For those who still have not fully understood the Euro situation

From the Sole 24 Ore, an influential economic newspaper : "would it be even reasonable to affirm that Europe exists if we let the markets attack and unabashedly hit one country after another? The answer is no!"

The Spanish Dilemma

A year and half ago, Krugman wrote in a NYT editorial that Spain's problem is the euro. What went wrong? This is his (perfectly right) explanation : " Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. (...) Spain fell into recession when that bubble burst, and has experienced a surge in unemployment. (...) Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs. (...) Spain is on the edge of a debt crisis. The U.S. government is having no trouble financing its deficit, with interest rates on long-term federal debt under 3 percent. Spain, by contrast, has seen its borrowing cost shoot up in recent weeks, reflecting growing fears of a possible future default. (...) At the end of 2007 Spain’s public debt, as a share of the economy, was only about half as high as Germany’s, and even now its banks are in nowhere near as bad shape as Ireland’s.

But problems were developing under the surface. During the boom, prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations". (...) "What all this means for Spain is very poor economic prospects over the next few years".

Spain is now the fourth country to be bailed out by the European Stability Fund, after Greece, Ireland and Portugal. It seems that the assistance (up to 100 billion euros) will be limited to the banks instead of the sovereign debt. This was largely predictable given the continuing attacks of financial markets since last year. Is it really the euro's fault, as Krugman argues or are there any good options to pursue?

Would Spain have been better off if it had never adopted the euro? Interest rates would have been higher and the fiscal situation would have been much worse. EU funds flowed to Spain to finance large infrastructure programmes and stimulated private sector investment. The housing bubble is not directly related to the euro, but is due to speculation, excessive risks born by banks and poor regulation and supervision by public authorities. Now tax payers will have to pay the bill on top of the savage austerity measures already taken, particularly on wage and social spending cuts.

The intervention from the European Stability Fund will provide relief to the Spanish banks but will probably not put an end to speculation. Banks have among their assets billions in State bonds, which will lose in value and if yields remain at current levels, banks will suffer considerable losses. It would have been preferable that the ECB intervenes directly to purchase public debt, avoiding asset depreciation but this not allowed by the Treaties. In that situation, banks will remain vulnerable to speculative attacks as long as the ECB does not intervene as a lender of last resort. The strong opposition of Germany to any reform of the ECB - which has been very active in alleviating the effects of the crisis- could lead eventually to the destruction of the eurozone. There are legitimate concerns of 'moral hazard' but if no bold actions are taken immediately, the crisis may end up in a much more dangerous recession. Big plans for a closer political Union and eurobonds are not for the next ten years but should be realized now together with a credible strategy at the EU level to promote growth and jobs through investment programmes, not with haircuts or other suffering. This is the Spanish dilemma, which depends on decisions to be taken by the European Union for its survival.

Debt is not immoral

European prevalent ideology is that debt is  evil and should be banned. This has to do with German culture shaped by history and traditions. In German, schuld means debt but is also used for fault or guilt. Max Weber wrote about absolute ethics and the ethics of conviction which neglects the consequences for the others. 

Debt is not necessarily bad. It's part of the functioning of an economy. Debts are normally contracted for consumption or investment, but not to repay other debts. The problem is that financiers' interests prevail over the economic interests of entire nations. Financial  orthodoxy is shaping economic policy as the only moral response to the crisis. In fact, Germany  is still defiant to any kind of debt. But this has dramatic consequences for people and businesses which continue suffering from austerity. Mass unemployment, high SMEs mortality, suicides, diseases...  Wise men would admit that this is immoral but they would also argue that we have surrendered to financial markets. 

Debt is not only a European problem. In the US, the total debt amounts to 15 trillion dollars almost equal to its GDP.  In his last book ('End this Depression'), P. Krugman argues that in the past, the US had even a much higher debt during the second World War; Great Britain had high debt levels for almost a century. Japan has a government debt higher than its GDP but does not have any financing problems with yields on bonds at only 0,9%! This shows that there are no thresholds to debt sustainability as claimed by austerity hawks. Furthermore, in times of depression, austerity policies are not a remedy to the crisis, but worsen recession, as tax revenues fall, so that with budget cuts debt continues to increase instead of decreasing. 

It is time to bring this debt ideology to an end. Robert Skidelsky, pledges for debt forgiveness as Keynes suggested for Germany after World War I the same principle can be applied to the eurozone and relieve much of the tension. We should not forget that banks caused the crisis and now want to be saved with tax payers money and the pain imposed to citizens. He writes: "Philosophically, the debt-forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place. As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transaction" . Keynes had a prophetic word in 1923 that our political leaders should meditate carefully: “The absolutists of contract…are the real parents of revolution.” 

Where Vultures Feast

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

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


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

Europe must remain based on solidarity

Growing euro-scepticism across Europe must be countered by a radical

renewal of those values that created the European Community out of the

ashes of the Second World War.  The same ideal should prevail; instead

we have a cacophony about what needs to be done to tackle the financial crisis,

in particular for Greece.

In a recent interview, the German philosopher Jurgen Habermas asks whether

European citizens want to commit suicide (in the economic sense) given the

 recent results of elections in several countries where anti-European parties

have won a large share of the votes. Meanwhile, the economic understanding

that the monetary union cannot be stabilised in the long term without

political union has become prevalent.   

We cannot afford to become complacent or indifferent

to events that are now shaping public opinion. Europe needs to rediscover

its purpose or we will shift inexorably toward disintegration and disunity.

Those angry men who want to change the World

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

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

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

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

Austerity is Wrong

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

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

Orthodox economists will argue that more spending in countries with large debt is pure madness. They are wrong: if demand falls and unemployment continues to raise, austerity measures will simply become ineffective and people will continue suffering. Obviously, savings can be achieved if they are undertaken wisely, for example to reduce waste of public money. But one thing is to reduce inefficiencies, another is to cut in basic services such as heath care and education which are vital for the well being of citizens.

Policies to increase public spending on investment would then make sense if they are coordinated at European level. The ECB is now pledging for a 'growth compact', being conscious that  its massive injection of liquidity at a very low interest for three years has not resolved the crisis. As the recession in the eurozone is likely to worsen, European leaders are determined to restore growth. But this can be pursued in different ways. Merkel and Draghi support growth initiatives through 'structural reforms',  an old euphemism which covers essentially wage cuts and less protection for workers.

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