Europe's fiscal union is at reach

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

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

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

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

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

The (real) Greek drama (II)

If we analyse the current state of affairs, we can argue that the Greek crisis has been dealt with the  wrong way. It's not just about money, but political courage and true solidarity if we really want to keep Greece in the euro area. Any scenario of Greece outside the euro area would be a catastrophe, particularly for the Greek people. It is also true that Greek politicians barely took action on tackling the crisis in the past two years.

But, more fundamentally, the whole debate about the Greek crisis highlights the weaknesses and flaws of the governance system, notably the impossibility under the current legal framework for the ECB to lend directly to member States at a low interest rate or to issue eurobonds to mutualize European debt. The German-French proposal of setting up a special account for Greece to offer creditors security will in the near future be discussed by the finance ministers of the euro zone. But the only way forward is to consider the idea of downsizing Greece's debt to an acceptable level.

In the meantime, the cacophony continues while people suffer from that situation.  Trade unions held a general strike to defend the interests of the middle class  which is now under siege. Wages dropped on average by 25% in the private sector. In return for the approval of the loan of  €130 billion , the "troika" (IMF-ECB-EU) has asked for more wage and expenditure cuts,  while the economy is in a recession for the fifth year and the debt-GDP ratio soared to 180% with yields at unprecedented levels. The economy has entered in a deflationary spiral where further austerity produces recession and impoverishment. 

We can be pessimistic about the possibilities of  the Greek government to reimburse 14,4 billion in debt before 20 March in order to avoid a default. But what the future will bring for Greece is difficult to predict; what is certain is that the process  the EU has gone through with Greece has created a "crisis of legitimacy". The EU is dependent on the support of its citizens and if they start questioning the legitimacy and integrity of the EU then its very foundation can be compromised.  We must not sacrify our European ideals of peace, prosperity and solidarity in the name of austerity. The Greek drama will then be ours.  

Record inequality between rich and poor

The OECD warns about the danger of rising inequality and its social costs. We have the greatest inequality since the 30s and societies face the risk of disappearing middle classes. But the greatest inequality is massive youth unemployment and a jobless generation which is a real scandal for rich, advanced economies.

Time for change

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

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

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

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

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

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

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

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

Unfair Trade

Fair trade aims to promote solidarity by helping producers in developing countries to have better trading conditions guaranteeing higher prices and ensuring higher social and environmental standards. It has been expanding over the last two decades, with a global revenue of about US $ 6 billion and an annual increase of more than 20% on average. While this represents a tiny proportion of world trade, some fair trade products such as coffee account for 20-50% of all sales in individual countries. According to Fairtrade Labelling Organizations International (2008), over 7,5 million producers and their families benefited from fair trade funded infrastructure, technical assistance and community development projects. Fair trade is guaranteed by more than 200 brands all over the world. The fair trade 'brand' has expanded beyond food and fiber, especially in the UK in particular for towns, schools, universities and churches.

However, its increasing popularity has drawn criticism from both conservatives and the progressive left. Conservatives argue that fair trade is a subsidy that impedes growth and that only free trade is fair. On the other hand, the fair trade movement has not challenged  adequately the current trading system. This division has become apparent within the largest association of fair trade producers, Fair Trade International, where conflicting views opposed the fathers of the movement, Nico Roozen and Frans van der Hoff, a Dutch missionary. In 1988, they had the idea to launch Max Havelaar, the first Fairtrade label to help small producers to sell their products at a minimum guarantee price which would allow to invest in social development projects. The former now supports more market orientation and favours the involvement of multinational companies; the latter  still lives in a poor community of Mexican producers and rejects any compromise with multinational companies like Nestlé. Since 1 January, the US association will separate from the international conglomerate and sell products under its own brand.

This raises economic and ethical issues about the significance of 'fair trade' in the capitalist world. If a small fraction of international trade does not strictly follow market rules, this means that the current trading system is unfair since it does not remunerate adequately producers from developing countries. The argument put forward by Nico Roozen and his followers is to extend the fair trade system to large producers and to soften some rules to allow big companies such as Starbucks, Nestlé or Walmart to get the fair trade branding.

Imagine a company which pays its workers 'fair' wages, uses sourced materials from sustainable sources, creates minimum environmental impact and operates a neutral carbon system of offsets. Why would this company need a fair trade logo to cover its wages or a Rainforest Alliance label to cover its sustainability to convince an'ethical' consumer to buy its products? There seems to be something wrong if a company which behaves in the most ethical way has to rely on others to make that known. Let's take an example: Cadbury, the British cocoa manufacturer decided to go for Fairtrade in 2009. The mechanism is simple: it has to guarantee a minimum price for cocoa and commit to a 'social premium' (for investment in the producer's area). This mechanism was designed when commodity prices were low but now seems inadequate. The problem is that with minimum prices for producers of cocoa or sugar remained stable for years because market prices have soared and the long-term outlook is that they will remain at current level. So the only cost for the company is the 'social premium', which in fact is the equivalent of an investment in communication to restore the image of the company! 

With a similar mechanism, multinational companies want to take control of the 'fair trade' market to the detriment of the small producers which are most in need. Conor Woodman has described in great detail in a  book* how big businesses want to increase their domination over the world's poor. It is sad to hear the recent scandal of a 'fair trade' cotton produced for a famous American lingerie in Burkina Faso was harvested by child slaves, who are not only forced to work long hours in the sun, but are beaten if they   don't perform enough. This appalling case raises the perpetual question of whether the search for profit (at any cost) which is the essence of capitalism  is compatible with human dignity and justice. 

* C.Woodman, Unfair Trade: 

How Big Business Exploits the World's Poor - and Why It Doesn't Have To - Random House 2011

Network of Power

As protesters rise in New-York and elsewhere, a scientific study carried out by the Swiss Federal Institute of Technology reveals that 147 multinational groups control over 40% of financial power. This is not news since previous studies had reached a similar conclusion though analysts failed to capture all interconnections between groups and their subsidiaries. The merit of the study is that it is based on a complex model which analyses the web of  interconnections and draws on  a database of 37 million companies and investors worldwide from which they pulled out 43060 transnational corporations and the share ownerships linking them. It revealed a core of 1318 companies with interlocking ownerships. Each one had ties with two or more other companies and on average they were connected to 20. These companies appear to collectively own through their shares the majority of global operating revenues.

Most of these powerful groups are financial institutions such as Barclays, JP Morgan Chase and Goldman Sachs. But they control directly large manufacturing firms, so that they also control most of the trade flows worldwide. The hegemony of financial capital, as already explained  in the early 20th century by R.Hilferding (das Finanzkapital, 1910) is based on the idea of an organized system and a relatively stable concentration of economic power.  K.Marx, on the contrary, believed, that the system was structurally unstable and was condemned to an eventual breakdown.

The key issue is the extent of the interconnectedness between these groups and the variety of links, which are not always conducive to ownership but may entail other forms of control. The authors of the study argue that such links may be beneficial in a context of economic expansion for the stability of the whole capitalist system. However, in times of crisis, they may represent a danger in the meaning that  if the core ties between groups are unstable, this could destabilize the whole global economy. As it happened in 2008, if one group (say Lehman Brothers) suffers massive financial losses, this propagates to the others as well.  The cause is that financial institutions arrange financial contracts with others to diversify risks but at the same time contagion may occur in such an inextricable situation marked by ownership relations, hence the risk of a domino effect.

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue 

The Occupy Wall Street movement claims that 1 per cent of people having most of the wealth tend to exert an influence on government decisions. It's not just conspiracy theory; it has a list of concrete proposals for the US Congress which include the  reintroduction of the Glass Steagall act (which was introduced in 1933 to avoid excessive concentration of financial power by separating commercial and investment banks); more powers for investigation and prosecution of financial criminals; fair taxation 'as suggested by  Warren Buffett and other super-rich people!...

By identifying the architecture of global power, this study contributes to a better understanding of the global crisis of capitalism and provides to its opponents key tools for challenging financial power in the name of social justice for all.

Zombie Economics