by Michael Roberts
Greek capitalism has failed. So has capitalist production in the
smaller Eurozone nations. Nothing demonstrates more the need for a
pan-European economy to use all the resources of the continent, both
material and human. The smaller and weaker capitalist economies have
been driven into a long winter of depression by the global slump. The
euro crisis is not really one of sovereign debt or a fiscal crisis. Its
origin lies in the failure of capitalism, the huge banking and private
credit crisis and the inability of undemocratic pan-European capitalist
institutions like the European Commission, the Council of Ministers and
the pathetic European parliament to deal with it.
The ambition of France and Germany to compete with the US and Asia on
the world stage through monetary union was fundamentally flawed. The
original dream of a united capitalist Europe, of free markets in
production, labour and finance, ever utopian, has turned into a
nightmare. Now the single currency union is under threat. It always
was ambitious.
JP Morgan recently looked at whether the ‘right conditions’ under
capitalism existed for setting up a currency union in Europe. They
measured the difference between countries using data from the World
Economic Forum’s Global Competitiveness Report,
which ranks countries using over 100 variables, from labour markets to
government institutions to property rights. They found that there’s an
incredible amount of variation among the euro zone’s member nations. The
biggest differences come in pay and productivity, the efficiency of the
legal systems in settling disputes, anti-monopoly policies, government
spending and the quality of scientific research.
Indeed, the euro zone countries are more different from each
other than countries in just about any hypothetical currency union you
could care to propose. A currency union for Central America would make
more sense. A currency union in East Asia would make more sense. A
currency union that involved reconstituting the old USSR or Ottoman
Empire would make more sense. In sum “a currency union of all
countries on Earth that happen to reside on the fifth parallel north of
the Equator would make more sense.”
But the currency union went ahead because of the political ambitions
of France and Germany to have a Europe led by them, even after British
capitalism refused to join. Of course, the aim was to bring about a
‘convergence’ between the weaker and stronger economies. That dismally
failed in the boom years of 2002-7. The Great Recession just exposed
and widened the inequalities.
Can the existing currency union survive? Well yes, if economic
growth returns big time or if German capitalism grasps the nettle and is
prepared to pay to help the ailing smaller capitalist economies through
fiscal transfers. It is no good the Germans saying they will do so if
the likes of Greece, Portugal, Ireland, Spain etc “stick to fiscal
targets”. They cannot. So Germany will have to decide on more
transfers without more austerity.
And it won’t be cheap. The Cologne-based IW economic research institute reckoned that West Germans paid about $1.9
trillion over 20 years, partly via a “solidarity surcharge” on their
income taxes, to help integrate and upgrade Eastern Germany. That was
roughly two-thirds of West Germany’s GDP then. The subsidies helped cover
East Germany’s budget shortfalls and poured money into its pension and
social security systems. At the same time, nearly 2 million East Germans
— a full one-eighth of the population — moved west to seek work. That
is the sort of transfer of funds and jobs that will have to take place
to save the currency union.
Currency unions cannot stay still – Europe’s has been around for only
13 years. Either they break up or they move onto full fiscal union
where the revenues of the state are pooled, especially when crisis
concentrates the minds. That means the smaller states agreeing to
German control of their budgets in return for fiscal transfers and the
Germans allowing proper fiscal transfers to the poorer ‘regions’ of the
currency union.
Take the example of the UK. This is a government of four nations and
many regions. Taxes are raised by a central state (although there has
been some devolution to Scotland, Wales and Northern Ireland) and
raising debt is mostly made by the central state (there are some local
government bonds or loans). Wales is a poorer part of the UK. It runs a
‘trade deficit’ with the rich south-east of England. Its inhabitants
contribute way less in tax revenue than they receive in government
handouts. So Wales has twin deficits on its government and capitalist
sectors, just as Greece has with the rest of the Eurozone.
But it is not an issue for Wales because it is part of the United
Kingdom of Great Britain and Northern Ireland. Sometimes there are
grumbles from the rich south that they have to pay for the unemployed
Welsh but that argument does not have much traction. After all, the
extreme logic of that is to say that the extremely rich inhabitants of
Kensington in the posh part of London should not have their tax revenues
redistributed to the poor inhabitants of east London. That would mean
Kensington would have to break with the fiscal and currency union that
is Britain, put up border controls and find their own government, armed
forces and central bank. Of course, their riches would soon disappear
because they are based on the labour of all the people in Britain and
even more from abroad. It is a point that many nationalist elements in
Germany and northern Europe forget. If the Eurozone breaks up into its
constituent parts, the ongoing (not just immediate) losses to GDP for
northern Europe would be considerable.
The example of the US also shows the advantages of a federal state
over the commonwealth of states that existed to begin with. It took a
civil war of bloody proportions to establish a unified state that wiped
out the idea of secession for good. Now the US federal government
raises taxes and debt and provides funds to the states (even though they
raise their own taxes). A full financial union came later than fiscal
union in the US, when the Federal Reserve Bank was set up by the large
private banks after a series of banking collapses. Now dollars are
redistributed through the federal reserve system to cover ‘deficits’ on
trade and capital between states.
So what happens now to Europe’s currency union? In the absence of
German capitalism bailing out the south with huge fiscal transfers, the
only way that the peripheral countries have to restore growth and avoid
the break-up of the EMU is by defaulting on the debt they have
accumulated – in effect a forced fiscal transfer. Remember most of this
debt is the result of the collapse of the banking system and the Great
Recession. It is not due to ‘excessive ‘ spending by governments. The
excessive debt was in the private sector: in mortgages and banking
debt. That debt got transferred onto government books through bailouts
and social benefits.
Take Greece. I have made an estimate how much the rest of the
Eurozone is exposed to Greek sovereign debt in one way or another.
Greek government debt stands at €337bn as of March 2012. Of that, about
€220bn is held by the EU institutions (EFSF, ECB) and the IMF. Foreign
banks have reduced their holdings dramatically to about €36bn in
long-term debt. In addition, the ECB and Eurozone central banks have
lent the Greek banks about €250bn directly and indirectly. So when we
add it all up, the Germans, French and others face default by Greece on
a total of €500bn, or 5% of Eurozone GDP. So if Greece defaults on its
sovereign debt, it will be Europe’s official sector that will take the
blow. And this does not account for losses in GDP in the euro area if
Greece defaults, causing a new credit crisis. The Institute of
International Finance reckons the total cost is closer to €1trn, or 10%
of Eurozone GDP. This is all the more reason why the Troika and the
European Union could be forced to abandon their fiscal austerity
approach and replace it with a real plan for Greek economic and social
recovery.
Debt ‘deleveraging’ is necessary under capitalism. If dead capital
remains stuck on the books of companies, then they won’t invest in new
production; households won’t spend more if they have mortgages hanging
over their heads and the value of their house is worth less. And
governments cannot take on new public projects if the interest cost of
existing debt eats into their available revenues. In their very latest
report, the historians of debt, the Reinharts and Kenneth Rogoff confirm
the relationship between debt and growth under capitalism (see Carmen
M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff, Debt Overhangs: Past and Present,
NBER Working Paper No. 18015 (April 2012)). They looked at 26 episodes
of public debt overhangs (defined as where the public debt ratio was
above 90%) and found that on 23 occasions, real GDP growth is lowered by
an average of 1.2% points a year. And GDP is about 25% lower than it
would have been at the end of the period of overhang. It is the same
when private sector debt gets to very high levels. Such is the waste of
capitalism and fictitious capital.
The correlation between high debt and low growth seems strong, but it
is a matter of debate within mainstream economics on the causal
direction. Is it the contraction of the economy that leads to high and
rising debt (Krugman and the Keynesians) or is it high and rising debt
that leads to the contraction of the economy and low growth (Rogoff, the
Austrians and the Minsky). I think that it is the contraction of
profitability that leads to a collapse in investment and the economy
which drives up debt. But until debt is deleveraged, profitability and
growth cannot be restored.
What is clear is that debt cannot be reduced for the smaller
capitalist states of Europe without default. If Greek public debt was
written down to 60% of GDP, as the new Euro fiscal compact demands, it
would allow the government to spend on investment another 5% of GDP a
year.
Growth will not be restored by the neoliberal solutions demanded by
the Euro leaders and the Troika. The OECD claims that ‘structural
reforms’ would deliver a rise in the level of GDP per capita over ten
years worth 13% of GDP for Portugal, 18% for Greece and 15% for Spain
because these economies are so ‘uncompetitive’ i.e. about 1.3-1.8% a
year. But what are these wonderful growth-enhancing structural
reforms? For Portugal, the Troika has decided that they are a reduction
of four public holidays a year, three days less minimum annual paid
holidays, a 50% reduction in overtime rates and the end of collective
bargaining agreements. Then there would be more working time
management, the removal of restrictions on the power to fire workers,
the lowering of severance payments on losing your job and the forced
arbitration of labour disputes. In other words, workers must work
longer and harder for less money and with less rights and a higher risk
of being sacked. Southern Europe must become a cheap labour centre for
investment by the north. That’s the Troika’s reforms.
Then there is deregulation of markets. Utilities are to be opened up
to competition. That means companies competing to sell electricity or
broadband to customers who must continually change their suppliers to
save a few euros. Pharmacies are to have their margins cut, so small
chemists are to earn less but there is no reduction in the price of
drugs from big pharma, the real monopolies. And the professions are to
be deregulated, so lawyers cannot make such fat fees but anybody can
become a teacher or taxi driver or drive a large truck with minimal or
no training. Finally, there is privatisation of the remaining state
entities sold cheaply to private asset companies in order to pay down
debt and enlarge the profit potential of the capitalist sector. It’s
more or less the same proposals for Greece, Spain, Italy and Ireland.
So the neo-liberal solution to restore growth is to raise the rate of
exploitation of the workforce, destroy pensions and public goods like
healthcare and education and to squeeze small businesses. The argument
goes, this would boost profitability and so the private sector will then
invest to create jobs and more GDP, assuming, of course, that
capitalism does not have another slump before then. But the UK and US
economies already implemented all these ideas a decade of more ago and
what was the result? Did these economies avoid a financial collapse or a
slump? On the contrary. There is no mention of public investment.
Investment is down to the private sector because government is
‘unproductive’ (which it is in a capitalist sense).
The idea of a pan-European economy must be right – but it just cannot
be achieved through wage reductions, deregulation and fiscal
austerity. Equally, just leaving the euro would be no panacea for the
likes of the Greeks or the Portuguese. Argentina is usually cited as a
successful example of a capitalist economy sticking its fingers up to
the IMF and achieving fantastic growth after defaulting and devaluing.
Clearly, writing off what Greek left leader Alexis Tsipras has called
‘odious’ debt must be part of the escape from recession. But leaving it
at that and devaluing the currency by leaving the euro is no answer,
even in the short term.
A recent report by the Federal Reserve Bank of Dallas (Default and lost opportunities: a message from Argentina,
May 2012) showed that Argentina was lucky in 2001 when they defaulted
and devalued the peso. After a big drop in GDP, real GDP per capita
rose by 7% a year for next seven years. But that coincided with the
huge global commodity boom benefiting sales of agro products that
Argentina produced. A similar default and devaluation of 1983 did not
deliver a great recovery. Then, in the depths of a global recession
(much like now), real GDP fell 15% and did not recover to pre-crisis
levels until 10 years later.
Under the capitalist mode of production, the smaller economies of
Europe are stuck in a generation of austerity, whether they leave the
euro or not. With public ownership of the finance and productive
sectors of the economy and a plan for state-led investment, growth could
be restored. Even then, that won’t be possible unless it moves onto a
pan-European level, where fiscal and capital transfers are integrated to
reduce the imbalances and differences highlighted by JP Morgan’s study.
No comments:
Post a Comment