Thursday, December 26, 2013

How to get out from the debt crisis ?

The American anthropologist and  activist  David Graeber  proposes a simple solution: cancel debt. Well, his book " Debt: the first 5000 years " published in 2011 (Melville House)  is worth reading for the deep historical research and original ideas. 

His thesis is that cancelling partly or wholly public and private debt has been recurring in history of societies over the last 5000 years. Adam Smith said , a few centuries before, that no State had never repaid its debts. Why should this time be different?  Graeber argues that  this solution would be preferable to offset rising inequalities rather than introducing a set of tax measures on the rich. . But in his view, this will imposed through debtors' action or movements (such as Occupy Wall Street in the US) not by public institutions.  

The partial debt write off (or 'haircut') imposed by the Troika in March 1992 is somewhat different from what Graeber has in mind. This forced agreement has been conditional to severe austerity measures which constitute a grave violation of economic, social and civil rights of the Greek people. It has in fact worsened the economic situation of Greece while allowing foreign banks (mainly French and German) to limit their losses and Greek banks being recapitalized at the expense of the Greek Treasury . The Greek public debt represented 130% of GDP in 2009 and after the 'haircut' reached another peak in 2013 at 175%! The unemployment rate rose from  12,6% in 2010 to 27% in 2013 (reaching more than 50% for the young unemployed). In the meantime, the Troika has durably reinforced its domination and Greece' loss of  sovereignty has paved the way for the rise of far right extremism. Who will pay for these mistakes? Debt write off or payment suspension has to be decided by the debtor country unilaterally to give some relief (as Argentina did between 2001 and 2005 and Ecuador in 2008-09).  

The debate on inequality has revived recently and as Krugman said (using the words of Pdt Obama) it has become "the defining challenge of our time". Experts like Th. Piketty will argue that the main political goal is to address the issue of wealth inequality rather than public debt. He is right but there is also an issue of private debt which is far more important because of  loss of middle classes income and unemployment increase and its dramatic rise during the crisis is also largely explained by the conversion of private debts, primarily of banks into public debts.   
We are talking about a more fundamental problem which affects the entire economic system. Measures such as capital taxation, write off of illegitimate debts and more progressive taxation on high incomes are just part of a plan designed to  change the current economic model. Such a program  which should have a genuine European dimension, should include the abandonment of austerity policies, the reduction of working time and wage increase for low income workers, a public service oriented reform of the banking sector, a global tax reform, more equality of opportunity for women and migrants in particular as well as  public measures to foster the transition to a low carbon economy. 
Graeber puts a strong emphasis on debt cancellation as a mobilizing goal, but he acknowledges that this measure will not suffice to promote a radical change. Taxing capital to redistribute wealth is a valuable goal to safeguard democracy.  We all aspire to a better and more equitable sharing of wealth , but  these will not fundamentally change the nature of the current economic system which does not respect people nor public goods and accelerates inexorably the destruction of our planet. 
The current crisis has revealed the predatory nature of the financial system. Given its overwhelming control on the state of affairs, can we realistically imagine that any government or any supranational institution such as G-20 will decide on the introduction of a global tax on capital ?  As Bob Dylan said  " the answer, my friend is blowing in the wind". 

Public debt, private wealth

The world is threatened by a huge mass of debt which has enormous consequences on the lives of  people and businesses. The central issue that needs to be addressed urgently if we want to restore growth is to escape from the debt economy. Many governments being confronted with this problem introduced austerity policies with severe cuts in public spending, particularly in basic social services, and tax increases. These policies have failed but no alternative policies have been found to date.

One possible solution to alleviate the debt burden is to introduce taxation on big fortunes rather than on high incomes (as proposed by President Hollande in France). This measure would introduce some social justice as it would not affect those households who have invested their savings in banks and hold a large part of the national debt. This is what the French economist, Thomas Piketty, an expert on income  inequality has recently proposed in his book 'Le capital au XXI siècle'. 

The basic rationale is that inequalities in income do not capture the reality and extent of the problem. The stress should rather be put on progressive taxation on capital, the big fortunes - the  richest 1% which according to Piketty own more than a quarter of total wealth in Europe and the US. The one-off tax would allow to repay total public debt. Subsequently, a strongly progressive taxation on income and capital would offset the reconstitution of wealth inequality. 

P.Krugman  has recently explained in his blog why inequality matters and should be treated as an urgent priority, not just as a subordinated issue to restoring growth. The cost of inequality (for middle classes) is as high as the effect of the great recession : the income share of the bottom 90 per cent has fallen dramatically, between 0,7 and 0,9% per year to less than half of total income. 

However, a mere redistribution of income will not solve the issue of mass unemployment since unemployed have no income from labour. But if there is  a significant shift from the wealthy to the middle classes and the poor, there will be room for governments to stimulate the economy while paying less for the unemployed. The problem, though is that there will be strong resistance from conservative parties. This is a battle for democracy not class warfare. 

Tuesday, December 10, 2013

One Human Family, Food for All

Pope Francis' gives his blessing to Caritas Internationalis' first ever global campaign against hunger. "We are in front of a global scandal of around one billion people who still suffer from hunger today. We cannot look the other way," .

Friday, December 6, 2013

Tribute to Nelson Rolihlahla Mandela, 1918 – 2013

Nelson Mandela passed away last night at 95. He was one of the greatest men of History alike Ghandi and others. He achieved peace without violence with those who kept him in prison  for 26 years. What is more important than giving hope to his people, oppressed by one of the worst regimes ? 

But we should also value peace not just for moral reasons but also because it represents a motor of progress. As Europeans we know what this means and how peace and reconciliation gave rise to an unprecedented era of prosperity.  In South Africa,  living standards have improved substantially for all, but the balance is still disproportionately in favour of white population and Asian South Africans.

As the Economist points out: "Under its own majority rule, the lot of the ever-growing black population—today forming over three-quarters of the national total—has been notably poor. Misguided governance, low-quality education, skills shortages and massive unemployment levels of around 40% have left it more disadvantaged today than when Nelson Mandela was still behind bars. Black income has virtually flat-lined, betraying tremendous gulfs between the wealth of the different racial groups. Sadly, the nation Mandela leaves behind today remains one of the most unequal in the world".

Mandela has paved the way to democracy and human rights in a divided country. He left a better world for all of us and for his country but there is still a long way to equality. As he wrote in 1970 during his imprisonment, " social equality is the only basis of human happiness.”   

Rest in Peace


Sunday, December 1, 2013

Another Icelandic lesson

In 2008, Iceland was a default country as their banks went bankrupt due to debts totaling 100 billion euros, a figure equal to 10 times its national GDP. The government intervened with a suspension of the Krona, closing banks and imposing the cost of repayment of the debt to foreign creditors  as well as austerity measures to citizens. The plan seems to have worked better than the austerity programs imposed to Greece and Portugal. In 2011, Iceland had a positive growth rate (2,9%) which continued in subsequent years. Unemployment has decreased from 10% in 2009 to 5,7%. 
Four years after, the Progressive party (which is a centre right party) has unveiled a four year plan to  reimburse part of the price indexed mortgages contracted by households up to a maximum amount of 24 thousand euros. The devaluation of the currency caused by the banking crisis has led to a significant increase in prices (+37% between 2007 and 2010) and high borrowing costs. This operation will amount to around 900 million euros. But despite the protests of Wall Street and other international organisations , the government pushed ahead the plan whose cost will be borne by banks and hedge funds through tax increases and write offs of old debts held by speculative finance.  
The rating agency S &P  downgraded Iceland's long-term credit rating to negative from stable. Even the US government which helped Iceland with a loan of 4,6 billion dollars  warned that the recovery is still weak to give those gifts to the population. According to the IMF, Iceland has “little fiscal space for additional household debt relief” , while the OECD stated that Iceland should limit its mortgage relief to low-income households.  
In fact,  the impact on public finance will be minimal according to official sources. The plan also includes tax breaks to encourage Icelanders to use their pension funds to reduce their indebtedness. This  means a debt relief plan of 1,6 billion , more or less 15% of the national income. This would equal 300 billion euros in a country like Italy or 1,500 billion at the level of the whole euro area. If households pay less interests, this will stimulate demand and help boost economic growth. As a result, these measures will bring gradually  the deficit down and restore financial sustainability.  

If we want to build a viable alternative to financial capitalism, there are a lot of lessons to be learnt from Iceland on the way the crisis must be handled. The fact is that the recovery has been more successful here than in other countries depending on foreign borrowing such as Greece, Portugal or even Ireland or Latvia. If this is regarded as a case for instability, let's just do it rather than just surrender to stability programs.  Let's stop listening to the Cassandras  of  IMF and S &P.   

Sunday, November 24, 2013

Accounting for the great divergence | vox

Accounting for the great divergence | vox

Stephen Broadberry from LSE argues that  economic divergence we observe today was existent even a thousand years ago. His work is based on Maddison's pioneering work on long term trends of inequality and other recent historical data. This work could shed some light on recent divergence between European and Asian economies. His argument on differential impact of shocks deserves, however some further analitycal work. 

Saturday, November 9, 2013

Worldly philosopher: The odyssey of Albert Hirschman

Worldly philosopher: The odyssey of Albert Hirschman | vox

Jeremy Adelman of Princeton University talks to Romesh Vaitilingam about his biography of the economist and social scientist Albert Hirschman. They discuss Hirschman’s ideas about economic development, ‘optimal’ crises and what is perhaps his most famous book among economists, "Exit, Voice and Loyalty". Adelman also speculates on what the citation would have said had Hirschman won the Nobel Prize – and explains why we should read Hirschman now. The interview was recorded in London in May 2013.

Sunday, October 20, 2013

Reinventing Europe

What went wrong? This was the basic question that was discussed in a three day conference  in Brussels at the initiative of the French Magazine 'Nouvel Observateur' and the 'Notre Europe' Institute. The conference gathered more than 100 policy makers and experts with one message - let's reinvent Europe'

Europe is not popular nowadays. In most countries, less than one national citizen supports the European project. There is a serious risk that an anti-European coalition could win the next European elections. Only in Germany there is political stability; elsewhere, the turnout of political elections was unpredictable like in Italy with the surprising victory of the M5S or resulted in the defeat of the governmental party.

When governance fails, can Europe re-invent itself ? J. Delors, the most admired European Commission president  expressed his disappointment and distress by the EU's failure to restore leadership by creating a job creating growth model instead of an austerity minded policy. France’s former president Valery Giscard d’Estaing, and author of the constitutional Treaty said that Europe has worked  but it " has no more objectives.”

The rise of populism is today the main European social and political issue. Recently, we have experienced the absence of Europe in the tragedy of Lampedusa where earlier this month hundreds of migrants boarded in Tunisia died after their boat capsized. But instead of agreeing on common policy to arrest growing, uncontrolled immigration of Africans seeking refuge in most EU member States , EU leaders prefer national solutions. The result is an increasing appeal of  Europe’s extreme-right political parties, ever-stronger notably in Italy, France, Greece, Hungary, Belgium and most Nordic countries,  hostile to their governments while using as scapegoats growing income inequality, foreigners, the euro or EU institutions. 

The solution to these complex economic, social and political issues is not less Europe. Some prefer the 'federalist' approach, but may underestimate the fact that Europe is not the United States, since its is fundamentally polycentric, with a huge diversity of traditions, cultures, languages. But at the same time they share values, social norms and a 'State of Law'. J.Habermas is right to put at the heart of a renewed European project the issue of democracy and citizens' participation.

We need a vision and concrete action to mobilize Europeans.  A true political Union... Our only hope is audacity. But discussing ideas about Europe and its future is already a good start.

P.S: Last week has been quite rich in debates in Italy with the excellent initiative of the newspaper 'La Repubblica' in Venice. A journalist and writer, Barbara Spinelli, (Spinelli's daughter) presented an interesting paper on the Europe we need.  An intense debate on European democracy also took place with Massimo Cacciari,  the Italian philosopher and former mayor of Venice and Eugenio Scalfari, writer and founder of the newspaper 'la Repubblica'.   

Saturday, October 5, 2013

Inhuman crisis

 Pope Francis said that "the current world economic crisis is inhuman, being a grave symptom of the disrespect for man and for truth with which governments and citizens make decisions" . These strong words were pronounced at the end of a 3 day Vatican conference gathering experts from Catholic universities and institutions and from the UN, Council of Europe, the African Union and the organization of American states  to discuss the relevance of the Encyclical letter 'Pacem in Terris" (peace on Earth) in the promotion of a more peaceful world.

The Encyclical underlines the importance of respect of human rights as an essential pillar of modern Christianity. It clearly establishes: "Man has the right to live. He has the right to bodily integrity and to the means necessary for the proper development of life, particularly food, clothing, shelter, medical care, rest, and, finally, the necessary social services".  But it also calls for better relations between men and States, the need for equality among  nations and mutual assistance.  

John's call for peace in 1962 was an attempt to promote international dialogue on the basis of mutual respect and solidarity.  This message was not heard by world powers, as tensions escalated with the rise of the Berlin Wall, the Vietnam War, the nuclear race and so on. Now, Pope Francis urges to build on this universal message to meet the challenges of peace today; what he described as an "educational emergency", " the impact of the mass media on consciences, access to the earth's resources, " the ethical use of biological research", " the arms race and national and international security measures".

The basis of peace making exists because it is in the nature of men. Individuals, families, the society and the States are called to contribute "to build peace, on the example of Jesus Christ... by promoting and practicing justice with truth and love…(and) contributing…to integral human development” through solidarity. And that means an end to “egoism, individualism, and group interests at every level. ”But has today’s world learned any lessons from Pacem in Terris?  “Are the words justice and solidarity” found “solely in our dictionary or are we all working to realize them?”

Pacem in Terris reminds us that “there can be no real peace and harmony if we fail to work for a more just” and jointly supportive society. Every human being shares a common dignity “to promote, respect and safeguard always. ”Priority national and international action,  must work towards a world where everyone is able “to effectively access food, water, shelter , health care, education and (be given) the possibility to form and support a family.” 

"Pacem in terris traces a line that goes from the peace to be built in the heart of men to a rethinking of our model of development and action at all levels, so that our world is a world of peace". Despite the fall of walls and barriers, the message of the Encyclical remains extremely relevant. There cannot be peace if there is no fair development of all men of the Earth! These words have a savor of revolution today. 

P.S: All quotations are extracted from the English version of the address made (in Italian) by Pope Francis on 3rd October

Monday, September 30, 2013

German model ought to change

After the German elections , the big issue is whether Germany will change its economic model, and more importantly its plans for Europe. Until now, the country had a relatively confortable situation in terms of growth and employment compared to other EU countries. But even so, the economy has not returned to its pre-crisis levels. How can we say that this model has been successful?

Germany has pursued "beggar my neighbour policies" like in the 30s whereby it has imposed austerity policies to the rest of Europe. Export oriented policies have yielded a  large current account surplus (about 6% of its GDP) to the detriment of internal demand. Countries like Spain and Italy  have already narrowed their external deficits, but GDP has dropped, and the best case scenario will be a prolonged stagnation (which some economists reckon as the exit from the 'Great Recession' ). The truth is that the combination of increased productivity (due to wage cuts) and depressing demand has driven those countries to an external balance so that they can  repay their  short term debt to the international creditors.
As Martin Wolf (FT 25/09) put it,  "a large country with a huge structural current account surplus does not just export products. It also exports bankruptcy and unemployment, particularly if the counterpart capital consists of short term debt". The main problem is that vulnerable countries must improve their competitiveness, not only in terms of unit labour costs (which means achieving more or the same quantity of output  with less labour)  but also in structural terms, that is the accumulation of human and physical capital which is conducive to long term productivity gains. However, this cannot be achieved with current German policies, which on the contrary tend to increase the divergence between northern economies - anchored to the German economy- and the others which have difficulties to stay in the eurozone with low levels of competitiveness.

The solution is a European wide keynesian stimulus plan which is justified on economic and moral grounds. This has worked quite successfully during the last two great crises. During the great Depression, F. Roosevelt's New Deal, which  injected massive government spending and introduced several reforms between 1933 and 1936 (including for the financial sector) reactived the US economy and restored the level of confidence among US citizens which was then necessary for the economic recovery which came after the II World war. A similar mechanism happened after the failure of Lehman Brothers in September 2008:  a goverment stimulus plan worth 800 bn $, combined with the Federal Reserve's availability of liquidity for banks in trouble brought a certain amount of confidence to the marketplace. A policy of quantitative easing together with a low interest rate environment  further stimulated economic activities in the US. But all this happened when the private sector does not have the capacity or is reluctant to spend and in these two big crises government spending has rescued the world economy from two of its greatest disasters.

Yet government alone was not sufficient to eradicate the crisis, but has Germany learned anything from these two large scale experiments?  Europe has the means due to its economic size (more or less similar to the US)to launch a large scale programme of investments which could exploit the full potential of the internal market. It has the moral obligation to do so due to the intolerable mass of unemployment and distress that the austerity policies have generated with job losses, wage cuts and less services to the most vulnerable. Is this what we want?


Sunday, September 15, 2013

Albert Jacquard: a utopian humanist

Albert Jacquard was a scientist who studied population genetics and worked long for the WHO. But he was known for his humanism and activism in defense of the weakest. He was obsessed by the idea that we should act to leave a better world to our grand-children. 

In 1978, he published 'L'Eloge de la Différence- la génétique et les autres" where he argued that all men were different from a genetic point of view. But none of these differences was a justification that a human group was superior to any other.  Becoming a member of the National Consultative Ethics Committee, he fought vigorously against racist arguments developed by far right extremism. 

Lately, he became an activist for human rights.  His engagement was expressed in a simple sentence : " devenir soi nécessite un détour par les autres"  ( to become oneself requires a detour through others). His reckless fight for the homeless to give them a home contributed to raise awareness among the population of the situation of people deprived of civil rights.  

In 2009, he participated to to another initiative, the Russell Tribunal on Palestine,  to reach a fair and durable settlement of the israeli-palestine conflict. His last battle was for a total nuclear disarmament together with Stéphane Hessel , an idea he defended since he ran for an ecologist list for the European elections in 1999. 

Prof. Jacquard was convinced that another model of society is possible. He considered that 'competition undermined the foundations of society" and denounced  the abuse of the word ' competitiveness' on which current policies are founded. He was a utopian but a realist one. 

France has lost one of his best men. Our hope is that many will take over his ideas and engagement . 


Wednesday, August 28, 2013

We have a dream

50 years ago, Martin Luther King pronounced  his famous speech  at the end of a huge march of protest for civil rights on 28 August 1963. Those words changed the world and are still relevant today. Hundreds of  millions of people do not enjoy basic rights of freedom, equality and access to education and healthcare. 

Pdt Obama has delivered a speech to commemorate that march and reiterate the values and the spirit of that fundamental event. Just as the US prepares an attack to Syria...

Thursday, August 15, 2013

Europe should aim at unity and solidarity

The economic crisis does not only bring negative changes that have to be addressed with vigour. It is also a moment to look at new opportunities. In ancient Greek, krisis means decision or judgment to bring about (positive) changes. This is the dilemma that Europe has to face not only for its own cohesion but also in the global scene. 

Globalization has produced a multipolar world with new economic powers, the so-called Brics - China, India, Russia, Brazil- which have experienced high rates of economic growth. The rise of these countries has shifted the balance of power with the relative decline of  rich western economies characterized by an ageing population and lower growth potential than the emerging economies. In this scenario, Europe appears as disunited and afflicted by internal divisions - Northern countries, led by Germany are  reluctant to support southern economies in recession with the imposition of austerity policies, thereby aggravating the crisis in those countries and Europe as a whole. 

Yet, we need a more united and cohesive Europe, not only for improving living conditions of the weaker social groups, but also to play a driving role in the global arena.  Africa represents  a great opportunity for Europe both for its vicinity and its enormous potential for economic and social development. One of its main challenges is the scarcity of water which puts entire populations on the edge of survival because they cannot develop their agriculture and are thus forced to live in precarious health conditions. But to produce water, African communities need energy ; for this solar technologies can satisfy the energy needs in the poorest villages of which only a small fraction has access to electricity. The availability of affordable energy can allow a more efficient use of water resources and can thus support the development of agriculture and the production of food. Energy, water and agriculture are therefore, the three pillars on which  Europe could devise a large scale plan, not only of financial aid, but more importantly through targeted interventions for the provision and the installation of new energy technologies as well as technologies for the extraction and supply of water. These are medium to long term investments - between 10 to 20 years, which will generate substantial economic returns through the mechanisms of  endogenous development that they will bring about. 

Over the last 30 years, most African countries were forced to implement  'structural adjustment programs' through measures of liberalization and privatization of the agricultural sector. The paradox is that this sector, which is essential for the survival of entire communities was considered as a market activity like any other economic activity which did not need any regulation or public intervention. This has created an adverse context for developing agricultural and food activities and therefore a substantial damage for the economies of many African countries Now the World Bank has changed its position and recognizes the need for the State intervention in this sector - which is also based on the fact that all large economies provide subsidies to their agricultural sector. In this regard, the intervention of Europe on a larger scale can create the basic conditions to allow  local populations to exploit more efficiently their natural resources. In such strategy, the supply of energy and water play a crucial role. 

Europe has enormous opportunities to promote economic development both internally and in other parts of the world. But this will happen only if it will rid from selfish attitudes that lead to stagnation and impoverishment and put at risk the future of entire generations.  A Europe which promotes the well being of populations (not only of European ones) is also the only route to avert  the rise of  populism and nationalism. As Pope Francis said recently in Lampedusa, Europe should not tolerate the 'globalization of indifference' toward refugees and desperate people which have no other possibility than migrate to survive and escape from poverty often risking their lives. 

Monday, August 5, 2013

We need an independent rating agency

It's urgent to reform the current rating system with an independent agency to ensure more transparency and objectivity in the functioning of financial markets. But some still think that the existing system is a "necessary evil" in the absence of a better one.

The issue is that there is a gigantic conflict of interest. Like any private business, the rating agencies are traded in Wall Street; Moody's has Warren Buffett (the American richest man) as main shareholder and S&P is part of a diversified  conglomerate like McGraw Hill. We assume that they orient their judgments according to their investment needs or their client interests. The worrying thing is that they are accountable to their shareholders , not to the general public.

Their credibility was put in question when they just ignored the subprime bubble or gave a favourable rating to Lehman Brothers just before it was forcedinto bankruptcy in September 2008. In fact, they have a direct responsibility in the financial crisis, by giving wrong signals to the market and downgrading sovereign debts, without being totally objective in their assessments . The US government has denounced S&P for 5 billion $ after it downgraded the US debt in 2011. In Europe, several countries have been downgraded or bailed out with their debt rating being close to junk bonds and a higher probability of default in coming years. When  S&P downgraded the Italian debt to triple "B", the Italian Finance minister contested the logic of the US agency on the grounds that the   'unsolicited' rating helped the agency to increase its own influence and  financial gains.  

All this reinforces the conviction that we need a 'popular' agency, a body where the shareholders are the citizens and where the financial analysts are just civil servants, like the FED or SEC. This idea will, however meet strong political resistance. There are other options which are being explored, such as a system run by supranational bodies such as the OECD, the BIS (Bank of International Settlements) or the IMF (which is a lender of last resort for developing countries and therefore exposed to conflicts).

This issue will be on the agenda of the forthcoming G-20 summit in St Petersburg. Unsurprisingly, the proposal will be put forward by Italy - which leads the club of the 'southern periphery', the most affected area by the financial crisis. The rationale is to free these countries from the 'diktat' of financial markets and avoid in the short term a potential collapse of the eurozone system, with further defaults in Italy and Spain. This calls for more structural measures, such as a strong and rapidly operational Banking Union along with appropriate governance mechanisms. What is now certain is that we cannot leave the delicate task of rating the sovereign debt of the eurozone in the hands of private interests.

Saturday, May 25, 2013

Debate on Inequality and Growth

Last May 19, there was an interesting debate around inequality and economic growth between Tony Atkinson and Paul Krugman at the Graduate Center of NYC. 

I pick up two issues from that discussion. The first one is that inequality is somewhat linked to tax avoidance. If taxes are increased substantially for the rich, then they will move out the country and choose an artificial residence in a more tax friendly country. Where is the global governance? The EU has powers to control much better tax avoidance and impose sanctions but there is no will to go for common tax rules. 

The second issue is that too much inequality hampers growth because middle classes do not have enough for consumption. But this is just one aspect of the problem. We need to focus on inequality of opportunity, basically social mobility across generations, which is much lower in more unequal countries like the United kingdom or the US. 

There are also new challenges linked with the crisis such as rising child poverty. Sacrificing the social welfare model would be an enormous mistake just like free marketers want. 

Monday, April 29, 2013

End of Austerity

The debate about austerity is getting much clearer now. There are increasing signals that austerity led policies have reached political limits in the face of growing opposition in countries hit by the recession. As economic pessimism  deepens over the global economy, the IMF called for more economic stimulus after revising downward its growth forecasts.

As Krugman points out, the austerity ideology has imploded. Academics who supported austerity are now in the defensive.  C. Reinhart and K. Rogoff  argued in a recent paper  that high public debt , exceeding 90% of GDP hinders economic growth. This has been criticised by many economists and also the IMF recently on the basis of non conclusive evidence. But the question is to ask why the level of public debt rose dramatically in recent years. There were no wars nor fiscal lax  in booming economies. Spain and Ireland had sound public finances, with primary surpluses just before the financial crisis.

The other argument which prevailed in the economic debate is 'expansionary fiscal austerity' put forward by Alesina and Ardegna. The basic idea is that fiscal consolidation may boost short term growth. here again, the IMF opposes this argument, arguing that a  fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years, and to an increase of 0.3 percentage points in the unemployment rate. Spending cuts may also be associated with declines in interest rates which help alleviate the impact on the real economy. Success stories of economic recovery like Latvia or Ireland are more ideological than actual. Just look at Ireland and Spain- the real economy has not recovered and unemployment rate continues to soar dangerously.

So why austerity has been so influential in the economic policies? Again, Krugman argues that austerity is the 1% doctrine, meaning that the dominant classes are marginally affected by spending cuts (rather than tax rises) unlike mliddle-classes which see their purchasing power much reduced. This further increases income inequality and depresses internal demand, thereby aggravating the recession. the austerity ideology has also been nurtured by moral arguments. The 'parable of excess' reflects the idea that one cannot spend more than its earnings and this generates debt that cannot be repayed. Sinful people are those who contract debt, but are they responsible for mass unemployment?

Central banks have exhausted their possibilities of intervention in terms of monetaryt stimulus. Now it is up to the governments to find a solution to the crisis. It is not enough the change the narrative, but to act effectively in support of jobs and redistributing wealth. If they fail, democracy will pay a high price. 

Wednesday, April 17, 2013

Are Germans really poorer than Spaniards, Italians and Greeks? | vox

The  interpretation given by De Grauwe & Ji is quite convincing. Germans are opposed to transfers to the southern countries because they are much richer despite the ECB figures . This also means that current measures of inequality could be misleading and should therefore refer not only to income but wealth and economic assets (of which capital stock is just a proxy)

Are Germans really poorer than Spaniards, Italians and Greeks? | vox

Saturday, April 13, 2013

Sampedro, an ethical voice

I am not familiar with the work and life of Jose Luis Sampedro, a Spanish economist and novelist who passed away last Sunday at 96. But what I have read from him in the last few days impressed me.  

Sampedro wrote extensively about the moral and social decline of western civilization and developed a critique of neoliberalism. He also  wrote the prologue to the spanish edition of the book Time for Outrage!, by Stéphane Hessel.

I just pick up one his numerous citations which summarizes his thinking:  "The market is in the hands of the mighty. they say that market is freedom but I would like to know which freedom has someone without a cent. When we talk about freedom, we have to ask : freedom of whom? " (El Pais 11 April 2013). 

Sunday, March 24, 2013

The Cypriot Mess

The recent Cypriot crisis shows that the eurozone debt crisis is far from over. We have a situation which is to some extent similar to Iceland. The Cypriot parliament has rejected the bailout plan put forward by the ECB to protest against to the proposed levy on bank deposits.  If this were to happen, big depositors may lose up to 40% of their money which has caused anger from Russia. 
But Cyprus chose to tax small deposits to limit losses of Russian oligarchs. 

The crisis has a clear geopolitical dimension due to the large presence of Russians in Cyprus banks. As the country is heavily reliant on financial services, this could trigger a massive capital outflow, which would worsen the current account balance, already high due to an overevaluation of prices and costs. 

Cyprus'economy is small in economic terms, around 0,2 % of the eurozone GDP. But it has a large  financial sector whose development is driven by  offshore capital due to high rates on savings and opportunities for tax evasion.  Cypriot banks have invested in Greece and in the real estate sector which has caused a financial bubble like in Ireland or Spain. This means more financial losses for the Cypriot banks which are not able to pay off their debts, hence the levy on deposits.  The combination of these two additional elements - financial bubble and loss of competitiveness due to high costs - may leave Cyprus in a Greek type situation with high sovereign debt and may be pushed to leave the euro.   

What lessons can  we draw from this crisis? 

The first one is that the Cypriot mess has caused a crisis of confidence in the eurozone system. In the middle of the financial crisis, the EU established a system of deposit guarantee to €100.000 to prevent bank runs. Now this rule may be breached if Cyprus were to inflict a taxation to savings under that threshold. Under a properly functioning banking union, heavier losses would have been imposed on large deposits but small depositers would have been saved; in addition, banks would have been recapitalised by the eurozone. The ECB remains the ultimate guarantee of the survuival of the euro, and most probably will defend Cyprus as it did for Greece from getting out of the euro. 

Second, the protection of small depositors is an essential element of a modern banking system. Institutions are therefore a critical factor for maintaining financial stability. Especially in the globalization context, where weak countries are more vulnerable to external shocks, the demand for clear rules and norms has increased, in particular to avoid any further increase in inequality while social safety nets are needed.

Third, Cyprus may still have the illusion that it would keep its 'business model' but the crisis makes it clear that it has  rebuild its economy on a more sustainable basis. This means it has  to downsize much of its financial sector with stricter rules on foreign savings and diversify its economy on other sectors such as tourism and culture.

W.Munchau, the FT editor, believes that that there is no"moral or economic reason to protect foreignerswho have decided to park large sums in a Cypriot bank account for whatever reason".  This means, on the contrary, that moral and economic considerations exist for small domestic depositors. 

Sunday, March 3, 2013

More Europe or Chaos

Europe is in great danger. Its political project is undermined by orthodox policies which are increasingly being contested. The debate about the European budget for the next seven years was incomprehensible for most of our citizens. The outcome is a budget of austerity : less than 1% of European GDP to revive its economy; in comparison,  the US federal budget represents almost a quarter of its annual output.    

A manifesto endorsed by several European intellectuals, from Umberto  Eco to Giorgy Konrad  made a vigorous plea for political unity of Europe. The text says:  "Europe is in crisis, it is dying. Not Europe as a territory. Europa as an idea. Europe as a dream and as a project"..either Europe makes a sep forward , but a decisive one, toward political integration, or it will leave History and fall into chaos. We do not have choice : either political union or death". 

Beyond this noble declaration, there are hard realities: the loss of social rights, the impoverishment of the middle classes or the frustration of the generation of educated young people. Are governments blind to see the failure of their policies? 

Mark Mazower, a British historian  rightly argues:  
Those preaching austerity probably do not see themselves as contributing to a crisis of democracy, but they are. The Italian elections should remind eurozone leaders to pay attention to their voters. Economic fixes have failed to staunch a political crisis that has the capacity to harm not only EU integration, but the legitimacy of the continent’s democratic order itself.

In the swamp of austerity, there are voices rising,  like Giorgio Napolitano , the Italian president,  whose federalist credo has been obscured by the darkness of populism or Joachim Gauck, the German president who recently made a passionate call for greater European integration. Let's hope that that these voices  will not be lost in the desert.

Friday, February 15, 2013

The Obama plan

In his 'State of the Union' address,  B.Obama outlined a 'kennedian 'vision for the United States. The main thrust is economic recovery coupled with some equity measures for the middle class. Austerity or budget cuts are not seen as an economic policy in itself but as a marginal part of a wider strategy aiming to promote a more sustainable development based on clean energy and other environmental measures.

There are two new ideas in his speech. The first one is to increase the minimum wage from 7 to 9 dollars per hour. The significance of this measure is that economic recovery has to be supported by wage increases rather than reducing purchasing power through internal devaluation measures. As he said in his address: "Let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty". Persistent high levels of inequality and concern for declining wages of working Americans have strongly influenced that decision. In fact, recent research found that despite the return of the US economy to growth, incomes remain flat but not for the 1% rich. 

The second idea is to " make high quality pre-school available to every child in America" with a view to offer better access to jobs while making savings for the entire society. The assumption is that "every dollar we invest in high quality early education can save more than seven dollars later on - by boosting graduation rates, reducing teen pregnancy, even reducing violent crime".

The agenda is not for 'big government' but rather 'smart government' based on quality and effectiveness of public intervention. But it contrasts strongly with austerity policies which are being pursued in Europe with severe consequences on living conditions of the majority of people.

Europe should take some inspiration of the Obama plan, even if it may appear modest in relation to the depth of the crisis. It has to abandon its destructive budgetary policies and launch a vigorous strategy for jobs and growth at the European level. No country will get out of the crisis alone with current fiscal policies.

Sunday, February 3, 2013

Inequality for All

Obama called inequality the 'defining issue of our time' and in his inaugural address took up this theme for his second term.  Over the past tewenty years, differences in in income have widening dramatically between the rich and the middle class. In his film Inequality for all, Robert Reich, the former Labor secretary under Clinton argues that there is no trickle down effect as the rich cannot spend enough to offset the loss of demand by the middle class.

Tribute to Albert Hirschman

Nowadays, there is a shortage of great thinkers with a sort of vision embracing different disciplines and areas of research. Albert Hirschman was perhaps one of the last great thinkers of the twentieth century. He was also a free thinker in the sense that he has never been tied up to any ideology. for over half a century, he was a living conscience for an entire generation of social scientists. Trespassing is perhaps the word which best characterizes his lifetime work.

He was an influential economist who wrote several books and articles on political economy.  His first major contribution was in the area of development economics where he emphasized the need for unbalanced growth. Like in F. Perroux's growth pole theory, he thought that industries with strong linkages with other industries should be encouraged. 

His later work was in political economy and there he advanced two simple but intellectually powerful ideas. The first describes the three basic possible responses to decline in firms : exit, voice and loyalty. The second describes the basic arguments made by conservatives: perversity, futility and jeopardy, in The Rhetoric of Reaction

But there is an intrinsic unity in all his work which is conducive to a deep reflection on the problem of development. He wrote: “ In dealing with the multiple and complex problems of development we have learnt that we must fashion generalizations at all kinds of ranges and be deaf, like Ulysses, to the seductive chant of the unique paradigm ”.

As the Economist pointed out, "Hirschman's exit will not silence his voice".

Sunday, January 13, 2013

The Monti Agenda

Monti has undoubtedly represented a breakpoint in the morass of Italian politics. He  was appointed by president Napolitano amid fierce economic turmoil in November 2011, helping restore the country’s international credibility. But his government’s tax increases have been unpopular and deepened Italy's recession, the longest since World War II. As he resigned after the right withdrew its support, he called political parties , social partners and citizens to adopt his agenda unveiled on 23 December. 

The “Monti Agenda,” titled “Change Italy, reform Europe” contains a set of   ideas largely inspired by the European agenda. The best definition of his political line is what the Economist called 'radical centrism' (which in a sense is a paradox!). The agenda combines financial rigour to bring down Italy's debt with further reforms, in particular of public administration and institutions and growth-enhancing measures. The aim is to build a"modern and dynamic social market economy" putting more people into employment, increasing the role of women in the society and combating ageing. 

Interestingly, there is a broad consensus on these measures between Monti's centrist coalition and the democratic left. Both parties agree that budgetary discipline should go hand in hand with greater equity and economic growth. However, new resources should be found through further cuts in public spending and fight against tax evasion to reduce taxation in favour of workers, businesses and households and build a modern welfare system. They also pledge for a revision of the recent law on corruption as well as a radical revision of the insittuttional architecture of the State, in particular the provinces and regions. Finally, both agendas point to a better income redistribution between regions as well as social groups and a decisive contribution to the European federal State. But there are also some marked differences, in particular on the need to tackle inequality and the extent of redistribution to the poor.  

On the reform of Europe, which is a central aspect of the agenda, Monti's document may appear rather modest. The underlying analysis of the crisis is that single States lack fiscal discipline rather than ackwnowledging its systemic character.  Each State has to do its 'homework' (that is putting its finance in order") within the European Union framework which essentially works although it needs to be adjusted. The only 'radical' proposal is that the European Parliament should have a constituent role in the reform of  European institutions. But the agenda fails to consider that the crisis extends to the whole Europe and cannot be overcome with orthodox measures. In fact, the only concrete commitments concern the reduction of national debt and the respect of the balanced budget rule, that is the application of the Fiscal compact, approved in March 2012, accompanied by a minimum wage and some taxation on wealth. But the problem is that austerity policies are not sustainable unless there is a decisive move towards a European Federation.

The partisans of  that project do not only focus on institutions. They have a different conception of the crisis and how it affects the life of citizens. The 'fiscal compact' will not help overcome the evil of inequality, unemployment and poverty. In this regard, the Agenda remains on the assumption that sound finance means growth and employment. The alternative project is that, as States are impoverished and cannot stimulate growth and equity, the European Union has to launch a sort of 'New Deal' like in the 30s. The idea was raised since the beginning of the Greek crisis but was opposed by the tenants of liberal orthodoxy. It meant, in practice, a significant increase of Europe's budget - which represents today about 1% of EU GDP  while it is 23% in the US- to foster investments in research, infrastructure networks and energy savings. This is possible with the insitution of two different taxes transferred directly to the EU coffers: the tax on financial transactions and the 'carbon tax' (which alone could provide some 50 billion euros a year).

In American history, Alexander Hamilton realized at some point that the supranational power would take debts of individual States, and gave birth by the Confederation of semi-sovereign States a federation, with resources sufficient to guarantee, jointly and severally a genuine unity. This is what we need today in the wake of a deep crisis in Europe. F. Roosevelt understood the real problems of his country and increased federal spending to invest massively in education, fight against poverty and healthcare. 

Unfortunately, there is no leader in Europe with such a vision and a 'progressive agenda' which can revive growth while tackling mass unemployment and inequality. History is tragic but no one seems aware of it.