Thursday, March 15, 2012

Europe: the path to growth

An unpublished report by EU commissioners on the Greek Troika team reckons that Greece will need to make further cuts of €12bn on top of those already planned in public spending over the next two years to meet Troika targets.  The EU Commission’s Compliance Report said that further drastic reductions equivalent to 5.5% of GDP would be have to be agreed by the end of May to fill “fiscal gaps” in the next two years. The next government’s first task will be to find €7.6bn of savings in 2013 and another €4.1bn in 2014 to stay on track with the fiscal programme agreed with the Troika. The savings are likely to come from fresh cuts to pensions, new reductions in social transfers, the further slashing of pharmaceutical and healthcare spending, another round of cuts to defense spending and a ‘restructuring’ of central and local administration.  Greece has to achieve a primary surplus (ie after debt interest payments) on its annual budget of 1.8% of GDP in 2013 and 4.5% in 2014 to continue to qualify for the loans the Eurogroup approved this week.

That means that any new Greek government elected in early May will not only have to implement the existing Troika measures agreed under the new bailout package.  It would also have to tell the Greek people that it needs even more pain to be inflicted by the government if it is to meet Troika demands.  Given that the current coalition leaders have pledged that there will be no more cuts, we can imagine how this news is going to be received by the people.

The continued drive for fiscal austerity to solve the Euro debt crisis is becoming self-defeating.  Country after country in Europe is announcing that it cannot meet its own fiscal targets and needs more room.  Spain has got the EU leaders to agree to a slightly less demanding target for its government balance in this year although it still has to go from a deficit of 8.5% of GDP in 2011 to 3% by the end of 2013.  A huge task.  Portugal is likely to slip from its targets. Belgium says it now needs to cut more to meet its target and so does the Netherlands and even Finland.  And the story for the UK, the US and Japan is much the same.

The EU leaders are beginning to realise that austerity is not enough.  Debt targets will not be met without economic growth as well.  So more growth is now becoming the mantra of the Euro leaders and mainstream economics.   But how is growth in the weak European capitalist economies to be achieved?  They are contracting by anything between 1-6% of real GDP this year.  The answer from mainstream economics is what we might call the traditional ‘neo-liberal’ solution.  By that I mean that Europe’s economies must become ‘more competitive’.  That means cutting wages to get down unit labour costs, ‘deregulating labour and product markets’ to break the power of trade unions to defend wages and increase the power of employers to hire and fire; and to ‘open up’ professional occupations to the less well-qualified and with poorer expertise at lower incomes. In other words, to try and create conditions for the private sector and especially big business (both domestic and foreign) to want to invest in these economies.

So the neo-liberal solution depends on praying that the private sector gets more profitable and then will invest and create new jobs and thus economic recovery.  It is probably a vain hope.  The reality is that since the trough of the Great Recession in mid-2009, profitability in the major capitalist economies is still generally below that in 2007 (see the graphic below showing rates of profit and my post, The UK rate of profit and others,4 January 2012 ).  So there is no enthusiasm to invest in new capital while ‘dead capital’ remains a burden.
There is an alternative solution for the path to growth. The Greek debt default shows that renegotiating the debt should have been a big part of any proper solution to helping economic growth in Greece.  For a start, the default deal will mean that the Greek public debt ratio will fall from 166% of GDP to about 125% or even lower.  But default was refused and denied for two years by the Euro leaders, the banks and the Greek government.  Eventually reality ruled.  Of course, the Euro leaders and the bankers want Greece to be seen as a ‘one-off’.  But part of the way out of the economic slump for the weaker capitalist states like Portugal, Spain or Italy is to negotiate a debt ‘restructuring’ that reduces the burden on the electorate of paying interest and debt repayments to Euroepe’s financial institutions – who caused the crisis in the first place!  The money saved could then be spent on investment for jobs and growth.  Instead, around 90% of the Greek bailout package funds from the EU-IMF are being spent to recapitalise the banks, paying off private bond holders and repaying the IMF that’s lending part of the money!

The other part of the alternative solution would be based on public sector investment on a big scale in infrastructure, new technology and the environment, as well as funding for small businesses to pick themselves up.  Such a programme is way more job-enhancing than the squeezing wages and sacking people to achieve ‘competitiveness’ that the neo-liberal solution offers.  Indeed, you have to ask the question: to be more competitive than whom?  If Portugal slashes wages like Greece, deregulates and cuts public services to the bone in order to drive down labour costs and become more competitive, where does that leave Greece, Ireland, Italy and the others trying to do the same.  There is no advantage gained (except perhaps to exports outside Europe).  It all smacks of a zero-sum game.  Growth does not have to be export-led growth designed to ‘steal’ growth off other countries unable to cut costs as much.  If that were so, there would never be any growth.  Economic growth can come from increased domestic investment and employment – in other words from a larger cake rather than trying to redivide a smaller cake.

Since the euro started, Germany has not become more competitive in Europe than others because it improved the productivity of its labour force through new investment.  Indeed, productivity growth in Greece has been much more than in Germany since 1999 – up 25% compared to 10% for Germany.  Of course, Germany’s level of productivity is still much higher.  But Germany’s competitiveness improved because German workers’ wage growth was curbed.  Since 1999 German wages have risen only 22% while they rose 66% in Greece.  So although Greek competitiveness (as measured by unit labour costs) improved between 1999 and 2007 by over 5%, Germany did even better  (see my post, Europe: default or devaluation, 16 November 2011).  In other words, Germany stole some growth from Greece by squeezing wages at home.  The neo-liberal solution is to make workers pay for the recovery and boost profits, not to raise productivity through investment and deliver higher incomes for all.

Will a public investment programme work?  Well, it will if the examples of China and Brazil during the Great Recession are any evidence.  According to the IMF, in the last four years, China’s real GDP has risen in real terms 53%!  Brazil’s has risen nearly 16%.  Real GDP in the G7 countries and in the Euro area has not risen at all!  Indeed, in many mature capitalist economies, real GDP is still lower than in 2007.
Why have China and Brazil done so much better?  The Chinese government launched a massive public investment programme in 2008 of $600bn, or 8% of GDP, to combat the impact of the global slump.  Public infrastructure development took up the biggest portion. The projects lined up included railway, road, irrigation and airport construction.  Reconstruction works in the regions were expanded followed by funding for social welfare plans, including the construction of low-cost housing, rehabilitation of slums, and other social safety net projects.  Rural development and technology advancement programs were extended including building public amenities, resettling nomads, supporting agriculture works and providing safe drinking water.  Technology advancement was mainly targeted at upgrading the Chinese industrial sector, gearing towards high-end production to move away from the current export-oriented and labor-intensive mode of growth. This was in line with the government’s aim to revitalize ten selected industries.  To ensure sustainable development, the Chinese government also promoted environmental engineering projects.

To a lesser extent, Brazil did the same through its state-owned development bank BNDES that financed a huge infrastructure programme with cheap credit, much to the chagrin of the neo-liberal voices in the World Bank, the IMF and in Brazil itself.  The BNDES is responsible for 20-25% of all investment in the country.  Over 70% of extra lending to industry during the Great Recession came from the state-owned bank.  That move saved Brazil from the slump.

The reason such an approach will not be adopted by the current Euro leaders and governments is that it threatens the interests of the private sector, particularly big business and their profitability.  The idea that the state should lead economic recovery is anathema.  It is better to have no growth than state-led or controlled growth.  So the major capitalist economies are likely to continue to experience weak growth for years ahead, while the weaker capitalist economies will stay in depression.  Unemployment will fall only slightly and will still be higher than it was before the Great Recession several years down the road.  Indeed, it is my view that before the end of the decade we shall have to face another slump in capitalist production in order to clear ‘excess’ dead capital in the private sector in order to revive profitability.  For now, the private sector is unwilling to invest enough to drive a path for growth in Europe.

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