Sunday, November 30, 2014

Hope for Europe

There are tangible signs of change concerning the future of Europe. Let's take here three important facts.   

In his address to the European parliament on November 25,  Pope Francis called for a united Europe. His main argument was human dignity as a central value for the rebuilding of Europe. This is an extract from his speech

Promoting the dignity of the person means recognizing that he or she possesses inalienable rights which no one may take away arbitrarily, much less for the sake of economic interests.
At the same time, however, care must be taken not to fall into certain errors which can arise from a misunderstanding of the concept of human rights and from its misuse. Today there is a tendency to claim ever broader individual rights – I am tempted to say individualistic; underlying this is a conception of the human person as detached from all social and anthropological contexts, as if the person were a “monad” (μονάς), increasingly unconcerned with other surrounding “monads”. The equally essential and complementary concept of duty no longer seems to be linked to such a concept of rights. As a result, the rights of the individual are upheld, without regard for the fact that each human being is part of a social context wherein his or her rights and duties are bound up with those of others and with the common good of society itself.

The second message is delivered by Mario Draghi in a speech at the University of Helsinki. He said (perhaps more openly than before) that Europe has to guarantee the sovereign debt of all States. The reference is clearly for Greece in case of victory of Szyriza at the forthcoming elections. The danger of a unilateral decision of withdrawal from the euro area would put at risk the whole monetary union. But Greece could stay if Europe holds  responsibility for the Greek debt for 50 years (as asked by Tsipras), which  is relatively small compared to Italy or Spain. This explains why Draghi has urged for further economic and fiscal integration while continuing his plan of massive purchase of private bonds. 

Last but not least, the president of the European Commission, Jean Claude Juncker has proposed the European Parliament a 3 year investment plan of € 315 billion starting from Autumn 2015. However, this amount is allocated to a specific Fund which includes so far €21 billion. But this initiative is different from previous ones as regards the modalities through which it will be made up. The Fund will be topped up by contributions from member States (including from non-EU States and other international funds) with a larger participation from richer EU States. In fact this is a step toward a genuine EU budget to issue guarantees for sovereign debts (to which Draghi referred to in recent declarations). 

Member States will contribute - up to at least € 200 billion in exchange of the possibility of making investments - outside the parameters of the Stability Pact- which should create new jobs and income in order to stimulate global demand, and generate new tax revenues and therefore save some financial resources for further investment.

As the economic scenario deteriorates in Europe, it would be difficult for member States to reject the Juncker Plan. There is no alternative than an EU wide plan for growth and jobs. 

The combination of these three messages provides some hopes for the future of Europe. In times of crisis and rise of populism, we need to mobilize all  our forces to act for the common good. 

Sunday, October 12, 2014

Productivity is Key to Recovery

Policy makers seem to be short of ideas to get out of the crisis. The mantra of austerity has prevailed over the last four years. Now it is the time of reforms. But which reforms? The focus is put on labour market flexibility. We know that this is a false problem. Even  countries with high flexibility of the labour force like the US or the UK have undergone a severe crisis.  

Recently, the ECB governor, Mario Draghi made an important speech at the Brookings Institution. He said in his introduction that he re-read the open letter from John Maynard Keynes to President Roosevelt published in the New York Times on 16 December 1933. Why is it an important letter? Well, Keynes acknowledged the efforts of Pdt Roosevelt was in his view the only one to have understood the sense of  urgency for a profound change.  But he raised some criticisms on the Us programme arguing that not enough was done to boost recovery. The point about Keynes' letter is that he stressed the primacy of recovery to reform.  

Draghi's speech contains an agenda on how to exit the crisis, but unlike Keynes's point, he insists on reforms first before the need for fiscal space for supporting investment. This is arguable , but understandable in the European context.

However, there are two important points in his speech. First, he explains that a self sustaining recovery requires some prior conditions to be in place. First and foremost, new jobs have to be created by rising productivity of the business system, training of young people and support to maintain  social equity hardly hit by the austerity policies. 

The second point is that the ECB will continue providing liquidity support to the real economy, but this is insufficient for recovery. If productivity does not increase in businesses the liquidity will remain in the banks, funds or households; output will not rise, nor investment or consumption. This explains why in certain countries (for example in Italy) tax reductions for low income people have not  resulted in increases in consumption. 

In Draghi's words,  there will be no recovery if some conditions are not in place, namely, if we don't have both a rising workforce and rising productivity. But "for many European countries, there is scope to increase labour participation rates over time. But given demographic trends, raising structural growth will have to take place primarily through productivity"

Social cohesion is not antinomic to growth. However, it does not mean freezing the production structures to maintain employment. It implies change, that is through innovation and technical progress to generate productivity gains. 

The message is clear, but we must not forget Keynes' wisdom which proved to be right.

Sunday, September 7, 2014

Europe's real problem is unemployment

Post war Europe has been hardly hit by the global crisis. It has affected the heart of its system: the European monetary system. The US financial crisis - which was essentially a banking crisis - has spread its effects all over the world and the European economies were not immune to it. This has resulted in massive wealth and job losses. Now there are worrying signs of deflation and no country is immune from winds of recession. even germany saw a drop of its GDP. 

 However, the eurozone crisis lasts  too because of inherent mistakes in fiscal and monetary policies. For the so-called 'peripheral' countries, the fiscal compact means a perpetual stagnation of their economies. They are all highly indebted, with a ratio debt to GDP close or above 100%, which means that they will have to cut massively their debt ratio putting these countries in an unsustainable situation both economically and socially.

Draghi's speech at Jackson Hole is a promising start. Everyone should read the beginning :

"No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income. For those in work, it raises job insecurity and undermines social cohesion. For governments, it weighs on public finances and harms election prospects. And unemployment is at the heart of the macro dynamics that shape short- and medium-term inflation, meaning it also affects central banks. Indeed, even when there are no risks to price stability, but unemployment is high and social cohesion at threat, pressure on the central bank to respond invariably increases".

Look at the diverging trends in Europe and the US, leaving aside the different characteristics of labour markets in both geographical areas.

As he explained how the crisis rolled on, he stressed the relationship between financial instability and unemployment. Since 2011, the sovereign debt crisis induces diverging trends within the euro area, with the bulk of job losses in countries most affected.  

Hence, austerity policies brought more unemployed but did not restore confidence. The ECB did it with the famous ' whatever it takes speech' : without disbursing a single euro, ten year bonds soared alleviating the stress on bond market and easing access to finance on international markets. 

In conclusion, " the way back to higher employment, in other words, is a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level. (...) The long-term cohesion of the euro area depends on each country in the union achieving a sustainably high level of employment. And given the very high costs if the cohesion of the union is threatened, all countries should have an interest in achieving this".

Now Europe will enter a new phase. The ECB has cut its interest rate at a level close to zero. This will be followed by an asset back securities (ABS) purchase plan on a large scale to revive lending to the real economy. As expected, this will face strong resistance from the German government and the Bundesbank which will appeal to the Court of Karlsruhe.

Beyond the rhetoric on compliance with fiscal rules, there is now growing awareness about the need to bring an end to eurozone orthodoxy. However, expansionary monetary policies are just a palliative to reduce deflation risks. As L.Summers put it, the excess of savings is responsible for a situation of 'secular stagnation' which justifies negative (real) interest rates and an increase of public spending. 

In his speech at the European parliament, the incoming European Commission President, Jean-Claude Juncker, has proposed a €300 billion public-private investment programme to help incentivise private investment in the EU economy. But this will require bold action from member States to support this EU wide initiative.

It is the time for unconventional policies, not  business as usual ones. The debate on flexibility on fiscal rules may result in sterile discussions while the true question is to  launch a  New  Deal based on an ambitious investment plan and less taxes on labour, especially the low income groups to promote economic recovery and job creation in all European economies. .

Friday, August 22, 2014

Markets and Morality

Today, public trust in markets has deteriorated. Modern societies are confronted with  extreme inequality (the Occupy movement), tax avoidance, corruption and protests against the dominant system. Mainstream economists  tend to ignore these contemporary issues leaving them to other social scientists.  

The relations between economics and ethics have been developed by a number of economists drawing on welfare and development economics as well as moral philosophy.  In the classical tradition of Adam Smith, Stuart Mill or Marx, economics goes beyond issues of profit and efficiency. Amartya Sen, perhaps the most prominent 'ethical economist', looks at the relations between economic behaviour and moral sentiments and discusses how freedoms and rights are fundamental to understand them.

The arguments about 'ethical economics' are often presented as a mix of markets and morals. We look here at three different arguments. 

Some consider markets as being intrinsically 'moral'. There is wide consensus  that  markets are necessary because they allow for free choice among a variety of goods and services. The former head of the Bank of England, Professor Brian Griffiths, gave a series of lectures in 1980, collected and published in 1982 under the title 'Morality and the Market-place'. In his book, he regards businesses as a moral community and markets as "morally self-sufficient" if they respect certain Christian values such as justice and compassion. But this is not a condition for being 'moral'. The question is to ask whether the income distribution outcome  is fair. Profits are not immoral but they are not an end in itself.

For others, ethical economics is about the use of  human and natural resources. Various economists (for example, J.Attali) consider that  sustainable development is 'ethical in itself'. The reduction of carbon emissions is certainly kinder for future generations than accepting the 'diktat' of markets. However, ethical investment goes beyond the environment: for example, respecting workers rights or not supporting dictatorships. Increasing the minimum wage, in times of austerity, is an 'ethical measure' because the poorest workers will increase their purchasing power and this will increase internal demand, which is also good for producers.

Moreover, other systems of ethics call for more fundamental change beyond the the functioning of markets. In Islamic finance, for example, religious tenets forbid usury and favour risk sharing with low but safe returns of investments. There are also some systems, such as Bouddhists who reject the foundations of classical markets based on individual choice, private property and material wealth. To be ethical an individual should withdraw from the market  or even disrupt it . Marxists in turn, seek a transformation of social production relations between capitalists and workers, but socialist ideas  gave rise to original forms of organization such as cooperatives and other aspects of social economy.  

There is thus wide disagreement on the relations between markets and morality and the different systems of ethics which underpin those relations. But, there are also different views on where ethics should apply when economic agents make a decision. Adam Smith, who was regarded as the founder of  classical economics was a moral philosopher who believed sympathy for others (or empathy)was the basis of the ethical system. But one of his key ideas in the Wealth of Nations is that empathy could be counterproductive - in other words individuals would be better off if they pursue their self interest. Smith explains this by the collective outcome.

Instead of judging consequences, Aristotle argued that ethics is about having the right character, displaying virtues such as courage and honesty. We see this today between good managers or political leaders and greedy bankers and financiers in search of immediate gains. Aristotle thought there was a golden mean between the extremes and found it a matter of fine judgement. But if ethics is a matter of character, it is difficult to apply it in modern economies.

But there is another approach - instead of focusing on the consequences of actions or the character of people who act - we  may also focus on our actions. From this perspective, some things are right, some others are wrong. For example, we should buy fair trade goods and help the poor, but adverts should not tell lies. Ethics could thus result in a list of commandments of dos and dont's

Many moral dilemmas arise when these three views go in different directions and conflicts can be inevitable. Take fair trade coffee, for example: buying it might have good consequences and feed virtuous behaviour in flawed markets. This suggests, that even without an agreement on where ethics applies, ethical economics is still possible.  

The classical conception of man - rational and selfish - exists, only in limited cases, and even classical economists, such as John Stuart Mill admitted that this was a parody. This economic man is a fiction, and our brain can hardly process all the relevant information to take rational decisions. A new wave of ' behavioural economists' (such as recent Nobel prizes Fama and Schiller), aided by neuroscientists, tries to understand our psychology, both as individuals and groups, so they can anticipate our decisions in markets more accurately. But psychology can also help understand why we react with disgust toward social injustice or we accept the market laws as universal. This will not define a new ethics for us, but at least economists will be more attentive to consider ethical issues in their judgements. 

Wednesday, August 13, 2014

Austerity and children poverty

Does austerity lead to worsen children poverty ? The findings, among others, are detailed in a 357-page World Social Protection report out Tuesday (3 June) by the Geneva-based UN agency, the International Labour Organization (ILO). The report notes that “The achievements of the European social model, which dramatically reduced poverty and promoted prosperity in the period following the Second World War, have been eroded by short-term adjustment reforms”. It also argues that fiscal consolidation meant to reduce debt has failed to stimulate the kind of economic growth needed to create jobs.

The report says that families in austerity-driven nations like Ireland, Cyprus, Greece, and Portugal have seen their disposable incomes plummet, leading to lower consumption. In Greece, salaries dropped 35 percent since 2008 while unemployment increased by 28 percent. At the same time, social security reforms are being replaced with a system that limits the responsibility of the Greek state.

For comparison, the ILO estimates poverty rates in Finland in 2010 would have been over 30 percent, as opposed to around 7 percent, had the government slashed social protection transfers to those in need. The ILO notes some structural reforms imposed on governments are designed to streamline administration.But the emphasis, it says, has been disproportionally placed on the fiscal objective of balancing public budgets “without due consideration to the objective of adequate benefits to all people”.

Europe’s solution to the crisis for the past five years has instead given rise to persistent unemployment, lower wages and higher taxes. All three have boosted poverty and social exclusion rates, which now affects some 123 million people or 24 percent of the EU population. Before the start of the crisis in 2008, the figure was 116 million. Today, around 800,000 more children now live in poverty compared to five years ago. However, "some estimates foresee an additional 15-25 million people facing the prospect of living in poverty by 2025 if fiscal consolidation continues,”

The Ilo report concludes that maintaining social protection not only reduces poverty but also stimulates growth by boosting the health of the vulnerable, increasing their productivity, and by extension props up domestic demand. 

House of Debt

In their book House of DebtAtif Mian and Amir Sufi  provide evidence on the causes of the Great recession and what explains the slow recovery and structural weaknesses affecting the most advanced economies. The main argument is that "debt fueled boom artificially boosted household spending from 2000 until 2006 and the collapse of house prices forced a sharp pull back because indebted households bore the brunt of the shock"

Some may argue that the authors have overstated the importance of  housing and household debt in explaining the crisis but there is new evidence which seems to support that argument, which obviously does not explain the whole thing. As some other authors, like Piketty, inequality does play a role in triggering the debt spiral. 

See new evidence here on Mian-Sufi's thesis. 

Wednesday, August 6, 2014

Inequality dampens economic recovery

A report shows that high inequality contributes to slow down growth and therefore matters for policy makers. The interest of that research is not that it brings new advances into the study of inequality - . The authors of that report are economists of Standard & Poor"s, the rating agency which provides information and analysis for investors in financial markets. This is a recognition that unequal income distribution represents a major risk and not an asset for an economy which seeks to recover from a deep crisis.

The S&P economists write : "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the US is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great recession and the government is in need of funds to support an aging population". 

The analysis which underpins that conclusion is quite straightforward. The wealthy tend to save more as a share of their income, as a growing part of the national income goes to the top-income group. As a result, there is a contraction of demand for goods and services to support strong growth. The income gap has been bridged with debt which fed a boom-bust cycle of financial crises. Therefore, high inequality becomes self reinforcing, as the wealthy use their resources to influence the political system toward policies that help maintain that privileged situation, such as low tax rates or low estate taxes and underinvestment on education and infrastructures. 

These ideas are not new, going back originally to John Maynard Keynes' theory and  recent work made by Thomas Piketty and Atif Mian and Amir Soufi. The novelty is that they go mainstream, beyond the academic debate on economic inequality and the left wing circles. But the policy prescriptions of the authors of that report are poor trying to avoid discussions about taxation and the social welfare system and focusing only on the need for higher investment in education as a key driver for growth.    

This is unfortunately just part off the problem. Tackling inequality requires bold measures, including redistribution of income and job creating investment plans to boost  sustainable growth. 

Wednesday, July 23, 2014

The end of innovation?

An American scientist, Jan Vijg, from the Einstein College of Medecine of New York, revived the discussion on science which has traditionally opposed optimism and pessimism. In a book called "the American technological challenge",  he has elaborated a detailed graph, reproduced recently in a journal  which compiles a list of 300 macro-inventions from 500 B.C. until 2010 and which demonstrates that innovation reached a peak in the 70s then declined in following decades. 

The author of the research has, nevertheless pointed out that it is not technological decline but a slow down of the pace of innovation. This trajectory may have some commonality with other evolved civilizations, such as China under the Song dynasty or Islam in the Middle Age. One of the causes may be saturation. According to a study by Jones and Azoulay from MIT, an average R&D worker was seven times more productive in 1950 as one today in terms of contribution to innovation and growth, probably because he could focus on frontier research rather than keeping up with scientific developments in his own field - and this why there more people working in R&D than in the past. 

However, the main obstacles to innovation are cultural factors. Relative welfare improvements lead to a lesser aversion to risk, and the institutions tend to slowdown, rather than stimulating technological development.  Hence the question : what can be else invented? Are we really condemned to give the best of our intelligence and creativity to make small improvements to inventions made by others in the past? True, we cannot ignore the great transformation of the Seventies- the music, the desire to change the world, the civil rights and so on - and the big technological push with the invention of the personal computer (1975), the cellular phone (1978), the walkman (1979) and even the first project of Internet by Tim Berners-Lee (1980).  

R. Gordon supports the idea that big innovation is behind us:  in a recent article, he suggests that the process of economic growth as it happened over the last 250 years will not persist forever. The sources of economic progress may derive from other factors such as education, energy gains or demography rather than innovations.

Are pessimists such as Vijg and Gordon right? The Economist argues that there are strong arguments for a certain optimism. The first one is that there is a time lag of 5 to 15 years between the investments in technology and the improvements in productivity levels. Therefore, the most modern technologies are actually not reflected in current statistics (as Solow used to say about information and communication technologies which are everywhere but in productivity statistics). The second argument is that new technological developments are hindered by rigid institutions which block the potential for growth and productivity.

The debate is quite complex as it involves both historical and spatial dimensions. If they are more innovations, it does not mean that they will have a greater impact today. Moreover, globalization of technology has resulted in stagnant incomes and declining employment in the US and Europe. As Marx and Schumpeter explained, the crisis of capitalism generates a tendency toward technological progress as part of a process of 'creative destruction' but it does not mean that innovation alone will be enough to boost growth and may coexist with a prolonged period of stagnation. 

Just a final note. A few centuries ago, Niccolo Macchiavelli wrote: 

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.

Thursday, July 17, 2014

Noam Chomsky (2014) "How to Ruin an Economy; Some Simple Ways"

Noam Chomsky (2014) "How to Ruin an Economy; Some Simple Ways"

We should think about how to lay the foundations of a good society  based on market economy coupled with social justice starting from Adam Smith, Marx, Keynes and Galbraith.  Unfortunately, governments have not drawn the right lessons from the global crisis pursuing self interest and selfish policies without caring for the poor and unemployed.

Sunday, May 25, 2014

The other Europe

Today, millions of Europeans will vote to designate their representatives of the European Parliament and indirectly the president of the European Commission. These elections are of paramount importance for the future of Europe. However, during the national campaigns, there was little debate about Europe as if the main issues were of a different nature as the populist parties claim 

In fact, national problems are inseparable from the destiny of Europe. Today, no nation-State could survive alone in a globalizing world without belonging to a wider entity which ensures fair competition, cooperation and solidarity among its members. This was the project put forward by J.Delors and those who supported it in perfect continuity with the original vision of the 'founding fathers'.

The European problem is not only about relaxing austerity and allowing more freedom to finance investments, decide on the level of employment, tackling insufficient purchasing power and the weakness of demand. These are all important questions but they are not the only ones. The objective that we must propose is that of the building of a European federal State, with powers at least in a number of highly sensitive areas, such as a genuine fiscal policy, a common defense, an immigration policy, a common energy policy where a transfer of sovereignty would be desirable.

 The promotion of an European culture, science and technology, social cohesion and the reduction of inequalities in wealth distribution should be pursued not only by each national government but by the European authorities.

Europe is already but not completely the guardian of human rights and citizenship, but this ownership must be preserved and extended. The European Parliament should become the legislative seat of democracy and control of an executive power entrusted to the European Commission. It should appoint the members of the Commission and also the president of the European Union or to entrust it to the direct election by the European citizens. The United States of Europe is the ultimate goal to be achieved, gradually but persistently.

These are the goals of a renewed European project. In this regard, the European parliament should become a fundamental institution along with a reinforced role of the European Commission and the European Central Bank whose powers should be extended.

Responsible citizens should vote to pursue these objectives. Unfortunately, irresponsibility is gaining ground in all European countries. Our only hope is that it will not prevail as an outcome of these elections.

Sunday, April 27, 2014

Beyond GDP: a new measure of growth

Since the 40s, GDP  measures output from the 'use' side , that is the  value of all 'final' goods and services used by consumers, businesses and government. It gives a biased view of the economy as it neglects the role of intermediate goods. 

The US Bureau of Economic Analysis has launched the 'gross output" measure to measure the total value of sales in all phases of economic activity, from raw materials, intermediate goods to final products. This measure was introduced by Wassily Leontieff in the 30s at the level of individual industries , but not as an aggregate measure. One of his disciples, Mark Skousen, presidential fellow at Chapman University and author of the book "Structure of Production" (New York University Press 2007) argues that this is a more reliable measure of total economic activity. In his view, the traditional measure of GDP has contributed to the idea that consumption is the real motor of the economy, as it represents more than two-thirds of it and that savings are unproductive. In fact, economic activity in the intermediate stages of  production - including capital formation, technology and business spending - is largely underestimated. The new measure  also provides a better understanding of business cycles. Nominal US GDP fell by 2% while gross output declined by 8%; conversely, it has risen faster than actual GDP . 

The question is what could be the consequences on the other economies in Europe and Japan, if gross output is generalized. Since gross output emphasizes the 'make' economy rather than the 'use' economy, it gives more weight to capital investment, innovation, entrepreneurship and productive savings. This indicator will  'reward' countries like Germany or Italy which have a tradition of manufacturing and a high propensity to savings (despite it has been hardly affected by the crisis). Therefore, economic policies will tend to focus more on production rather than purely on demand stimulation, which is not to be neglected, though.. 

It is certainly a decisive step forward to a better measure of growth. However, it is still not a radical reform like the measure proposed by Stiglitz, Sen and Fitoussi,  focusing on quality of life rather than on material components of wealth. 

Saturday, April 26, 2014

Fiscal Colonialism

Philippe Legrain (former head of analysis at BEPA, the Advisors Council of the European Commission's President)  has published a book explaining why the Eurozone is still in a mess. He developed these ideas in a recent article published in NYT  (April 21) where he denounces the 'eurozone fiscal colonialism". 

"The primary cause of the crisis was the reckless lending of German and French banks (both directly and through local banks) to Spanish and Irish homeowners, Portuguese consumers and the Greek government. But by insisting that Greek, Irish, Portuguese and Spanish taxpayers pay in full for those banks’ mistakes, Chancellor Angela Merkel’s government and its handmaidens in Brussels have systematically privileged the interests of German and French banks over those of euro zone citizens.”

How to get out of the mess?  Legrain proposes a change of policies and institutions for the eurozone.  

"Banks need to be restructured and unbearable debts written down. More investment is needed, along with bold reforms to boost productivity.The “no bailout” rule should also be restored. Elected national governments must have much greater flexibility to tax and spend as they please, constrained by markets’ willingness to lend to them and ultimately by the possibility of default. A mechanism for the orderly restructuring of sovereign debt should be established for that purpose.To avoid future panics, the European Central Bank’s role as a lender of last resort to solvent governments should be enshrined. The mechanism for restructuring failed banks also needs to be properly independent. In the long term, a euro zone treasury accountable to both European and national legislators should be created, with limited tax-raising and borrowing powers, including an accountable  eurozone treasury, an enhanced role of the ECB, restructuring of the banking sector"  

A blueprint for change. Just one question: why not a fiscal Union based on a much bigger EU budget with real fiscal powers and a system of permanent transfers like in any federation. But this would require a political Union? This should be the final aim, isn't it?

P.S: As Robert Frost said,  "The strongest and most effective force in guaranteeing the long-term maintenance of power is not violence in all the forms deployed by the dominant to control the dominated, but consent in all the forms in which the dominated acquiesce in their own domination" 

Saturday, April 19, 2014

A New Deal for Europe

Europe is at a crossroads. Its model of economic integration has become unsustainable since the 80s but the situation has worsened with the crisis.  Have we learned the lessons from the crisis?

In the past 25 years, the EU has accomplished significant progress in terms of economic integration with the institution of the internal market in 1993, the creation of the EMU in 1999 and the enlargement to 28 member States. However, despite macroeconomic stability, the economic performance of the EU has been poor with low growth and productivity.

Five years after the bust of the global financial crisis , the outlook is still negative:   low potential growth, high unemployment, loss of income, high levels of public debt, loss of competitiveness and slow reduction of unit labour costs (not helped by a strong euro), tight credit rationing due to bank's de-leveraging. Meanwhile progress toward the banking Union is slow and no steps are taken toward a genuine fiscal Union, despite austerity fatigue and growing risks in the eurozone periphery.

Europe is losing ground with the other parts of the world as shown by the graph below (2007= 100, in current USD ).

Since 2010, European governments have undertaken wrong economic policies which have aggravated the crisis in terms of growth and cohesion. Economic governance still needs to be fixed but this cannot be a means to an end. The only way forward is to combine a sound reform of European governance with a  true strategy for growth and employment based on long term investments.

Thursday, April 17, 2014

Bauman and the case for a social Europe

Zygmunt Bauman, the Polish sociologist who is Emeritus Professor at the University of  Leeds made his fortune with his original thinking on modern societies. His concept of 'liquid modernity" describes the shift from the rock solid industrial society - whose basic foundation is mass production and the social relations which it created-to the fragile and unstable societies of today.  

In a recent book, he develops the idea of "liquid fear" that is the fear of natural disasters, environmental catastrophes or indiscriminate terrorist attacks, all things that we cannot prevent. For Bauman, the main source of fear is the decline and decomposition of the social organisation which prevailed, sometimes called fordism as the industrial substratum which underpinned the entire edifice. That basis gave security and solidity to the entire society through redistribution of wealth and the ability of the State to cover a wide range of needs.  But the strength of the system was the "propelling and operating force of the society". 

The State and the western society of the Fordist era - which initiated their decline in the 70s and suffered the impact of globalization and deregulation - had a stabilizing role for the individuals and created a context of solidarity for the working class. The Fordist factory was the best example of the 'solid modernity" in which most individuals without capital stood out, the place of a conflict between capital and labour in a hostile but long term relationship. But this allowed those individuals to "think and make plans for the future". Conflict was a sort of investment into the future as well a sacrifice which would bear fruit  while the current condition of  global volatility makes it meaningless. This phase being exhausted, due to the pressure of global forces, and independent of the policies of individual States, has transformed our lives, created an  'open society', -not in the sense of Popper's free society-  but rather in the sense of society 'exposed to the blows of fate". 

The paradox is that the sense of insecurity is widespread in developed societies, which in fact are better off relative to the rest of the world. Insecurity is when individuals are dependent on strong protections," which become fragile and are afraid of losing them" . In recent decades, the whole phenomenology of fear has appeared again in the various segments of society : terrorism, urban crime,  environmental and health risks a and then the influx of the Others and the Diverse, which become the main target of  populist parties  which see in the immigrants the most profitable scapegoat. Even the political capital becomes liquid seeking profits (in terms of votes!) from increasing fear and insecurity. 

Z. Bauman summarized his thinking in this sentence : "Modernity was supposed to be the period in human history when the fears that pervaded social life in the past could be left behind and human beings could at last take control of their lives and tame the uncontrolled forces of the social and natural worlds. And yet, at the dawn of the twenty-first century, we live again in a time of fear. Whether its the fear of natural disasters, the fear of environmental catastrophes or the fear of indiscriminate terrorist attacks, we live today in a state of constant anxiety about the dangers that could strike" 

 As Europeans , we are trapped between the horrors of the past and the risks of a distant future. Fear undermines social cohesiveness and  creates tensions between social groups and individuals. To combat the insidious fear that pervades our continent , the solution is to be found outside the national confines in the reinforcement of supra-national institutions. A social Europe is our only hope.

Wednesday, April 2, 2014

Redistribution, inequality, and sustainable growth | vox

Redistribution, inequality, and sustainable growth | vox

For once, I can agree with IMF stance, though  these ideas are little reflected in their policies. The point is redistribution is actually necessary to pursue efficient growth policies. There is no evidence of trade off and we see the results when there is less redistribution because of the myopia of austerity policies. The widening of inequalities is a source of unsustainable development.

This is why we need a new deal for Europe.

Sunday, February 9, 2014

A great European

In his speech at the European Parliament five days ago, President Napolitano made a passionate plea for Europe as well as for his country, Italy. In times of growing euroscepticism, he said, citing Altiero Spinelli, that " nothing can make us turn back from Europe". Yet he addressed the current problems of Europe and the need to reinvent Europe. 

The crisis of the European Union lies in the "deterioration of the living conditions" which is currently affecting a wide share of the population and the most striking factor is the rise in unemployment and the sharp increase in youth unemployment". It is therefore impossible to rely solely on restoring public finances and that more flexibility is needed. He also said that "austerity policy at any cost no longer will work". “Sustained, qualified growth clearly requires reform, but besides simply referring to clear parameters, we also need a great attention to be paid to the effective conditions of debt sustainability in each country and, connected there too, we need to be flexible enough in terms of the ways and the timing for bringing about further financial re-balance.” This was a clear message for Italy (and thus other 'peripheral' countries) to get a margin of  flexibility in their budgets to allow for investments programmes for boosting their economy (the so-called 'investment clause'). 

President Napolitano dedicated large part of his address to defending Europe, against populism and anti-European movements.. While the President was condemning “the destructive agitation against the euro and the European Union,” the Italian Northern League MEPs stood up wearing their green scarf, whistling and showing “No Euro” signs. According to Napolitano, “there is empty propaganda and little credibility from those who have spoken out” against the history of European integration. 

“How can people talk about the end of the European dream claiming that the end could involve the abandonment of euro to save the Union? The traumatic consequences and the feasibility of doing that are seen with terrifying simplicity by some people, and really, that would be such an improbable change,” added President Napolitano. “This moment of truth must be lived the fullest, with all its implications,” said President Napolitano, referring to the forthcoming European Parliament elections. 

A great European in the line of Adenauer, De Gasperi, Spinelli or Delors.  

Sunday, January 19, 2014

The Metamorphose of the Crisis

Six years after the start of the Great Recession, the world is not any better. The outlook is gloomy despite  signs of recovery that some economists claim as a demonstration of success of austerity policies. During these years, capitalism  has undergone an intense  restructuring with dramatic cuts in wages and social services.  But large firms have restored their profits and banks are cleaning up their balance sheets. 

The Economist  (Dec.7) devotes a special issue to Blackrock, the largest investment fund in the world.which is the first shareholder in half of 30 biggest multinational corporations. It represents it as a black rock hanging over a background of blue sky, which reminds a painting of Magritte. Its power relies on managing other firms' money and controlling their investments in bonds, commodities or other assets. 

There are other examples of 'financiers' who are now returning on the scene, such as Icahn, a raider who became famous for his take over on the US airline company in 1985 but who challenges Apple for being responsible of  having too much liquidity without distributing profits to shareholders. A big sense of the general interest? Those investment funds can own anything. There is one called Marathon Asset Management which has taken control of an entire city, Scotia, at 250 km from San Francisco. This may pave the way for other cities like Detroit, where even museums will be sold in an auction. 

The question is whether their dominance is a problem? The return of the 'masters of the universe' is seen by big magazines as a sign of dynamism of capitalism. .Remember what Adam Smith used to say his classic 1776 treatise on capitalism, the Wealth of Nations : " All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind. Crisis, what crisis? Not for the super-capitalists.

The contradiction  is that capitalism cannot continue with the same model of growth and rules which prevailed before the crisis. This means the pursuit of the 'financialization' of the economy, with the concentration of economic power in the hands of few large corporations and investment funds. Furthermore, it would represent a continuing widening of social inequalities, with gains of growth still flowing to the richest part of the population. A recent research study of the Washington University suggests that top 5%  has too much saving while the bottom 95% is forced to reduce their savings to offset the worsening of their living standards.

Did we learn something from the crisis ? In a recent speech at the IMF, Larry Summers, the former President adviser, has warned against the risk of prolonged stagnation and deflation. These are the words he pronounced on Nov.8: "my lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential"

We are perhaps at the end of a capitalist era, but we do not know how the world in which we are living will look like in the next ten years. From his prison, the Italian philosopher Antonio Gramsci, wrote : "The old world is dying away, and the new world struggles to come forth: now is the time of monsters"