9 Jun 2010

Can Finance Writers Find Europe On A Map?

By Evan Jones
Is it all really the fault of Greece and overly generous social welfare policies? Why do finance writers and Wall Street deficit hawks get Europe so wrong, asks Evan Jones

The premier catechism of economists and the faceless financial markets is that governments should live within their means. Nothing was heard of this axiom when the recent financial crisis exposed the rotten core of the Western financial sector. The US Government threw hundreds of billions at the guilty parties and other governments soon followed suit. The bailouts have weighed down mightily on exchequers across the world.

Suddenly arising from their slumber, the markets and the commentariat have remembered their lessons. The "deficit hawks" are rampant again. Economic recovery is to be subordinate to deficit reduction. French radical Olivier Besancenot summed it up clearly in an article published in Le Monde in May:

Now the markets, having digested the crisis, are attacking government debts and speculating on the future of the weakest. What an exemplary lesson on the amorality of a system that is able, in one year, to survive thanks to the intravenous drip of the state and then to plunge the state itself into a speculative punishment. ... In liberal Europe, governments are allowed to contravene the stability pact only when they are opening the public assistance taps for the banks. Humanity can wait.

And the root cause of the malaise? The masses, demanding and lazy, are an intolerable drain on the public purse.

Or so claims Sydney Morning Herald journalist Paul Sheehan: "This debt has been used to pay the bribes demanded by the militants, to pay for a giant public sector that Greece cannot afford, and whose workers expect a generous pension from the age of 58. Finally, this collective madness reached crisis point." Sheehan knows nothing about Greece, Europe or the capital markets. But he claims to know the problem and the solution.

And here's Ross Buckley, "finance law" academic, writing in the SMH a week earlier: "Unless Spain and Portugal act with rare alacrity to reduce wages and costs, Greece's problems will probably flow on to them ... Given devaluation is not an option, wages and prices have to fall by well over 10 per cent for these economies to regain their competitiveness — an extremely painful process." Buckley elsewhere displays some nous, but his intelligence isn't on show here.

These excerpts from the Australian media are typical of the English language finance media more broadly which, reflecting the unalloyed interests of capital, has always abhorred the welfare state in Continental Europe, the so-called European "social model". It is hardly relevant that there are as many welfare models in Europe as there are countries. No matter, because knowledge of Europe remains impoverished. Le Monde recently interviewed a Frenchman working on Wall Street, seeking insight into the latter's latter day mentality: "Here, nobody knows where Greece is. For the Americans, France, Germany, it's all the same — they just say 'It's Europe and it's a disaster'."

Capital is at its most feudal in the US, and it is from there that the war against social rights and welfarism that we see played out in the media emanates. Wall Street, having further blown out government finances, sees this as an opportunity to give the American social security system a haircut. This in spite of the fact that real wages have been stagnant since the early 1970s. They've been after social security and Medicare for years. This in spite of the fact that the relatively modest social security system was fashioned in 1935 by sophisticated business leaders who confronted the reality that 1920s-style anti-union corporate welfare was unaffordable — and that a basic public safety net was essential if the profit machine was to be sustainable.

Behind the attack on welfare is a presumed epidemic of sovereign debt risk. So the markets attack Europe, supposedly at its weakest points: Greece first, then the rest of the PIIGS — Portugal, Ireland, Italy and Spain. And the media skips along for the ride. In early May the sober heads of the European Union, panicked by the mad markets and pushed by the US and Britain, threw together a plan to bail out first Greece and then the euro itself. The gargantuan €750 billion package was shared by the European Central Bank, the IMF and the EU member states. The mad beast that is the markets was quelled for several days.

The process was a fiasco and the package is completely dysfunctional. Why? It merely adds to debt throughout the already stretched eurozone. Greece, with its portion of the bailout facing usurious interest rates, will inevitably default down the track. Further, there is widespread agreement that the bailout was not for Greece but for the major holders of Greek debt — the European banks. Even the august Otto Pöhl, former head of the Bundesbank, claimed: "On the day that the rescue package was agreed on, shares of French banks rose by up to 24 per cent. Looking at that, you can see what this was really about — namely, rescuing the banks and the rich Greeks."

Greece had it coming, say the media — but they didn't get it quite right.

Greece does not monopolise its particular peccadilloes (corruption, living beyond its means, etc.). And why is Greece facing the bullets first? Its wage levels are amongst the lowest in the eurozone, and its pensions are derisory. Its ratio of external debt to Gross Domestic Product is ugly, ditto budget deficit projections — but Greece is hardly in a league of its own here, especially with respect to Italy. (And do not, ever, bring up the off-the-rails American debt train wreck.)

Moreover some of Greece's problems are system-wide problems. They reflect the structural imbalances within Europe, which were supposed to have been reduced in time but instead have become entrenched — not least because of German self-interest. Greece's backwardness suits Germany — in 2009 exports to Greece were €6.7 billion and imports only €1.9 billion. German armaments manufacturers fuel Greece's bloated military establishment, and its elite's taste for kickbacks. More generally, German exports benefit from the same currency that harms Greece, which is more favourable to "competitiveness" than if it were faced with a flexible Deutsche Mark.

And on to Spain. In late May, credit rating agency Fitch withdrew Spain's AAA credit rating (following Standard & Poor's a month previously). Said a staffer: "Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates the economic adjustment process will be more difficult and prolonged than for other economies with AAA-rated sovereign governments."  What? This is the same crowd that debauched its crucial gatekeeper role in pursuit of the filthy lucre. The agencies are also threatening the new Coalition government in Britain with a downgrade of its AAA rating if deficit reduction is not forthcoming.

John Pilger is a journalist who goes straight for the jugular, and for his insight (if occasionally erratic) and courage he is excoriated as having transcended the norms of acceptable intercourse. On Greece, however, he's got it right:

What has happened in Greece is theft on an epic, though not unfamiliar scale. ... The crisis that has led to the 'rescue' of Greece by the European banks and the International Monetary Fund is the product of a grotesque financial system which itself is in crisis. Greece is a microcosm of a modern class war that is rarely reported as such and is waged with all the urgency of panic among the imperial rich. 

This is the first of two articles by Evan Jones on the European economy and the bailouts of Greece and the euro.

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This user is a New Matilda supporter. Marga
Posted Thursday, June 10, 2010 - 14:12

In one of the (serious) German newspapers this week I saw an article that opined on splitting the Eurozone into two:
Northern and Southern
It has always been a bit utopian to try and unite all of Europe. Since time immemorial has there been a division of
Germanic-Celtic people
Slavs
Mediterraneans (Romans)

Whilst sharing many common characteristics they share different philosophies on work ethics, financial management, social issues et al and they live in different climatic zones, which makes for different attitudes.

moniep
Posted Friday, June 11, 2010 - 07:44

I'm in France - near Spain. Which zone am I in??? This is as silly as Alan Kohler dividing Europe between beer swillers and winos. At least Alan's tongue was mighty cheeky.
Peter Monie

This user is a New Matilda supporter. Marga
Posted Friday, June 11, 2010 - 11:19

moniep - where would you want to be?