German model ought to change

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

Germany has pursued "beggar my neighbour policies" like in the 30s whereby it has imposed austerity policies to the rest of Europe. Export oriented policies have yielded a  large current account surplus (about 6% of its GDP) to the detriment of internal demand. Countries like Spain and Italy  have already narrowed their external deficits, but GDP has dropped, and the best case scenario will be a prolonged stagnation (which some economists reckon as the exit from the 'Great Recession' ). The truth is that the combination of increased productivity (due to wage cuts) and depressing demand has driven those countries to an external balance so that they can  repay their  short term debt to the international creditors.

  

As Martin Wolf (FT 25/09) put it,  "a large country with a huge structural current account surplus does not just export products. It also exports bankruptcy and unemployment, particularly if the counterpart capital consists of short term debt". The main problem is that vulnerable countries must improve their competitiveness, not only in terms of unit labour costs (which means achieving more or the same quantity of output  with less labour)  but also in structural terms, that is the accumulation of human and physical capital which is conducive to long term productivity gains. However, this cannot be achieved with current German policies, which on the contrary tend to increase the divergence between northern economies - anchored to the German economy- and the others which have difficulties to stay in the eurozone with low levels of competitiveness.

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

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

 

Albert Jacquard: a utopian humanist

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

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

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

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

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

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

R.I.P. 

We have a dream

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

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

Europe should aim at unity and solidarity

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

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

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

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

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

We need an independent rating agency

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

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

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

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

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

Debate on Inequality and Growth

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

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

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

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

End of Austerity

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

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

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

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

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