Thursday, May 24, 2012

Where Vultures Feast

In Greece, rising suicide rates, malaria and HIV are spreading in the middle of the crisis. These are tough challenges for hospitals that must make further cuts to meet demands from the IMF and the EU.  There are vultures circling to buy up Greek debt, and they have no interest in settling. On 15 May, Greece paid 400m Euros to Dart Management. While Europe can write down Greece’s debt, private investors have no incentive to do so.

How can we stop this? European leaders could force them to hold to the agreed 50% umbrella on debt restructuring. But they chose not to do so. Instead they allow the robbery to continue.

P.S: In the meantime, the OECD warns about the danger of additional austerity measures as the economy is receding further and unemployment rapidly soaring.

Europe must remain based on solidarity

Growing euro-scepticism across Europe must be countered by a radical
renewal of those values that created the European Community out of the
ashes of the Second World War.  The same ideal should prevail; instead
we have a cacophony about what needs to be done to tackle the financial crisis,
in particular for Greece.

In a recent interview, the German philosopher Jurgen Habermas asks whether
European citizens want to commit suicide (in the economic sense) given the
 recent results of elections in several countries where anti-European parties
have won a large share of the votes. Meanwhile, the economic understanding
that the monetary union cannot be stabilised in the long term without
political union has become prevalent.   

We cannot afford to become complacent or indifferent
to events that are now shaping public opinion. Europe needs to rediscover
its purpose or we will shift inexorably toward disintegration and disunity.

Wednesday, May 9, 2012

Those angry men who want to change the World

Austerity has caused massive anger in Europe as it has hit severely the weak and very little the rich. The recent political elections in France and Greece are a reflection of this phenomenon. We have to understand the causes and the objectives that these angry men pursue and see how to channel this energy into a creative process rather than destruction.

Where do they come from?  The angry men belong to the middle class which has sustained the functioning of our economies and societies during the post war period. However, the situation has dramatically changed since the 90s. Inequality has hugely increased  because there has been a significant redistribution from middle classes to the rich due to the development of financial markets. The pyramid of income distribution has a widening base, mostly people with low salaries (say less than 25.000€ a year) and very few people with high salaries (say above 300.000€). The bulk of the so-called middle class is made up of people living in precarious conditions; they owe debts and have very few assets. They include pensioners, unstable or low paid workers, young people without a job. This mass of people in most European countries fears the danger of austerity and insecurity.

They express their anger publicly. They want to be listened by the government at all levels. They don't have a clear representation, ranging from trade unions, social protest movements and some parties.They reject traditional democratic parties and vote increasingly for the far right (massively in France) or the radical left (in Greece), the two being of course different. But the mass of angry men can be an easy target for demagogic parties of any kind which use scapegoats like immigration or taxation. The danger lies in the instability that it generates in our democracies. 

We need therefore a radical change in the policy agenda toward more growth and equity, without which the depression will persist for many years and cause a social disruption. Remember the lessons from the 30s with the rise of fascist and nazi movements. We should instead draw inspiration from wise men like Albert Einstein who said: “learn from yesterday, live for today, hope for tomorrow

Tuesday, May 1, 2012

Austerity is Wrong

Austerity policies have proved to be wrong in Europe and efforts of the EU and the ECB to contain the crisis rather ineffective. L. Summers, a former US Treasury secretary wrote in FT (April 30): "Treating symptoms rather than, causes is usually a good way to make a patient worse". This is what is happening in Europe where the problem is growth, not excessive deficits. This is now becoming evident, even for the most orthodox defenders of fiscal rigour. Now that the ideological veil has dropped, more pragmatic solutions in favour of growth enhancing policies are being envisaged.

What went wrong in Europe? Increased austerity has not restored normal financial conditions, but has actually worsened access to financial markets. Public spending reduction reduces income, so the ability to repay debts. In fact, as happened in Greece, massive budget cuts have produced only limited reductions in deficits. This , in turn, reduces the growth potential if capital investments fall sharply and prospects to get the unemployed back to work are becoming more difficult. In Europe, due to economic integration, these effects are amplified. A recession in one country produces a fall in demand in others. Increase in savings and exports in one country have to be compensated by equal increase in spending and importing in others. Germany's performance has been achieved by becoming a huge net exporter but this would not have been possible without large scale borrowing and importing by Europe's peripheral countries. Peripheral countries will not be able to reduce their debt substantially if at the same time Germany pursues the same policies aiming at increasing its surplus.

Orthodox economists will argue that more spending in countries with large debt is pure madness. They are wrong: if demand falls and unemployment continues to raise, austerity measures will simply become ineffective and people will continue suffering. Obviously, savings can be achieved if they are undertaken wisely, for example to reduce waste of public money. But one thing is to reduce inefficiencies, another is to cut in basic services such as heath care and education which are vital for the well being of citizens.
Policies to increase public spending on investment would then make sense if they are coordinated at European level. The ECB is now pledging for a 'growth compact', being conscious that  its massive injection of liquidity at a very low interest for three years has not resolved the crisis. As the recession in the eurozone is likely to worsen, European leaders are determined to restore growth. But this can be pursued in different ways. Merkel and Draghi support growth initiatives through 'structural reforms',  an old euphemism which covers essentially wage cuts and less protection for workers.

F.Hollande, if he were elected president, has pledged for a large scale plan to finance trans-European infrastructure projects which will be financed through the emission of bonds by the European Investment Bank. This is a promising start, but may not be sufficient. We need certainly a common European commitment to growth based on efficiency measures to increase productivity but also on equity concerns to restore confidence and hope among the majority of men and women suffering from the dangerous spiral of recession nurtured by more austerity.