Thursday, April 04, 2013

The euro crisis rolls on and the left-center parties back austerity

Krugman addresses the euro currency trap and reminds us how similar it is to the dilemma posted by the gold standard during the Great Depression in One Size Fits None 04/02/2013:

What has happened in Europe is that the peripheral countries have been forced into extreme austerity, but this has not been offset in the core – in fact, core countries have also engaged in austerity measures, albeit not as severe. So the overall result has been a sharp fiscal contraction in Europe – the cyclically adjusted balance is now much tighter than it was before the crisis, even though private-sector demand remains very weak — with no offset from looser monetary policy.

European policy makers seem surprised that this policy mix has led to a double-dip recession, but they have no right to be – it’s exactly what basic macroeconomics would have told you to expect.

And this in turn tells you that the euro is an even more flawed construction than optimum currency area theory might have predicted. OCA emphasized the problem of one size fits all in the face of “asymmetric shocks” – the problem of how countries are supposed to cope if they’re slumping while the rest of the currency area is booming. But it turns out that in times of broad economic weakness this problem is compounded by the asymmetry of the pressures countries face, in which troubled economies are compelled to tighten but less troubled economies feel no need to loosen, so that the overall stance of policy has a strong deflationary bias.

As Matt O’Brien says, this is the same issue countries confronted under the gold standard – a problem they dealt with, eventually, by going off gold. [my emphasis]
Wolfgang Münchau jumps on one of my hobby horses, the pitiful response of the Social Democratic parties in Europe to the economic and euro crises in Zeit für eine neue Sozialdemokratie Spiegel Online 03.04.2013. He recalls that the Center Party, the predecessor of the Christian Democratic Union (CDU), German Chancellor Angela "Frau Fritz" Merkel's party, was the party of the Hunger Chancellor, Heinrich Brüning, who held the office from 1930 to 1932. "Die heutigen Konservativen haben die frühen dreißiger Jahre aus ihrer Gedankenwelt verbannt. Sie haben nichts gelernt und nichts vergessen." ("Today's conservative have banned the early 1930s from their world of thought. They have learned nothing and forgotten nothing.")

In Münchau's analysis, the German Social Democrats (SPD) went into "hibernation" on macroeconomics after the Chancellorship of Helmut Schmidt (1974-1982). He doesn't use the term "neoliberalism" in this article. But what he's describing is the neoliberal capture of the center-left parties in much of Europe. But he's blunt about what he means. He says the SPD became "a party of industry lobbyists" that has "lost the words" to be able to address the problems of the European depression and the eurozone crisis in a meaningful way. But very similarly to what the Democratic Party in the US has done, the SPD and other major Social Democratic parties in Europe adopted the language of budget-balancing and fiscal probity. They framed economic issues in a way that is fundamentally favorable to conservatives. And they have largely embraced Frau Fritz very current and very damaging version of Heinrich Brüning's austerity politics in the current crisis. And while Germany itself isn't as bad off as its victims in Greece, Ireland, Italy, Spain, Portugal and now Cyprus, its economy is also weak and in recession, as Münchau notes, with unemployment beginning to rise.

Frrench President François Hollande won a majority last year as Presidential candidate and his Socialist Party has a majority in Parliament. He won, not even a full year ago, campaigning against Frau Fritz' austerity policies and demanding renegotiation of the Stability Pact, which I tend to call the fiscal suicide pact because it largely bans the use of counter-cyclical fiscal policies during a recession or depression even within nations, much less eurozone-wide. But he barely got into office before he chunked those campaign issues out the window, signed on to the fiscal suicide pact unchanged, and proposed an austerity budget for France.

Now a poll done for Le Nouvel Observateur finds only 27% satisfied with his Administration (Allison Jackson, Poll: French President Francois Hollande approval rating at record low Global Post 03/27/2013):

... only 27 percent of respondents said they were satisfied with the Socialist leader, with 68 percent dissatisfied.

The LH2 survey found 15 percent of respondents were satisfied with Hollande’s efforts to tackle rising unemployment, with 81 percent dissatisfied.

Twenty-two percent said they were happy with his efforts to cut public debt.

The poll of 968 people was conducted on Friday and Saturday, and published in the newspaper on Wednesday.

"This assessment ... shows that his May 2012 designation as a 'candidate of change' now leaves people with a feeling they have been deceived, which is amplified for his measures to fight unemployment and reduce the public debt," LH2 was quoted by Reuters as saying.
A new scandal over Hollande's previous campaign treasurer isn't making things easier for him. (Aziz El Yaakoubi, French government blameless in minister scandal: Hollande Reuters 04/04/2013)

Martine Bulard discusses Hollande's neoliberal course in Neoliberality, inequality, austerity Le Monde diplomatique (English edition) Apr 2013 (accessed 04/04/2013). "It took [previous Socialist President] François Mitterrand two years to switch to a policy of rigour, in 1983, after a few, significant, structural reforms; it has taken the Fifth Republic’s second Socialist president only six months to turn to neoliberalism with all the enthusiasm of a true believer." And he elaborates:

Almost immediately after taking office, Hollande, like Nicolas Sarkozy before him, fell into step with German chancellor Angela Merkel. He went to his first European summit intending to "renegotiate" the Treaty on Stability, Coordination and Governance (TSCG) to "favour growth and jobs" (2), one of his electoral promises. He returned with the "golden rule" that the budget deficit must not exceed 3%. Goodbye jobs, hello austerity. ...

Initially, this founding act was accompanied by measures that gave some dreamers grounds to hope for "social justice within austerity" (the new watchword): a back-to-school handout for the poorest households, an exceptional 75% tax band for very high earned incomes, the taxation of capital gains at 24%, the taxation of some types of capital income at the same rates as income from work, the establishment of a semi-public investment bank, the freezing of some rents, full reimbursement of the contraceptive pill under national health insurance, retirement at 60 for anyone who had contributed to the pension system for 40 years, the creation of new teaching jobs (10,000 in 2013) and the official end of the General Review of Public Policies (RGPP), [previous conservative French President Nicolas] Sarkozy's formula for halving the number of civil service jobs through natural wastage.

But things were soon back under control. The symbolic 75% tax band, designed to impress public opinion and distract from the shelving of any plans for significant fiscal reform, was abandoned. Exemptions cut down the capital and capital gains tax measures to almost nothing. The RGPP was reintroduced as "Modernisation of Public Action" ...
He quickly became extremely solicitous of the banksters he had campaigned to restrain:

This is not the end of Hollande’s backsliding. His declaration that “my real adversary is the world of finance” (at Le Bourget, 22 January 2012) was very quickly relegated to the election campaign scrapbook. Thanks to the media’s worship of neoliberal orthodoxy, the business elite safeguarded its privileges — the same privileges that led to the financial disaster of 2008. By making even fewer demands than Britain’s Conservative prime minister David Cameron, Hollande has deprived himself of any means of getting France away from the banks’ demands for double-digit profit growth.
And his own base among French workers? Well, somebody has to pay the price for the banksters' convenience, now don't they?

Hollande will be celebrating his first year in power with a social law that negates the principles of France's labour legislation, confirming the primacy of collective bargaining agreements within individual companies over national agreements and restricting the right to legal challenges. Sarkozy had already switched the message from "work longer to earn more" to "work longer for less". His "competitiveness-employment agreements" were thrown out along with him. Now they have reappeared, rebranded as a leftwing policy euphemistically labelled "stabilization of employment".
I try to be cautious about international political generalizations. But there are striking similarities between the capitulation of the Social Democratic parties to neoliberalism across Europe and to the course of the Democratic Party in the US under President Obama's leadership. Lower wages, fewer jobs, reduced labor protections, lower pensions: that's what the center-left voting constituency gets from the left brand of neoliberalism:

The Hollande administration’s achievements over this first year are impressive: France is now familiar with recession, and unemployment and the budget deficit are growing. This is no surprise: lower government spending and wage austerity lead to lower economic activity. This brings higher unemployment and more welfare payments, which lead to lower tax revenues, causing the deficit to grow... Even the IMF is beginning to question the benefits of this medicine.

And yet Hollande’s team, despite their initial good intentions, have succumbed to neoliberalism. To be able to go on borrowing at low rates on the “markets”, and avoid following Greece or Spain, France is toeing the line. It could take inspiration from Iceland, which has reined in its banks. Or it could bypass the financial markets with a large issue of government bonds, since the level of national saving would allow this. It could also put taxes back up to the level they were at in the 1980s (before the tax phobia of US-style neoconservatism went global), or implement sweeping structural reforms. German intransigence is often cited as an objection to these suggestions, but Germany is heavily dependent on exports and on the euro, and would be in trouble if France left the monetary union. Blackmail could work both ways. ...

Socially unjust and economically inefficient, austerity is a time bomb that threatens society. Greek socialist MEP Dimitrios Droutsas said: "We introduced policies that went against our beliefs. We took measures we did not believe in. The result was predictable: people have lost confidence in us. Greek society has reached boiling point and I fear it will boil over".
The depression is not over, and Europe's current course will prolong it. And unless the Social Democratic parties find a way to fight for the interests of their base voters, their future as political organizations may not be so bright.

Italy is feeling some of the political effects of a depression with no large established party offering a clear, progressive alternative to Frau Fritz' Heinrich Brüning policies and the euro trap. As Barry Moody reports for Reuters (Scenarios for Italy crisis, uncertainty could drag on 04/04/2013):

An election on Feb 24-25 pushed Italy into limbo with a huge protest vote for the populist 5-Star Movement splitting parliament three ways, wrecking the established bipolar system and leaving no group with enough support to rule alone.

Under the constitution, it is up to the president to sort out the mess, but [President Giorgio] Napolitano's own 7-year term ends in six weeks and his successor must be elected by the divided new parliament.

Center-left leader Pier Luigi Bersani has a majority in the lower house but not in the Senate and has rebuffed repeated overtures from center-right leader Silvio Berlusconi to form a grand coalition with him. In turn, 5-Star leader Beppe Grillo rejects Bersani's attempt to form an alliance with the left.

Hopes of a solution now appear to depend on Berlusconi and Bersani reaching some kind of deal over the presidential election, which will begin on April 18. Any deal could clear the way for a government. Otherwise Italy will head for elections, possibly as soon as June-July but more likely in the autumn.
You're doing a heckuva job, Angie!

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