10 Jun 2010

The Real Problem With Europe's Economy

By Evan Jones
After yesterday's piece on how finance writers get Europe's current problems wrong, Evan Jones takes a close look at what is really going on behind all the scapegoating
If you listened to Wall Street and most of the commentators in the Australian media, you could be forgiven for thinking that the problems in the European economy can be attributed to a combination of Greek self-indulgence and European social spending generally. But you'd be wrong.

Europe's major problems are not sovereign debt and unaffordable social programs — those are just symptoms. To help cut through the verbiage, French economist Frédéric Lordon is very useful. (Lordon's work is unknown to the English-speaking finance media, so it remains untranslated.)

As Lordon explains, the fundamental problem Europe faces is that the EU's economic policy framework is innately flawed (French). The European Central Bank (ECB) was established in 1998 to ensure the global status of the euro through a strict anti-inflationary regime. Formally it functions in conjunction with the strict rules of the 1992 Maastricht Treaty which "forbids" member states from having annual budget deficits greater than 3 per cent of GDP and total public debt greater than 60 per cent of GDP.

The framework is rooted in a flawed ideology, as reflected in the perennial flouting of the fiscal rules. As financial commentator Mike Whitney has observed: "The nonsensical treaty basically repeals the business cycle by edict," as if it were possible to simply legislate against things like recessions, and thereby to happily sacrifice the measures needed to address them. Spain currently has an unemployment rate of 20 per cent — but the indicator of successful governance is still seen to be deficit reduction rather than unemployment alleviation.

More fundamentally, the framework presumes that economic robustness and dynamism are innate to the market mechanism — that is, it credits markets with strengths and qualities they do not have. The innate weakness of Maastricht was noticed immediately by the maverick economist Wynne Godley in 1992:

The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn't need any management at all.

The repressive and inflexible character of the German Bundesbank, on which the ECB was modelled, was offset in post-war Germany by active industrial policy, a dimension ignored by pundits of German economic resilience. Lordon notes that, ironically, supposedly undisciplined Europe is far more constrained in dealing with economic crises than are the "respected" Anglo countries. Yet the US, as we've seen, simply prints money. The current move by European leaders to centralise fiscal policy (meaning only fiscal restraint), again under external pressure, will only exacerbate the innate flaws in the ECB/Maastricht framework.

The second big problem Europe faces is that it too has succumbed to the neoliberalist siren song, which has further constrained the capacity (French) of states to manage the health of their economies. Taxes on businesses and the wealthy have been cut. As Lordon notes drily of the threat: "Defiscalise me or I clear out" — or, in other words, lower my tax or I'm leaving. National finance sectors have been deregulated, laying the groundwork for the subsequent orgy of irresponsible lending and trading in dodgy instruments. Remarkably, the most dramatic transformation has occurred in Germany where the previously cautious and highly regulated financial sector has been blown open.

The system is in chaos but those responsible for the wider crisis home in — selectively — on the latest symptoms, and expect bystanders to pay for the mess.

This selectivity in finding a way out of the crisis goes further. It is salutary to note that whereas social programs are targeted for cutbacks, defence budgets are off limits. The Trident system is up for renewal in Britain, with billions due to be wasted on another symbol of Britain's dead imperial splendour. In May, NATO's secretary-general Anders Fogh Rasmussen "warned member governments against making deep cuts in national defence budgets, insisting the 28-nation alliance must reverse the decline in military spending if it is to meet looming security threats." Ah yes, the permanent Cold War against a fabricated enemy.

It is remarkable that nobody in English-language officialdom or academia — except for a handful of leftover Marxists — is really trying to understand the character of this finance sector driven system that currently prevails.

Certainly irrationality plays an integral role, in a way far more profound than is suggested by the now fashionable (yet essentially trivial) formulae of behavioural economics. And there's also incompetence. And corruption. And venality.

The irrationality is a product of the system's anarchy. But there are strategic players aplenty (Goldman Sachs as exemplar), always after the main chance, yes, but who also seek to mould the system's imperatives more profoundly in their favour. Strategy and anarchy thus combine in perpetual flux.

Neoliberal theories celebrate this order as natural and good, and there is a natural order (of sorts) to the system, but it is far from the elegant and beneficent spontaneous order envisaged by Friedrich Hayek — that was something that only ever existed in Hayek's imagination. It is self-reproducing, albeit through the auspices of the state.

This real world order is facilitated by the common worldview of most of the major players, although this hegemonic mentality is inconsistent with the convulsive, inefficient and destructive character of the real thing over which this cabal presides. Greek pensioners, Spanish public servants, the English unemployed and disabled — all become road kill. And worse, whole countries — Argentina, Latvia — are condemned for years to national economic decay, widespread destruction of industries and public services and jobs, with subsequent impoverishment. Meanwhile, the Greek elites' tax evasion will continue unabated, the disproportionate role of the construction sector in Spain remains unresolved, and the engorged and disabling character of the finance sector in Britain remains deeply entrenched.

It gets worse. The observed convulsions arising from the anarchy have now been picked up and refashioned for strategic purposes for even greater gains. Thus arises what (again from the French) has been labelled a strategy of "constructive chaos", using tactics not unlike those employed in the sphere of warfare (French). English language readers would be more familiar with the related concept of "shock doctrine" coined by Naomi Klein.

The unreformed finance sector is the central vehicle for this rollercoaster. The perspicacious Lordon once more: "Save me or I'll kill you." Or, more accurately, "Save me and I'll kill you." A sector whose integral function in economic activity gives it a public purpose has been appropriated for entirely private ends, and with disastrous consequences.

Finally, and worse still: nothing about any of this looks set to change in the indefinite future.

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Posted Thursday, June 10, 2010 - 16:08

"Meanwhile, the Greek elites’ tax evasion will continue unabated, the disproportionate role of the construction sector in Spain remains unresolved, and the engorged and disabling character of the finance sector in Britain remains deeply entrenched. "

And in Australia we perpetuate the idea that anyone can be, or become, a mining billionaire.... and that we all somehow benefit when a faux-workingman in a safety vest like capitalist bodgie Andrew Forrest or the cartoon-ish Clive Palmer make another billion, so you'd better not try tax reform there or 'we'll all be rooned..'

Posted Thursday, June 10, 2010 - 16:17

Yes exactly. The finance sector, which caused this economic mess, gets bailed out, CEOs continue raking in obscene rewards and who pays the price?: the unemployed, the working poor, the disabled, homeowners etc. Meanwhile, the mainstream media continues in its fantasy land that capitalism will save us all in the end and IMF discredited austerity programs get another run through, to be as disasterous as they were 10 years ago. Well at least people are protesting! Maybe the revolution is at hand.

Posted Thursday, June 10, 2010 - 18:30

All seems a consequence of the imbalance between Democracy and Capitalism. One is for the individual and the other should be for the good of the whole society, but there's no balance between the two at the moment and the so called elites really are just wrecking the world as a consequence.

Posted Thursday, June 10, 2010 - 20:24

Interesting article E. Jones. Please continue this topic.

On your nice comment Chris 1987- I think democracy (legislature, executive, and judiciary) is supposed to protect the majority by decentralizing power (and holding the monopoly on violence).
I see this happening by decentralizing control of law- by electing a legislator (MP).
I think Capitalism is supposed to concentrate power, by concentrating money ownership.
I wish these 2 essentially opposite forces would work together to create a sensible balance of power in every community, but they fail to do this in practice.
I reckon that for the last few decades Democracy has mostly failed to decentralize wealth/power, but Australia's focus on a decent minimum wages has been one of the strongest success stories in decentralizing wealth, and our low crime statistics are largely attributable to this.
When you say 'elites', do you mean those with undemocratically large amounts of power?
I think that if Australia creates more policy similar to the Mining Corporation taxes idea, wealth will become more decentralized.
I observe that apart from the obvious power/money owners, and their associated entrenched interest people, another group antagonistic to such policy are people with totalitarian ideology- who respect power acquisition at almost any cost, and therefore power centralization. I observe anti-democratic influence from such people, and cheerfully suggest baiting them into exposing their true nature publicly.

Posted Thursday, June 10, 2010 - 21:15

Good article, pity it is a voice lost in the wilderness. Without a really free mass Media there cannot be democracy. All we hear is the capitalist song.
Capitalism is in an advanced state of putrefaction and the whole consumer society is infected and starting to rot; there is no opposition, nor any rational movement to pick up the pieces when all will fall apart.
For what it is worth visit www.salterre.org modest but honest.

Posted Thursday, June 10, 2010 - 22:41

Interesting article,unfortunately we've seen it all before,many times,bankers are rather like the Bourbons-they learn nothing,they forget nothing. What they never forget is, that sooner or later the taxpayers will bail them out.

It's amazing how many otherwise well-informed people think that economics is a science.

Posted Thursday, June 10, 2010 - 22:54

Great article.

No doubt many Europeans are asking themselves, "for whose benefit, exactly, were all these financial rules established?" And part of that answer will be, inevitably, not theirs.

Perhaps we will see some much-needed reform in a system where financial priorities override elected governments.

Posted Monday, June 14, 2010 - 19:47

Excellent article! I cant believe it has taken so long to get a decent (English) synopsis of what exactly is happening in Europe. Cheers

Posted Friday, December 10, 2010 - 23:36

One thing is for sure: the EU € EURO single currency either was or was not created by fools. The EURO member nation states do not have the economic control mechanisms to prevent the occurrence - it is a car-park on a cliff full of cars with no handbrakes!

If we generously consider the EU economists were not all blithering idiots it must have been clear to them the current situation was indeed ultimately inevitable. In other-words this path economic failure was deliberately planned.

WHY? The objective of the EU is, and always has been, ever deeper political integration, to dismantle the national sovereignty of the nation member states and build a federal EU soviet state. The EURO was one step to that goal but did not give the EU total control of the member-state's economies - that would have been a 'bridge too far' at the time of establishing the currency.

So instead a deaf-ear was turned to those who proclaimed the eventual outcome could only be economic meltdown. Not because they were not right in the assertion but because this was actually the covert intention.

I am rather taken with the following video which goes far into explaining so much of what has happened to the EU economy:

http://www.youtube.com/watch?v=1JeMRSNCO8M - just for fun!