Friday, July 12, 2013

Saving the eurozone, a desperate undertaking

Sony Kapoor and his fellow associates at the Re-Define think tank have been offering constructive analyses of the eurozone's problems from a pro-Europe but non-"austerian" viewpoint. Kapoor in A Eurozone-wide IMF programme could save both 07/12/2013 encourages the eurozone leaders - of whom the chief is German Chancelor Angela "Frau Fritz" Merkel - to learn some constructive lessons from the IMF's recent reflections on the, uh, inadequacy of the austerity policies currently strangling the economies of Cyprus, Greece, Ireland, Italy, Portugal and Spain.

In this Yannis Ioannou cartoon of 07/07/2013, Angela Merkel and her Finance Minister Wolfgang Schäuble rush to provide more assistance to their Success Stories Portugal and Greece, their graves already dug, just waiting for the dirt to be piled on top of them

As Kapoor observes, "Recent commentary that 'the Eurocrisis is back' is not accurate; the crisis had never gone away."

And it's bad:

The Eurozone is now stuck in a death spiral, as the failure to clean our banking system combines with unduly harsh austerity to choke the real economy. The record-high and still rising level of unemployment, collapse of investments and dismal growth prospects have shrunk political space and endangered the social fabric in crisis economies. A continuation of flawed current policies expounded by the European Commission, the ECB and perhaps most of all, Germany, will almost surely take us over the brink. The question is no longer whether the next acute crisis will come, but more what form will it take. Financial problems can be addressed, for example, by flooding the system with liquidity, but political and social breakdown would be impossible to reverse.
Kapoor reminds us, "Before the crisis, the IMF had come to be seen as a pariah by the developing world, but it appears to have learnt lessons from past follies." But since 2009, the IMF's inclinations for dealing with the debt crises have tended to be more realistic, less draconian and therefore less destructive than those preferred by the Troika (IMF, ECB, EU Commission), which is dancing to the tune dictated by Merkel. That's not so much a recommendation of the wisdom of the IMF as it is a measure of the extreme folly of Angie-nomics and her austerity demands stemming from her stone-conservative economic outlook of "ordoliberalism."

Kapoor envisions the IMF as taking a lead role in pushing the ECB and the EU (more precisely: Angela Merkel and Germany) to taking a constructive rather than destructive role:

The failure to agree Europe-wide mechanisms for capitalising banks thus far, or providing funding guarantees to the banking system made sense for certain Member States, but was disastrous collectively. The harmful delay in the restructuring of Greek debt and EU leaders' insistence on self-defeating harsh austerity measures also fall in the same category. Having the IMF in-charge would mean fewer collective action problems. A system-wide view of the crisis, which only the IMF can bring from outside, would be invaluable.

As discussed above, an IMF programme would also bring a reversal of fiscal tightening, a more coherent approach to bank restructuring and a sharper focus on growth-enhancing structural reforms in product and service markets. Importantly, this would happen not just in crisis economies, but also in countries such as Germany, the Netherlands and France, with positive spill-overs for the rest of the Eurozone.

The European Commission, the European Investment Bank and the ECB would be natural counterparts for the IMF providing fiscal, investment and monetary support respectively to facilitate necessary adjustments.
Given the hardnosed determination that Merkel has shown so far to force the victim countries to stick with pro-cyclical austerity, and given the rank nationalism that she and also her SPD competitors (and aspiring Grand Coalition partners) have promoted throughout this crisis, this proposal has a definite air of desperation. But those who genuinely want to see a democratic EU survive Merkel and her Ordoliberalism, they have to try to push movement in that direction.

But given the current corrupted vocabulary, i.e, neoliberal doubletalk, I'm not sure what Kapoor means by " a sharper focus on growth-enhancing structural reforms in product and service markets." Merkel and her minions have turned the word "reform" into a synonym for deregulation, financialization, weakening of unions, reduction of incomes for the majority, privatization and drastic cutbacks in public services. Since the Re-Define crew seem much more oriented toward actual growth policies, Kapoor may well mean Keynesian reforms, New Deal-type reforms, democratic reforms. But we need to read everyone's lips closely when they talk about "reforms" in the eurozone context, especially when the word "market" appears in its vicinity.

How far Merkel's government is from moving urgently forward on necessary reforms that would actually have a chance to save the eurozone is illustrated in this piece by Derek Scally from the Irish Times, Proposals for single banking resolution rest on 'shaky foundations' 07/12/2013. Loyal as they are to Germany's One Percent and Merkel's dogma of Ordoliberalism, she and her Finance Minister Wolfgang Schäuble are opposing the eurozone banking union to which they have agreed in general principle, mostly immediately because the are striking a nationalistic posture for the September elections:

German officials complain that, by bedding the proposals down in European common market law, Brussels is trying to establish a competence for which it has no legal entitlement.

Sooner or later this "competence hijack", as they put it, will be challenged in court - with unpredictable consequences - by the losers of any bank wind-up.

Berlin wants bank wind-ups to be overseen by a network of national authorities until member states agree a limited treaty change to give Brussels an explicit competence in this area. ...

He supported the idea of a mutualised EU bank wind-up fund but warned against expecting European taxpayers to cover the cost of struggling banks while the common fund was filled with the proceeds of bank levies.”

“We don’t want that Europe decides and the member states pay,” he said, urging responsibility and liability to remain in one hand. “That is our obligation to national parliaments.” ...

Yesterday Stephan Götzl, president of Germany’s regional bank association, attacked the single resolution plan and common fund as an "enabling act" - a term with historical associations to the Nazi takeover of 1933. [my emphasis]
Wasn't it not so long ago than respectable Germans, including bank lobbyists, pretended to be "good Europeans"? Now this bankers' lobbyist calls the eurozone banking union a Nazi-like idea? The "good European" talk seems to be pretty dispensable for the German One Percent.

Kapoor's diagnosis of the eurozone's problems is in line with that in this "Charlemagne" article he cites, Lessons from Lagarde The Economist (dated 07/13/2013)

The fund forecasts a deeper-than-expected recession in the euro zone this year, and slow growth in 2014. Disruptive Greece is again falling behind in its reforms, particularly in its promise to cull thousands of civil servants, and will doubtless need another debt write-off. Better-behaved Portugal saw bond yields spike after the abrupt resignation of the finance minister, Vítor Gaspar, and may need a second bail-out. Slow-learning Italy was marked down by a credit-rating agency this week, helping to push the euro lower against the dollar. Even the overachieving German prefect saw a sharp drop in exports.

When so many students are failing, it is fair to ask whether the fault lies with the school itself. Is it time to put the euro zone as a whole under a remedial programme? The idea has circulated in various forms, though it runs into legal and practical problems. The euro zone is not a member of the IMF, so cannot borrow money or be placed in a programme. In any case, European institutions are not directly responsible for most aspects of economic policy-making, including taxes and spending.

Even to suggest the idea as an intellectual exercise highlights the failings of the Europeans. The euro zone does not have a balance-of-payments crisis (it enjoys a current-account surplus). Nor does it have a debt-repayment problem. Overall its deficit and public debt are lower than America’s. The euro zone’s biggest problems are all internal. [my emphasis]
And the biggest single one of those problems is called, "Angela Merkel."

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