Sunday, March 25, 2012

Citizens of Europe unite

The Eu suffers from a democratic deficit. Ten years ago, EU leaders declared that they need to make the Union more democratic and to give citizens a voice in shaping European legislation. On 1 April, the new Treaty on the functioning of the European Union will give this possibility. The so-called Citizens Initiative requires the European Commission to consider legislating in an area on the back of at least 1 million signatures from a minimum of seven (or one quarter) of member States.

The Arab spring has shown the power of social networks to spread ideas and initiatives. EU leaders may, however, be concerned about protests against austerity and poverty in various countries, which would become a single widely supported petition. Citizens will have the opportunity to connect directly to the political world. But there is always the risk that political parties will take up some successful initiatives for their campaigns for the next European elections in 2014 or that  the citizens' initiative could be hijacked by a particular interest group including extremists anti -European groups. 

The next few months will see a period of experimentation to see how it will work from both sides. These initiatives will be constrained by the threshold of member States and signatures required. It has also some 'get out' clauses : initiatives cannot be called for actions which are outside the powers of the EU or which are 'abusive, frivolous or vexatious" or contrary to EU values. Instead, they should have as their main thrust the promotion of the European 'common good'.

The success of the EU's foray into participatory democracy  will depend on the degree of mobilisation of civil societies but also how fairly citizens think the European Commission will respond. This is a unique opportunity to confer more credibility to the European Union that it has lost during the crisis where it failed to communicate to its citizens. 

As Jean Monnet said,  we have to unite States, but above all citizens. 

Monday, March 19, 2012

Roubini : Greece private creditors got a very sweet

Roubini : Greece private creditors got a very sweet

Roubini is right. Private bondholders will bear limited losses and the debt burden will be transferred in future to the official creditors. The greatest debt restructuring in the history may appear as a gigantic bluff !

Sunday, March 18, 2012

Paying for inequality

Inequality in the capitalist world today is striking and immoral. We have the greatest social inequality since the 30s. In a recent report, OECD warns about the danger of rising inequality and its social costs. But let's be clear, the rise in inequality has largely been the product of neo-liberal policies pursued during more than three decades.

The facts about inequality are undisputed. Since the mid-70s, income inequality (among working age people) has risen fast. Using a standard inequality measure, the report points out that the wealthiest 10% of the population have incomes 12 times greater than the  poorest 10% up from eight times greater than 1985.  This trend is especially pronounced in Britain, where the dramatic rise in inequality has been fuelled by the creation of a super-rich class. The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in 2005 . Even in countries viewed as more 'egalitarian' - such as Germany, Denmark and Sweden, the income gap between rich and poor is expanding from five to one in the 80s to osix to one today. In the rising powers of Brazil, Russia, India and China, the ratio has reached 50 to one ! 

Here is a chart which shows the rising trend of inequality in OECD countries: 

Some argued that inequality has contributed to the crisis. Redistribution from the poorer, who spend almost all their income to the richer who spend a much smaller fraction of their income and save more reduces aggregate demand. This happens when resources are redistributed from households with credit constraints to those not having similar constraints or much less. This has generated low interest rate policies and triggered increases in household debt beyond sustainable levels. In parallel, the search for high returns by investors with  growing incomes has contributed to the formation of asset-price bubbles. High and increasing inequality could have fueled the economic instability. This means that a very large part of the inequality increase has come from the financial services. 

On the other hand, national budgets have become less redistributive and less benefits were given to the poor; instead more fiscal bonuses went to the rich . The effect has been a dramatic weakening of the State's ability to increase the society's welfare. As the OECD points out, the tax benefit system cannot offset the rise in income inequality. There are sweeping consequences for the rich societies with a rash of occupations and protests, especially for the young people around the world. But the paradox is that such legitimate protests are not grounded in popular support. 
The OECD is not a dangerous, radical left wing organization; its mission is to promote a free market system. But it warns against the excesses of capitalism and it expresses a general concern about inequality about  as a factor of social disruption and the risk of disappearing middle classes. Who will pay for these social costs?

In fact, the OECD calls for a series of measures focusing on job creation, increased redistribution and free access to high quality public services in education, health and family care. While agreeing that fiscal consolidation is important, it wants to see governments increasing, or least maintaining social investments instead of cutting them.

The need to redistribute more equally is the most urgent priority for our societies. The problem is not to have a new kind of compassionate capitalism. Milton Friedman, probably the most reactionary and cynical economist,  said that deflation could be fought by "dropping money out of a helicopter". In other words, if the poor want money, let's give them money! The real issue is about human dignity - the greatest inequality is youth unemployment which means sacrificing an entire generation which does not know what a job actually means. Mala tempora currunt ! .

P.S: There is a wide ranging debate about inequality among economists and politicians. One way of looking at the issue is in terms of trade off between equality and efficiency  and the possible range of outcomes as in the Okun's law. I found a book published in 1994 whose title is 'paying for inequality - the economic cost of social injustice" which contains interesting ideas. Interestingly, it was edited by Andrew Glyn and David Miliband, the current Labour leader's brother ! 

Sunday, March 4, 2012

The Debt Web

Here is a very useful webpage at the BBC website which explains quite clearly the financial interdependence between euro-zone countries in terms of debt. It gives a good picture of the tangled debt web - who owes to whom?

Well, I found it surprising to see France and Spain as medium risk countries and Italy as a high risk country due to its exposure to the Greek debt.  In all cases, France and Germany are the principal creditors, with the exception of Ireland, which owes a larger share of its debt to the UK. The figures for Ireland are indeed very high but as for the other countries they do not include just public sector debt but all debt owed overseas,  including that owed by the government, monetary authorities, banks and companies.

The conclusion is that Europe is overwhelmed by public and private debt in a variable proportion. So why just focus on public debt, which in some cases, has increased as a result of excessive risks and moral hazard caused by private banks and companies? 

Europe's fiscal union is at reach

The Eurogroup deal on Greece marks a new phase in the Greek debt crisis. It is the first experiment of a large fiscal transfer to an EU country, let aside the structural and cohesion funds. EU member States made the choice not to let Greece default. But prior to the disbursement of new bailout funds, the northern States imposed tough measures in the form of further expenditure cuts, privatizations and other reforms to bring the debt-GDP ratio down to 120% by 2020.  

We are in exceptional situation which has no equivalent in the European history. It requires, therefore, exceptional measures. M.Wolf wrote (FT 15.02): "The reason Greece has caused such difficulty is that the country's failings are extreme, not unique. Its plight shows that the eurozone still seeks a workable mixture of flexibility, discipline and solidarity". But what, M.Wolf does not say is that this experiment requires a revision of the institutional setting in Europe. 

Nicolas VĂ©ron, a senior fellow at Brussels-based think tank Bruegel points out : "A meaningful upgrade of EU institutions is a necessary condition for the eventual resolution of the Greek problem. (...) "There is no easy or quick way to solve the euro area’s complex equation, but one thing is sure: the status quo, even with the European Stability Mechanism and the fiscal compact, is unstable and unsustainable. The market lull must be used by leaders to prepare the next steps. Otherwise it will be another missed opportunity." 

The fiscal compact - agreed at the EU Council on 1-2 March ( with the exception of the United Kingdom, Czech republic and Ireland which will vote in a referendum -  represents a  transfer of sovereignty to the EU to control fiscal discipline , the largest since the Maastricht Treaty. It is the expression of the German ideology on financial rigour through which it imposes its power. But it does not represent true fiscal integration - which requires an effective coordination both on expenditure and taxation. In this regard, the proposal of a financial transactions tax (FFT) has an essential role. If it is implemented in a coherent manner, the eurozone countries will reduce the influence of financial markets and on the other hand, acquire one of the attributes of sovereign power, which is to levy taxes. The problem is that if a supranational political authority is set up to govern the eurozone, there will be another dilemma, that is the possibility to create a sovereign pan-european power to limit the market excesses but without a democratic legitimacy. 

Europe will evolve through its internal contradictions. The resolution of the Greek crisis is only a first step in the direction of a greater political unity with a coordinated fiscal policy to boost growth and jobs.