Sunday, January 22, 2012

Time for change

Standard & Poor's, one of the leading rating agencies, announced that it has downgraded nine Eurozone economies, including France, Italy, Austria and Portugal. The statement says: "the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone". These measures were largely expected but it is important to understand their significance. 

First, the rating agencies do not provide reliable assessments - which are based on restrictive rating definitions, but they still largely influence markets and therefore States' economic policies. Does it make any sense to downgrade two strong economies such as France or Italy, despite the austerity measures taken by their governments? The wealth of a country cannot be evaluated only on the basis of debt or deficit figures  but has to take account of other factors. For instance, Italy as well as Greece have a cultural heritage whose value is almost impossible to evaluate. Moreover, private savings are also an important asset which can offset (in macroeconomic terms)  the negative effects of the crisis. Hence, the rating agencies make wrong judgments about States - because it is not the same thing as judging the financial solidity of firms or banks.  So, if they are wrong, they should be at least downgraded or even prosecuted for the pain caused to millions of people.  But the problem is the volatility of markets which react irrationally to the credit ratings.    

Second, this indicates that the debt crisis continues to spread to all countries (and Germany is not immune). It will not be resolved with austerity measures which contribute to worsen the economic depression. Now, this contradiction comes to the fore: without growth, governments will end up in a debt spiral with serious social consequences.  

Is it fair that banks which get money at 1% interest rate from central banks and that at the same time some States should pay six or eight times more than banks for their debts?  People are suffering from austerity plans imposed by governments to which financial markets give hundreds of millions of loans at interest rates not lower than 7% . As a result, governments will cut pensions and wages as well as investment programmes, which contributes to create more unemployment and brings us into a severe economic recession. 

Should we continue waiting until it is too late to understand the gravity of the crisis and decide collectively on changing the economic model before our societies become disrupted? Europe should react united to the attack of financial markets. It has the necessary means to stop it and for this, it is not necessary to modify the Treaties, at least not in the short term.

The European Central Bank (ECB) should evolve towards the FED model, which does not only guarantee price stability but also stimulates economic activity and employment. It cannot lend money directly to member States  of the European Union, but it can release credit without limit to public credit institutions (art. 21.3 of the Statute of the European system of central banks) and to international organizations (art.23 of the same statute). The ECB can provide liquidity  at a rate of 0.01% to the European Investment Bank or other public banks, which, in turn can lend at a modest rate to indebted States to repay their old debts. Some countries such as Italy would have a surplus budget if they did not have to pay higher interests on their national debt. Should Italy sink in an economic recession or is it the time to put an end to rent situation of private banks? The answer should be evident for whom the common good matters.

Furthermore, the reforms of the euro governance appear not to be effective in a context of recession. Of course, we need a new European treaty to build a political Europe with common institutions. The European Financial Stability Fund (EFSF) has been strengthened several times, but S&P has downgraded it. At this point, Europe needs eurobonds to reduce the debt burden for all and resist against international speculation. But, more importantly, it is essential to finance large infrastructure works to foster growth and employment in Europe. It is not a new idea: J.Delors proposed it in its White Paper (1993).

As Keynes said, we need " a wisdom for a new age". The most urgent action is to send a signal to citizens to explain that Europe is not in the hands of financial lobbies, but that it is acting in the general interest. 

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