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Ideia central: Até 2010 não existia crise de dívida soberana. Esta foi criada para salvar os bancos alemães, franceses, ingleses e belgas da bancarrota através da socialização da dívida (que anteriormente tinham atirado para os mercados de especulação imobiliária no sul da europa).Ver em baixo os números concretos (a negrito).

Bailing out Germany: The Story Behind the European Financial Crisis

Bankia, Spain’s fourth largest bank, asked the government for a €19 billion ($24 billion) bail out on Friday night.  Four Greek banks – Alpha Bank, Bank of Piraeus, Eurobank and National Bank of Greece – were together given €18 billion ($23 billion) from their government last week also.

The sudden economic crash in several southern European countries: Greece, Italy, Portugal and Spain as well as Ireland (sometime called the PIIGS, a rather dubious and perjorative name); is commonly blamed on lazy workers, a bloated social security system and unwise borrowings by greedy governments. This is why lenders like the European Central Bank (ECB) and the International Monetary Fund (IMF) are now asking these governments to cut social spending (austerity measures) and pay ever higher interest rates, despite the fact that only serves to make the situation worse.

“As far as Athens is concerned, I … think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax,” Christian Lagarde, the French head of the IMF told the Guardian.

In reality, a large chunk of the bailouts are for debts created by private banks in Greece, Ireland, Italy, Portugal and Spain borrowing abroad – for speculative real estate schemes and such like – not by shopkeepers, small entrepreneurs and ordinary citizens. And a surprisingly big chunk of the rash loans were handed out by private (and some public) banks in just four countries: France, Germany, the UK and Belgium (in that order).

Peter Böfinger, an economic advisor to the German government, put his finger on it when he told Der Spiegel last year: “[The bailouts] are first and foremost not about the problem countries but about our own banks, which hold high amounts of credit there.”

Let’s dig a little deeper. First were all the borrowing countries wildly spendthrift? Here are some very instructive numbers: before 2008, the Irish and Spanish governments had borrowed less than Belgium, France, Germany and the UK. The Irish owed owed roughly 25 percent of gross domestic product (GDP) in 2007, the Spaniards owed 36 percent. Meanwhile the Belgians had borrowed 84 percent, the French and German government had taken out 65 percent while the UK was at 44 percent. The Portugese were at about 65 percent – same as the Germans – and Greece and Italy admittedly were at over 100 percent.

The BBC’s Laurence Knight notes “Madrid was in the process of paying its debts off – it earned more in tax revenues than its total spending. In contrast, Berlin regularly broke the maximum annual borrowing level laid down in the Maastricht Treaty of three percent of GDP.” Interestingly, so did France and the UK (the latter isn’t bound by the treaty).

Second, who was lending the money that is now so difficult to pay back? After all it takes two to tango, as they say. Borrowers and lenders share in the risk and the blame.

Well, Bloomberg took a look at statistics from the Bank for International Settlements and worked out that German banks loaned out a staggering $704 billion to Greece, Ireland, Italy, Portugal and Spain before December 2009. Two of Germany’s largest private banks – Commerzbank and Deutsche Bank – together loaned $201 billion to Greece, Ireland, Italy, Portugal and Spain, according to numbers compiled by BusinessInsider. And BNP Paribas and Credit Agricole of France loaned $477 billion to Greece, Ireland, Italy, Portugal and Spain.

How much of these loans were to the government? The Economist has some interesting numbers  – just $36 billion went to the governments of Greece, Portugal and Spain. The rest was loaned out by banks like Munich based Hypo Real Estate that distributed over $104 billion for property schemes.

(For more details the BBC has an excellent graphic tool that shows which country was borrowing from whom: Spain’s biggest creditor is Germany at €131.7 billion ($171.2 billion) and Portugal’s biggest creditor is also Germany €26.6 billion ($34.6 billion). The Greeks owed most to France at €41.4 billion ($53.8 billion).

Finally, who profits out of this? Well, the German banks have since taken their money out: Bloomberg estimates that $590 billion was taken back after December 2009. But the debt remains so that is why the borrowing countries are forced to go to lenders like the ECB which in turn is getting it from the Bundesbank (the German central bank). The German government only has to pay an interest rate of 1.42 percent to borrow money for 10 year bonds, apparently the lowest they have ever paid. (The French are also doing fine at 2.42 percent)

The ECB money comes with strings attached – severe austerity. It is true the borrowing countries don’t have to take these conditional loans, they can also borrow at market rates but this can be very expensive: they have to pay between 5.5 percent (Italy) to an astronomical 30 percent (Greece) in interest for 10 year bonds.

“The euro-zone crisis is often framed as a bailout that rich, responsible countries like Germany have extended to poor, irresponsible countries like Greece,” writes Ezra Klein in the Washington Post.

In reality this crisis is at least partly (perhaps mostly) the fault of the banks in the wealthy countries like France and Germany and it is these banks that have really been bailed out by the ECB and the IMF.

The Indignados in Madrid, Blockupy in Frankfurt and Occupy Wall Street have it right.


O artigo explica como um media de referência, o New York Times, tem consistentemente produzido uma cobertura mediática da crise do euro, que relata a situação exclusivamente da perspectiva alemã e promove a austeridade.

A luta contra as políticas de austeridade é também uma luta pelo controlo do espaço mediático. É preciso combater os meios de comunicação e forçar a entrada de outras análises e perspectivas na arena política. Este blog tenta dar um modesto contributo na cena portuguesa.


Publicado originalmente no blog Naked Capitalism e no New Economic Perspectives

Bill Black: New York Times Reporters Embrace the Berlin Consensus and Ignore Krugman and Economics

Yves here. Black does yeoman’s work in describing the bias in the New York Times’ Eurocrisis reporting.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

The New York Times’ coverage of the euro zone crisis continues to exhibit two related flaws. First, it is overwhelmingly written from the German perspective – the Berlin Consensus that is driving the crisis. Second, it continues to ignore economics. Paul Krugman, the NYT’s Nobel Laureate in economics, has been explaining the economics of the crisis for years in his weekly NYT column. We know that Berlin either doesn’t read or comprehend what Krugman has been trying to explain, but it is remarkable that so many of the NYT reporters covering the euro zone crisis share their failure to read or comprehend.

A recent example of this pattern is the May 8, 2012 article “German Patience with Greece on the Euro Wears Thin.”

The introductory paragraph establishes that the frame for the article is Berlin’s destructive and warped view of the euro zone crisis.

BERLIN — Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable. Now, with Greece’s newly empowered political parties refusing to abide by the terms of the country’s international loan agreement and Europe’s leaders talking tough, that outcome is looking increasingly likely.

We should begin with the title of the article. Germany has insisted that Greece follow austerity policies (the Berlin Consensus) that were certain to force Greece into depression. The Berlin Consensus has forced Greece into a depression. The German reaction to the economic catastrophe that it has forced on the Greek people is to be enraged that the Greek people in the recent election rebelled against their leaders who had given in to the German demands that the Greeks be forced into a depression. Greek patience with Germany’s destructive policies, its assaults on Greek sovereignty, and its constant, vitriolic insults of the Greek people has more than worn “thin.”

The Greeks are responding to the failed Berlin Consensus in a manner similar to Latin America’s revolt against the Washington Consensus. The Greek reaction, therefore, was not “almost unthinkable” – it was the typical response of a nation whose leaders caved in to a neoliberal assault on their economy and sovereignty. The NYT reporters get their analytics wrong because they studiously ignore the Greek perspective and refuse to even entertain the question of why anyone would expect a nation to accept being forced by a hostile foreign power into a great depression. As I have argued, the “Occupy” movement in the U.S. should stand in awe of Germany’s reoccupation of Greece. The Greeks have a bitter history of Greek quislings aiding Germany’s World War II occupation, so their rage at their recent leaders’ surrender to German demands is understandably intense.

The Greek reaction would be understandable if the NYT reporters bothered to consider the Greek perspective. Unfortunately, the reporters’ adoption of the German perspective leads them to emulate Berlin’s refusal to consider the Greek perspective. Instead, the reporters’ adopt the German framing of the issue. That framing is that the Greeks are inexplicably “refusing to abide by the terms of the country’s international loan agreement.” The idea that the Greek people should continue to take the Berlin elevator that has plunged their nation into a great depression because their disgraced leaders were coerced into agreeing to a deal that is destroying their nation is insane. Democracy is all about throwing out leaders who have disgraced themselves, crushed the nation’s economy, and cravenly taken orders from a hostile foreign power. The Greeks have done just that. Why would anyone expect the Greeks to continue to follow a suicidal economic policy imposed by Germany? Berlin and the NYT reporters share the bizarre belief that if your coerced leaders sign a suicide pact you have a duty to commit suicide because – a deal is a deal.

The reporters fail to ask why the Greeks object to the deal and why the consequences of the deal would be suicidal for Greece. Instead, they simply assume that Greece should continue a deal.

But the frustration with Greece here is undeniable. There is a growing conviction that it is up to Greece to follow through on its commitments, that Europe is done negotiating.

Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,’ said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. ‘If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?’

Note the lack of any embarrassing questions by the reporters to Hefeker, who they describe as an expert in the euro. His premise is that if the Greeks refuse to continue to follow a suicidal austerity program mandated by Berlin, if instead they take “the path” of rejecting austerity “it would be hard to justify keeping them in [the euro].” We are back at one of the most disturbing aspects of the Berlin Consensus – the dogma that “there is no alternative” (TINA). Austerity during a recession, much less the great depression levels of unemployment Greece is suffering, deepens the depression and tears the nation apart. Berlin insists that its suicidal policies are the only alternative. Krugman (and many others, including UMKC economists) have been explaining for years why that view is economically illiterate.

The Berlin Consensus has forced the euro zone into recession and thrown the periphery into depression level unemployment. If the reporters had listened to economists they would have responded to Hefeker’s query by reformulating his question. His question invites a follow-up by the reporters: “How do you deal with a country that says we don’t want to keep any of the commitments we have made?” If the “commitments” are suicidal, then the way you deal with Greece’s refusal to commit suicide is to praise it and end the German diktats that have devastated Europe. If Chancellor Merkel gave into foreign coercion and signed an agreement that was suicidal for Germany and the German people threw her out of office through a democratic vote and repudiated the agreement, who believes that Hefeker would urge Germans to commit suicide on the grounds that a deal is deal?

The reporters then note the German praise for Spain’s conservative government because of “the government’s efforts to cut deficits in spite of a contracting economy.” Germany praises the quislings who give in to its coercion and cause their national economy to collapse into great depression levels of unemployment. Germany praises suicidal quislings, but it is venomous in its hate for the Greeks because they have thrown the quislings out of office.

Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again.

I agree that Greece is a special case and that it has greater internal problems of its own making than other nations of the periphery. What isn’t special about Greece, however, is the insanity of Berlin’s demands for austerity in the midst of a recession or depression. Austerity has produced a crisis throughout the euro zone and it has caused a great depression in many nations of the periphery. Most euro zone nations have made false statements about the true state of the economy and budget deficit projections. The central reason the projections proved false is that Berlin insists that austerity will produce recovery, but it actually produces economic losses or even catastrophe. Berlin wants euro zone nations to create their budget deficit estimates on the assumption that austerity will spur economic growth. Using Berlin’s preferred means of projecting budgets deficits has caused virtually every euro zone nation to greatly underestimate the actual budget deficit.

When a nation such as Greece is forced into a great depression its tax revenues fall sharply and the need for public expenditures, e.g., for unemployment payments, grows. The result is that nations do not control their budget deficit. If they adopt austerity they may make the budget deficit even larger. If they raise taxes they reduce private sector demand and if they cut government programs they reduce public sector demand – both of which make the recession worse. My colleague Stephanie Kelton has been very strong in trying to get this basic fact across to the public and policy makers – nations do not control their budget deficits. Austerity does not lead to balancing the budget – it leads to recession and depression. If you hate budget deficits, you should realize that it is recessions that primarily drive budget deficits and that adopting austerity during a recession or the recovery from a recession is what leads to deeper recessions and severe depressions.

The reporters miss all of this (as does Berlin). The reporters then move to options, but the genius of TINA is that there are no options.

But the options are few and unpalatable. One possibility, analysts said, would be for the troika to pay Greece just enough to keep government services running, withholding the rest until the political situation clears up. In what some consider the most likely possibility, the creditors would agree to renegotiate the terms of the bailout and the new Greek government would go along.

But there is also the possibility that the troika will finally refuse to hand over any money whatsoever, something the I.M.F. did a decade ago in Argentina, when Buenos Aires failed to meet its bailout terms. If this happens, many experts say, Europe will be ready.

“Unpalatable” to who – and how did the purported unattractiveness of policy options come to be a “fact”? The reporters present these two paragraphs as facts – not Berlin’s dogma that is economically illiterate and has been falsified by the facts. If Germany stopped demanding austerity the euro zone would not be in recession and the periphery would not be continuing to descend into depression. If the euro zone followed policies to expand employment through increased public sector demand the results would be extraordinarily “palatable.” The German Consensus is catastrophically “unpalatable” – which is why it has consistently led to voter rejection of the quislings who have been coerced into giving in to Berlin’s austerity diktats.

It is unacceptable for reporters from the nation’s top paper to present statements like this as facts. The reporters’ statements about the alternatives are not simply contestable; they are contrary to observed reality and economics. It is deeply disturbing that the reporters covering the euro crisis have adopted the Berlin Consensus and become devotees of cult of austerity, but the newspaper has a duty to prevent them from presenting their dogma as fact.

If the NYT reporters read Krugman (or most any sentient macroeconomist) they will learn that austerity is not the only alternative – it is the worst alternative of those under consideration. If Germany and the European Central Bank (ECB) were to increase public spending Germany and the entire euro zone, indeed, the entire world would be better off. Pushing the euro zone into recession and the periphery into great depressions is terrible for every euro zone nation and imperils the global economic recovery.

The NYT reporters do note the alternative that Greece could withdraw from the suicide pact that Berlin insisted they sign and default on its debts. The article implies that the IMF taught Argentina a lesson when it refused to continue to adhere to the suicide pact the IMF had coerced disgraced Argentine leaders to accept. The implication is that the Argentine option is unpalatable because the IMF cut off of funding results in a disaster in Germany. The facts, however, are inconvenient. First, it was Argentina that told the IMF to go jump into their choice of the Atlantic or Pacific Ocean. Second, Argentina’s rejection of the austerity suicide pact worked brilliantly for Argentina and its people – and Argentina’s government has never been cited as an exemplar of good government.

It would be relevant to know why Argentina fell into a depression so severe that the IMF intervened and prescribed its universal snake oil – austerity. Argentina eventually rejected the IMF suicide pact and defaulted on its debt. Argentina was the purported star performer demonstrating the wisdom of the Washington Consensus. Timothy Geithner, in his IMF incarnation (where he was also a policy failure), approved a report entitled “Lessons from the Crisis in Argentina” dated October 8, 1993:

In 2001-02, Argentina experienced one of the worst economic crises in its history.

Output fell by about 20 percent over 3 years, inflation reignited, the government defaulted on its debt, the banking system was largely paralyzed….

The events of the crisis, which imposed major hardships on the people of Argentina, are all the more troubling in light of the country’s strong past performance. Less than five years earlier, Argentina had been widely hailed as a model of successful economic reform….

Argentina was widely considered a model reformer and was engaged in a succession of IMF-supported programs (some of which were precautionary) through much of the 1990s, when many of the vulnerabilities were building up.

Argentina followed the IMF’s Washington Consensus game plan, which plunged it into depression. The IMF told Argentina that a partial bailout and austerity was the answer to depression and the Argentine leaders were desperate enough to agree. I set out below the IMF’s description of what it sought to impose on Argentina. If you know enough to realize its similarity to the troika’s (EU, ECB, and IMF) demands on Greece you may wonder why the troika would repeat the IMF’s failed policies from a decade ago in Argentina. (Hint: recurrent failure is the IMF’s specialty. Failure, therefore, has never led the IMF to change its insistence one size fits all financial suicide pact. Actually, I am being too kind to the IMF. Geithner concluded that the IMF had made mistakes in dealing with Argentina – it had not been draconian enough in insisting on austerity, reduced national debt-to-GDP ratios, and reduced working class wages. As I said in my first column on this subject, citizens that have experienced the tender mercies of the Washington and Berlin Consensus develop a passionate hate of those policies.)

“The program sought to bolster the prospects for economic growth through gradual fiscal consolidation—an increase in the public sector primary surplus to 1½ percent of GDP from about ½ percent of GDP in 2000— with an overall deficit of about 3 percent of GDP—and various structural measures. The consolidation plan was formulated against the backdrop of a new fiscal pact with the provinces and envisaged improvements in tax enforcement. On the structural side, the program aimed at promoting private investment and competition in domestic markets through (inter alia) elimination of tax disincentives, continued implementation of already approved labor market reforms, and deregulation of key sectors….”

The alert reader will not be surprised that austerity did not produce an economic recovery in Argentina.

The attempts at strengthening the public finances failed, however, to break the cycle of rising interest rates, falling growth, and fiscal underperformance. Financial markets initially responded positively to the revised program, but already by mid-February, it became evident that the fiscal deficit was about to exceed the agreed ceiling for the first quarter. Moreover, following the resignation of the finance minister, his successor was forced out of office in less than two weeks as his planned budgetary cuts and reform measures failed to find the necessary political backing.

As always, austerity failed to deliver its promised economic benefits and produced a political backlash among the citizenry that realized that austerity was a suicide pact imposed by a hostile neo-colonial power.

Geithner predicted that Argentina’s default and anti-austerity response would make it extraordinarily difficult for Argentina to recover.

Looking forward, the country faces enormous challenges not only in restoring macroeconomic stability but also in re-establishing the pre-eminence of contracts, property rights and economic security that has been damaged by the government’s defaulting on its debt and reneging on its convertibility commitment. Damage both to the balance sheets and to the credibility of the banking system also needs to be repaired. While the devaluation has addressed immediate concerns about competitiveness, one troubling aspect of the performance of the Argentine economy was that, even during its boom years, 1991-98, unemployment remained persistently high, underscoring the need for reforms of the labor market and for other improvements in economic institutions and structures that foster a more dynamic private sector.

[T]here needs to be a fundamental rethinking of the role of the state—not least, in the relations between the federal government and the provinces, and the size and cost of the civil service—if expenditure is to be commensurate with revenues.

The IMF was writing about an Argentina in a severe recession, but Geithner’s report stressed that the IMF’s primary concern was the need to re-establish: “the pre-eminence of contracts, property rights and economic security….” “Reforms of the labor market” is code for cutting working class wages. The IMF answer to severe unemployment is to add to it by firing public workers. The needs of the Argentine people were not even tertiary to the IMF. The IMF, Washington, D.C., and Berlin are always amazed that the citizens of the nations they assault figure out that their welfare is irrelevant and become enraged at those that inflict the suicide pact.

Actually, the Geithner report did reach one sound conclusion. Unfortunately, Berlin has ignored it.

With regard to crisis resolution, the Argentine crisis illustrates the importance of timely debt restructuring in cases in which the debt dynamics have become irreversible. Once a debt restructuring has become unavoidable, measures to delay it are likely to raise the costs of the crisis and further complicate its resolution.

Berlin has mastered the art of forcing the periphery to twist slowly in the wind while being subjected to constant insults. Everyone suffers from Berlin’s passive aggressive assault on the periphery. Berlin, however, finds it politically and personally desirable to put a boot on the throat of the nations of the periphery and squeeze until quislings emerge to do Berlin’s bidding.

The 1993 Geithner report about Argentina reached another interesting conclusion that the IMF and Berlin failed to follow when dealing with the current crisis.

An important consideration that has to guide the Fund’s decision-making process and that was clearly underscored by the Argentine experience is that, in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.

Greece’s “debt dynamics are clearly unsustainable” but the devotees of the cult of austerity are late to see this fact because they believe that austerity spurs economic growth. If austerity spurs economic growth then debt dynamics are rarely unsustainable. As the nation reduces spending the economy expands, which increases tax revenues, which allows the nation to achieve a budgetary surplus. Similarly, the IMF and Berlin assume that if a nation cuts working class wages during a recession it will increase exports and run a trade surplus that will provide funds it can use to pay down its sovereign debt. The IMF and Berlin do not understand that sharply reducing working class wages during a recession can cause already inadequate private sector demand to fall and deepen the recession. The result of believing in what Krugman aptly labels the “Confidence Fairy” is that it leads you to believe financial fairy tales in which austerity allows nations to recover from even severe debt crises – even when (like Argentina and the euro zone) they lack a true sovereign currency. This causes Berlin and the IMF to continuously fail to realize that debt has become unsustainable in nations that lack a sovereign currency. The Geithner report admits aspects of this problem.

Growth projections were a central element in the failure of many interested parties—including the authorities, the Fund, and market participants—to identify the vulnerabilities that were building up during the boom years of the 1990s. During that period, Argentina’s growth projections were based on what was, in hindsight, an overly favorable reading of the benefits of the structural reforms that had taken place and prospects that further reforms would be implemented. This experience calls for a careful and critical assessment of the links between structural reforms and growth, both in the context of work on individual countries and in cross-country analysis.

Sadly, it is impossible for the IMF or Berlin to undertake “a careful and critical assessment” of a core dogma. That is the nature of dogma. The result is recurrent error.

The IMF was relying on austerity to summon the “confidence fairy” and produce a miraculous Argentine recovery. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research (CEPR) authored an excellent report on Argentina (Political Forecasting? The IMF’s Flawed Growth Projections for Argentina and Venezuela) in April 2007.

‘The Argentine authorities were committed to fiscal tightening, including ‘a freeze on nominal primary spending at all levels of government, and by deepening the proposed reform of the social security system’ and the Fund staff expressed satisfaction. According to their report in the Second Review the staff insisted, ‘this strategy is appropriate, and deserves the increased financial support of the international community.’

On the basis of the optimistic projections for economic growth, the Fund pushed for deeper reforms including more fiscal tightening, privatization, and deregulation aimed at restoring market confidence. In January of 2001, First Deputy Managing Director Stanley Fischer stated, ‘Market reactions to the program and recent external developments have been positive: spreads on Argentine bonds and domestic interest rates have declined significantly in recent weeks and the stock market has rebounded strongly. These developments bode well for a recovery of confidence and economic activity in the period ahead.’

Even the IMF’s internal review found that the IMF took actions that could succeed only if confidence played a magic role. The confidence fairy, of course, never appeared.

In 2004, the IMF’s Independent Evaluation Office (IEO) would report on the Second Review declaring that the ‘[p]rogram design was highly optimistic’ based in large part on overly optimistic assumptions and inconsistent program projections. The IEO even pointed to a lack of ‘serious analysis of exchange rate sustainability.’ Subsequent decisions by the IMF to provide further loans in May and then September 2001, despite ‘increasing recognition that Argentina had an unsustainable debt profile, an unsustainable exchange rate peg, or both’ were made ‘on the basis of largely noneconomic considerations and in hopes of seeing a turnaround in market confidence and buying time.’

Once Argentina defaulted, the IMF expressed its desire to see the nation “suffer.”

In January, Stanley Fischer’s replacement, Anne Krueger, wrote in El Pais, ‘Defaults are always painful, for debtors and creditors alike. And so they should be. Countries – just like companies and individuals – should honor their debts and suffer when they fail to do so.’

What is clear is that the IMF did not approve of Argentina’s actions. Dawson expressly linked the lack of financial assistance to specific policy actions on the part of the Argentine government.

Before lending resumes, it is expected that Argentina will move to establish an internationally recognized insolvency regime and deal with the economic subversion law, which allows for arbitrary official actions against business. The authorities also must address the provincial governments’ spending and issuance of alternate “currencies.” To date, these and other necessary reforms have not been put in place, and so… no financial assistance has been offered.

‘The Fund is also concerned about the rule of law in Argentina,’ Dawson wrote. However, the very next day, the democratically elected President Hugo Chávez of Venezuela was overthrown in a military coup. On April 12, the day after the coup, Dawson noted that the IMF was already in Caracas to conduct an annual review. ‘And we hope that these discussions could continue with the new administration, and we stand ready to assist the new administration in whatever manner they find suitable.’ Chávez was returned to power a day later, after most Latin American governments refused to recognize the dictatorship, and after massive street protests by Venezuelans.

So what happened to Argentina after it defaulted, the IMF withdrew all aid, and Argentina adopted policies that Geithner claimed made its recovery extraordinarily unlikely? For the reasons I have explained, the IMF consistently overestimated how well the Argentine economy would perform under its Washington Consensus policies. “In Argentina, the IMF overestimated GDP growth for 2000, 2001, and 2002 by 2.3, 8.1, and 13.5 percentage points respectively.”

Once Argentina decided to default on its debt and break with the suicide pact demanded by the IMF, the IMF’s economic projection errors continued – but reversed their direction.

The direction of International Monetary Fund (IMF) forecasting errors was reversed after Argentina rejected the IMF suicide pact.

Argentina’s default on its public debt at the end of 2001, and the subsequent collapse of its currency. Then the IMF began underestimating the strength of Argentina’s economic recovery. As shown in Table 1, the WEO estimates for the four years 2003 through 2006 came in low by 7.8, 5.0, 5.2, and 4.3 percentage points respectively.

Argentina’s recovery, which Geithner had dismissed as next to impossible given its break with the policies mandated by the IMF suicide pact, proved extraordinary.

In December 2002, with the economy eight months into an economic recovery, the IMF staff wrote that “[f]inalizing an economic program that could be supported by the international community is an essential first step to putting Argentina on a path to recovery.” Even later, in April 2003, the IMF’s Director of Research called Argentina’s growth “a hiatus at the moment from its long economic fall.” Argentina has now completed a five year economic expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for inflation) growth of 47 percent.

To sum it up, Argentina’s experience demonstrates one of the most palatable alternatives to Berlin’s insistence that the periphery accept a suicide pact of austerity-driven severe depression. The NYT reporters wrote about Argentina in a manner that deliberately gave the opposite impression.

The reporters end their article by channeling Berlin at is most arrogant.

Mr. Dieter said: “The mood in German government circles has become a little less enthusiastic, to put it mildly. Just last Friday, Finance Minister Wolfgang Schäuble said on the record that membership in the European Union is not compulsory, it’s voluntary, and Greek society has a choice.” He added, “I think this is a good reflection of the changing mood of German policy makers.”

“You can’t be a member of the club and disregard the rules,” he said.

Berlin’s way or the autobahn! The nations of the periphery cannot follow “the rules.” Berlin’s insistence that they do so has forced them into depression. No nation in the periphery should be trying to follow Berlin’s suicide pact. Euro zone nations cannot insure that they follow “the rules” and their attempt to do so is what has thrown the euro zone back into recession, has casued revenues to fall and expenses to rise, which has caused almost every euro zone nation to violate “the rules.” Again, a nation does not have the ability to simply make a “choice” as to whether it runs a budget surplus. Attempting to run a surplus can trigger and intensify recessions and cause enormous budget deficits. Germany and France have violated the oxymoronic “Growth and Stability Pact.” The Pact produces shrinking economies and economic crises. As the Pact threw the euro zone back into recession Berlin insisted on making the Pact more suicidal. Greece should withdraw from the euro, but the euro zone must abandon its worship of the failed austerity dogma and its endless wait for the confidence fairy.

Another team of NYT reporters wrote a slightly better article on May 8, 2012 about the financial crisis, but they too began from the TINA premise, as their title reveals: “Few Options if Europe Turns Away From Austerity.”

The authors acknowledge that austerity is counter-productive.

The situation in Europe represents a conundrum for investors who generally recognize that the cuts that have been made in recent months by countries like Italy, Spain and Greece have caused their economies to shrink.

That is a good start to an article and, logically, the admission should call for an urgent rejection of austerity. The reporters, however, do not seem to understand that a counter-productive policy cannot be the preferable policy. Instead, the reporters seem to imply that a counter-productive policy might be desirable.

‘It’s very easy to abandon austerity measures because they are painful things to do,’ said Otis Casey, the head of fixed-income research at Markit. ‘It is much tougher to figure out how to grow economies.’

Those statements are incoherent. It should in fact be “easy to abandon” a counter-productive policy like austerity. The use of the word “painful” causes the incoherence. Lancing a boil is painful, but essential to healing. The problem with austerity for nations that are in recession or seeking to recover from recessions is not that it is “painful”, but that it is counter-productive. That is why it represents the same kind of disastrous treatment as bleeding patients. The first thing to do when one finds oneself in a hole is to stop digging. So the first answer to the problem of recessions is to not make it worse by adopting austerity. It is not “much tougher to figure out” that counter-cyclical fiscal and monetary policies are superior. Economists have understood for over a half-century the desirability of creating automatic stabilizers. The Berlin Consensus has created automatic destabilizers via austerity.

The article then descends into total incoherence by embracing TINA.

Foreign investors, who are still an important source of funding for the French bond market, are closely watching to see whether Mr. Hollande hews more closely to his more strident campaign rhetoric or to an official platform that actually called for cuts to France’s deficit, just more slowly than had been planned.

‘He needs to realize that he has very limited room to maneuver,’ said Jurgen Odenius, the chief economist at the fixed-income division of Prudential. ‘If he goes out of his room to maneuver, the markets will push back.’

The NYT journalists characterize Hollande’s statements criticizing the Berlin Consensus because it prescribes austerity for recessions as “strident campaign rhetoric.” That is a phrase that implies that the policy is extreme, unsound, and advanced solely for base political reasons. But the reporters know better, or at least they did four paragraphs earlier when they conceded that austerity was counter-productive. Hollande’s statements opposing Berlin’s counter-productive insistence on austerity that threw the euro zone back into recession and the periphery into depression were correct. In those statements, Hollande was speaking sound economics and policy. The proponents of austerity are the folks who rely on “strident campaign rhetoric” and ignores the facts that that their predictions that austerity will lead to recovery have repeatedly proven false and that they offer no coherent theory of why austerity would lead to recovery. “Strident” accurately captures the virulent nature of the Berlin Consensus’ rhetoric.

It is true that Hollande’s statements about austerity are incoherent. He has called for balancing the budget – eventually. That position is not sound economics, but it is a vastly less counter-productive policy than Berlin’s. Hollande (and the entire euro zone) “needs to realize” that it is the Stability and Growth Pact, the structure of the euro, and the limited role of the ECB combine to expose euro zone nations to the bond vigilantes. None of those exposures support adopting counter-productive policies that cause economic catastrophe. The exposures to the bond vigilantes tell us where the design flaws are in the euro zone are that the euro zone should be fixing. If Berlin is telling us that the euro, the Stability and Growth Pact, and the ECB are designed so badly that TINA arises and forces the euro zone to adopt the counter-productive policies that have forced the euro zone back into recession and the periphery into depression, then Berlin is telling us that the system must be immediately reformed or ended.

The reporters who wrote this second article also fail to realize that they are making purported statements of fact that are anti-facts. This sentence assumes that that imposing austerity on nations in recession leads to balanced budgets and reduced debt. “Beyond France, Mr. Hollande has advocated for a revision to the European fiscal compact, which would move the countries toward balanced budgets and less debt.” I hope that by now the reader spots the error in that sentence. The reporters present as fact the false claim that the Pact “would move the countries toward balanced budgets and less debt.” The Pact’s mandated austerity, as the reporters said in the seventh paragraph, “caused their economies to shrink.” It is a dangerous illusion to believe that a nation controls its budget deficit. The Pact mandates a pro-cyclical fiscal policy that makes recessions and depressions more likely and more severe. The Pact does not “move the countries toward balanced budgets and less debt.” It does the opposite.

Another example of this most basic of economic errors was presented uncritically by the reporters.

Dennis Snower, president of the Institute for World Economics in Kiel, Germany, argues that Spain and most European countries could still tap financial markets for more money if they adopted constitutional pledges to run budget surpluses in good times.

The pledge would have to be written in stone, he said. Mr. Snower argued that one reason German borrowing costs are near record lows is because the country has already adopted such a constitutional amendment.

With the exception of Greece, it would work for everyone,’ Mr. Snower argued.

No, it would not work for everyone. Indeed, it would not work reliably for anyone. Running material budget surpluses “in good times” is an excellent means of producing “bad times” (recessions). There is nothing virtuous about running budget surpluses. Governments are not like households. My colleague Randy Wray has a number of articles explaining this point. The United States and Japan “borrowing costs are near record lows.” Neither mandates budget surpluses and both have debt-to-GDP ratios far in excess of Germany’s.

O pequeno artigo em baixo analisa a possibilidade de os títulos de dívida portuguesa a 10 anos terem sido usados no mês de abril para aumentar os lucros de fundos de investimento, no que se pode definir numa acção de cartel para artificialmente aumentar os preços e depois vender para lucrar (levando à queda abrupta dos mesmos). Ah! A eficiência dos mercados…


Dan Loeb And The Portugal Connection

by Tyler Durden on 05/04/2012

Publicado originalmente no Zero Hedge

Portuguese bonds imploded this week with 10Y spreads rising over 70bps, which given its recent performance, got us wondering. For the last few weeks we have commented on the improvements in the Portuguese bond market’s yields and spreads – specifically how this seemed much more about the CDS-Bond basis (on cheap carry and renewed confidence in CDS trigger events via ISDA) than simple risk appetite. It was especially surprising given the rest of Europe’s sovereign bonds were deteriorating gradually in a somewhat range-bound market. Today we get some insight – courtesy of Dan Loeb’s Third Point hedge fund’s month-end performance details. The Dapper-Don notes Portuguese Sovereign Bonds as among its top-winners for the month of April – which overall was a poor month for the fund.

We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade – lower risk, higher leverage if a ‘guaranteed winner’); bonds soared and the basis was crushed; now that same cartel – facing pressure on its AAPL position (noted as one of Loeb’s largest positions at the end of April) – has to liquidate (reduce leverage thanks to AAPL’s collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month – and perhaps now we know who was pulling those strings?

Portuguese bonds have been on an incredible run (thanks to their illiquidity) and so a fund (or group of funds) could easily allbenefit from a concerted effort…

especially in the basis trade… (where we some profit-taking this month – which fits with our view above)…

Charts: Bloomberg

Re-publicamos em baixo um texto de Michael Hudson, professor de economia na Universidade do Missouri, Kansas City, e autor de livros como “Super-Imperialism: The Economic Strategy of American Empire”.

O artigo argumenta que os ganhos resultantes do aumento de produtividade nos últimos 50 anos foram apropriados pelo sector financeiro da economia através da dívida e do mercado de produtos financeiros, ao mesmo tempo que se suprimiu o crescimento real dos salários. Por conseguinte, a criação de nova riqueza tem sido acumulada exclusivamente por uma elite (Hudson usa o termo  aristocracia financeira), com o apoio do Estado.

O artigo conclui com as implicações políticas e sociais (oligarquia e cleptocracia) deste tipo de organização económica, baseada em comportamentos que procuram maximizar monopólios e criar rendas.

Aconselhamos vivamente a leitura.


Productivity, The Miracle of Compound Interest and Poverty

April 22, 2012

By Michael Hudson

Original Post:

This is a re-working of my second talk at the Rimini MMT conference, as heard on Guns and Butter.

Suppose you were alive back in 1945 and were told about all the new technology that would be invented between then and now: the computers and internet, mobile phones and other consumer electronics, faster and cheaper air travel, super trains and even outer space exploration, higher gas mileage on the ground, plastics, medical breakthroughs and science in general. You would have imagined what nearly all futurists expected: that we would be living in a life of leisure society by this time. Rising productivity would raise wages and living standards, enabling people to work shorter hours under more relaxed and less pressured workplace conditions.

Why hasn’t this occurred in recent years? In light of the enormous productivity gains since the end of World War II – and especially since 1980 – why isn’t everyone rich and enjoying the leisure economy that was promised? If the 99% is not getting the fruits of higher productivity, who is? Where has it gone?

Under Stalinism the surplus went to the state, which used it to increase tangible capital investment – in factories, power production, transportation and other basic industry and infrastructure. But where is it going under today’s finance capitalism? Much of it has gone into industry, construction and infrastructure, as it would in any kind of political economy. And much also is consumed in military overhead, in luxury production for the wealthy, and invested abroad. But most of the gains have gone to the financial sector – higher loans for real estate, and purchases of stocks and bonds.

Loans need to be repaid, and stocks and bonds receive dividends and interest. For the economy at large, people are working longer just to maintain their living standards, which are being squeezed. Women have entered the labor force in unprecedented numbers over the past half-century – and of course, this has raised the status of women. Mechanization of housework and other tasks at home has freed them for professional life outside the home. But on balance, work has increased.

What also has increased has been debt. When World War II ended, John Maynard Keynes and other economists worried that as societies got richer, people would save more. For them, the problem was to keep market demand high enough to buy all the output that was being produced.

And indeed today, markets are shrinking in many countries. But not because people are saving out of prosperity. The jump in reported “saving” in the National Income and Product Accounts (NIPA) in recent years has resulted from repaying debts. It is a negation of a negation – and hence, a statistical “positive.”

Paying off a debt is not the same as building up liquid savings in a bank. It reflects something that only a very few economists have worried about over the past century: the prospect of debts rising faster than income, leading to financial crashes that transfer property from debtors to creditors, and indeed polarize society between what the Occupy Wall Street movement calls the 1% and the 99%.

What also was expected universally fifty years ago – indeed, until about 1980 – was that governments would play an increasingly important economic role, not only as forward planners but as direct investors in infrastructure. To Keynesians, government spending served to pump money into the economy, maintaining demand and employment in cyclical downturns. And for hundreds of years, governments have undertaken basic infrastructure spending so that private owners would not use monopoly privileges to charge economic rent.

Nearly all observers expected the fruits of technology to trickle down, not be siphoned up to the top, to the banking sector whose “financial engineering” played no directly technological role in the production process. Textbook models describe – or rather, assume – that rising productivity will be passed on to labor in the form of lower prices (reflecting falling costs of production, enabling wages to buy more) or, if prices are “sticky,” higher wages.

According to what the textbooks called Say’s Law, there is a circular flow between producers and consumers. Workers must be able to buy the results of what they produce. This correlation between output and consumption goes back to the Physiocrats prior to the French Revolution, who created economics and account keeping. Their founder, François Quesnay, was a medical doctor and a surgeon. He created the basic format of national income accounting on the analogy of the circulation of blood within the body. An increase in production had to find its counterpart in increased consumption, creating its market by paying workers who spent their wages on buying the products they produced.

Working harder, producing more, but going into debt to buy it

After World War II many women stayed home and raised families. But since the 1950s they have been forced increasingly into the labour force for what are called two-job families – and now, three-job families (with only two family members). If you project labor participation rates, by the year 2020 every woman will have to work 18 hours a day or economic trends will falter.

What was applauded as a post-industrial economy has turned into a financialized economy. The reason you have to work so much harder than before, even when wages rise, is to carry your debt overhead. You’re unable to buy the goods you produce because you need to pay your bankers. And the only way that you can barely maintain your living standards is to borrow even more. This means having to pay back even more in years to come.

That is the Eurozone plan in a nutshell for its economic future. It is a financial plan that is replacing industrial capitalism – with finance capitalism.

Industrial capitalism was based on increasing production and expanding markets. Industrialists were supposed to use their profits to build more factories, buy more machinery and hire more labor. But this is not what happens under finance capitalism. Banks lend out their receipt of interest, fees and penalties (which now yield credit card companies as much as interest) in new loans.

The problem is that income used to pay debts cannot simultaneously be used to buy the goods and services that labor produces. So when wages and living standards do not rise, how are producers to sell – unless they find new markets abroad? The gains have been siphoned off by finance. And the financial dynamic ends up in austerity.

And to make matters worse, it is not the fat that is cut. The fat is the financial sector. What is cut is the bone: the industrial sector. So when writers refer to a post-industrial economy led by the banks, they imply deindustrialization. And for you it means unemployment and lower wages.

Financial dynamics vs. industrial dynamics

The accumulation of payments on interest-bearing debt leads companies to search for new loan markets, just as industrialists seek out new markets for their expanding output. This search means looking for assets in place to be pledged as collateral. The largest asset in any economy is real estate – mainly the land’s site value. So about 80 percent of bank loans are mortgage loans. But by 1980 property prices had turned down as interest rates rose during the Vietnam War and the general Cold War buildup throughout the world. Overseas military spending obliged the Federal Reserve to raise interest rates to borrow abroad to prevent the dollar’s exchange rate from declining.

So in the 1980s banks found a new market: corporate raiders treated companies much like real estate, to be bought on credit and managed to create a capital gain. The rise in interest rates to 20 percent by 1980 forced most states to revoke their usury laws, and credit card companies played states against each other in a race to the bottom when it came to protecting consumer rights. So the high-interest junk bond was born, largely at the hands of Michael Milken’s gang at Drexel Burnham.

American industry began to be financialized (and in the process, criminalized). But running a company to make a financial gain is different from running an industrial firm to expand production. Cash flow that was not paid to bankers and bondholders for the credit to buy out stock holders was used for purposes other than direct capital investment – above all for stock buybacks to support their price, and for mergers and acquisitions to acquire yet more companies.

The aim was not to increase production but to increase balance-sheet wealth – while extracting revenue from companies much like landlords bleeding a building. That is the time frame of finance capital, in contrast to industrial capital. It is short-term, not long term. This is why it is extractive rather than productive. The revenue has no counterpart in new direct investment in output, but rather in overhead debt extracting a rising flow of interest from the economy.

“Wealth creation” by debt leveraging – that is, asset-price inflation – was celebrated as a post-industrial economy, as if this were a positive and natural evolution. But in reality it is a lapse back into a rentier economy, and even into a kind of neofeudalism. The post-2008 bailouts have vested a new rentier elite to lord it over the 21st century, thanks to the fact that most gains since 1980 have gone to the 1% – mainly the financial sector, not to the 99%.

In the end this shrinks the economy – and that means that more and more loans will go bad, until crisis levels are reached at the point where lenders realize that there is no more room to extract more, and stop lending. But in the absence of government budget deficits, bank lending is the only support for demand – so the financial rug is pulled out from under the economy. That is the point at which banks demand bailouts – giving them the money, rather than giving the economy the revenue to spend and pull itself out of depression. So government debt is increased by giveaways to the banks, not by spending into the “real” economy.

Economics textbooks teach supply and demand curves. Every marginal increase in supply lowers the price of what is being supplied. For the job market this means that the higher the unemployment rate, the lower wages will fall. Conversely, the more workers you hire, the more you have to pay to attract workers. Government officials and bankers are indoctrinated in these textbooks and conclude that the less employment there is, the more wages will fall – thereby presumably leaving a wider profit margin, assuming that the goods can still be sold at a steady price. So employers seek to earn more by keeping employment low enough to prevent wages from rising. This maximizes the power of wealth over labor.

Economists conclude that to make economies more competitive, they need to keep wages low so as to undersell other countries. So a race to the bottom develops. But what seems to help countries compete actually hurts their domestic market.

Back in the 19th century this was called the reserve army of the unemployed. Unemployment keeps labour down. And even more important, to the extent that incomes do rise, they are paid out as debt service. A dynamic is put in place in which debt keeps labor down – not only by eating up its wages in debt service, but in making workers suffer sharp increases in the interest rates they have to pay or even risk losing their homes if they miss a payment by going on strike or being fired. Alan Greenspan explained that unemployment was not needed to keep labor down these days. All that is needed is to traumatize and disable them politically by debt leverage. (Quote his Senate testimony)

This is why, despite the fact that productivity has risen so dramatically, the real economy and its wage levels have tapered off in an S curve. The magic of compound interest has increased debt (and the savings of the 1%) to more than absorb the productivity gains. And this financial overgrowth has accrued to the 1%, not to the 99%.

Finance is what makes today’s economy different from that of 1945. We are at the end of a long cycle. Back in 1945 the private sector in every country was relatively free of debt. There was little civilian output for consumers to buy during the wartime years. Companies had little reason to invest, except for the government’s military demand. So most families had little debt – and a lot of savings, and good job opportunities after the return to peace. But today the economy is in reverse. Savings have been run down and consumers, real estate and industry is left in debt.

Untaxing land rent and monopoly rent so that it can be paid to the bankers, not to government

To stop this reversal, it is necessary to understand its causes. They are not only financial. The banking interests have gained sufficient power to distort tax policy, creating a dual fiscal-financial problem. Taxes have been shifted off the major bank customers – real estate and monopolies – onto labor and consumers. In the United States, two-thirds of state and local tax revenues in the 1930s came from the property tax. Today the proportion has fallen to only one-sixth. States and cities replaced property taxes with income and sales taxes. Europe and the post-Soviet economies have adopted the most anti-labour tax of all – the value added tax.

The rationale is that it is easy to collect. But it falls on consumers, not on the economy’s free lunch of economic rent as advocated by classical free market economists. The value added tax adds to consumer prices and shrinks the market, preventing labor from buying the goods it produces. This is done simply to free more land rent, natural resource rent and monopoly rent from taxation so that it can be paid to bankers as interest.

When voters threaten to elect politicians to pursue less bank-friendly policies, the EU announces that the country needs a technocrat to impose more taxes to bail out the banks for their bad loans. It is all in vain without changing the system, because today’s financial business plan cannot work for more than a short time. Being extractive rather than productive, it leaves a swath of bankruptcy in its wake. Yet it is the banks that the technocrats are saving, not labor and industry, the “real” economy’s employment, social spending and public wealth.

Changing Social Security from being paid out of progressive taxation to a regressive labor tax

In 1982, bank lobbyist Alan Greenspan was appointed to head a U.S. commission to shift Social Security out of the public budget (where it was funded largely by progressive taxation) and fund it by user fees that fall on employees and employers. The aim was to privatize it Chilean style. Wall Street’s dream is to turn wage set-asides over to money managers to buy stocks and create a stock market boom (and in the end, siphon off commissions and push contributors into high-risk bets on the losing side of the deal with large financial institutions, Goldman Sachs style). In effect, Mr. Greenspan’s position was that Social Security should not be a public service. It should be a user fee, so that prospective retirees would pay for it in advance. Their savings were to be lent to the government to enable the Treasury to slash taxes on the higher income and wealth brackets. So the effect was to reverse the long trend toward progressive taxation.

The upshot of the Greenspan tax increases (only on labor, not on wealthy earners) was to create a budget surplus for the Social Security Administration, enabling the government to cut taxes on real estate, on finance, and for the rich in general. Capital gains taxes in particular were cut in half. And real estate investors (absentee owners, not homeowners) were allowed to pretend that the value of their holdings were depreciating rather than rising in price, by junk accounting based on junk economics.

The end game came when the Bush and Obama administrations announced, in effect, “We’re broke. So now we have to balance the budget by cutting social spending and raising the Social Security tax further. We’ve cut taxes on the rich by so much that the workers have not paid enough to cover this give-away, not to mention fighting the Bush-Cheney war in Iraq and the Obama Administration’s war in Afghanistan – or for that matter, the class war against labour.

Under Pension Fund Capitalism, employees are encouraged to think of themselves as capitalists in miniature – and provide for their retirement by employee stock ownership programs rather than saving up their wages themselves or having pensions financed on a pay-as-you-go basis out of future production. The idea is to make money from money (MM’), not by producing commodities (M-C-M’). In America, half the employee stock ownership plans (ESOPs) have gone bankrupt, mainly by being grabbed by the corporate employers. Corporate raiders borrow credit from bankers and bond investors to fund management buyouts. The plan is to buy out stockholders, pledging the earnings to pay out as interest. And not only earnings; they loot the employee pension plans. George Akerlof won the 20– Nobel Prize for describing this. But novelists have recognized it more than economists. It was Balzac who said that behind every great family fortune is a great theft, often long forgotten to be sure.

Today’s economy is based on theft under the euphemism of “free enterprise.” It’s sometimes called “socialism for the rich” because they receive most government subsidy. But it’s not the kind of socialism that people talked about a hundred years ago. It is a travesty of social democracy and socialism. In a word, it’s oligarchy. But we’re living in an Orwellian world. No party calls themselves fascist today, or even anti-labor. They call themselves social democracy. But it’s the opposite of what social democracy meant in the 19th and early 20th century.

Social Security has not yet been privatized, but education has – not only privatized, but financialized. Students no longer get free or low-priced education. In order to qualify for professional jobs in America, they have to take out loans that put them deeply in debt. Then, when it comes time to start a family, they have to take on a lifetime 30-year mortgage debt. They need to take out an auto loan to buy an automobile to drive to work, especially where public transportation has been dismantled as in Los Angeles. And when their paychecks are squeezed more, they can maintain their living standards and social status only by taking on credit card debt.

Paying the carrying charges on this debt diverts spending away from the goods and services that employees produce. The result is debt deflation. Employees have less and less ability to buy what they produce – except by taking on even more debt. That’s why banks and bondholders have ended up with the increase in productivity – almost synonymous with the 1%. They are the core of the Finance, Insurance, and Real Estate (FIRE) sector that now absorbs most of the economic surplus in the form of various types of economic rent: land and natural resource rent, monopoly privilege and financial overhead.

The inversion of classical free market reform to its diametric opposite

Classical political economy sought to mobilize democratic government to tax the rentiers: landlord, monopolists and bankers. The objective was to create an industrial surplus and, in the process, raise productivity, wage levels and living standards. To keep prices low and hence national economies competitive, governments were to undertake society’s largest spending programs: basic infrastructure such as transportation, power production, communications – all of which happen to be natural monopolies as well. So the aim was not only to provide basic infrastructure needs freely or at subsidized prices, but to prevent private owners from erecting tollbooths on roads and charging monopoly prices for power, phone systems (as in Telmex in Mexico or similar phone monopolies in the post-Soviet kleptocracies).

Post-classical economics (deceptively called neoclassical) seeks to untax the rentiers, and shift the costs of government onto labor and even onto industry. To achieve this, democracy is rolled back to oligarchies. But this time they are controlled not by landlords as in the case of Europe’s landed aristocracies, but bankers and financiers. And their aim is to privatize the public domain with its monopolies. Bankers advance the credit to buyers, who install tollbooths and raise prices for basic needs. By paying out their revenue in a tax-exempt form, as interest, they keep their income out of the hands of government – forcing national treasuries to tax labor and industry, consumers and producers rather than finance, insurance and real estate. Governments thus become the protectors of monopoly and its financing.

It is a short-term policy. By raising domestic price levels, financialized economies price themselves out of global markets – unless than can create a world order in which all economies are symmetrically debt-burdened. This is where the International Monetary Fund, World Bank and World Trade Organization are brought into play – to financialize globalization, excluding countries as pariahs if they do not join this self-destructive and self-terminating system.

An object lesson of the shift from classical democracy to post-classical oligarchy is a country that is held out to you as a success story: Latvia, where neoliberals had a completely free hand, as they did in Russia. What they call a neoliberal paradise turned out to be debt-ridden kleptocracy. The country has a set of flat taxes on employment of 59 percent – and only a 1 percent real estate tax.

You can imagine what happened with real estate taxed so low and labor taxed so high. Employment was high-cost – but there was a real estate bubble. When I was Research Director at the Riga Graduate School of Law, I visited the government agency in charge of property assessments, and asked how they got the 1 percent. I was told that they based it on the most recent real estate appraisal they had. This turned out to be back in 1917, before the Russian Revolution. (The lead assessor had written her doctoral dissertation on this survey.) Whatever the tax collector gives up and relinquishes in taxes, is available to be paid to the banks as interest. So housing prices are bid up in price – on credit – while the tax collector has to turn to labor and industry for the revenue that has been given up. Instead of paying taxes, new homebuyers pay interest to the bankers. The upshot is that the banks end up with the rent that used to accrue to the landed aristocracies of Europe. This is making bankers the new aristocracy.

When I headed an international investigative economic team in 2010, we visited Latvia’s bank insurance agency and were told that they had anticipated a collapse of the bubble. Their response was to advise banks to back their mortgage loans not only with the property as collateral, but to get as many family members as possible to co-sign the loan. That way, if and when default occurred, the parents, siblings or other relatives would be personally liable.

The bank regulators did not urge the government to tax real estate more. That would have squeezed homeowners on their bank loans – and left less new rental income to be capitalized into new bank loans. But it would have enabled the government to reduce its heavy taxes on employment. This was not the bank regulators’ concern – and bankers themselves saw their main business in lending to fuel real estate, not industry, given what the neoliberals did to Latvia’s economy and that of the other Baltic states!

Unfair? Economically polarizing and destructive? Of course. But the bank insurers said that their task was to protect bank solvency, not create an optimum economic structure.

One result is that a recent EU survey found that one-third of Latvia’s population between the age of 20 and 35 either had emigrated or was planning to do so. As of 2012 the country’s population recently has shrunk by 15 percent. Marriage and birth rates are falling off, as they are throughout the post-Soviet economies. After all, who can marry and buy a house when your wages are taxed at 59 percent and you have to take on a debt?

Iceland provides another object lesson. Even more than Latvia, it became a rogue banker’s paradise – and also one for vulture banks. Their loans are indexed to the consumer price index – which means in practice to the foreign exchange rate. The krónur plunged after the banks crashed in 2008. The result a 1,000 krónur debt has become perhaps 1,800 – against property that has fallen from the equivalent of 1000 krónur down to perhaps 400 krónur. This leaves many families in negative equity. And they are personally liable.

When the crooked banks of Iceland went under (and they’ve only recently begun to arrest some of the crooks) the government took them over and, on European advice, sold them to vulture investors, for around ten cents on the dollar. Despite the fact that Iceland’s constitution said that they were not allowed to increase debts by indexing, this is just what the banks did. If the government had taken over, it could have written down the debts to the ability to pay. But the new vulture banks have not done this. And the Social Democratic government backed their rights to make as much as they can, rather than giving priority to the welfare of the Icelandic people.

What I find so striking is how far to the right wing of the political spectrum the Social Democratic and Labour parties have moved. Iceland’s Social Democratic leadership explained that it wanted to be part of Europe. But this meant acting on behalf of the British and Dutch bankers, not democratically on behalf of Icelanders. They acted on behalf of the emerging financial oligarchy.

I’ve known many of the social democratic leaders of America and the world since I was a young boy. My father was a socialist labor leader and political prisoner from Minneapolis, which was the high point of American labor history as a result of its great General Strike in the 1930s. I was told by a Socialist Party leader (Terence McCarthy) in the early 1960s that the travel and hotel expenses of nearly every member of the Socialist International (the Second International, of which Dmitri Papandreou of Greece is President as of autumn 2011) was paid for by the CIA or its front organizations. I watched the Socialist Party in America come to support the Vietnam War, and Michael Harrington ban criticism of the war in its youth magazine – driving it to quickly lose most of its members.

Harrington and his mentor, Max Shachtman, took this position because they believed that the West could not be persuaded to be Marxist until the world was freed from the Stalinist travesty that claimed to be Marxist. So the Social Democratic Party of America joined the Cold War effort. Politics was turned upside down by the triangulation of socialism, Stalinism and the ability of the United States to back and finance European social democrats to support the banks and “centrists.” This became the tragedy of the old non-Stalinist left in America and other countries. So the Social Democratic leadership imagined (or simply sold out to pretend to believe) that “free financial markets” would lead the world into economic progress.

This was just the opposite from the Progressive Era and indeed, what industrial capitalism promised. The Social Democratic parties of Iceland, Britain, Greece, Scandinavia and other European countries have adopted the position that the way to re-employ labor is to impose austerity. Budgets are to be balanced by lowering wages by 30 percent, and shifting taxes off the finance, insurance and real estate sector onto consumers.

Taxes on labor add to its cost. So competitive power would be maximized by untaxing labor and consumer goods, by getting rid of the value-added tax. But not all taxes are bad. The classical free market economists endorsed taxes on unearned income: land rent and natural resources, monopoly rent and financial privilege. These categories of income have no counterpart in a cost of production undertaken by the rent recipient. The more that governments can shift the tax burden onto land and property, the lower housing prices will be – and the less governments will need to tax labor by income and sales taxes.

Bankers back anti-government ideology because they want to obtain all of the untaxed rental revenue as interest. So taxes that otherwise would be paid to the government will be paid to the bankers. The result – what you’re seeing today in Europe and North America – is an economic grab that is in many ways like that which gave birth to European feudalism. But this time around it is financial, not military.

Portugal vai mesmo à falência. Mas creio que pelo caminho, Passos & Companhia vão roubar o país de tudo o que tem.

Portuguese Liquidity Trap: When You Add Too Much Liquidity To F.I.R.E. It Burns!

Reggie Middleton, do blog

Artigo original publicado a 12 de Março de 2012

In this followup to Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot I think we should get straight to the point – Anyone who doesn’t believe that Portugal is clearly set up to for a bond route, and that it is seriously considering a default is either lying to themselves, believe human nature has changed, and/or really hasn’t bothered to review the math. Here’s proof of a Portuguese default presented with logic, numbers and pretty colorful graphs. The full spreadsheet behind all of the calculations, scenarios, bond holdings and calculations can be viewed online here (click this link) by professional level subscribers. Click here to subscribe or upgrade.

For one, we are on up to the 3rd Greek Bailout (Portugal has only received one hence it could be getting envious:-)). Portugal has had extreme austerity measures inflicted upon it. So extreme that it has materially and significantly depressed the economy. Portugal’s GDP growth contracted even further by 1.3% q/q in Q4. Its HICP Moderated to 3.4% y/y in January. Very high unemployment (currently at 14% and rising), weakening wages, and a total dearth of credit to businesses and households (do you really think bond-busted banks are lending to and within Portugal like the good ‘ole days) will lead to a downward spiraling self-fulfilling prophecy that is the antithesis of what appears to be driving all of those rosy estimates behind reports that Portugal won’t default. I do mean rosy, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for examples. Let it be known that instead of growing the economy out of the doldrums, Portugal’s austerity measures will push it down the drain.
It’s gotten so bad that even the rating agencies are on board the truth train (Rating Agencies vs Reggie Middleton, Part 3). After Moody’s downgraded Portugal, all three major agencies have it at junk, of course a year later than said information would have been useful. The massive liquidity injections by the ECB have prevent the market from imploding, but has also failed to rectify the problem, rather they simply feed the appetite of an addicted pig in the form of banks and sovereigns that rely on cheap/free money without the requisite market disciplines of risk wieghting and respect for the cost of capital.

Due to total reliance on funny munny from the ECB, required due to the lack of external financing avialable from the markets (unless Portugal defaults/restructures and starts from scratch, which is inevitable anyway) the Portuguese machine will still be in arrears accumulation mode – a mode which is essentially unsustainable.

Despite what I see as practically unassailable facts, the MSM is still steadfastly and unrealistically bullish, as per Bloomberg, Portugal Bond Rout Overstates Greek Likeness. Well, the Portugal Bond Yield is at 13% Despite Greek Deal – that’s right, the 3rd Greek deal and one that include 74% haircut!!! Portugal will default/restructure and there’s a very, very strong chance that right behind them will be Spain and then Greece again. That’s right, Greece, again!

Who was right about the Greek default, running against the consensus two years ago? See 2010 posts – Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and then A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina. In The Anatomy of a Portugal DefaultA GraphicalStep by Step Guide … I walked through the financial tangle that is Portugal about two years ago, as excerpted.

This is the carnage that would occur in the OPTIMISTIC if the same restructuring were to be applied to Portugal today.

Yes, it will be nasty. That 35% decline in cash flows will be levered at least 10x, for that is how much of the investors in these bonds purchased them. A 35% drop is nasty enough, 35% x 10 starts to hurt the piggy bank! As a matter of fact, no matter which way you look at it, Portugal is destined to default/restructure. Its just a matter of time, and that time will probably not extend past 2013. Here are a plethora of scenarios to choose from…

This is Portugal’s path as of today.

Even if we add in EU/IMF emergency funding, the inevitability of restructuring is not altered. As a matter of fact, the scenario gets worse because the debt is piled on.

Well, I took said model and updated it with recent historical GDP results as well as projections which incorporated the most recent developments. Do you think things look better or worse?

This is what Portugal’s situation looks like today…


The Portuguese bond yield has spiked since the Greek deal. Methinks Mr. Credit market (who is much wiser than Mr. Eqiuity market, probably due to the increased difficulty in manipulating Mr. Credit’s demeanor) seems to agree with Reggie…

These are the Portuguese bonds used in the calculations. Professional subscribers can access the full model and all of the stuff that went into it via the link at the bottom of this article – Introducing the Not So Stylish Portuguese Haircut Analysis.

Num extraordinário momento de hipocrisia moral, política e económica, o Banco Central Europeu está a defender o direito dos seus trabalhadores a terem pensões ajustadas à inflação automaticamente, enquanto recomendam precisamente o contrário para os salários e pensões da zona euro, em especial, os países em “ajustamento estrutural” (para usar os palavrões do FMI).

By Stephan Ewald, who works in the financial sector and lives in Cologne, Germany. He contributes to the blog and you can follow him on Twitter at @StephanEwald

On its website the European Central Bank proclaims the mission of the Eurosystem (emphasis mine):

The Eurosystem, which comprises the European Central Bank and the national central banks of the Member States whose currency is the euro, is the monetary authority of the euro area. We in the Eurosystem have as our primary objective the maintenance of price stability for the common good. Acting also as a leading financial authority, we aim to safeguard financial stability and promote European financial integration.

Since the start of the Eurosystem our brave inflation warriors at the ECB regularly praise themselves what a heck of the job they are doing about their primary objective the maintenance of price stability. But yesterday the German Daily Frankfurter Allgemeine Zeitung (FAZ) published an article (German), that our guardians of price stability fight another good fight. The employees of the ECB want their own pensions to be inflation protected.

So the same folks who lecture member states of the Eurozone about the danger of private sector labor and pension contracts being inflation-indexed because of moral hazard want their own pension contracts inflation-indexed. For this fight to be successful ECB employees deploy a very evil institution: the central banker union IPSO. According to the FAZ article a former employee sued the ECB with the help of IPSO at European Court of Justice.

Which begs the question: what hypocritical morons are working at the European Central Bank?

Deixo-vos com uma pergunta: acham que o Governo português e a sua retórica de crise é em alguma coisa diferente? É de alguma forma menos hipócrita?

Tirado do blog Naked Capitalism

Aproveitamos o dia para fazer a reciclagem de um excelente artigo publicado no Overland Literary Journal, uma revista radical australiana devotada à crítica cultural e com 50 anos de história. O artigo é assinado por Richard Seymour, doutorando na London School of Economics, autor do livro “The Liberal Defence of Murder“, de que já fizémos aqui menção e do qual recomendamos a leitura, e figura regular nos media alternativos tais como Richard Seymour é também autor do blog Lenin’s Tomb.

Como pequeno resumo, o artigo é uma breve história crítica da construção da União Europeia e de como essa construção se tem marcado por 1) imperialismo intraeuropeu  2) divisão de classes e 3) frontispício ideológico neoliberal.

But the sovereign debt crises following from the financial crash and subsequent recession have exposed the combination of class antagonism and the core/periphery relationship in a dramatic fashion. This can be seen in the way that Greece’s debt crisis has evolved. While Greece is belaboured for its apparent laxity in allowing debt to accumulate under the cover of accounting tricks, the reality is that French and German capital have depended on the country consuming beyond its means. High levels of public and private debt ensured that Greece could function as an export market for German products, without adding to wage pressure. And because Germany could thus maintain a balance of payments surplus, it didn’t have to support consumption domestically through high private borrowing or wage increases.

Protecting the banks has been imperative for European leaders, particularly the powerful financial institutions of the core. There is a logic to this. As the crisis continues, profit rates across the Eurozone have recovered somewhat, but not by means of productive investment. In fact, there has been a slump in corporate investment. Most of the recovery in profitability has been achieved through wage cuts, downsizing and speculation. Thus, instead of the widely advertised Keynesian revival, the neoliberal emphasis on finance-led growth continues to be orthodox among European leaders. For this reason, Greece has been awarded ‘bailouts’ to cover payments to financial institutions largely based in France and Germany, while almost all the ‘haircuts’ applied to Greek debts have affected only Greek banks.

O artigo original pode ser encontrado aqui.


The European meltdown

The spectre of capitalist failure

Like ‘sex’ and ‘violence’, the words ‘Europe’ and ‘crisis’ seem to have a near permanent affinity these days. This constant conjunction tells us that the nature of the crisis is no transient thing. It is what Gramsci would have called an ‘organic crisis’, one that condenses multiple chronic problems at various levels of the system in a single, epochal spasm. Growth rates across the Eurozone are close to zero, unemployment is over 10 per cent on average – a figure masking extremes of joblessness in Greece and Spain. But it is not just an economic crisis. The Eurozone is a political creation, and it is at the level of politics that the strains are manifested at their highest level. Repeated sovereign debt crises threaten debt default, the withdrawal of economies from the euro currency and the ultimate collapse of that currency. The material basis for the European Union (EU) to continue to exist in its present form is endangered, and the solutions only seem to exacerbate the problem.

Greece’s calamitous decline, accelerated by the neoliberal austerity measures supposed to rescue it, has been staggering enough. The cost of bailouts for banks with investments in Greek debt continues to soar and the IMF has revised the country’s growth rates downward to -6 per cent in 2011 and -3 per cent in 2012. The addition of Italy, the fourth largest economy in the EU, to the roster of endangered states has raised the material possibility of the death of the Eurozone. The system’s rulers know it. Angela Merkel and Nicolas Sarkozy have both acknowledged that the euro will not survive if Italy goes under. Jean-Claude Trichet, president of the European Central Bank until 2011, characterised the turmoil as ‘the most difficult situation since the Second World War – perhaps even since the First World War’. The head of the Fitch ratings agency fears a ‘cataclysmic’ collapse of the euro. Sergio Marchionne, the boss of Fiat and Chrysler, has bluntly called ‘the future of Europe’ into question.

The raw fear of Europe’s ruling classes is driving them now. Knowing they can no longer rule in the old ways, their new measures reek of the ruthlessness born of despair. Austerity budgets have been pushed to their limits in terms of economic viability and political acceptability. The tendency now is towards more federalism: European courts, Merkel argues, should be empowered to enforce budgetary rules across the EU, oversee fiscal discipline within national states and sanction those who break the rules. But the disagreements aroused by such solutions have been destabilising enough to worry the credit ratings agencies and will most likely summon the opposition of national electorates.

Meanwhile, old political fissures are exacerbated. In the UK, Tory enragés are taking the opportunity to try to break Britain from its growing entanglement with the EU. The spectre of capitalist failure is haunting Europe.

Creative powers of the bourgeoisie

It was not always thus. The project of a single market and currency, signalled by the Single European Act of 1987 and consecrated by the Maastricht Treaty of 1992, was initially sent aloft on a gust of irrepressible optimism. Representing the culmination of decades of work, ideas, planning and intense political battles, the EU would eventually constitute the largest single economic unit on the planet. According to its champions, such as the British think-tanker Mark Leonard, it was on the verge of becoming a global superpower to rival the US. The next century would be a European century, with Brussels its veritable Olympus. And indeed it would be foolhardy to underestimate just what an accomplishment was the EU, the single currency and the successive treaties that created a dramatic pooling of markets and sovereignty, with remarkably little friction. Even the leaders of the most recalcitrant un-European nation-states, such as the UK, were tempted by the advantages of European unity. In an extravagant judgement, Perry Anderson considered the EU ‘the last great world-historical achievement of the bourgeoisie, proof that its creative powers were not exhausted by the fratricide of two world wars’.

Yet Europe does not embody a community of shared interests. The project of European unification was always riven with antagonisms that would ultimately contribute to its ongoing crisis. Omitted from panoramas of the European scene are the quasi-colonial relations between core and peripheral states, the dimension of class conflict, and the role that pan-European institutions play in such struggles. The core/periphery structure allows the dominant EU states to exploit subordinate ones. Its absence from analysis tends to lead to the sovereign debt crises being explained in glib cultural terms – the supposed profligacy and laziness of the Greeks, for example.

Yet if this relation of dominance within the EU is under-examined, class antagonisms are virtually invisible in mainstream discourse. As Guglielmo Carchedi puts it, the process of European union ‘has been fuelled by European oligopolies under the leadership of German oligopolies’ while ‘the European working class has been locked out as much as possible from the construction of the European Union’. As a result, where organised labour has had an input into the EU’s formation, it has overwhelmingly been reactive and defensive, engaging in campaigns to restrict its development, such as that against the EU Treaty. Nevertheless, these class antagonisms, and the attempt to manage them on terms favourable to capital, has decisively shaped the EU’s development and the form its crisis is taking.

To understand how, it is necessary to trace the EU’s origins to the efforts of European statesmen after the Second World War to create a viable liberal bloc, independent of the US. All of the states that would lead the drive towards unification had experienced the devastation of defeat and occupation during the inter-war period. The politicians who took the initiative had been shaped by an epoch of extensive European empires, and expected these powers to continue as dominant world actors for the foreseeable future. Yet the rapid collapse of the colonial empires left European nation-states struggling against the immense advantages of American capitalism, particularly its vast markets, larger production facilities and economies of scale. The pooling of productive resources and sovereignty was one way of resolving this dilemma.

Franco-German axis

For its principal architect, Jean Monnet, European union was a means of rationalising Europe’s outmoded polities and forms of production, while also easing the friction that had led to two world wars. Monnet’s relationship with US policymakers is relevant, inasmuch as he proactively sought the support of Cold War planners such as Dean Acheson, the Dulles brothers and others. US strategists looked favourably on his ideas, seeing in them the basis for the economic regeneration of Western Europe and unity against the Soviet Union. But Monnet’s objective was not to fashion Western Europe as a bulwark against the USSR. On the contrary, European union was a means to an independent path, equidistant between the US and the USSR. To achieve this, it would be necessary to manage the sources of conflict that had previously dogged the continent.

The European Coal and Steel Community (ECSC), for instance, initiated by the French foreign ministry in 1951 at the behest of Monnet, was a way of unifying French and West German capitalist interests with respect to the coal and steel region of the Ruhr. As a precursor to the Common Market, in principle it aimed to enshrine supranationalism as an impediment to war, while also strengthening liberal statecraft. Stripped of pieties, however, it was a French effort to prevent renewed German expansionism. It also sought to rationalise production in the economic sectors affected, containing the effects of intermittent gluts and shortages. Finally, it sought to stabilise a state system under threat from labour and leftist insurgencies. In the immediate aftermath of the war, communist parties in France and Italy were resurgent. Colonial insurrections were combined with domestic turmoil, particularly in France where a series of militant strikes broke out in 1947 and were crushed with austere brutality by the government. Unity among the core European states was thus partially a means of containing the influence of postwar socialism.

In the new Franco-German axis, France would provide political leadership and Western Germany would serve as an economic powerhouse. The institutions developed by the ECSC, from the High Authority to the European Court of Justice, prefigured the institutional forms that would dominate the European Economic Community (EEC) and later the EU. The EEC, created by the Treaty of Rome (1958), expanded the common market allowing for the free movement of labour, capital and commodities within a number of core states including France, Germany and Italy. A series of institutions were created to facilitate this mobility, such as common policies on agriculture and transport and the harmonisation of laws across nation-states.

At this stage, however, the model was not economic and monetary union. Indeed, France’s political dominance was made clear, as it effectively blocked access for the UK, Ireland and Denmark to the EEC – partially on the grounds that admitting them would turn the common market into a vast free trade area subordinate to the US.

From common market to economic and monetary union

It was the deep crisis of the seventies and the subsequent rowing back from unification that led European elites to fully embrace the idea of economic and monetary union. An epochal crisis beginning in 1973 left European economies seeking to shore up tumbling currencies, socialising private sector losses, erecting protectionist barriers and pumping money into national corporatist projects to regenerate growth. Meanwhile, following the collapse of Bretton Woods, the US was exploiting its position as the sole supplier of international reserve currency. It could allow the value of the dollar to drop, in order to boost exports, without experiencing the sort of currency collapse that would afflict European rivals adopting the same tactic. This was intended to overcome the loss of its global advantage relative to Japan and West Germany, the most dynamic European economy. West Germany’s response was to invest in new technology, suppress domestic demand in favour of export-led growth, and shift production overseas to exploit cheaper labour: a strategy that a reunified Germany has pursued to this day.

But the EEC’s planners also tried to develop a common monetary strategy to restore stability in exchange rates. These efforts culminated in the European Monetary System, and later the Exchange Rate Mechanism. Logically, this entailed the deepening alignment of European economies, as no stable currency system could emerge while nation-states pursued radically different fiscal policies. Parties to the mechanism thus converged on policies of austerity similar to those already adopted in West Germany. France, which had initially sought to revive its economy on the basis of Keynesian nostrums, had adopted austerity measures by 1983. European unification thus reinforced a neoliberal turn, based on a policy mix pioneered in Chile and subsequently rolled out across the US and UK. Profitability would be restored to industry through drastic cuts in wages and the unleashing of financial markets; currencies would be stabilised through reduced consumption (thereby easing inflationary pressures); public spending would be cut and labour organisations weakened; and demand would either be supplemented by overseas markets or stimulated by private borrowing.

Austerity policies (demanding low inflation, controlled wage growth, fiscal conservatism and flexible labour markets) became the bedrock of the Treaty of European Union (1992), and especially the Stability and Growth Pact (1997) that underpins the euro. An exceptionally powerful European Central Bank was created to help enforce these rules.

The project, by this point, was far more than one of economic union. Implicitly, each step in the integration of European economies demanded a further pooling of political sovereignty. In the wake of the collapse of the Warsaw Pact and the absorption of a host of formerly Stalinist states into the European community, the political thrust of integration became more important. Acceptance into the EU offered these states a means of rapid economic expansion after recent stagnation (while also supplying dominant European capital with cheap labour markets). But to qualify, they had to accept not only a plethora of economic and fiscal rules, but also the liberal political structure codified in the EU’s laws and reinforced by its courts. With this centralisation and concentration of political authority in the EU, the logic was increasingly tending towards federalism.

All of this has been carried out among elites with barely a nod to electorates, barring some scattered plebiscites seeking popular mandates for decisions already taken. And, as the case of Ireland’s two votes on the Lisbon Treaty shows, even an unwelcome referendum result can be reversed with sufficient pressure and blackmail. Organised labour has occupied a subordinate role – for example, it was incorporated into the Consultative Committee of the ECSC – but otherwise, popular constituencies have simply been marginalised.

The EU’s liberal champions have never exhibited much concern about its undemocratic character. Even as the Eurozone demands the replacement of elected governments with unelected technocracies in Greece and Italy in order to force-feed the public austerity measures, the note of complacency remains. Worried about the betrayal of democratic principle? Not so fast, says the political scientist David Runciman: ‘it could work’. Democracies are superior (on technical, provisional grounds) to their rivals, but during a crisis ‘the last thing you need is democratic politicians trawling for votes’. Who knows what voters might demand?

Such a purview is certainly worthy of a project that, from inception to denouement, has evinced an organised distrust of the masses.

Europe in chaos

The project of European unification proceeded comfortably along neoliberal lines throughout the 1990s and most of the next decade. The regionalisation of the world economy has underpinned the ‘Europeanisation’ of capital across the continent. The sociologist Michael Useem has described the development in advanced capitalist economies of an ‘interlocking directorate’: a network of directors sitting on the boards of multiple firms and developing a shared general perspective on the business scene. Across Europe, such a directorate has emerged over the last two decades to rival the similar networks connecting the US and UK. In addition to the core European economies were added a belt of new, peripheral states, including the former Soviet satellites. The arduous process of Turkey’s incorporation has not been hindered by any lack of consensus as to its suitability as a member state. Only the latter’s resistance to the de-militarisation of Cyprus stands in its way.

Otherwise, the expansion of the union has been so rapid that, in its way, it almost constitutes an overland empire. It has certainly vied with the US for influence abroad, emphasising its economic strengths, while member states have occasionally supplied military hardware. An example of this was Britain and France’s leading role in organising the overthrow of Libya’s Gaddafi, which helped secure an outpost for the EU amid a turbulent revolutionary process that otherwise threatens European business interests in the Middle East.

Nonetheless, the limitations of this empire, largely political and military, were visible even before the credit crunch and its fall-out. Europe’s ruling classes have lacked sufficient unity to develop a centralised political authority to rival the US, with various attempts to float a Europe-wide defence initiative floundering. Military resources have instead tended to be deployed through NATO, under US supervision. The idea of an EU military force was, apart from anything else, about the suppression of conflict within the union, particularly after the Yugoslav debacle.

The EU is therefore ill-placed to contain future turmoil within its boundaries. The lack of political unity has also thus far retarded the development of a single, centralised stock exchange of a scale necessary to compete with rivals. The development of mass resistance to the Lisbon Treaty, whose provisions were inspired by the European Round Table of Industrialists, illustrated that unification was not taking place in a way that incorporated all classes. Indeed, the success of wage repression across the EU, where the share of income going to labour has fallen on average by more than 10 per cent, is to a considerable degree the result of policies pursued under its rubric.

But the sovereign debt crises following from the financial crash and subsequent recession have exposed the combination of class antagonism and the core/periphery relationship in a dramatic fashion. This can be seen in the way that Greece’s debt crisis has evolved. While Greece is belaboured for its apparent laxity in allowing debt to accumulate under the cover of accounting tricks, the reality is that French and German capital have depended on the country consuming beyond its means. High levels of public and private debt ensured that Greece could function as an export market for German products, without adding to wage pressure. And because Germany could thus maintain a balance of payments surplus, it didn’t have to support consumption domestically through high private borrowing or wage increases.

Attempts to resolve the debt crisis have compounded this unevenness. Protecting the banks has been imperative for European leaders, particularly the powerful financial institutions of the core. There is a logic to this. As the crisis continues, profit rates across the Eurozone have recovered somewhat, but not by means of productive investment. In fact, there has been a slump in corporate investment. Most of the recovery in profitability has been achieved through wage cuts, downsizing and speculation. Thus, instead of the widely advertised Keynesian revival, the neoliberal emphasis on finance-led growth continues to be orthodox among European leaders. EU powers have been far more aggressive in the pursuit of ‘austerity’ than their American counterparts. For this reason, Greece has been awarded ‘bailouts’ to cover payments to financial institutions largely based in France and Germany, while almost all the ‘haircuts’ applied to Greek debts have affected only Greek banks.

In return for these ‘bailouts’, the Greek government has been enjoined to sell public assets worth $71 billion at fire sale prices: public industries, post offices and airports, infrastructure and acres of prime real estate. Public sector wages have been cut by 20 per cent and taxes have risen to levels simply unaffordable for most of the population. Meanwhile, the power of the ‘troika’ within the EU – the Presidency, the Secretary-general and the High Representative – has been demonstrated with their insistence on access to Greek ministries in order to oversee the decisions made by elected politicians. Germany has argued that this monitoring should be conducted on a permanent basis.

Insulating parliamentary decision making from the public is of supreme importance. When the Greek prime minister, Papandreou, proffered a referendum over the most recent austerity/bailout package, EU leaders were aghast. It was a feint, intended to coerce the conservative opposition into abandoning their opportunistic criticisms of the package, but to the EU this was playing with democratic fire.

What future for Europe?

Part of the difficulty for the EU is that its measures are not working, even on narrow technical terms pertaining to growth and debt repayment. The latest decision from ratings agency Standard & Poor’s to downgrade a number of countries such as France and Italy was accompanied by a censure of EU leaders. On the one hand, it charged that they didn’t sufficiently recognise that the problem was caused by ‘fiscal profligacy at the periphery of the Eurozone’. This reflects the financial elite’s desire to transfer the blame for, and thus the burden of, the crisis onto the weakest. On the other hand, it complained that ‘fiscal austerity alone risks becoming self-defeating’, as the resulting collapse in demand would undermine growth and tax revenues, and thus the prospects of debt repayment. The future of the EU is therefore hostage to conflicting imperatives – make the poor pay but not so much that they can’t go on paying indefinitely.

Yet the failure of Europe is fundamentally a political failure. Unable to develop into a superstate or to cohere around a military agenda, it must continue to try to centralise political authority. Nor can it contain its class antagonisms in the way that the postwar compromise partially did. The model of development now proffered by the Franco-German leadership offers nothing but hardship for the continent’s working classes and years of devastation for vulnerable states in the periphery.

The lack of democratic legitimacy may turn out to be the EU’s greatest weakness. In principle, the EU derives its legitimacy from the participation of elected governments, and elected representatives in the EU parliament. But this was never convincing. In practice, the unelected executive – the EU Commission – has always dominated decision making and the Commission has always reflected the interests of industry and high finance. Similar authority has been accumulated by the European Central Bank and the European Court of Justice. But the power of the EU was also mediated by modestly democratic national states. Now, with the EU effectively using its power to gainsay the authority of elected governments and insist on ‘technocratic’ administration, even this limited democratic space is incompatible with its survival and expansion. The question is whether popular, democratic forces within Europe have the wherewithal to propose and implement an alternative.

Where the leaders of the EU have the advantage is in their near monopoly, thus far, on political initiative vis-à-vis their opponents. In Greece and Spain, for instance, popular struggle has taken militant forms. But it has so far been largely defensive and insufficient to face down the combined power of the EU, the IMF and domestic elites. The Left is growing in these countries but as yet, even in these vanguards, a leftist political leadership articulating a viable alternative to the EU has not emerged. The leadership of organised labour is everywhere in a more or less defeatist mood, interested only in modifying the terms of surrender. Despite some promising revival of anti-capitalist organisation after Seattle in 1999, much of the political Left was cannibalised by schisms and sectional rivalry from 2005 onward. And the Left has been at least as disoriented by the global crisis and its unpredictable effects as its opponents.

Yet, events are proceeding more rapidly than they can be accounted for and it would be a complacent European leadership that wrote off the prospects for mass insurgency. Unexpected eruptions of militancy have the capacity to unsettle fixed political calculations. For example, the indefinite strike by Greek steelworkers that has gone on for months in the face of management aggression stirred a movement in solidarity that led to a general strike on 17 January. Austerity measures enforced by the new ‘technocratic’ government of Italy, replacing Silvio Berlusconi’s administration, have provoked shutdowns from government workers and wildcat strikes among taxi drivers. This itself is one of the factors unnerving the ratings agencies, and one of the reasons why panicked EU administrators have so openly bruited their undemocratic credentials.

The union was built on the desire to suppress inter-European rivalry, but is imperilled by serious strategic divisions. It was developed to expand and rationalise production, but is now shaken by its inbuilt irrationalities. It sought to contain socialist and labour challenges, but, through its lack of legitimacy, is arousing the renewal of these challenges. Lastly, it aimed to form a pole of power independent of the US. At the moment, it is difficult to imagine that it will be the power to replace America – or that the twenty-first century will be a European century.