What Future of Europe?

There is a growing anti-European sentiment which takes the form of massive protests and demonstrations almost everywhere. Unemployment and poverty are spreading everywhere and create a favourable terrain for self defence reaction, giving rise to a rethoric of scapegoats against banks, immigrants or the euro as the cause of our problems. Nationalism and localism are becoming more evident from France to Catalonia. Beyond their diversity, they are all the expression of the rise of  'ethnic' identity. 

A political scientist of Yale university, N.Sambanis wrote (NyTimes, August 26)  : "As Europe’s status declines, the already shaky European identity will weaken further and the citizens of the richer European nations will be more likely to identify nationally — as Germans or French — rather than as Europeans. This will increase their reluctance to use their taxes for bailouts of the ethnically different Southern Europeans, especially the culturally distant Greeks; and it will diminish any prospect of fiscal integration that could help save the euro, The result is a vicious circle: as ethnic identities return, ethnic differences become more pronounced, and all sides fall back on stereotypes and the stigmatization of the adversary through language or actions intended to dehumanize, thereby justifying hostile actions. This is a common pattern in ethnic conflicts around the world, and it is also evident in Europe today".

Our politicians use the term  'populism' to qualify the rise of anti-European parties. This is a far too simple argument. We need a much deeper analysis of the causes of the rejection of Europe. It is not the European idea which is put in question. It is about what Europe proposes to tackle European citizens problems. The first cause of rejection stems from austerity policies which have produced poverty and recession. Instead of preserving the welfare State, the crisis becomes an opportunity to dismantle Beveridge's system, which is , despite its geographic differences ( in particular between the 'Scandinavian' model and  the 'southern' one) a model for the whole world. Let us be clear, this model has to be efficient, equitable and sustainable. We should not defend waste and inefficiency neither corruption or fraud. 

Second, Europe is not business as usual. The financial crisis has been dealt with essentially with existing rules. The only innovation was the set up of financial instruments to act as firewalls against market speculation but  they did not allow to stabilise financial markets. Spain and Italy are still on the frontline, although the 'unconventional' intervention of the European Central Bank has brought temporary relief  to these countries. But how does this  translate in permanent improvements in workers living conditions? We did not see any substantial  change in labour market situation in Spain and Italy despite reforms. 

Third, European leaders have failed to explain the reality of the crisis as if their people were not concerned. Poltical competition in a democracy has always been  a matter of education  of the voters and their maturity is the best defence against populism. Before it is too late, we must stop the tempest of the populist rethoric by putting in honour pragmatic, realistic checks. There are supra-national ideas for which it is  worth fighting and they can prevail if the European interest prevails over narrow, selfish  politics. European leaders should propend to what A.Hirschmann called 'self-subversion' meaning in this case a radical change of paradigm. Policies and doctrines have failed since they have created in Europe a divide between creditors and debtors and produced inequality and poverty.   

The struggle for a political Europe is not an abstract goal. It means giving to Europe a true Constitution drafted by the representatives of European people, not by the States. We need urgently large scale investment programmes to foster sustainable growth which cannly be promoted by a European government- with a consistent budget approved by the European Parliament, given national budget constraints. There would be substantial economies of scale and savings if resources and efforts are put in common.

In doing so, citizens could understand that those who command are not oligarchs, and that policies adopted can be subject to confutation as any policy in a democracy. The European Central bank, despite their unconventional weapons, remains a technocratic apparatus, with no political legitimacy because there is no common Treasury and no common government. Political leaders are wrong if they think that it is the solution to the crisis; they just abdicate their power, which is to seek alternatives, not the consensus of  markets. Populism is the product of this abdication.  

We should ask citizens what kind of Europe they want. Let's put it in three basic questions: Do they want a new Europe which could help building global partnerships and solidarity? Do they want a Europe governed by economic liberalism or a kind of 'liberal' socialism uniting the market economy with social equity and fight against inequality? Do they want a Europe where the general interest prevails over particular interests of groups and lobbies which prepend the present to the construction of the future?

An inspiring man of Church

Archbishop Card. Martini passed away today at 85 . After leaving  Milan, the largest archdiocese in Europe where he was archbishop during 23 years, he was living in retirement in his beloved Jerusalem.

He was one of the greatest biblic scholars and  he was well known for his sermons and his profound writings. In opposition to the conservatives, he defended 'liberal' ideas on contraception, the beginning of human life and the role of women in the church. 

But his fundamental battle was against social injustice. In particular, he expressed concerned and defended immigrants and social minorities against any form of discrimination.  Martini said  that the Church had to rekindle a "burning fire in the heart" of men and women today.

Cardinal Martini, then President of the Conference of the European Churches  addressed the European Parliament in 1997 in a symposium on 'Remembering the Origins of the Process of Integration' with these words: ""Europe is faced with a decisive crossroads in its history. On the one hand it opens the way for closer political integration involving the European peoples and their institutions. On the other hand there may be a stagnation of unification or a reduction by only a few economic aspects and limited to a few countries"

He was a man of culture and dialogue who listened to people. This is the Church prophetically inspiring that we need today. 

P.S: Card. Martini gave a last interview to a Jesuit priest, Georg Porschill - who interviewed him in "Nighjt conversations in Jerusalem"  - and which was published by  Corriere della Sera after his death.   " the Church is tired, in the Europe of wealth and in America. Our culture has aged, our churches are big, our religious houses empty, the Church bureaucracy is growing and our rites and vestments are pompous" . He also said that the "Church was 200 years out of date and needed faith, trust and courage to move on".

Beyond the European crisis

Despite their formal unity, EU governments think and act nationally looking first at their narrow, short term interest.  Above all, Germany lacks a vision for Europe which in turn nurtures a growing anti-European sentiment. At best, it tries to manage the crisis in a  context of high uncertainty but not to resolve it . The Greek debt crisis was originally set to cost 50 billion ; now it is out of control despite harsh austerity programmes. Germany's selfish attitude tends to create further divisions in Europe between the North (supposedly more virtuous) and the South (supposedly more laxist). Instead of creating a space of solidarity, it has widened the competitiveness gap (in terms of labour costs per outpur unit) making southern countries uncompetitive and therefore forcing them to implement deflationary policies by reducing wage costs and public spending.

The Euro is not just a symbol of the unity of Europe. It has been beneficial for Germany more than for any country. It would thus be logical that it pays for European economic recovery. In recent history, how many times has Europe paid for Germany? We should not forget that at the London conference (1953), the German external debt contracted between the two World wars was settled by writing down half of the overall German debt.

 In this context, there are three possible options. The first is to improve the existing sructures and instruments but it would be an illusion to think that this will lead to a durable solution to the crisis. The second option is the return to the old D-Mark - a thesis now supported by the liberals and the Bundesbank hawks- whose consequences are unthinkable. Finally, the third option is a common responsibility for debt with Eurobonds, common fiscal rules and harmonized social policies.

The issue is whether Europeans still want to take their destiny in their hands. The idea of a federal Europe has been mentioned by the German chancellor but its contours are still vague. Will it look like the United States of America? The first Treasury secretary, Alexander Hamilton who elaborated the 'voluntary compact' which gave rise to the creation of the Federal State is becoming popular in Berlin. In fact , he defended the idea that debts accumulated during the war of Independence. Is Ms Merkel thinking about a Philadelphia convention? 

Such a political project will be opposed by States not belonging to the euro area such as the United Kingdom and Poland but also by other States such as France which would resist any transfer of sovereignty. But it is clear that Europe needs to go beyond the tortuous mechanisms of the Funds put in place to rescue heavily indebted countries. The current agenda includes complex issues: the modalities of the ECB intervention on sovereign debt; the final 'harmonization' of the Treaty on fiscal compact depending on the German Court's judgement, which will raise difficult issues of interpretation and compatibility between different legislative acts (for example, the norm on debt reduction by 1/20 per annum laid down in the 'fiscal compact'); the banking Union and the set up a European regulatory authority; the political Union. 

We need to redesign the European institutions to a new reality. Let's imagine what these reforms inspired by great Europeans such as Altiero Spinelli could look like . First, a European parliament elected on a genuine European basis. Second, referenda on relevant European issues should concern all European citizens not single States. Why not ask citizens if they want to stay in the euro area and what kind of project they want for Europe? Third, the structure of the Federal union should be based on an elected president who appoints the federal government; a European Parliament which controls the federal government and approves the federal budget; a Constitutional Court which guarantees the respect of the federal constitution.

If a European State has the dimension of a continent in a global world, the democratic system has to ensure at the same time legitimacy but also effective decision making, political leadership and true participation of citizens. The foundation of such a federal system builds on the division of powers. As a matter of fact, these objectives will be achieved in the long term, but it is important to raise awareness among the public opinion in order to ensure an informed discussion and prepare their eventual realization.

Nicolas Boileau, a French poet and critic, also called the 'Législateur du Parnasse', wrote : "N'en déplaise à ces fous nommés sages de Grèce, En ce monde il n'est point de parfaite sagesse : Tous les hommes sont fous, et, malgré tous leurs soins, ne diffèrent entre eux que du plus ou du moins. "

Finance and the good society

Robert Shiller of Yale University talks  about his book, ‘Finance and the Good Society’, in which he argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. He discusses financial innovation, personal morality, the importance of education, and the contribution that finance can make to our lives. The interview was recorded in Bristol in May 2012.


Finance and the good society | vox

Vox Clamans

Draghi comments from London have risen high expectations from global markets. Basically, he said that ECB would do whatever it takes  to save the euro by any means. This needs to be interpreted since ECB powers are limited by the EU Treaty. Maybe we should understand that it would go beyond its remit by anticipating the June European Council decision, which gave the power to the ECB to purchase directly bonds in euro-zone members.

The reaction of markets was positive as Spanish and Italian bond yields were brought down, but still remain high. But just after the hawks of the Bundesbank warned against any intervention of the ECB, markets retrenched immediately. The German conservative newspaper, Die Welt, said that Mario Draghi, is the "Trojan horse of the indebted South, who wants to transfer resources from the rich and productive North to the continental South". 

Markets are not driven by moral sentiments. The finance world is neither a land of sudden and lasting miracles. The recent speculative attacks - concerted between the most powerful US and European banks - aimed to test the resilience of most exposed countries of the euro-zone and to bet on the inability of  EU institutions and national governments to set out an effective strategy to counteract them. Lately, Europe has given its worst image: after the announcement of unanimously agreed measures to tackle the euro crisis at the June council, some countries put in question the agreement with contradictory declarations with the sole consequence of feeding international speculation in a growing political decay. The perfect storm ! 

Under these conditions, the final assault to the crumbling fortress of the euro-zone was to be expected. In his statement, Mario Draghi has warned against the risk of disintegration and  explained that the ECB was ready to mobilize all the instruments at its disposal  to stop speculation. The (temporary) retrenchment does not mean that speculators will surrender, but they know that they will have to deal with a genuine federal institution which is determined to defend the euro-zone at any cost. But it cannot remain alone in this final battle and governments should,  without any ambiguity, play their role, for example by bringing additional resources into the European financial stability fund, and then into the European Stability Mechanism (ESM) which will enter into force in September 2012.

Progressively, the ECB will have to turn in a sort of Federal Reserve. Economists are divided over its performance on managing the crisis in the US economy. Some argue that its policy of 'quantitative easing' (easy credit) inflated the bubble while others believe that the Fed's interest rate cuts since the bubble burst have been a success as they prevented a much more severe recession. Others think that the Fed has merely postponed the day of reckoning. 

Ch. Kindleberger, a famous economist who wrote a history of financial crises, in "Manias, Panics and crashes " (1978)  believed that , in certain conditions, markets needed help from a lender of last resort. He understood both the danger of inaction by such a lender and the “moral hazard” that its mere existence can create, by encouraging investors to be reckless in the belief that they will be bailed out if all goes wrong. Thus, he argued, a “lender of last resort should exist, but its presence should be doubted.” It should always come to the rescue, but “always leave it uncertain whether the rescue will arrive in time or at all, so as to instil caution.” this is precisely what we need in Europe, not just a firefighter.

The price of offshore finance

Studies on inequality focused mainly on income and failed to capture the missing wealth due to tax evasion, which means that global inequality is much higher than accounted so far .  A recent research  on the" price of offshore" - carried out by James Henry, the former chief economist of Mc Kinsey based on data from the World Bank, IMF, central banks, UN and the Bank of International Settlements - has estimated for the first time the private financial wealth deposited in tax havens. In fact, there are very few studies on private wealth, despite the wealth of information. The report  estimates that the global super rich people have hidden at least 21 trillion dollars in tax havens, which is equivalent to the  combined GDP of the US and Japan. However, this estimation is conservative as it takes into account only private financial wealth and leaves aside real estate, yachts and other non-financial assets. 

The research was promoted by the British NGO, Tax Justice Network , which opposes tax havens since "they are heightening inequality and poverty, corroding democracy, distorting markets, undermining financial and other regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world". The existence of countries without any fiscal transparency is indeed one of the causes of global poverty and the growing inequality between the rich and the poor. These resources are diverted from productive use, investment and labour and therefore have a negative effect on the financing of public goods such as infrastructure and education, especially in times of recession. This vicious circle creates a sort of 'black hole in the world economy" with terrible consequences on the lives of billions of citizen

According to the report, the leading 50 banks - of which primarily Credit Suisse, Ubs and Goldman Sachs- have transferred, at the end of 2010,  mores than 12 trillion of cross border investments on behalf of individuals, large corporations or foundations controlled by the super rich. This network of financial intermediaries explains the rapid growth of off shore finance.  

If the deposits were taxed at 30% a minimum gain of 3%, governments could collect 180 billion dollars ( 280 billion on the basis of a higher estimation of 32 trillion), more or less what the OECD countries allocate to aid to developing countries. This is without any doubt a concrete way to help getting out from the Great Depression. 

Regulation is not enough

After the crash of 2008, governments had to bail out their banks for having taken excessive risks. Some were too big to fail, let aside the exception of Lehman Brothers, the fourth largest US bank.  But in the aftermath of the crisis, they continued their business as usual activity.  Nouriel Roubini points out that" the incentives of the banks are still to cheat or to do things that are immoral and the only way to avoid that is to break-up this financial supermarket " 

The Barclay's  case is just another example of immoral behavior. Together with other European and US banks, they manipulated the Libor - the average (estimated) interest rate which serves as a benchmark for inter-bank and private transactions which represent today around 500 trillion dollars- as well as the Euribor, the equivalent for the euro area. The financial impact is quite significant: billions of profits for the banks, additional charges for businesses and citizens. 

How could these crimes happen ? Regulators were distracted, or complacent but did not ignore the fact. Bankers have disregarded basic financial rules without any effective control and supervision. Now, investigations are under way in the US and Europe which could eventually lead to arrest bank managers and traders. 'Class actions' (collective judiciary actions) have been launched against the banks, but these legal battles will probably take years.

The issue is whether there is any effective regulation which could stop banks from cheating on interest rates, building 'ponzi schemes' or laundering dirty money. There are no limits to their criminal fantasy. Global rules are necessary but they have to be enforced vigorously with severe sanctions. Leading by example is one way forward: powerful bankers who committed criminal acts should go to jail. We need to create the right incentives to reform the international financial system and put an end to Adam Smith's 'vile maxim of the masters of mankind" - "all for ourselves and nothing for other people". 

Sign the petition: http://www.avaaz.org/en/bankers_behind_bars_f/?fp