The
European Financial Crisis: A Can of Worms
Nicholas
Fourikis
1
- INTRODUCTION
Before
exploring the European financial crisis it’s worth remembering the historic
exchange that took place between Chou En-Lai1 and President Nixon in the walled garden of the Forbidden City after Kissinger’s visit to
China in 1972.
The President asked Chou what the impact of the
French Revolution had been on the Western civilization and Chou replied, “it’s
too early to tell,” after considering the question for a few moments.
Armed with that valuable
insight, it would have been unwise to consider the impact of the European
financial crisis on the Europeans and on the rest of the world at this point in
time. What is unfolding in Europe however warrants an urgent consideration
because what started as a financial crisis is developing into a social crisis
that threatens the very fabric of the continent that was once the hub of
culture, innovation and progress. Moreover the rest of the financial world is
threatened by these developments.
In summary German and French banks lent excessive amounts of money to Portugal,
Italy, Ireland, Greece, and Spain, the group that is euphemistically
abbreviated as PIIGS. Greece’s public debt, for instance, is 170.6 % of GDP.
As
the
governments of the PIIGS countries could not service their excessive loans, the
banks imposed strict austerity measures on the citizens of the PIIGS countries;
these measures were so harsh some commentators labeled them draconian or
barbaric.
The tragedy is widespread because millions of Europeans lost their jobs
and pensions were reduced by 25% - typically. The overall unemployment figure
for the PIIGS countries, for instance, rose to 20-25% but for the young
population it reached the 50% mark. Typically the overall unemployment figure
for Greece in August 2012 was 25.4%. More importantly the employees, who are lucky
to have a job, lost several entitlements / bonuses they won over many years.
The
number of suicides increased in the PIIGS countries, and some parents abandoned
their children because they could not feed them. Before the crisis, Greece had one of the lowest
suicide rates in Europe, just over 300 a year. In 2009, the police recorded 507
suicides; in 2010, 622; and last year, 598.
Dimitris Christoulas2, a 77 -year old
retired pharmacist, blew his brains in Syntagma Square – the main square in
Athens - because he could not face the prospect of scavenging through garbage
bins for food and becoming a burden to his child. He wasn’t a criminal, he
was a tertiary educated pharmacist; he was no parasite but a valuable member of
the European community.
No wonder unrest and demonstrations became common. People in the streets
have been shouting, “we’ve done nothing wrong, why are we being punished so
severely?” while the German politicians have been shouting back, “you have to
learn to live within your means,” echoing no doubt the sentiments of the
bankers.
What
happens with monotonous regularity is worth noting here: every so often the
representatives of one member of the PIIGS family would visit the EU, cap in
hand, to re-negotiate the loan of their country. The loan is re-negotiated provided
the government of that country increases the austerity measures already in
place and some “haircut” to the amount of money due is attained. Then another
member of the PIIGS family visits the EU, cap in hand and the tragedy which
started in 2009, continues.
It
is worth noting here that each member of the PIIGS family confronts the EU officials
separately.
2 – TAKING STOCK
Several questions fly onto our collective faces.(i) For how long are we to tolerate the continuation of this tragedy in the 21st century? Surely there must be a point beyond which we have to say enough is enough. Many commentators hinted that the current German government is trying to revive the Fourth Reich from the ashes. Are we waiting for the widespread demonstrations to develop into wars before we review what is happening?
(ii)
Where is the economic theory which stipulates that
money to pay the debt of a country can be generated by throwing millions of workers
into long unemployment queues and by drastically reducing the pensions of
workers who dutifully paid their taxes over a lifetime? These reductions
typically amount to 25% of the pension a pensioner usually earns.
(iii)
Is there empathy for the tragedy millions of workers
/ professionals are experiencing in Europe? Do Europeans still remember that if
one person hurts, everyone hurts? Where is the solidarity among unionists, in
say Germany or Sweden, for their fellow unionists residing in the PIIGS
countries? Where is the solidarity among professional associations, in say
Germany or Denmark, for their fellow professionals residing in the PIIGS
countries?
(iv)
Why and how the EU representatives lent outrageous
loans to so many countries when they knew the GDP of each country? My bank
manager will kill himself laughing if I was to request a sum of money he knew I
could not pay back. In a similar vein the EU with all its resources should have
blocked any requests for outrageous loans.
(v)
Why is it that the EU reps that approved the
massive loans and the reps of the PIIGS countries that negotiated these loans
are not brought to justice? As we will see these criminal transactions took
place year after year from1998 to 2009! Here we are dealing with massive loans
the EU reps approved over 11 long years!
(vi)
What astounds me is that the bankers have been
successful in beating the citizens of the PIIGS countries into submission one
at the time for many years. Many commentators write and speak as if this is the
first time in history we are seeing all powerful bankers eager, extremely eager
to have their pound of flesh from the poor citizens. This is simply not the
case and we have learnt a lot from recent history.
(vii)
PIIGS is a derogatory acronym of describing the
citizens of the poor southern European countries.
(viii)
The bankers demand their money now, come hell or
high water. They simply do not care if their demands have created and continue
to create bad blood between the Southern and Northern Europeans. Can the EU
survive when there is so much bad blood within the Union? And if it survives
that calamity what sort of union would it be?
(ix)
Membership in the EU is under the spotlight. Most
Greeks, for instance, would prefer to stay in the EU without realizing that the
prosperity they have enjoyed in the past was due to the excessive amounts of
money their governments borrowed; moreover they have to pay the borrowed money
through their collective noses over many painful years. Was the membership in
the EU a tender trap?
(x)
Was it wise for the EU to adopt a single currency
for countries that have radically different economies and when no EU country
can readily devalue its currency? and
(xi)
Was it prudent to have a financial union without having
a political union in place?
3 – THE MAIN PLAYERS AND AUSTERITY MEASURES
Germany with its industrial might is the main banker
of the EU closely followed by France. Dr Angela Merkel, the Chancellor, and her
Finance Minister Wolfgang Schäuble are therefore the major players.
Dr Merkel is a brilliant physicist who enjoys
considerable support of her people. It is not however clear whether she would
continue to enjoy the same level of support next year, when the German
elections are due. The main problem is that the austerity measures her
government imposed on the citizens of the PIIGS countries did not yield the
desired results; indeed the economies of many countries have contracted. While some belt tightening is necessary for a
nation eager to pay back its debt, prolonged austerity measures are
counter-productive.
Paul Krugman,3 the 2008 Nobel laureate for economics, argued
that Germany's support for austerity measures will lead
Europe onto a death trip and that prosperity through pain is a fantasy. He also
reminded us many times what John Maynard Keynes postulated: "It's the
boom, not the slump that is the time for austerity." Lastly he labelled the austerity measures “a zombie” economic policy because zombies keep on champing forward no matter how many times you have killed them. More to the point after two and a half years of imposing austerity measures the European bankers still support the same policies despite all the evidence that the measures are not working.
Paul Krugman explained that a government is not like a household. Across an economy,
one person's spending is another person's income. If everyone is trying to
reduce their spending, the economy can be trapped in what economists call the paradox of thrift, worsening the recession as GDP falls. If the private
sector is unable or unwilling to consume at a level that increases GDP and
employment sufficiently, he argued, the government should be spending more.
John
Maynard Keynes and Krugman are not alone; here is what Mike Whitney4
wrote.“Austerity measures have led to a decline in personal consumption, an erosion of confidence, and a more generalized slowdown across all sectors. Still, intractable bankers and bureaucrats in Brussels and Frankfurt have not veered one bit from the original policy. They remain steadfast in their commitment to austerity.”
…. “Austerity is just the euro-version of “starve the beast”; and W Munchau5 echoes the same truths.
Coming back to the German Chancellor, an ability to comprehend physical phenomena, which are by and large linear in nature, by a brilliant physicist, is not necessarily useful to comprehend the non-linear phenomena we encounter in modern economies. One could even argue that the bad blood created between the southern and northern European nations is enough to preclude reconciliation within the EU for several years.
The suicide note Dimitris Christoulas left encapsulates public feeling in Greece6
“The Tsolakoglou (The collaborationist occupation government established after the Nazi Germany invasion of Greece during World war two) government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting (although if a fellow Greek were to grab a Kalashnikov, I would be right behind him), I see no other solution than this dignified end to my life, so I don’t find myself fishing through garbage cans for my sustenance. I believe that young people with no future will one day take up arms and hang the traitors of this country at Syntagma square, just like the Italians did to Mussolini in 1945.″
If I could hazard a guess, events would force Dr Merkel to lead an expansionist policy in Europe before the elections. If that takes place I do not expect to hear any expressions of regret from the good Doctor for the tragedies that followed the austerity measures her government imposed. Moreover there would be no compensation to the millions of Europeans who lost their jobs or a large chunk of their pensions; and you’ve guess it, there would be no mention of restoring the privileges / bonuses workers / professionals lost during the period when her government imposed the austerity measures. And lastly the names of Professor Paul Krugman, Mike Whitney and Wolfgang Munchau – to cite only three astute observers - who reminded us what Keynes taught us many a time, would not be mentioned.
The following incident illustrates a deep-seated
German belief Wolfgang Schäuble shared with the world.
In the
interview with the PBS7, Paul Krugman recounted a story when he and
his wife were attending a speech from Wolfgang Schäuble, the German finance minister: "My wife8
took off her headphones for the translation just to watch the body
language...and then she turned to me and said, 'As we leave this room, we're
going to be given scourges with which to whip ourselves.' Because it was all
morality and debt is evil.
. . . “The
question is whether the Europeans in general, and the Germans in particular,
can accept the fact that this is not going to be about punishing the guilty,
especially because in many cases the people suffering the most had nothing to do
with creating this crisis.”
“We’ve
done nothing wrong, why are we being punished so severely?” That is what the
poor demonstrators shout in the streets Athens.
4 – SOME BROADSIDES AGAINST THE CITIZENS OF THE
PIIGS COUNTRIES
A humanist would have expected empathy with the citizens of the PIIGS
countries because he / she would believe that if one person hurts, everybody
hurts. In the same vein he /she would have expected that the unions and
professional associations of the northern countries would have shown solidarity
with their fellow workers / professionals residing in the PIIGS countries. But No!
There is no empathy and no solidarity because the bankers want their pound of
flesh now and debt is evil.
Here’s what we’re told9
“Greece’s economy blew apart because a bunch of olive-spitting,
ouzo-guzzling, lazy-arse Greeks refuse to put in a full day’s work, retire
while they’re still teenagers, pocket pensions fit for a pasha, and they’ve
gone on a social services spending spree using borrowed money.
“Now that the bill is due and the Greeks have to pay with higher taxes and
cuts in their big, fat welfare state, they run riot, screaming in the streets,
busting windows and burning banks.
I don’t buy it. I don’t buy it because of the document in my hand marked
“Restricted distribution.”
“I’ll cut to the indictment – Greece is a crime scene. The people are
victims of a fraud, a scam, a hustle and a flim-flam. And – cover the
children’s ears when I say this – a bank named Goldman Sachs is holding the
smoking gun.”
An evocative report that captured the essence of what happened; let’s us however
complement that report by hearing from a trusted economist10.
“Greece has a lot of corruption and a lot of tax evasion; moreover the
Greek government has had a habit of living beyond its means. Greek labour
productivity is low by European standards - about 25 per cent below the
European Union average. It's worth noting, however, that labour productivity
in, say, Mississippi is similarly low by US standards - and by about the same
margin.
“On the other hand, many things you hear about Greece just aren't true.
“The Greeks aren't lazy - on the contrary, they work longer hours than
almost anyone else in Europe, and much longer hours than Germans in particular.
“Nor does Greece have a runaway welfare state, as conservatives like to
claim; social expenditure as a percentage of gross domestic product, the
standard measure of the size of the welfare state, is substantially lower in
Greece than in, say, Sweden or Germany, countries that have so far weathered
the European crisis pretty well.”
Goldman Sachs systematically helped
the Greek government mask the true facts concerning its national debt from 1998
to 200911. The same
bank and other US banks helped the
other PIIGS countries to mask the true facts concerning their national debts.
What is missing from the full picture of events is the fact that the EU
did not have robust mechanisms to block the requests for outrageous loans from
1998 to 2009!
5 – DEBTS AND ODIOUS DEBTS
While we are
familiar with debts of all kinds e.g. personal / national / international, etc.
we need a definition for odious debts12.
“In international law, odious debt
is a legal theory that holds that the national debt incurred by a regime
for purposes that do not serve the best interests of the nation,
should not be enforceable. Such debts are, thus, considered by this doctrine to
be personal debts of the regime that incurred them and not debts of the state.
In some respects, the concept is analogous to the invalidity of contracts
signed under coercion
The doctrine was
formalized in a 1927 treatise by Alexander
Nahum Sack, a Russian
émigré legal theorist, based upon 19th-century precedents including Mexico's
repudiation of debts incurred by Emperor
Maximilian's regime, and the
denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime. While
historical flashbacks are useful, I will review how Ecuador dealt with its debt
in 2008.
Dr Rafael Correa13,
an economist educated in Ecuador, Belgium and the United States, was elected President of the Republic of Ecuador in
late 2006 and took office in January 2007. In December 2008, he declared
Ecuador's national debt illegitimate, based on the argument that it was odious debt contracted by corrupt and despotic prior regimes. He announced that the
country would default on over $3 billion worth of bonds, pledged to fight
creditors in international
courts and succeeded in
reducing the price of outstanding bonds by more than 60%.
6 – FUTURE OPTIONS
FOR THE GOVERNMENTS OF THE PIIGS COUNTRIES
While one member of the PIIGS family lacks the power to
negotiate better outcomes with the EU bankers, an association of all PIIGS
countries is worth considering. If all members of the PIIGS family speak with
one voice the association can expect better outcomes for all member countries when
negotiating with the bankers. Simply put there is strength in numbers.
The same association could fund teams of international
lawyers to establish whether some or all debts are odious. Here there is ample
room for negotiation.
Beyond these two useful approaches each member country of
the PIIGS family has to consider its international competitiveness and take
steps to increase it.
In Table 1 I summarized the global competitiveness of a
number of countries.
Table 1 - Global Competitiveness Index 2011-2012 rankings+
of some
countries and of the
PIIGS countries compiled by the
World Economic Forum14
Switzerland++ 1
Singapore++ 2
Sweden 3
Finland 4
Denmark
8
UK 10
Belgium 15
Norway 16
•
•
•
Ireland
29
Spain 36
Italy 43
Portugal 45
Greece
90
+the rankings are w.r.t.142 countries
++Switzerland and Singapore are not members of the European
Union
It’s worth noting that the two most competitive countries
of the world are not members of the EU. Good news for the Euro-skeptics!
The competitiveness of all the PIIGS countries is low and
that of Greece is very low indeed.
In reference [15] the author observes that Greece is the
least competitive country in the EU and suggests the following measures for
improving Greece’s competitiveness:
|
(i)The recapitalization of the banking systems
(ii)The proper management of public finances
(iii)The promotion of structural reforms aimed at increasing
productivity; and
(iv)Liberalizing markets and services, particularly in the domains of
education, new technologies and innovation.
|
Was Greece uncompetitive over the recent past? Krugman16
who studied the historical data concluded:
"Yes, Greece was poor and relatively unproductive. But
its famous lack of competitiveness is a recent development, caused by massive
post-euro inflows of capital that raised costs and prices. And that’s the kind
of thing that currency devaluations can cure.”
7 – THE WIDER ISSUES
What can the EU architects / theorists learn from the successes of the
United States of America, as a union of many states and the reasons the USSR
disintegrated.
In the final analysis there
are no tablets on which the words:
“The Third Reich will live
for a thousand years,”
“The 15 Soviet republics
will always form the USSR”; and
“The EU will succeed as a union of European nations,” are engraved.
On the other hand it is well known that the United States of America has
been faring remarkably well as a union of fifty states and a federal district. Could
it be that political union should precede the financial union?
It will be gratifying if the EU reps that approved the massive loans and
the reps of the PIIGS countries that negotiated these loans are brought to
justice, sooner rather later.
While financial
issues are important, cohesion between the EU countries is as important. This
not appreciated by the European bankers who demand their money now,
come hell or high water. They simply do not care if their demands have created
and continue to create bad blood between the Southern and Northern Europeans.
Can the EU survive when there is so much bad blood within the Union? And if the
EU survives that calamity what sort of union would it be?
While the residents
of the PIIGS countries suffer, the rest of the Europeans are not particularly
supportive of their fellow Europeans. The rest of Europe reads that Greek /
Spanish . . . workers are unemployed and lose the bonuses / privileges they
have gained over many years and don’t shed a tear. There is no solidarity among
the EU countries.
There is no theory to support the financial austerity
measures imposed on the PIIGS countries as a way out of the veritable economic
mess. On the contrary expansion policies can end the calamity caused by the
imposition of prolonged financial austerity measures.
Looking ahead the German election might force the leaders
of the parties who win power to re-examine past policies. It is debatable that
the Greek people would be able to suffer more austerity measures and if they
force another election and the Syriza party wins a majority, the newly formed
party will hopefully bring fresh ideas to the table. In brief17, 18
the party supports Greece’s membership in the EU but is against the austerity
measures.
8 – CONCLUDING REMARKS
I have outlined many options for the EU and for the
PIIGS countries to consider in the near and far future because I believe that
the more options we consider the freer we become.
Lastly I would like to conclude that my thoughts
are with the men and women of the poor European countries who lost their jobs,
large chunks of their pensions and the many privileges / bonuses they have
gained over a number of years. I empathize and stand by them because they are
suffering so much but committed no crimes.
9 – REFERENCES
1 Chou / Zhou En-Lai – was the first Premier of the People’s Republic
of China.
2 Niki Kitsantonis. Pensioner’s suicide continues to
shake Greece. NY Times April 5, 2012
3 Paul Krugman. Right now we need expansion. Der
Spiegel interview. 23 May2012
4 Mike Whitney. Counter
punch. The meaning of austerity measures. April 27-29, 2012
5 W Munchan.
Relentless austerity will only deepen Greek woes. Financial Times Oct 7, 2012
6 Dimitris
Christoulas. Wikipedia.
7Paul Krugman. ‘Solving Europe’s Crisis ‘Is not
going to be about punishing the guilty.’ B. Kavoussi. Huff Post, 30 Nov 2012.
8Dr Robin Wells, also an economist, is married to Paul Krugman.
9Greg Palast, Morning Star, 07 November 2011 - Author of “Vultures’ Picnic: In Pursuit Of Petroleum
Pigs, Power Pirates And High-Finance Carnivores.” Nov 14, 2011.
10 P
Krugman. Greece as victim. NY Times. 17 June 2012
11 Goldman Sachs. Wikipedia.
12
Odious debt. Wikipedia.
13
Rafael Correa. The President of Ecuador. Wikipedia.
14 World
Economic Forum Report - 2011-2012
15N Chrysoloras. www.ekathimerini. +1'd this publicly.
5 Sep 2012
16P. Krugman. Long run Greek Competitiveness. The conscience of a Liberal. N
Y Times June 2012.
17Costas Douzinas and Joanna Bourke. The
Guardian Weekly. Sunday 17 June 2012. A Syriza victory will mark the beginning
of the end of Greece's tragedy.
18Costas Douzinas. Greece is ripe for a radical change. The Guardian Weekly, 8
Nov 2012.
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