The terrifying intentions of Eurozone technocrats

Greek Prime Minister Lucas Papademos assembles his new cabinet.

Because the crisis remains unexplained, it is unresolved. 

Dear readers. This is a piece I have written with Douglas Coe for PRIME – Policy Research in Macroeconomics. Be warned: it’s rather long, more than 2,000 words. For some reason, the references do not appear within the text…but are inserted at the end of the piece….will seek advice, and ensure this problem is fixed. In the meantime, read on:

“As the world economy fails to recover, and instead threatens to implode we are now witness to political and social developments in Europe that are deeply alarming, even if inevitable. It is important that we understand and prepare for the implications of recent events.

The good news is that both politicians and official policymakers at the OECD and EU are finally forced to recognise the scale of the economic disaster that threatens social and political stability. The bad news is this has not led to any better understanding of the crisis, or to an admission of its causes.

Instead the crisis continues to be narrowly represented as a sovereign debt crisis, and not as a crisis of the private, liberalised banking system. Rather than acknowledge that the rise in sovereign debt is both a result, but also a symptom of a crisis in the private financial sector, EU policy-makers continue to blame public debt as causal. Flawed policies for reducing public debt, that instead increase it, are now a constant theme of public discourse. In the meantime the crisis in the private banking system remains neglected – with the impending threat of bank runs and bankruptcies ignored.

As a result the global financial and economic crisis that began in August 2007 has intensified. Because it remains entirely unexplained it remains unresolved. On 14th November, 2011, in evidence to the German Parliament’s Finance Committee Jens Weidmann, the new president of Germany’s Bundesbank “assigned the blame for the crisis of confidence in the Eurozone to politicians” reported Des Spiegel.

Because of this flawed diagnosis and misplaced focus by influential technocrats and policy-makers, the economic ‘remedies’ applied serve only to prolong and exacerbate the crisis.

And let us be under no illusion about how severely the situation is deteriorating. According to the Economist the number of underemployed 15- to 24-year-olds in the OECD – the richest countries in the world – is higher than at any time since the organisation began collecting data in 1976.

In Spain unemployment stands at 5 million, or 21.5% of the workforce (and this despite the departure back to Latin American of thousands of jobless immigrants.) Amongst young Spaniards unemployment is a staggering 46.2%.

In Ireland, much celebrated as a success story, the jobless rate has tripled to 14.2% since Europe’s worst banking crisis and the subsequent collapse of the property boom in 2008. This despite the fact that emigration is now the highest since the 19th century with an estimated 100 people leaving Irish shores each day.

Greece’s jobless rate hit a record high of 18.4 percent in August this year, when the number of the unemployed grew by almost 50 percent over the year, to 907,953. Young Greeks continue to be the hardest hit, with the jobless rate in the 15-24 category soaring to 43.5 percent, twice its level three years ago.

In the US, in spite of a less vigorous approach to austerity, the official unemployment rate of 9% has more than doubled from its pre-crisis low of 4.4% in 2007. But this statistic does not include workers discouraged from seeking work, or those working part-time when they would prefer full-time work. If the latter are included, then according to the Bureau of Labour Statistics (and quoted on the “Bond Vigilantes website) “11.4m Americans do not have an income, do not pay income tax, and do not contribute to producing goods and services.” Almost 15% of Americans (45.8m) are now on food stamps.

Attention is presently focused on the Eurozone. Its badly-conceived monetary union, modelled on the 1920s gold standard which imposed similar constraints on sovereign governments – has begun to unravel. Simultaneously, sovereign debt crises proliferate. But the latter are again merely symptoms, not cause.

We assert once again: the crisis is not one of sovereign debt. Instead it is one of the underlying bankruptcy of the private, globalised financial system, and the implosion of unpayable debts built up over thirty years by private bankers and other financial institutions.

As a result, globalisation – a liberalised financial system that has favoured the powerful – is imploding. And the blame for its implosion – by both ‘technocrats’ and politicians – is directed not at central bankers, policy makers and private bankers – but at the weak. As richer Eurozone countries blame poor ‘peripheral’ economies, we think of parallels: the Captain of the Titanic clinging to the wreckage of his ship, while blaming drowning victims for its fate?

With this flawed approach, it is now the apparent and terrifying intention of the authorities to enforce the wrong ‘medicine’ – austerity – down the throats of Europe’s victims – and to do so at the expense of democracy.

This process began of course in Greece. If rumours are to be believed, faced by the threat of a military coup Prime Minister Papandreou put his country’s fate in the hands of its people – via a referendum along the lines conducted by the President of Iceland. ‘Markets’ and Western politicians went ballistic. Papandreou was removed and the Orwellian construct of a government of national unity appointed. The government is led by Lucas Papademos, a former ECB central banker who once argued that: “The macroeconomic and microeconomic benefits for Europe and Greece from the introduction of the euro are numerous”. The coalition that Mr Papademos leads “includes four self-declared racists some of whom are neo-Fascists and one a neo-Nazi of some renown” writes Yanis Varoufakis.

As we have repeatedly argued and predicted, particularly in our report “The economic consequences of Mr Osborne” (published in July, 2010) austerity or ‘fiscal consolidation’ does not ‘slash’ the debt, but instead increases it. Austerity does not stimulate economic activity, it depresses it – as is evidenced everywhere it is practiced. The reckless imposition of austerity policies has intensified the financial crisis and may well lead finally to a modern form of fascism, as Gideon Rachman warned recently in the Financial Times.

“Marine Le Pen of the far right National Front will have a big impact on the 2012 presidential election in France, although she is unlikely to win. In the Netherlands the government is now reliant on the votes of the Freedom party led by Geert Wilders, which is running second in the polls. Austria’s far right Freedom party is at level pegging in the polls with the governing People’s party. In Finland the nationalist True Finns are still gaining ground and are easily over 20 per cent in the polls.

“Imagine” wrote Rachman “what the European political landscape would look like if banks started to collapse, people lost their savings and their jobs, and there was another deep recession. At that point voters would be desperate and disillusioned enough to turn to the extremist parties in much larger numbers.”

The idea of a technocrat is meant to re-assure. These individuals, we are led to believe, have mastery over the economic matters that are beyond the skills and intelligence of victims of the private financial crisis – ordinary people and their democratic representatives. By accepting government by ‘technocrats’ we are assured that policies will be applied to stabilise debt markets, avoid further unemployment, bank failures or lost savings. Yet these are the very officials and authorities responsible for the financial liberalization course that triggered the 2007 bank failures, rises in unemployment, and lost savings. These are the blind-sided technocrats that failed to predict the global collapse; that have acted only in the interests of the financial master at the expense of the victim, and that are now installing themselves in the highest political offices of Europe without a mandate from the people.

In reality these technocrats have operated inside the machinery of Haute Finance at every level, both within the private financial sector and the associated governance structures. Now at the highest level they represent the interests of bankers, including Goldman Sachs, the bank notorious for its “Vampire Squid” greed and grip on the minds of senior policy-makers.

Mario Monti, hurriedly appointed a senator for life in the Italian senate so that he could take up his post as Italian Prime Minister in November, 2011, has been European Chairman of the Trilateral Commission, a think-tank founded in 1973 by David Rockefeller. He is also a leading member of the exclusive Bilderberg Group of economists ; and an international adviser to Goldman Sachs and The Coca Cola Company. Mr Monti chaired the Italian Treasury’s committee on the banking and financial system, which set the country’s current disastrous financial policies.

Another powerful ‘technocrat’ is Mario Draghi, head of the European Central Bank (ECB) and a former Goldman Sachs executive. Lucas Papademos, Greek PM is a former vice-president of the ECB and also ran the Central Bank of Greece at a time when the Greek government worked with Goldman Sachs to devise complex derivatives that would disguise the apparent size of its government debt and enable it to qualify to join the euro.”

The idea that these people will serve the greater good of society is a deception of the most dangerous and invidious kind. Dangerous because of the public reaction and backlash likely to result from their flawed diagnosis of the crisis, and their determination to force the wrong austerity ‘medicine’ on innocent victims of the crisis.

With the failure of austerity now entirely apparent, the technocrats will continue to deflect responsibility or blame. Rather than acknowledging a failure of the bankers’ and economists’ diagnosis and strategy, technocrats will continue to blame politicians, pensioners and trades unionists for not implementing the austerity strategy forcefully enough.

In the meantime, arguments are marshalled against those that contest the value of austerity policies. The most current is the idea of inherent ‘structural’ problems. On the 21st November, 2011, the ECB’s Juergen Stark was quoted as saying:

“There is an urgent need for fiscal consolidation but it is more, it is also the structural weaknesses some countries are facing.”

The reference to ‘structural weaknesses’ is to the social welfare systems, reasonable working hours, wages and conditions of EU countries. All these it seems, stand in the way of resolving a private banking crisis of excessive, unpayable debts: a crisis which now threatens to bankrupt banks across the world. In the case of Greece and Italy, the rhetoric aimed at pensioners, the unemployed and the poor is racist and imperialist.

As Lord Skidelsky has reminded us,  in the early 1930s the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government. These policies paved the way for the rise of Nazism. Austerity policies – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed the country’s return to the gold standard between 1924 – 1931. Reparations were easily circumvented by wildly excessive borrowing from financial institutions around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power. He was the technocrats’ choice and was advised every step of the way by Hjalmar Schacht who served as President of the Reichsbank and Minister of Economics until 1937. Schacht was a close friend and confidant of the equivalent of today’s ‘Frankfurt group’: Montagu Norman, then Governor of the Bank of England; and Benjamin Strong, Chairman of the Federal Reserve.

However while this dismal parallel is alarming, there is also a more hopeful parallel.

Perhaps just as instructive to the present day may be the suspension of British democracy in September, 1931 when the National Government replaced the Labour-led coalition of 1929. This Government quietly abandoned austerity, and proceeded slowly to adopt measures promoted by progressive forces – not least Keynes – policies ignored or denied to the earlier Labour government. The National Government freed Britain from the ‘fetters’ of gold; proceeded to expand monetary policy and more quietly to expand fiscal policy.

It is quite possible that the technocrats in the Greek and Italian governments will follow their example and do the same, gradually distancing themselves from failed austerity policies. However, while they must know that the present course is disastrous – and we have already seen ungraceful policy contortions on the part of, for example, the OECD – the ‘technocrats’ do not want to lose face and permit progressive policies by a genuine, democratic opposition – because that would disturb the status quo.

After all, the greatest threat to the established order is that genuinely representative forces take control of their own destiny on the streets of Athens, Milan, New York and London. That would set in motion a restoration of democracy, policies for a prosperous and fair society, and the dismantling of today’s established order.

While we wait for such a restoration, the devil we know must be served at all costs, setting the world on a very dangerous course indeed.

 

[1] See PM David Cameron’s speech to the CBI: “Getting debt under control is harder than envisaged.” November 21st 2011. http://www.bbc.co.uk/news/business-15816199.

[1] “Germany’s Central Bank Against the World” – November 15th  2011.

[1] As above.

[1] Financial Times, October 28th  2011: “Spanish Unemployment nears 5m”.

[1] Economist “Left Behind: The harm today’s youth unemployment is doing will be felt for decades, both by those affected and by society at large” September 10th 2011.

[1] Eurostat: Harmonised unemployment rate by gender – total. http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=teilm020&tableSelection=1&plugin=1

[1] Reuters, “Greek unemployment hits record; youth jobless soar” November 10th 2011.

 

[1] “Why you shouldn’t just read the headlines on US unemployment” by Anthony Doyle, Bond Vigilantes website, November 3rd 2011.

 

[1] Yanis Varoufakis: “The Serpent’s Egg hatchlings in Greece’s postmodern Great DepressionNovember 18th 2011. http://yanisvaroufakis.eu/2011/11/18/the-serpents-egg-hatchlings-in-greeces-postmodern-great-depression/

 

[1] “The economic consequences of Mr Osborne.” Fiscal consolidation. Lessons from a century of macroeconomics.” By Victoria Chick and Ann Pettifor. First published, July, 2010 by PRIME – Policy Research in Macroeconomics. http://www.primeeconomics.org/wp-content/uploads/2011/06/The_Economic_Consequences_of_Mr_Osborne.pdf

[1] Gideon Rachman “Look behind you, Lucas and Mario” Financial Times, November 14th  2011. http://www.ft.com/cms/s/0/6913807e-0ebb-11e1-b83c-00144feabdc0.html#ixzz1eHcMD000

[1] Bilderberg Meetings: governance. http://bilderbergmeetings.org/governance.html

[1] “What price the new democracy? Goldman Sachs conquers Europe” by Stephen Foley, the Independent, Friday November 18th 2011.

 

[1] Mario Monti profile, Wikipedia. http://en.wikipedia.org/wiki/Mario_Monti

[1] “Europe facing a fate worse than debt” by Paul Vallely in the Independent, November 20th, 2011. “As the eurozone crisis sees elected governments replaced by technocrats, democracy seems a high price to pay for market stability.” http://www.independent.co.uk/opinion/commentators/paul-vallely-europe-is-facing-a-fate-worse-than-debt-6264954.html

[1] Forex News November 21st 2011. ECB’s Stark Warns of Dampening Effects on Q4 Growth; Calls for Urgent Fiscal Consolidation.

http://www.forexbrokerz.com/news/ecbs-stark-warns-of-dampening-effects-on-q4-growth-calls-for-urgent-fiscal-consolidation

[1] Eight Fallacies in the BBC’s “Keynes vs Hayek Debate”at the LSE, 3rd August, 2011. By Victoria Chick, Douglas Coe and Ann Pettifor. PRIME. http://www.primeeconomics.org/?p=635

[1] Austerity: OECD economists show clear signs of ‘cold feet’ by Ann Pettifor. June 2nd 2011.

http://www.primeeconomics.org/?p=534

 

 

 

 

 

10 comments to The terrifying intentions of Eurozone technocrats

  • Keith Tapp

    Thank you Ann and Douglas. Reading all these kinds of Keynesian blogs this past week and failing personally to get any Irish policy elites to show the slightest bit of interest in these alternative models, I have realised just today that the task is hopeless. Reading your article tells me you feel the same way, at least for a few years perhaps until the technocrats can change direction without losing face. The Irish Labour party (of which I am an incredulous ordinary member) will announce a second year of austerity measures(on a shrinking economy) within the next two weeks, contrary to its charter and its recent election mandate based on false promises. Jurgen Stark’s quote about ‘structural problems’ got significant play here in the media today as well. Last week I began quietly taking all my savings out of the bank as an act of protest and also security. I am thinking I may just leave Europe as well for a while. Perhaps we all should.

  • The reasons that various people advocated austerity in the 1930s are totally different from the reasons for the austerity currently being imposed on Euro periphery countries. The former arose out of a simple failure to understand Keynes’s basic message, namely that in a recession a monetarily sovereign country can borrow or print money and then spend its way out of a recession.

    The current Euro problem is that periphery countries are uncompetitive. The purpose of austerity is to bring their costs down and make them competitive, though the process is far too slow: some sort of instant devaluation of periphery currencies would be preferable, like an overnight cut in their nominal wages and prices – if that could be organised.

    So while the stimulus you seem to advocate for periphery countries sounds wonderful, unfortunately it just delays the day of reckoning when these countries have to make themselves competitive.

    Re “Athens, Milan, New York and London” which you cite in your 2nd last paragraph, I suggest that monetarily sovereign countries (New York and London) are so different from non-monetarily sovereign countries (Athens and Milan) that it is very dodgy to even mention them in the same sentence.

  • thiscreepingmalaise

    Leaving Europe? where would you go. Things are tough all over I think. Canada maybe?

  • Ann

    Ralph…Countries do not become monetarily sovereign or non-monetarily sovereign by accident, but by design. The question is: whose design? And whose interests are served by a) stripping democratic economic of monetary sovereignty? and b) forcing them to ‘become competitive’? My view is that the finance sector’s interests are best served by denying an economy its own monetary system, power over its exchange rate and currency. The reason is simple: without these economic levers, economies become wholly dependent on borrowing from private banks….borrowing that in the case of the Eurozone was effectively guaranteed by EZ governments….

    I think that monetary systems should serve the interests first and foremost of the people of that country; they should make it possible for people to work, to do that which is vital to maintain social, political, environmental and political security and stability. The Euro has achieved the very opposite: economic, social and political insecurity.

  • Ann

    Keith you are not alone in your actions…..if only policy-makers would wake up! Anyway, hang on in there…and keep us posted.

  • While of course I agree with your two central ideas. As I see it, 1) that austerity is only going to deepen the present problem and 2) that governments are bending over backwards to say they are at fault and not the over-leveraged world. That said, isn’t it also true that many European countries have a really problem with tax scofflaws and also unproductive public sectors? That’s not to say austerity makes sense, but there is a real problem, at least, on the revenue side… which is a problem for the rule of law and for orderly society.

    More broadly, though, I come back to agreeing with your larger point. As much as I believe, in theory, in regulation, regulatory capture seems to be the story not just of the crisis but the post crisis. Folks talk about regulatory capture as a trivia item, but I think it is central to all the drama since 2008.

    I tried to help negotiate a deal to create real rules around predatory lending in Pennsylvania, and believe me: those regulators were captured. I’d love to hear the revisionist history they have to tell about those negotiations now.

  • Joe Smith

    Good to see you back again! Also thanks for this latest piece, which as always gets straight to the heart of the problem.

    You fail to mention, as well as what happenned in Europe and Germany in the 1930’s, the obvious point about the mess created by President Hoover and Treasury Secretary Mellon in the US. Fortunately Roosevelt saved the day in the US, and when World War II came along, saved Europe as well.

    In times of crisis, the US as a relatively new nation, is able to re-invent itself and accommodate to new realities. Unfortunately Europe is bogged down by it’s history of class and racial tensions. We see this in the scape-goating of the “work-shy” Southern countries, and the “welfare-sponging” unemployed, disabled, old, etc.

    In the course of time Europe will undoubtedly sort itself out, due to the Chinese law of “ying and yang” (i.e. every bad event has it’s good corollary). There is an easy planned way, or a difficult unplanned way. At the moment, unfortunately, the difficult unplanned way seems the most likely outcome.

  • Ann

    Brady…thanks for this comment and for sharing the Pennsylvania story. On the point about EU countries having problems with revenue and unproductive public sectors: you’re right. There are problems with revenue collection/tax evasion, and no doubt there are inefficient public sectors. But I have worked in many African countries – and they all have problems with revenue collection and inefficient public sectors. And that, it seems to me, is because they are poor. Getting all the infrastructure in place for efficient tax collection takes a dedicated state/public sector, a fully or close to fully employed population and trained staff and managers in govt departments…and sadly for some decades now, the state and public sector has been so derided, and its functions so under-valued, that the result is as you outline above. But this was not always so…and so we must hope for the day when the critical role that the state plays in supporting the market and the private sector, is once again recognised….

  • Nick Berry

    Ann, I think it was Mussolini who proudly proclaimed ‘when you can no longer tell the difference between government and business, then that is fascism’. I paraphrase, as he probably used the terms state and corporatism, but the sentiment and parallels are very disturbing.

  • Ann

    Nick, thanks for this quote. Will try and stand it up, because I have been a little slow to waking up to this threat…and was particularly unnerved when I came across an Oswald Mosley site the other day…like many, I have preferred to be in denial about the threat of corporatism/fascism…

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