Saturday, October 29, 2011

The primacy of Labour

In a recent speech held in Rimini on 28th October, Cardinal Bagnasco, a conservative and influential member of the Catholic Church, affirmed that the State has the duty to intervene to create job opportunities. He said: "”In the shadows of the non-working , confidence and self-esteem are severely threatened, and serenity to the future is not. For all these reasons, the State has the delicate and onerous duty to provide access to employment opportunities in different areas, taking into account all circumstances, however, that unusual, such as those that the world is experiencing, require an update of mentality and ability to ”renewal. (...) Without decent employment, the man hardly able to measure his personal capacity, to establish collaborative relationships with others, to contribute to the achievement of social good, to feel part of the building in the world, to perceive its dignity in earning honorable bread for themselves and their loved ones". 

The archbishop of Genoa has insisted on the work as " a right and duty of every person, the primacy of man at work, and the primacy of labor over capital, without labor". It‘s undeniable- he added – that all human activity, and then the work takes place within the culture and interacts with it, and then between economy and culture, there is a reciprocal relationship, but must remain firm and clear the primacy of culture, if you do not want to enter the jungle of a market without rules because without values.

Every man  of good will and respectful of human dignity should subscribe to these words. In fact, many constitutions recognize that work is a right and its primacy over capital. This is the legacy of Europe's culture and ideas on labour and value developed by Adam Smith, David Ricardo and Karl Marx. 

Today's world is characterized by an increasing antagonism between labour and capital. Governments failed to address social inequalities while maintaining privileges for the rich. That unsustainable situation gave rise to the explosion of anger of the young generations and revived social conflicts in our societies. The Church's message on the priority of labour is a key component of its social doctrine and has been subject to academic discussion.  But now it has to be understood and turned urgently  into concrete measures of social justice and equity for the vast majority of men and women. 

Thursday, October 27, 2011

The Icelandic lesson

In an international conference held on October 27 in Reykjavik, Iceland's experience in addressing the global financial crisis was reviewed. In the light of the achievements and challenges still ahead, there are some interesting lessons to learn in order to inform the wider economic issues for  the eurozone countries.

Iceland suffered the largest banking collapse in economic history. In 2008, the Icelandic financial crisis  led to the collapse of the three main banks, whose assets were much larger than the country's external debt. The national currency (krona) fell sharply (more than 35% against the euro) which led to capital account restrictions; the market value of  the stock exchange fell by more than 90%. This led to a severe economic recession, with a drop in GDP of 10,2% in 2009-2010. According to certain estimates, the cost of the crisis can be evaluated in  at least 75% of the country's GDP. But the external consequence was also dramatic as millions of  bank deposits were frozen and foreign banks had to face significant losses.

The government decided to nationalize the banking sector - which was deregulated in 2001 - (after that the UK decided to nationalize Bradford & Bringley, one of the banks involved in the financial crisis) since banks were unable to refinance their debts. Banks were restructured  and subordinated to stricter financial supervision; businessmen involved were subject to intense scrutiny; criminal investigations were launched on financial fraud. Eventually, the government resigned in 2009 after massive protests .

Since the crash, the country has improved its financial position and the economic recession was halted at the end of 2010. The emergency legislation which allowed the State to take control of the financial sector helped resolve the financial crisis.In fact, the country was not affected by Europe's sovereign debt crisis. Despite contention with Britain and the Netherlands over the question of a state guarantee on the deposits of an Icelandic bank (Landsbanki) in these countries, credit default swaps on its sovereign debt have steadily declined and are now much lower than Ireland . Furthermore, the decision of the government to apply for the euro membership has also helped to enhance credibility on international financial markets. 

But the most important fact is that a country on the verge of financial collapse has managed to resolve the financial crisis with a strong fiscal adjustment under an IMF programme while using the social welfare  system to maintain real wages. Welfare expenditure in the form of transfers to households and social protection increased significantly between 2007 to 2010 to soften the impact of the crisis. Child benefits were also increased and  targeted  at lower income groups. As a result the inequality trend was scaled back, with a Gini coefficient declining from 0,43, its maximum level in 2007 to 0,29. 

 European leaders should draw lessons from this country, in the way it managed to overcome the financial crisis with a sense of equity and justice. In comparison, the eurozone crisis requires urgent action on a much wider scale, including with non-European partners, and bolder measures to strengthen fiscal integration and the creation of eurobonds.

Sunday, October 16, 2011

The Indignant Generation

2011 is the year of global indignation. We have not seen such mass reaction since May 1968: the Spanish 'indignados' ; the Arab revolutions;  the riots in London; the protests of young Israelis in Tel Aviv against high costs of living; protests of Chilean students demanding higher social spending; massive demonstrations against austerity in Greece, Portugal and Italy; India’s movement against corruption; and now the “Occupy Wall Street” movement in New York and across the United States. These movements are now turning into global protests:  from America to Asia, from Africa to Europe, people are rising up to claim their rights and demand  a true democracy. On 15 October, people met pacifically  in the streets in 951 cities from 82 countries to initiate global change. 

Many of these revolts have a common ground. They represent a powerful critique to globalization which has benefited to the wealthy and has produced an international labour market that held down the wages of the  unskilled workers in western economies. It is a genuine expression of anger of a generation without future and distrust of  traditional institutions, political as well as financial, being responsible of the crisis and having caused an enormous damage to our societies. The indignados of Madrid, Athens and Paris claim they do not belong to any political party, but they are not conservatives. They demand support for a “European social model”, which promises free education and healthcare and a decent income for all. 

Some may argue that this is a reminiscence of utopian communism, a sort of City of the Sun (Civitas Solis) where all public goods would be put in common. We cannot agree more but is this possible on Earth? Of course, water is a public good of common use; forests should not be destroyed; the air should not be contaminated; banks should not commit fraud and cheat out for profit. Citizens should have a say in the organisation of public life. The risk is that utopian ideas may be exploited by populist leaders to their own profit. 

The consciousness of the indignant  is about their future stolen for an entire generation. Our societies don't have anything to offer to them: no jobs, less public services, erosion of middle classes living standards. In a sense, they express an alternative economic model, a more egalitarian society based on the satisfaction of  basic needs and the respect of human dignity. Is there anything wrong with that? 

As N.Roubini put it, "any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are re-balanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare".

World leaders are too busy to find solutions for re-capitalizing the banks but don't listen to the pacific and silent revolution of an entire generation. They must act before it is too late. But global change is at our door !

Omnia cum tempore !

P.S: In October 2010, St├ęphane Hessel, a former French-German resistance fighter published a pamphlet called    Time for Outrage! (original French title: Indignez-Vous! ) which  has sold more than 3.5 million copies worldwide. The essay calls on young people for peaceful and non-violent insurrection against  the growing gap between the very rich and the very poor,  the need to re-establish a free press,  to protect the environment and the welfare system, and the plight of Palestinians. It inspired  one of the names given to the Spanish protests against corruption and bipartisan politics, Los Indignados . These protests, in conjunction with the Arab Spring, later helped to inspire other protests in many countries, including Greece, Israel, and the United States.

Sunday, October 2, 2011

We must defend citizens, not banks

Europe is on the verge of  collapsing. The eurozone crisis seems unstoppable and  despite of  measures taken so far by the European governments, the European Central Bank as well as other central banks from other countries,  it still feeds panic in financial markets.

European governments now recognise that they have to do more if they want to save the eurozone.  They have to tackle several problems at the same time, e.g. the rescue plan for Greece,  recapitalization of the banks, protect from contagion Spain and Italy. But there is no consensus so far  on a comprehensive plan which provides a durable solution to the eurozone.

An elaborated proposal  has been put forward recently by  G.Soros  who writes :  "Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control, and they need to do so now". He suggests three main steps: "first, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under the direction of the European Central Bank in exchange for a temporary guarantee and permanent recapitalization. Third, the ECB would enable countries such as Italy and Spain temporarily to refinance their debt at a very low cost".

In a pure financial logic, this would contribute to 'calm the markets'. We should give him some credit given  his expertise in financial speculation, but he understands that capitalism is digging its own grave  and that a collapse of the euro would have dramatic consequences for the entire world economy.

The first proposal requires a change in the EU Treaty and cannot be readily be implemented as it would require the unanimity of all Member States. But, despite political difficulties, it would certainly be a step forward toward the creation of a fiscal union which would then imply the emission of eurobonds. In the meantime, who will fill the vacuum:?  The European Central Bank is not a political authority and even an intergovernmental body would require the approval of the Bundestag and other EU countries.

The second one is more problematic. The proposal is to use the European Financial Stability Facility (EFSF) to recapitalize major banks  which are heavily exposed on sovereign bonds of Greece, in particular. This would be done under the aegis of the ECB, which will monitor risks, and so doing will the remove the incentive to de-leveraging. In return, the ECB would lower its discount rate to relieve the pressure on Spain and Italy.  The conclusion is that these measures would be sufficient to ensure an orderly default of Greece without 'causing a global meltdown' and the "EFSF could underwrite a “voluntary” restructuring at, say, 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalize the European banks, and it would be left to the IMF to recapitalize the Greek banks".

The second rescue plan, which was agreed on 21 July still needs ratification from the Bundestag in October.   After the latest austerity measures imposed to Greece - with thousands of public sector jobs to be axed -  there is a chance that Greece  will get (hopefully by mid-October) another tranche to replenish its budget. If Greece meets its 'targets', the rescue plan - perhaps in a revised form- will in fact be used to repay the creditors (such as Deutsche Bank), which, in fact were largely involved in the plan. But in exchange of the 'voluntary' restructuring, banks will ask for being recapitalized, which means benefiting from another injection of tax payers money.
 Europe's debt crisis is now turning into a banking crisis.   Eurozone banks heavily exposed on sovereign debts are likely to cause 'collateral damage' and contagion for other eurozone countries  But, despite the measures taken and the amounts of money devoted to stimulate the economy through banks, the amount of credit provided to the 'real economy' is still very low. In fact, the money which will be mobilised will pay back the banks for their high risk investments. Greek people will not benefit from the new rescue plan, which will just reimburse the banks and continue feeding international speculation. Actually, they suffer from severe budget cuts which affect directly their living conditions:  higher prices, lower wages, poorer health and education services.

Before deciding on a further recapitalization, there are certainly other options which could be pursued while preserving the general interest. In a recent interview, Jacques Delors, former president of the European Commission said: "The ideology of finances which frightens us continues to dominate. It is necessary to restore the balance of politics, economics and people’s needs, which definitely existed during the creation of united Europe".  We risk the collapse of not just the euro but the whole European project, which was built up with political vision and perseverance. Now, the high tide risks to throw away everything and citizens will have to pay a high price for it.