This article appeared in AToL
on June 10, 2010; an excerpt appeared in NewDeal20.
At the close of an emergency Sunday meeting
of financial
ministers from the 27-member European Union (EU) that lasted until the
early
hours of Monday, May 10, 2010, the exhausted attendees emerged to
announce a
startling nearly $1 trillion (€750 billion) financial stabilization
package for
EU member states with sovereign debt problems and the European Monetary
Union
(EMU) to restore market confidence in the euro, its common currency for
the
16-country eurozone. Immediately after foreign exchange markets opened
several
hours later on the same say, the dramatic news caused the euro to soar
against
the dollar and the yen, reversing its recent sharp decline as fallout
from the
sovereign debt crisis in Greece.
Unfortunately, the trillion dollar package seems to be a
total failure. The relief from downward market pressure on the euro was
short
lived, confirming the market’s continuing apprehension about the heavy
and
worsening sovereign debts burden facing all EMU member economies and
possibly
beyond and across the Atlantic. The Crisis in Trade
The eurozone buys around 15% of US
export. Reflecting the global economic slowdown, the EU bought $221
billion from
the US
in 2009,
down from $244 billion in 2007. US trade deficit with the EU fell
sharply from
$110 billion in 2007 to $60.5 billon in 2009. A sharp fall of the euro
against
the dollar in 2010 accompanied by fiscal austerity in eurozone
economies will
adversely impact the US
economy by making US exports more expansive in a market of falling
demands,
while investment and tourism from eurozone will moderate. This may
reverse the recent
downward trend of the US
trade deficit with the EU.
The eurozone is now China’s
largest trade partner, surpassing the US.
Europe’s imports from China
grew by around 18% per year for the previous five years from 2009. This
trend
will accelerate further if the euro falls. Two decades ago,
China-Europe trade
was negligible. In 2008, the EU imported €248 billion of goods from China.
China
now is Europe’s
biggest source of manufactured imports and also Europe’s
fastest growing export market. Europe exported
€78.4
billion worth of goods to China
in 2008, a rise of 9% compared to 2007, growing by 65% between 2004 and
2008. Europe
runs a surplus on trade in services with China
- €5.7 billion in 2008 (up from €3.9 billion in 2007). Yet this is
about 30
times smaller than its trade deficit for goods, which was €169 billion
in 2008.
EU-China trade decreased in 2009 due to the global economic downturn.
European
imports from China
went down, while EU exports to China
have remained largely stable. This trend can be expected to accelerate
as the
EU deals with its sovereign debt crisis in its member states with
austerity
measures.
A slowdown of the eurozone economies will further adversely
impact China’s
export sector that has already been hit by severe recession in the US.
A falling euro will also present problems to the Chinese central bank
in its
recent efforts to diversify its huge foreign reserves away from the
dollar. The Crisis in
Exchange Rates
The euro jumped to a high of $1.3048 on the day the EU stabilization
package was announced. European policymakers prematurely breathed a
sigh of
relief that their “shock and awe” package had helped to shore up market
confidence in the common currency.
However, by Thursday, May 13, two trading days later, the
euro had fallen back near its 14-month low at $1.2586, down 0.3% on the
day,
putting it within a cent of where it had been just before word of the
bold
stabilization move hit the market. It traded at $1.1960 on Friday, June
4, almost
11 cents below the $1.3048 level traded immediately after the
stabilization
package was announced on May 11. The Crisis in Government
The failure of trillion dollar stabilization package is more
than financial. Though the stabilization package helped ease concerns
over the
prospect of a wave of imminent sovereign debt defaults within the
16-country eurozone,
currency traders were aware that the underlying problem had not been
solved,
because even with a gargantuan stabilization fund, there was no hint on
how the
highly indebted eurozone member states would get their public finances
back on
track going forward to meet European Monetary Union (EMU) requirements
without
triggering political crises from popular opposition to fiscal
austerity.
A major concern was the problem of deep popular discontent
with pending government austerity measures that would be required to
lower
excessively high public debt levels and chronic fiscal deficits. In
particular,
there were worries in the market that the recently installed socialist
government in Greece would not be able to push through the draconian
measures
it had been forced to accept in order to secure the earlier €110
billion rescue
pact scheduled over three years. This was because of the fear that
resultant
political resistance and social unrest would topple the current
socialist Greek
government under Prime Minister George A. Papandreou that had been
elected on a
platform of increased prosperity only seven months earlier on October 6, 2009.
Market participants are cognizant of the fact that this
sovereign debt crisis is not an isolated local problem in a small
country, but
a eurozone-wide financial virus that broke out first in Greece
but could detonate explosive crises in other similarly infested
national economies
around the globe with serious economic and political implications.
Already, Germany’s
conservative coalition government led by the CDU (Christian Democrat
Union) has
been weakened as the CDU suffered an important regional election defeat
over
its inept handling of the sovereign debt crisis in Greece.
And German voters fully expect that Germany
would have to face her own fiscal austerity measures soon as a result.
Other eurozone
member states are not expected to be exempted from similar popular
discontent
against incumbents in government in this regional sovereign debt
crisis.
Even in the UK
which has been a member of the EU since1973 but is not a eurozone
member state,
yet conducts large trade with the eurozone, the Labour Party lost
control of
the government after a general election produced no majority winners.
Failing
to form a new coalition government with the Liberal Democrats, Labour
had to
hand over the reins of government to a Conservative coalition supported
by the
defecting Liberal Democrats.
All over the political landscape worldwide, voter hostility
towards center-left incumbency over painful economic austerity issues
is
rampant in the multiparty democracies. A Panic Wave of Demand
for Fiscal Austerity
The sovereign debt crisis in Greece
has sparked a panic wave of radical policy demands for fiscal
discipline
throughout the European Union from a perverse coalition of neoliberal
public
finance ideologues and anti-government conservatives. Proponents of
fiscal discipline
argue that the EMU and its common currency, the euro, would not be
sustainable
without the drastic restructuring of public finance in all eurozone
member
states through a combination of tax increases and deficit reduction
through
fiscal austerity. But creditors, mostly transnational bank, will be
protected
from having to accept “haircuts” on their holdings of sovereign debt.
Yet such harsh approaches of tight fiscal austerity at a
time when the global recession of 2008 is still waiting in vain for a
recovery will
risk increasing the danger of a double dip recession in 2011 in a
secular bear
market. The alarmist voices of these fiscal deficit hawks clamor for
fiscal
austerity programs that are essentially punitive for eurozone workers
while
continuing to tolerate abusive financial market manipulation that will
benefit
only the financial elite as the economic pain is passed on to the
general public. Bank Creditors against
Wage Earners
Fiscal deficits across the eurozone are to be reduced by
cutting public sector wages and social benefit and subsidy expenditures
so that
transnational bank creditors will be paid in full while turning a blind
eye to
blatant tax evasion and avoidance by the rich with non-wage income that
contribute to loss of government revenue and fiscal deficits. The
dysfunctional
disparity of income and polarization of wealth between the
waged-earning masses
and the financial elite with income from profit and capital gain, are
the main
causes of overcapacity in the economy. In past decades, the neoliberal
response
to overcapacity was to shy away from the obvious solution of raising
wages,
turning instead to flooding the economy with huge mountains of consumer
and
corporate debt that eventually resulted in a tsunami of borrower
defaults that
turned into a global credit crisis. Yet repeating the same response to
the
current crisis will lead only to another global crisis down the road.
While the culprits of the global credit meltdown of 2008
have been bailed out with the public’s future tax money, the sovereign
debt crisis
across the globe is blamed on innocent wage earners for receiving
supposedly unsustainably
high wages and excessive social benefits that allegedly threaten the
competitiveness of economies in a globalized trade regime designed to
push
wages down everywhere. Sovereign Debt Crisis
not caused by the Welfare State
The rush by the rich and powerful to punish the trouble
causing working poor goes against strong evidence that the current
sovereign
debt crisis is not caused by high social welfare expenditure, but by a
sudden
drop in government revenue due to economic recession caused by credit
market
failure under fraudulent accounting allowed in structured finance for
which the
financial elite are directly and exclusively responsible.
Through devious “special purpose vehicles”, the sole special
purpose of which is to treat proceeds from debt issuance as revenue
from sales
to remove financial liability from government balance sheets to present
a
deceptively robust picture of public finance, phantom profits are
siphoned off
from the general economy into the pockets of greed-infested financiers
while
pushing the real economy out of balance, resulting in high real public
debts
that inadequate aggregate worker income cannot possibly sustain. As a
portion
of GDP, wages and benefits have been falling in past decades while the
public
debt has been rising. Transnational financial institutions routinely
generate
profits larger than government revenue of small economies.
Despite propagandist distortion, the sovereign debt problem
has not been caused by the high cost of a welfare state; it has been
caused by
deregulated financial markets that allowed governments to borrow huge
sums
against future revenue from public sector enterprises without showing
the
liabilities on government balance sheets.Structure
finance was providing participating
governments with up-front
cash while hiding the sovereign debts that had to be paid back in the
future.
But the bulk of the borrowed money went to the pockets of dealmakers of
public
sector privatization while the debts were left with society at large.
Large
amount of the national wealth is transferred from the local economy to
international speculators through legalized manipulation made possible
by
deregulated financial market globalization. It is a new form of
synthetic
financial imperialism against weak economies through a scheme of naked
shorts
against the currencies and equities of vulnerable nations. Fiscal Austerity will
endanger the EU
Further, such punitive fiscal austerity solutions will
render the EU unsustainable as a political superstructure due to
violent popular
opposition in the constituent nations. Third
Way
centrist synthesis of free market capitalism with the social democratic
welfare
state has provided the enabling conditions for the current sovereign
debt
crisis. Market fundamentalism has been exposed by unhappy but
predictable
events it helped create as an exorbitant and spectacular failure. And the exhorbitant cost of this spectacular
failure of market fundamentalism will be put on the back of the
innocent working
poor. There are strong
signs that voters in countries with multiparty democratic political
systems have
been brainwashed into beleiving that free market capitalism with
minimum
government intervention is the only road to prosperity. Voters have
been
conditioned unwittingly to buy into an anti-government ideology that
diametrically
contradicts the public’s other demand for generous safety nets of
socioeconomic
security that only government can provide. When the gullable
weak is convinced by the devious strong in society that government is
the problem,
not the solution, the weak are inadverdently trapped into a political
climate
that permits the destruction of their only institutional protector,
since the
existential function of government, regardless of political and
economic color,
is to protect the weak from the strong. Government
non-interference through deregulation and privatization of the public
sector
leads to the law of the jungle in free markets under which the economic
function of the financially weak is to serve as the food supply for the
financially strong. Historically, government evolves in civilization so
that
the weak masses can collectively resist the oppression of the strong
elite.
This is the reason why the strong in society always bash popular
government. Price of Saving
the Euro may be EU Disolution Thus the attemp
to save the euro from collapsing in exchange value under the weight of
aggregate eurozone member state sovereign debts through coordinated
fiscal
austerity in all member states of differing scocio-economic legacy and
conditions will incure the price of political divergence of the member
states
from the European Union. Member state governments are pulled apart from
the
union by centrifigal nationalist forces generated by separate and
divergent
domestic politics. Popular sentiment against local fiscal austerity for
the
sake of preserving the European Union is spreading like wild fire in
this
sovereign debt crisis of the European Union.
But a weakening of convergence toward full integration of
European nation states will prolong the euro’s structural vulnerability
as a
common currency without a unified political structure and condemn it to
remain
a multi-state currency with high political risk. This internal
contradiction is
the Achilles’ heel of the euro, which is the legal tender of a monetary
union
without a political union. Stormy Political
Weather for Incumbents
Stormy political weather have recently battered incumbent
centrist political leaders in several countries by holding each of them
separately
responsible for the austerity measures they are now forced to implement
to get
their different economies out of unsustainable sovereign debt.
In order to meet a 2013 deadline for compliance with EMU’s
euro convergence criteria as spelled out in its Stability and Growth
Pact
(SGP), at the end of the preceding fiscal year, the ratio of the annual
government
fiscal deficit to GDP must not exceed 3% and the ratio of gross
government debt
to GDP must not exceed 60%. This means the eurozone governments need
slash
their individual budget deficits to add up to a total of €400 billion.
This
huge sum will be taken primarily from pockets of public service
employees,
pensioners, the unemployed and the indigent in the EU for decades to
come.
Greece was forced to adopt on May 11, 2010 an austerity plan to reduce
its
budget deficit by €30 billion over the next three years through wage,
benefit,
subsidy and pension cuts, slashing social programs and an increase in
VAT (value
added tax). Spain
on May 26 announced cuts of €80 billion from its fiscal budget,
shedding 13,000
public service jobs, reducing salaries of state employees by 5% and
freezing
pensions. The allowance of €2,500 for parents of a new birth to reverse
declining
population trends will be suspended. Portugal
has imposed a hiring and salary freeze in the public sectors and passed
an
increase in VAT in order to cut €20 billion from its budget deficit.
The Italian government launched measures that will result in cuts of
€24
billion by 2012. They include a reduction in civil service jobs, salary
cuts, raising
the retirement age and cuts in the health care system.
France
plans to
reduce its budget deficit from 8% to 3% of GDP by 2013. This will be
achieved
by delaying the retirement age of public employees; cuts in housing
benefits,
employment compensation and museums funding; as well as a 10% cut in
administrative costs.
The German government will decide upon concrete austerity measures on
June 6
and 7. The so-called “debt brake”, anchored in the German federal
constitution,
imposes a reduction in new debt of €60 billion by 2016. Among the many
measures
under discussion are cuts in social programs, such as family, child,
welfare
and disability benefits, annuities and pensions.The
German government plans to save around €80
billion between 2011 and 2014 with measures that include a €30
billion reduction in welfare spending and a cut of 15,000
in public sector payrolls. It hopes to realise €5.5
billion euros through subsidy cuts, and may reduce the armed
forces by 40,000.
Delaying Retirement
Age Counterproductive
The EU Commission suggests that the retirement age in Europe
should continue to rise steadily. This is to ensure that in future, no
more
than a third of a person’s adult life could be spent in retirement. In
the long
term, this would mean raising the pension age to age 70. This will add
pressure
on young new entrants to the job market for the next two decades as
fewer
positions will be vacated by retirement of the currently employed.
The new center-right British conservative government announced
immediate budget
cuts of £7.2 billion, including a hiring freeze in the civil
service. The new
Prime Minister, David Cameron, said
Britain's
budget deficit will be cut over the next four years by more than
£100 billion.
This will include slashing 300,000 posts in public service and a freeze
on
public sector pay.
For millions of workers and young graduates, the newly
adopted measures mean rising unemployment and poverty levels. In
particular,
old-age poverty will again become a mass phenomenon in Europe.
Nothing will remain of the post-war welfare state. A study by the
Carnegie
Endowment for International Peace think tank in the US
concludes that “the welfare states set up across Europe
from the 1940s onwards with the aim of suppressing popular unrest and
paying
off tensions that could lead to another continental war” are
“unaffordable”. What
was left unsaid in the study was that it would be unaffordable only if
the
disparity of income and polarization of wealth were to be allowed to
continue.
In an overcapacity economy, the people can afford what they produce if
the
system does not deprive the majority of their right to the wealth they
create
and hands
it to a controlling minority. Revolution
would have to come by policy or it will come by violence. Crisis of Mal-Distribution
of Income and Wealth
In a fiat money regime, it is the central bank’s responsibility to
ensure an
adequate supply of money. The fiscal budget shortfalls that are being
used to
justify the dismantling of the welfare state are the result of the
systematic
mal-distribution of income and wealth from those at the bottom of
society who
do the work to those at the top who do the manipulation.
For a quarter of a century since the late 1970s, both
right-wing and center-left governments have reduced taxes on income and
property
for the rich, depressed wages through structural unemployment as a tool
to
fight inflation and have abdicated government responsibility in
maintaining
economic justice.
The concept of a living wage is regarded by new coalition as
utopian. Wages are set by their marginal utility to the return on
capital in
unregulated markets rather than by the economic law of demand
management in a
modern overcapacity economy of business cycles, the recessionary phase
of which
has become nearly continuous. Popular discontent is muted with
unsustainable
increases of the public debt. These are the main causes of the
sovereign debt
crisis, not over-consumption by the working poor.
Public Debt Crisis
caused by Bank Bailouts
The public debt had been pushed up sharply in the last two years by the
trillions
that governments run by free market policymakers pumped into distressed
banks to
prevent their collapse from proprietary speculation in deregulated
markets. Recent
figures from the German Bundesbank showed that in 2008 and 2009, some
53% of Germany’s
new public debt was used to rescue distressed financial institutions.
The total
new public debt rose by €183 billion in those two years; the costs
involved in
supporting distressed financial institutions amounted to €98 billion. Trade Union Leaders s
as Hatchet Men of Neoliberalism
To push through the austerity measures against the working poor, the
ruling financial
elite drafted the social democrats and the trade unions as their
hatchet men.
In the PIIGS (Portugal,
Italy,
Ireland
Greece and Spain)
countries, social-democrat-run governments impose the austerity
measures, or,
as in Britain,
France
and Germany,
the social democrats have so discredited themselves by their previous
cost-cutting measures that now the right-wing parties have reaped the
political
benefit. In all cases, the social democrats leave no doubt that they
support
the cuts, telling working people that there is "no alternative".
Trade union leaders have been willingly subscribing to the discredited
“TINA” (There Is No Alternative) voodoo
economics of Reagan and
Thatcher, in cooperation with corporate-controlled governments to wage
financial war on labor. The labor-organized demonstrations and strikes
against
austerity measures have all been suppressed by armed police, with the
violence
and deaths exploited as reasons why labor protects must cease.
Yet labor has a moral and functional obligation to force
structural changes in this dysfunctional economic system, instead of
continuing
to remain a passive victim in the new age of wholesale anti-labor
selfdom.
Meanwhile, a conservative populist movement that calls itself TEA (Tax
Enough Already) Party is gaining
popular support and
can easily be transformed
into a fascist political force. Left unsaid in TEA Party rhetoric,
beside
protest on rising taxes, is protest on the prospect that the tax money
should
be spent on the poor, rather than bailing out the errant financial
elite. Until
labor takes the rein of reform, the EU’s trillion-dollar stabilization
package
will end in failure.
