Trumped

I did not think that Trump could win the US election because an electoral base made up of the ‘disgruntled and angry white working classes’ is too narrow. But it is now obvious that Trump has wider popular support. Clinton did gain more of the popular votes by a slim margin, but there is no hiding the significance of Trump’s victory.

So, some thoughts.

A Trump presidency will not mean immediate significant changes on the world stage. The imperialist governance of the world is grounded on the Atlantic agreement, the order based on the US-UK-EU. But these are hard times. An unresolvable crisis, which makes each component of this triptych look more narrowly to its own domestic interests, and more watchful of the clamour of its own populations – particularly since none of the three is capable of providing a solution, or even the illusion of one. The British Brexit, and now the American ‘Brexit’ which Trump represents, will however provoke a slow disintegration of the dominant Anglosphere.

A not so special relationship

On the morning after Trump’s election victory I watched a chirpy TV journalist ask rhetorically ‘Will a Trump presidency lead to better relations with the Soviet Union?’ It was a slip of the tongue as revealing as it was understandable: the US is still milking the Cold War for all it can and that is the propaganda framework most Western journalists work inside. The idea that since both Trump and Putin are plain speaking, tough-talking ‘real men’ they are better placed than Clinton to ‘do business’ is a silly media fantasy. Relations are determined by three factors that still hold true and will do so for some time, whatever politicians may fancy. Firstly, the US is still the most powerful nation on earth and the whole of the privileged West benefits from its hegemonic role. Secondly, Russia is one of the weakest of the powers, economically and militarily. Thirdly, any serious move against Russia would unleash such turmoil between Western nations that it would significantly undermine the first point. So, lots of clacking and clucking, but no attempt to significantly alter the architecture of world politics. The rest is just games.

Trump’s victory is an immense blow for Britain’s Brexit, which looks increasingly unlikely to happen, though this will take some time to sink in. At the heart of the Brexit gamble is the popular illusion that the UK, on the basis of its world power, and other nations’ commercial self-interest, would be able to renegotiate its world trade and financial relationships. Trump is a businessman who thinks he can further American interests by negotiating like a businessman. That is also the militant understanding of his electoral support. Both have some learning to do. So, on the face of it, his presidency should provide a better practical and pragmatic framework for the UK to renegotiate its economic relationships outside the EU.

Yet, as in so many cases, the devil is in the detail. Trump’s negotiating policy, and that of the economic nationalism that has brought him to power, is to drive a very hard bargain that yields tangible benefits for the American people. This will make it very much harder for the UK to negotiate a favourable deal, and certainly makes an early trade settlement virtually impossible. But the UK needs something quick! This will be a significant blow to the UK because a settlement with the US would have been key to achieving trade settlements with other nations (the billboard effect).

The irony of the Brexit mentality is that, if every nation and trade block adopts a hard-line economic nationalist stance, it works for no one. Every nation declares that it wants to avoid the bad old protectionism of the 1930s, but the crisis is making them all inch in that direction. The idea that the UK can cut loose from the EU, sail for the open seas, towards the sunny uplands of a new world trade order, is dead.

Working class politics

Both the British Brexit and now Trump’s victory have put the revolt of the Western working class at the very centre of politics – though not in the way socialists would have liked. Next year will be the tenth year of the crisis. Across the advanced Western world the working class has experienced a significant decline in its prospects. Yet it has opted – everywhere – for economic nationalism and has shifted politically 10% to 20% to the right.

In each advanced imperialist Western country the only radical shift is within a small and embattled current of the middle class still committed to social liberalism and the Atlantic world order. Both the Corbyn and Sanders phenomena are examples of this. In not a single privileged country has there been even a smidgen of working class radicalism. Not even a warming up.  The revolutionary left, far from ‘making hay’ at a time when the truths of Marxism are pounding ever harder on the door, is in tatters.

This raises the question: why does the revolutionary Left in advanced imperialist countries persist in basing its strategic outlook on the future emergence of a revolutionary working class when all the evidence, and all the reasoning, is in the opposite direction? Partly, this is due to the fact that the Western left is ossified and has relegated itself to blindly repeating the mantra of ‘one day the workers will rise up and …’ It must be something human. Two thousands years of experience have demonstrated the inefficacy of Christian prayer, but people still pray to God.

There is also a personal motive. Blind and obstinate adherence to something that will never happen, and which every day becomes more obviously so, is the only way many socialists have of personally remaining true to their Socialist ideals and prevent themselves from being absorbed by bourgeois society, as so many have. In the face of never-ending defeat and disappointment, of a popular revolt that never materialises, the important thing is never to give in, never to succumb, and go to the grave in obdurate affirmation of what one has fought for all one’s life. Sadly, such people fail to realise that their stoicism, while morally laudable, only serves to blind them to the many things happening in non-imperialist countries. These show that things are indeed ‘going our way’. The non-imperialist world is not on the brink of revolution, but it is warming up nicely everywhere.

But the main reason why the Western radical left clings to the chimera of proletarian revolution in the West is that its politics and activities are exclusively direct towards the brittle and transient radicalism of the petit-bourgeoisie – the only milieu it can really operate in because there is no other available. Both the left and the radicalized petit-bourgeoisie know in their bones that, however worthy their campaigns, without working class support there is nothing real or lasting. So, the putrefied political corpse of the Western working class has to be kept alive – at least somewhere in the background or hoped for in the distant future – though never directly or honestly analysed. The moment one states the obvious – that the Western working class is thoroughly and irredeemably imperialist, colonialist, arrogant and capitalist, that a working class that continually and substantially benefits from the exploitation of ‘lesser peoples’ can never set itself free – one is dismissed as a hopeless or doctrinaire ‘Third Worldist’ or ‘Maoist’.  Never mind that ‘the Third World’ is today the ‘the First World’ in proletarian terms.

Clarity

In contrast, in those countries with no popular imperialist tradition, politics has shifted significantly and quickly to the left. Last week, an in-depth poll of public opinion in Spain put Podemos at 21% in terms of ‘voting intention’, ahead of the Socialist Party with 17%. The Socialist Party has been the architect of modern capitalist Spain and has governed for most of the last 35 years. It is a seismic shift. Podemos has been in existence for barely two years. The poll showed that most Spanish people are ‘left-leaning’. The top four ‘voter issues’ were identified as unemployment, corruption, the lack of a government and the economic crisis. Even though Spain has a similar level of immigration as other EU countries (10-12%), and even though explicit and politically incorrect racism is widespread,[1] immigration, the key issue in British and American politics, came in at the 33rd position in order of popular concerns.

Trump’s victory also destroys the left’s self-serving explanation of its own continual marginalization as grounded in the capitalist media’s grip on the popular mind. Trump won against the hostility and opposition of practically the whole of the media – in addition to the establishment, and world opinion. Trump, although a billionaire, also had far less election funds than Clinton. The left needs to wake up to the reality that if Western workers for decades have voted for, and consciously supported, bourgeois nationalist and imperialist politics it is because they know on which side their bread is buttered – not because they have been duped by the media.

But the best thing about Trump is he doesn’t conceal what he means: Marxists should welcome how explicit he is. Since Teddy Roosevelt, can you think of a president who in words and in his persona better expresses the realities of American capitalism and imperialism than Trump? That has to be a damn good thing. Of course, the danger is that wiser counsels will eventually prevail and Trump will go all ‘social democratic’ and ‘caring’ on us. Trump is a narcissist and narcissists love to be loved. So, make the most of it while it lasts.

Susil Gupta, 15 November 2016

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[1] Racist attitudes among even left-wingers in Spain are often quite shocking and would be unthinkable in the British left, for example.

Trends in World Debt

The reality of a global economy is shown by close connections in trade and investment, and is reflected in similar trends that affect many key countries. One of these trends is the rise in debt held by governments, households and corporations, as borrowing grew to provide the funds to maintain economic activity. After the acute phase of the economic setbacks in 2007-08, the world is now in the chronic phase of stagnant growth. Occasional blips higher look good, and the patient goes for a walk, but the economy is never far from stumbling back into a ditch.

There are individual deviations from the average picture, but each country's details express the evolution of a world economy. Even though one country may be impacted less, or more, that deviation usually reflects its position in the hierarchy of world economic power. Higher debt levels, or ratios of debt to GDP, are common among the richer countries, especially those that have a privileged position in world finance. After all, they can raise funds from the world market fairly easily since they are the guys in charge and, in the market's 'wisdom', are likely to remain so. Poorer countries have what is called a 'less developed' financial system and tend to hold less debt, at least in relation to the size of their economies. This general point is borne out by the data on debt/GDP for those the Bank for International Settlements considers the 'advanced' versus the 'emerging' countries, as shown in the next chart for the period 2000-2015:

Two features of the previous chart stand out: first, the much higher debt ratios for rich countries, but, second, the faster rate of growth of debt in the poorer countries in recent years. This reflects how much more the poorer countries attempted, from a lower base, to keep their economies ticking over in the wake of the acute phase of the crisis by accumulating more debt.

Country details bring out some other points. First, here is the chart of the total financial sector debt for some key emerging market countries, to add to that already given in a blog post a few days ago for the major advanced countries:

Clearly, China and South Korea have had the biggest growth of debt in the past 15 years, and have the highest ratios of the main 'emerging market' countries. China's rise in debt has been most dramatic after 2008, but, as a later chart will show, this has principally been on the back of the extra debt burden taken on by non-financial corporations (both private and state-owned).

This China development is similar to the results for many EM countries. It contrasts with the picture for advanced countries, where the extra debt has been mainly held by the government sector. This reflects the ability of the major states to borrow and alleviate the burden of the crisis in the corporate and household sectors via government liabilities (debt), while the emerging market countries and their governments, with less access to world markets, are far less able to do so. The breakdown of EM debt in BIS data only goes back a few years, compared to the longer time series for advanced countries, but the next two (different) charts below indicate what has happened:

While advanced countries have seen the debt burden (debt/GDP ratios) of the household and corporate sectors decline in recent years, emerging market country debt ratios have increased sharply, especially for the corporate sector. Government debt ratios have not changed much for emerging market countries.

Now to some country pictures for the breakdown of debt, starting with the major powers. Every picture tells a story, so my comments will be brief. Take care to note the y-axis scale in each chart. A taller bar in one chart compared to another chart does not necessarily mean that the debt ratio is higher.

The US: total debt has stabilised around 250% of GDP. Government debt has doubled to 100% of GDP, but household and corporate debt ratios have declined. As mentioned in an earlier blog post, these data ignore the US Federal Reserve's 'assets' in the form of mortgage securities that they have bought. Also, the data only cover 'non-financial' sector debt, so exclude many other liabilities of the financial sector, not least pension funds.

The UK: similarly, the UK has seen household and corporate debt shrink somewhat, while government debt ratios have also doubled to around 100%. Total non-financial sector debt in 2015 was a touch lower than in 2012, at 266% compared to 277% of GDP, but again, this ignores the many extra liabilities of the Bank of England apart from other obligations.

France: this country is in a worse debt position than the UK. The increase in government debt has been similar, but household debt, and especially corporate debt has risen further in recent years, rather than declining. The total debt ratio in 2014-15 was 290%. In the past five years, annual economic growth in France has been below 1% and often close to zero. This picture gives the backdrop for worries about French banks.

Italy: traditionally having a relatively high government debt ratio compared to other major countries, that debt grew still further after 2007. Total debt stabilised at close to 275% of GDP in 2014-15. Economic growth has been lower even than in France.

Spain: there has been a sharp rise in total debt since 2000, but some recent reduction. Corporate and household debt ratios have fallen in recent years, largely offset by a rise in government debt. In 2015, total debt was 283% of GDP.

Germany: this is the outlier country, with a steady reduction of the total debt ratio in recent years, hitting 184% of GDP in 2015, and with the ratio staying below 200% even in the acute phase of the crisis. German annual economic growth has been weak, at less than 1% in recent years, but Germany's government debt ratios increased by much less than in most other major countries. This may be related to the liability that Germany takes on for the eurosystem via the Bundesbank, and this is not counted in the data here.

Emerging Market Countries

Interesting emerging market countries from a debt perspective are China, South Korea and Brazil. The total debt picture for these was given in the second chart above.

China: historical details for China's debt data are patchy, so for 2000-2006 the following chart only gives the total and the government number (with the black bar indicating the difference). After being fairly stable from 2000 to 2008, China's total debt rose sharply, principally through the rapid debt accumulation of non-financial corporations, both state and private. Household debt has also risen, but not by much. In 2015, the total debt ratio was 255% of GDP, with corporate debt at 171%, up from 99% in 2008. This rapid debt accumulation has led to worries about bad loans, but against this one has to take into account some important mitigating factors. While corporate debt has risen rapidly, the average leverage of corporations is low. Furthermore, the government has an ability to allocate funds between different sectors in the case of emergency, apart from still holding more than $3 trillion in foreign exchange reserves.

South Korea: there has been a steady rise in debt ratios for all three non-financial sectors from 2000 to 2015. In 2015, total debt was 235% of GDP, which nevertheless remains well below the figure for most of the major countries shown above.

Brazil: the debt picture for Brazil would seem to belie the crisis the country faces. Total debt rose from close to 100% of GDP in the early 2000s to 149% in 2015, but not by much in the scheme of things, and to a level that remained below all the other countries shown, even below Germany's debt ratio. As in China, Brazil's debt ratio only started rising after 2008. This indicates that the debt ratio is far from giving a full summary of economic conditions. Brazil's economy has been in decline for several years, hit by weaker commodity prices and a slowing of world trade. Government debt started at a relatively high level, but has hardly changed. The increases in household and non-financial corporate debt has accounted for the rise in the total.

Debt and Interest Rates

If you were wondering why interest rates remain at very low levels, with central bank rates negative in Japan and in many European countries, the debt burden is the clearest answer. Huge debts have been accumulated in most key countries in response to the crisis. Now they stand as a mountain of liabilities, payments on which can only be serviced - and defaults avoided - if interest rates remain low. Higher levels of interest rates would threaten to collapse the edifice that has been erected to shore up the world economy.


Tony Norfield, 8 September 2016

Spain: Fear and Austerity in the EU

It seems that the class struggle, or at least the fear of it, is indeed the motive force of history. The EU has announced that it will not, after all, impose a hefty Є2.2 billion fine on Spain for repeatedly missing its budget reduction targets, as it had been threatening to do for months. EU hard-liners, particularly the Germans, were until recently demanding a Є5 billion fine. Spain has now been given another two years to get its finances in order.

 

EU Economic Affairs Commissioner Pierre Moscovici, who made the announcement, explained that the Spanish people had already made sacrifices and it was not appropriate to demand more of them, particularly at a time when there is a question mark over the entire European project.  Why has Spain been shown such largesse, when the Greeks were not? The Greek people also made sacrifices, larger than those imposed on Spain.

 

More significant still is that, according to German press reports, it appears that the change in policy was promoted by none other than German Finance Minister Wolfgang Schäuble, the hard-line archduke of fiscal probity and sticking to the rules. The German business paper Handelsblatt reports that following a long discussion with French, Italian and Spanish ministers at the recent G-20 summit in Beijing, Schäuble himself phoned the EU Commission pressing for a policy change in favour of more carrot and less stick. The Spanish argued that a fine would undermine Spain’s Christian democrats and would only benefit the ‘populist’ Podemos.

 

The EU’s problem is that the three areas in which it wants to see some major traction – labour market flexibility, pensions, and social spending – are all very politically sensitive and disruptive. This limits how far it can push austerity. Spanish Economy Minister Luis de Guindos has been bragging openly for weeks that the EU would not impose a fine, which was rather undiplomatic.

 

Greece, with only 2% of the EU’s population and of little economic importance, can be pushed around. Spain, the EU’s fifth-largest economy, is a different matter.  Despite being wrongly dubbed a ruthless neoliberal by the Left, prime minister Rajoy has been resisting on all three fronts.  Sledge-hammer austerity can only knock Spain’s social and constitutional order to pieces and push the popular classes into the arms of Podemos and possibly beyond.

Employment

Spain has around 30 different forms of employment contract. Brussels wants these cut down to three or four to make hiring and firing easier. The Spanish labour market is highly differentiated. About a third is ‘protected’, while two thirds form a ‘precariat’ surviving on very short-term contracts with only basic employment rights. The average duration of an employment contact is now 53 days. The effects of this are dramatic. While wages in the protected sector have dropped a few percent since the beginning of the financial crisis, the wages of the ‘precariat’ have dropped 14-17%. This accounts for Spain’s recent improvement in exports, in the absence of any significant rise in productive investment.  So the employment contract reform Brussels wants to see implemented is aimed mainly at the protected sector. But this section of the labour force, which includes much middle class employment, is the bedrock of the two mainstream parties. Destroying employment protection hacks away at political stability. 

 

Pensions

Spain has 9.42 million pensioners. Around 45% of the ruling conservative party’s voters are pensioners, as are 40% of socialist party voters. Only 16% of the Podemos vote is made up of pensioners. Moreover, half of those receiving pensions are supporting their offspring’s families. So pensions are a vital source of income in a country where just under half the unemployed no longer receive any benefits at all as their entitlement period has expired.  So deep cuts in pensions, as demanded by the EU, would push a substantial number of families over the brink.

 

State spending

Due to Spain’s very late development as a modern economy, and the weakness of its central state, Spanish politics remains very regional, often parochial, and is dominated by local elites and parties, which are voted in with the express aim of getting as much as possible out of Madrid. The regional federations of both the main parties are very strong.

 

A significant part of state spending, such as health and education, is channelled through regional governments, the majority of which are conservative. Cuts in social spending have an immediate effect on regional politics and immediately create intra-party revolt.  For example, the main impetus behind Catalans' apparent bid for independence is really a ploy to pressure Madrid to allow Catalans to keep all or a larger part of their taxation, a privilege the Basques already enjoy. So, although the ruling conservative party is hostile to everything Catalan that smacks of independence, it continues to make large concessions to the region in the hope that those wanting only tax autonomy will curb those backing complete independence.

 

No one really believes that Spain can turn its economy around in two years or meet its budget reduction targets, which have been raised to 4.6% of GDP for 2017. But, for a while, the EU has put this problem on the back burner because it now has its hands full with Brexit.

Susil Gupta, 28 July 2016

Euro Labour Costs

The previous chart is calculated from some recently published Eurostat data on labour costs in the business sector. For several euro member countries, I have compared changes in their average hourly labour costs (wages, salaries, benefits, etc) to the average for the euro area as a whole. Eurostat does not seem to publish absolute levels of these costs, and only gives an index number (2008 = 100 for all countries). It might be that one country's costs have risen faster than the average, but still remain below average, or vice versa. Also, these numbers take no account of productivity developments and just show changes in an employer's hourly cost of hiring a worker. Despite these qualifications, the picture is still striking.

The chart is indexed to 100 at the start of 2001, thus showing the relative change in each country's labour costs compared to the average since then. This is not to argue that 2001 is some kind of equilibrium year when everything was fine, it just makes the longer-term development easier to see than Eurostat's index numbers with 2008 as 100.

Greece also joined the euro in 2001, and it stands out in the chart. From 2001 to 2005, Greek labour costs rose by around 15% more than the average, then, after falling back, rose again into early 2010. Thereafter, relative costs slumped along with the Greek economy. In absolute terms, the level of Greek labour costs jumped from an index number (2008 = 100) of 76.7 in early 2001 to a peak of 113.4 in early 2010. By the end of 2014, the index number had crashed to 84.3. Nominal wage costs in Greece are back to where they were in 2002, and lower still when adjusted for inflation. On the face of it, this should be encouraging for capitalist employers, but there is still barely any sign of economic recovery. Profitable production depends upon more than cheap labour.

Spain stands out too, as the euro member country with the most sustained rise in relative labour costs. From 2001 to 2010 these rose by some 15% more than the euro average. Mass unemployment in Spain has made the gap narrower since then, but, by the end of 2014, Spain's relative costs were still 10% higher than in 2001. In absolute terms, Spain's labour costs have flatlined in the past few years, rather than having fallen drastically, as in Greece. Spain's index number (2008 = 100) rose from 72.3 in 2001 to 110 in 2012, where it has since stayed.

France and Italy's labour costs have risen only a little faster than the average, by less than 5% in the period to end-2014. Germany's labour costs, however, rose less quickly than the average for a decade, and only began to rise a little faster from 2010.

Tony Norfield, 20 April 2015

Europe Gets Even More QuEasy

Today the European Central Bank did what financial markets had expected, after lots of leaking of the policy moves. They announced they would buy securities in the asset markets, at a rate a little higher than had been expected of €60 billion per month, from March 2015. The policy will continue until inflation looks like getting closer to 2%, which, with the slump in energy prices, will be a while yet. In all likelihood, this extra asset buying (there has been some before) will amount to a bit over €1 trillion and last until September 2016, maybe longer. For comparison's sake, the new policy is around 10% of euro area GDP, compared to the US and UK policies of 'quantitative easing' that have amounted to more than 20% of GDP.

This policy move is the latest in a series that indicate there is no way out of the crisis. How can anyone believe that this policy, essentially making government bonds have even lower yields, can do anything for the economy when 10-year government borrowing costs were already less than 1% in Germany and France and less than 2% in Italy and Spain, the euro area's biggest economies?

The central bank's notion is that this will feed into private sector borrowing costs being lower, but there are some difficulties here. One is that there is very little demand to borrow to invest, given the dire economic outlook; the other is that banks would not to lend at anything like the sub-1% or 2% numbers to private investors, and the level of interest rates is not the problem. The problem is that there is no profitable avenue for large-scale capital investment, or any investment that does not depend upon government subsidy, tax dodging or some form of financial trickery. Even the countries that claim they have done better than the euro average - especially the US, but also the UK and Switzerland - are now faced with higher currency values against the ones that are under the market's cosh. Last week, the Swiss National Bank's made a dramatic move to abandon its 3-year attempt to stabilise its currency against the euro. This was done largely in anticipation of this week's action by the ECB and so far the euro's value has fallen 18% against the Swiss franc. Unsurprisingly, the euro fell another 1-2% today.

The ECB made a concession to German worries about the new policy. They said that 80% of the risk of the new purchases would be borne by national central banks, because central banks in the euro area might buy rubbish and face a loss. In its press releases today, they did not explain who would buy what, or how much. Because the scale of the buying, if it is not directed, would evidently be concentrated on the better risks - Germany, especially - a proviso was included: only up to one-third of a country's outstanding debt could be bought in this way, and the debt had to have a maturity of 2-30 years. Germany has around €1.1 trillion of debt outstanding, with less than this in the 2-30 maturity range. So these, the 'safest assets', will not be able to use up more than about a third of the new programme. German government securities out to a maturity of 5 years also have a yield that is zero or negative. So, presumably, this is good news for the government securities of France, Italy and Spain, the other countries with large bond markets.

The ECB's hope is that the lower yields will force investors to take on more economy-boosting risks. Instead, the likelihood is that there will be a continued reliance by capitalists on 'making money' through financial investment, something that further stretches the gap between value creation and financial accounting. On occasion, that gap is narrowed by a slump of financial market prices for bonds and/or equities, but the ECB has signalled that it will gamble for a while longer on trying to push the gap still wider.

Tony Norfield, 22 January 2015

The Wages of Sinn and the Euro Crisis

Today I went to the launch meeting in the City of London for the latest book from Hans-Werner Sinn, entitled Euro Trap: On Bursting Bubbles, Budgets and Beliefs. Sinn is probably best known as the President of Germany's Ifo Institute, as a well-informed, critical commentator on the European Central Bank and as someone who delivers withering critiques of economic and financial policies in the euro area. I have read some of his papers on the ECB's TARGET payments system - ones that explain the economic disaster of the euro project more clearly than one might expect - and have seen a video of an earlier speech on the euro crisis. So, I was intrigued to attend this meeting. The comments here are from my notes of his presentation. They will lack some detail, although they should nevertheless give the gist of what was said. I have ordered his new book, and will correct any misrepresentations once I have read it.

Professor Sinn's skill is in expressing his views very clearly, and with an abundance of supporting empirical evidence. Those who disagree with him may claim that he has got it wrong, but often they will be addressing a different question and not confronting the essence of what he is saying. This is certainly the impression I have had reading 'expert' spokesmen for the euro elite who criticise Sinn. Radicals, who consider him part of the reactionary establishment arguing for austerity, do not usually attempt to address his views at all.

Sinn's view of the (euro economic) world is straightforward. He admitted that he was initially a supporter of the euro project, with some reservations, and that he did not anticipate how badly it would turn out. He then focused on the facts that cannot be denied: most, if not all, of the crisis-hit euro countries went through a decade or more of falling competitiveness before the global turmoil (for the richer countries) began in 2007-08.

This falling competitiveness was based upon a growth of real incomes, consumer demand and public spending that outran the productive capacity of the individual countries. It was fed by falling interest rates that encouraged borrowing and, for the weaker countries, by a euro system that appeared to make lending to borrowers (Greece, Spain, etc) with much weaker economies have more or less the same risk as lending to those in the richer, stronger euro countries. The 'irrevocable exchange rate' of the euro, and the denial that any individual state would ever exit the system, covered up the gap in the euro project's construction: there was no agreed mechanism for rescuing insolvent states, in particular there was no unified fiscal policy, something that would have to have depended upon a political union of member countries, not simply a monetary union.

So, the euro system had no mechanism for dealing with the economic effects of divergent competitiveness reflected in the mounting levels of external debt (via current account deficits) for weaker countries. What happened instead was that the TARGET payments system for interbank transfers within the system simply led to ever-increasing liabilities of the uncompetitive and ever-increasing assets of the competitive, with the ultimate risk being put on the relevant national central banks. In practice, Germany's central bank has taken on the asset risk that German companies have in Spain, Greece, etc. The German companies get paid, but via a credit issued by the German central bank to its central bank counterparts in Spain, Greece, etc. This means that the German central bank, the Bundesbank, has questionable assets in its lending to the central banks of Spain, Greece, etc, while the Spanish and Greek central banks have liabilities to the Bundesbank offset by questionable assets from securities (and promises) delivered to them by their own domestic banks and companies.

That is bad enough, but things got worse. In recent years, the credit quality of collateral accepted by central banks from private banks in the euro system was reduced, the ECB embarked upon a series of measures to buy government and private sector securities and, in the latest measures, the ECB will also buy junk assets to 'rescue' private banks from their ownership of rubbish. Six crisis countries, claimed Sinn, have received more than €1,300bn of credit in this way, of which more than 80% has come from the ECB.

These points should make one ponder a while.

For all the protests about austerity, the euro system has invented new funds for crisis-struck countries in a way that has clearly transgressed the supposed neoliberal policy regime. Sinn noted that the US Fed, for example, would never have bought Californian state bonds. Instead, he complains, the risks of the economic disaster have been transferred to euro states and, hence, to the (German?) taxpayer.

Radicals will complain that the banks have been bailed out and rescued, while austerity continues. However, the real point is that Europe is an economic disaster area and there has been, so far, great reluctance by governments to force a market reckoning upon the mass of the population. Sinn is more conciliatory on this issue than one might think. He fears that mass unemployment, especially youth unemployment above 25% in several countries, will lead to political turmoil and extremism. He worries that 'productivity' is only rising in some countries because jobs are being shed, not because there is any productive investment. If one were to argue that yes, there has already been enough austerity, he will present statistics to show that there is another 10% to go in Italy, 20% in France and 30-35% in Spain and Greece before competitiveness is restored.

I do not necessarily agree with Sinn's numbers, but his case is clear and a few percentage points here or there make little difference to his main argument: the economics of (euro) capitalism demands austerity. All this, of course, raises bigger questions.

Sinn, despite appearances to the contrary, hopes that the euro system will survive, but he argues that it can only do so if it recognises its fundamental flaws. He proposes a 'temporary' exit of crisis-hit countries, who will then devalue their currencies and later re-enter the euro system, as of right. His solution is quaintly optimistic, but one should recognise that he favours European integration and political stability. The only problem here is that he insists that this must be on sustainable terms if it is to work. Critics of his position often focus upon Germany's benefits from the system, but he correctly notes that Germany itself had a long phase of labour market austerity in the 2000s, which is why the country has become very competitive. Above all, he wants a viable capitalist system, although with European capitalist stability high on his list of priorities.

Questions confronting those who are less concerned with saving the capitalist system, in the euro area, or elsewhere, are as follows. Firstly, it does not make sense to argue against austerity by making this an anti-German argument, as if German workers did not also have their own phase of austerity before. Secondly, an attack on 'austerity' must recognise the privileges of those in the EU/euro area who have benefited from their own countries' domination of international markets, through the control of trade links, patents or owning many of the key monopolistic companies. Fighting austerity at home is hypocritical if it does not recognise the way that the economic system subordinates others.

Thirdly, recognise that Sinn's arguments are the logical consequence of a clear-sighted capitalist perspective, and one that is also ameliorated by a concern for social stability. He has much better arguments about what is needed by capitalism today in Europe than the nonsense of 'alternative policies'. The proponents of the latter know they are dead in the water, but they might still attract some external funding, whether in advocating wind farms or whatever else. Sinn's position is to advance a policy that he recognises is a 'dismal option' - and one that he does not really expect to succeed, still less to make people happy - but he hopes it would be better than the current euro political decision to do nothing and instead to hope something will turn up.

It is unlikely that his policy recommendations will be followed, partly because euro politicians correctly see the barriers to any proposal that highlights what is really going on. Confronting an intractable capitalist crisis is something that the current generation of politicians cannot manage. The crisis has blown their legs off, yet they still dream of strolling down the road as in the good old days. Even if Professor Hans-Werner Sinn were to become the new arbiter of euro policy, that would still leave the system he seeks to sustain in question.

Tony Norfield, 9 October 2014

Merkel's Money

Don’t take the rally in Europe’s financial markets as a sign that the euro crisis is over. The 4.3% jump in Germany’s Dax index today and the rise in the euro’s exchange rate are more a reaction to hopes for further flows of ‘free money’ and relief at a crisis postponed once more. The surprise was genuine enough, after German chancellor Merkel’s former hard line on the need for austerity and ‘reform’ among indebted euro countries Spain and Italy, and in the context of widespread German political opposition to further bailouts.

A report on Merkel’s rationale for dropping the position Germany had before the latest Euro meeting, and making big concessions to Spain and Italy (hence, also to France, given French banks’ massive exposure to these countries!), highlights the following issues.

Merkel seems to think that high interest rate on Spanish and Italian debt are the problem, not the mess those countries are in which is leading to the high interest rates! Plus she thinks (or at least said in her statement to the Bundestag) that the EU Commission monitoring of their economic policies is still 'tough', so they did not need any additional terms applied to extra loans.

The end result is that there is a further extension of a 'euro country' general bail out for Spain and Italy, via the European Stability Mechanism, one of the newly invented funds. Merkel did not mention Germany's dominant share in paying for these, nor being liable for these, nor was she impolite enough to note the limited prospects for 'reform' in either country.

She won the Bundestag vote. But there will be further political trouble for her in Germany, and also many more disputes over terms and conditions of the new loans between Germany and other countries, when eventually they are due to be paid out.

Partly, this episode reflects the intractable debt situation in Europe and a desire to postpone confronting problems that cannot be solved. Partly, it is one of the wonders of the credit markets that you can always appear to have more money than you really have, if you only pay attention to the interest payments and not to the accumulation of debt. This is especially when it seems possible to drive the interest rate on borrowing down through state-credit backed bond purchases!

That neat solution of using someone else's money and credit rating to extend further debt begins to unravel when their credit rating is called into question. This is probably still some way off for Germany, which recently has had very low bond yields (even negative yields for 1-2 year bonds!). However, the first sign that the game is up will be when Germany loses its triple-A rating.

In the meantime, this episode also highlights the nonsense that it is German imperialism that is strangling Europe's economy. Yes, Germany is an imperialist power, but it is desperately trying to keep together a system – at growing cost to itself – that has guaranteed both its economic privileges and those that accrue to other members of the euro group. As a policy, this is like delaying an amputation until the last minute, just in case something else, less drastic, comes up. While these matters fester, just consider: how many tens, or hundreds, of billions in cheap credits have been extended to those outside the rich club?

Tony Norfield, 29 June 2012

Bankiarupt

The Financial Times reports the latest financial trick to emerge from the euro crisis. The Spanish government, which cannot sell its bonds at less than disastrous yields, has decided to bail out one of its major banks, Bankia, by directly giving it Spanish government debt securities that it would then exchange with the European Central Bank (ECB) for much-needed euro cash. This will help the Spanish state find the funds – reported as €19bn – to manage the overall bank bail out. Apparently, Cyprus will follow suit.

My view has been that the euro project is such a longstanding and important construct for the major European powers – Germany and France – that they will move heaven and earth to defend it. Earlier plans attempted to create a firewall around Greece, though still to keep it within the euro system. I admit to some reconsideration now.

It is not simply the possible rejection of austerity measures in Greece that creates for Germany and other creditor countries the prospect of unending, unproductive subsidies that they are likely to reject. The scale of the problems in Spain, and other countries too, means that the numbers have simply become too large. When it comes to hundreds of billions of euros, then Germany and other creditor countries in Europe will begin to ask questions: can this money be better spent than on bailing out recalcitrant bankrupts? Especially when their actions, as with Spain’s latest move, only add to the burgeoning liabilities of the ECB. Spain is essentially saying that ‘We cannot pay for the bail out, so we are passing the ball to Europe’ – ie the creditor countries who will back up the ECB.

This is such a big crisis that the resolution is not something to be sorted out over a policy weekend, as many previous weekends have shown. It is also more than facile to expect anything progressive from Hollande, who will simply act to protect France’s interests in the troubles ahead – essentially by making Germany pay more, if possible. A long, hot summer is ahead in Europe.

Tony Norfield, 27 May 2012