonstrations which blocked the country during several weeks. This massive movement involved workers from all sectors but also young students  who expressed their concern not about pension reform but about their future. The French pension reform is particularly unjfair as it penalises particularly people who started working very early.

In France like in Italy, younbg people have no bright prospects . Social mobility does not work any longer: young generations are not getting a better situation relative to previous generations. But they don't protest, neither do their parents. They express distrust of the institutions, including the Church, and in past years hundeds of thousands left their country in search of a job in other European countries.

So what makes Italy so different from France? Italians are traditionally tied up with their families; this has become more evident with the crisis, where the family is a 'natural' safety net, in the absence of  a Welfare State protecting those who lost their jobs. For their future , the young count increasingly on the assistance of their families. They stay longer living with their families, even beyond 30 or 35, or when their leave their homes, they tend to rent a house close to their parents. Ties become even closer, because of reciprocal need and dependence. In so doing, the family has a 'conservative' influence on society as it protects its children in all areas, studies as well as professional activity.

Politicians have understood this phenomenon and use the family as a flagship for their political campaign. But just in a rethoric way, because in fact, little has been done, especially on social services for women having a job, or tax benefits for families with children. Families are increasingly under stress, as an inefficient State has now to struggle with debt reduction. Social cohesion is a matter of concern, and it might be in peril.