Debt, austerity, devastation: it’s Europe’s turn

10 August 2013 by Susan George


As the creditors get fatter, the innocent are punished. Susan George laments a leadership subservient to big business.

Like plague in the 14th century, the scourge of debt has gradually migrated from South to North. Our 21st-century Yersinia pestis isn’t spread by flea-infested rats but by deadly, ideology-infested neoliberal fundamentalists. Once they had names like Thatcher or Reagan; now they sound more like Merkel or Barroso; but the message, the mentality and the medicine are basically the same. The devastation caused by the two plagues is also similar – no doubt fewer debt-related deaths in Europe today than in Africa three decades ago, but probably more permanent harm done to once-thriving European economies.

Faithful – and older – New Internationalist readers will recall the dread phrase ‘structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
’. ‘Adjustment’ was the innocent-sounding term for the package of economic nostrums imposed by wealthy Northern creditor countries on the less-developed ones in what we then called the ‘Third World’. A great many of these countries had borrowed too much for too many unproductive purposes. Sometimes the leadership simply placed the loans in their private accounts (think Mobutu or Marcos) and put their countries in hock. Paying back in pesos, reals, cedis or other funny money was unacceptable: the creditors wanted dollars, pounds, deutschmarks…

Furthermore, the Southerners had contracted their loans at variable interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, initially low but astronomical from 1981 when the Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
declared an end to the era of cheap money. When countries such as Mexico threatened default, panicked creditor-country treasury ministers, top bankers and international bureaucrats spent some sleepless weekends eating take-out and cobbling together emergency plans.

Plus ça change, plus c’est la même chose. [1] Decades later, serial crisis meetings still take place, this time in Brussels and, with minor variations, the response is identical: you only get a bailout in exchange for committing to a set of stringent requirements. These once echoed the neoliberal ‘Washington Consensus’; now they are more truthfully labelled ‘austerity packages’ but demand the same measures. Sign here, please, in blood.

For the South, the contracts said: ‘Cut back food production and grow cash-earning crops. Privatize your State enterprises and open up profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. -making activities to foreign transnational corporations, especially in raw materials and extractive industries, forestry and fisheries. Drastically limit credit, cancel subsidies and social benefits. Make health and education paying propositions. Economize and earn hard currency through trade. Your prime responsibility is to your creditors, not your people.’

Once they had names like Thatcher or Reagan; now they sound more like Merkel or Barroso but the message, the mentality and the medicine are the same

Now it’s Europe’s turn. The countries of southern Europe, plus Ireland, are relentlessly told: ‘You have been living beyond your means. Now pay.’ Governments meekly accept orders and their people often assume that their debt must be paid instantly because the debt of a sovereign State is just like the debt of a family. It’s not – a government accumulates debt by issuing bonds on financial markets. These bonds are bought mostly by institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. such as banks which receive an annual interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. payment, low when the risk of default is low, higher when it isn’t. It’s absolutely normal, desirable and even necessary for a country to have a debt which will pose zero problems and generate many benefits if the money is prudently invested for the longer term in productive activities such as education, health, social benefits, solid infrastructure and the like.

Indeed, the higher the proportion of public spending in a government budget, the higher the standard of living and the more jobs are created – including private-sector jobs. This rule has been verified time and again since the correlation between public investment and national well-being was first noted in the late 19th century.

Obviously, borrowed money can also be wasted and spent stupidly and benefits can be distributed unfairly. The big family-State budget difference is that States don’t disappear like bankrupt companies. Productive, well-managed investment financed by government borrowing should be seen on the whole as A Good Thing.

The magic numbers

In 1992, European countries narrowly voted Yes to the Maastricht Treaty, which at the insistence of Germany contained two magic numbers, 3 and 60. Never allow a budget deficit greater than three per cent; never contract public debt greater than 60 per cent of your Gross Domestic Product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP). [2] Why not two or four per cent, 55 or 65 per cent? Nobody knows, except perhaps some ancient bureaucrats who were there, but these numbers have become the Law and the Prophets.

In 2010, two famous economists announced that beyond 90 per cent of GDP, debt would plunge a country into trouble and its GDP would contract. That sounds logical because interest payments would take a bigger chunk out of the budget. But in April 2013, a North American PhD candidate tried to replicate their results and found he couldn’t. Using their figures, he got a positive result for GDP which would still rise by more than two per cent per annum. The famous, if red-faced, twosome had to admit they were Excel victims and had misplaced a comma.

Even the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
has confessed to similar mistakes, this time on the austerity cuts issue. We now know, because the Fund was honest enough to tell us, that cuts would hurt the GDP by two to three times more than it initially foresaw. Europe should go easy, says the IMF, and not ‘drive the economy with the brakes on’. The magic 60 per cent of GDP debt limit is no more sacred than the three per cent deficit limit; yet policies remain the same, because the neoliberal hawks seize upon every scrap of dubious evidence that seems to promote their cause.

We are faced with two basic questions. The first is why did the debts of European countries rise so steeply after the crisis struck in 2007? In just four years, between 2006 and 2010, debts escalated by more than 75 per cent in Britain and Greece, by 59 per cent in Spain and by fully 276 per cent in all-time champion Ireland, where the government simply announced it would assume responsibility for all the debts of all the private Irish banks. The Irish people would henceforward be held responsible for the irresponsibility of Irish bankers. Britain did the same, though in lesser measure. Just as profits are privatized, losses are socialized.

So citizens pay through austerity, whereas bankers and other investors who bought the country’s bonds or toxic financial products contribute nothing. After the 2007 crisis, the GDP of European countries dropped by an average five per cent and governments had to compensate. Escalating business failures and mass unemployment also meant more expenditures for governments just when they were taking in less income from taxes.

The New Morality

Economic stagnation is expensive – higher expenditure and lower revenue add up to a single answer: borrow more. Saving the banks and taking the consequences of the crisis they created are the fundamental reason for the debt crisis – and consequently for harsh austerity today. People were not ‘living beyond their means’ but the New Morality is clearly ‘Punish the Innocent, Reward the Guilty’.

This is no defence of stupid or corrupt policies such as allowing the Spanish housing bubble to inflate or Greek politicians to hire masses of new civil servants after each election. The Greeks have a bloated military budget and inexcusably refuse to tax the great shipping magnates and the Church – the biggest property owner in the country. But if your bathtub leaks and the dining room paint is peeling, do you burn down your house? Or do you fix the plumbing and repaint?

Eminent economists like Paul Krugman or Joseph Stiglitz believe that the European leadership is brain-dead, ignorant of economics and needlessly committing economic suicide

The human consequences of austerity are inescapable and well known: pensioners search through rubbish bins at mid-month hoping to find a meal; talented, well-educated Italians, Portuguese and Spaniards flee their countries as unemployment for their age group approaches 50 per cent; unbearable stress is laid on families; violence against women increases as poverty and distress rise; hospitals lack essential medicines and personnel, schools decline, public services deteriorate or disappear. Nature takes the brunt as well: nothing is invested in reversing the climate crisis or halting environmental destruction – it’s too expensive. Like everything else, we can’t do it now.

We know these outcomes, the results of what Angela Merkel calls ‘expansionary austerity’ policies. This neoliberal theory claims that markets will be ‘reassured’ by tough policies and reinvest in the newly disciplined countries concerned. This hasn’t happened. Pictures of Merkel adorned with swastikas are appearing throughout southern Europe.

Many Germans think they are helping Greece – and they don’t want to anymore. In fact, virtually all the bailout money has taken a circuitous route: EU government contributions made through the European Stability Mechanism ESM
European Stability Mechanism
The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.

http://www.esm.europa.eu/
have been channelled via the Greek Central Banks and private banks right back to British, German and French banks that had bought up Greek Eurobonds to get a higher yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. . It would be simpler to give European taxpayers’ money directly to the banks, except that said taxpayers might notice. Why make an ongoing psycho-drama over two per cent (Greece) or 0.4 per cent (Cyprus) of the European economy? A cynic might say: ‘Easy. To ensure Ms Merkel’s re-election in September.’

The second basic question is: why do we continue to apply policies that are harmful and don’t work? One can look at this self-created disaster in two ways. Eminent prize-winning economists like Paul Krugman or Joseph Stiglitz believe that the European leadership is brain-dead, ignorant of economics and needlessly committing economic suicide. Others note that the cuts conform exactly to the desires of such entities as the European Roundtable of Industrialists or BusinessEurope: cut wages and benefits, weaken unions, privatize everything in sight and so on. As inequalities have soared, those at the top have done nicely. There are now more ‘High Net Worth Individuals’ with a much greater collective fortune than in 2008 at the height of the crisis. Five years ago there were 8.6 million HNWIs worldwide with a pile of liquid assets of $39 trillion. Today, they are 11 million strong with assets of $42 trillion. Small businesses are failing in droves, but the largest companies are sitting on huge piles of cash and taking full advantage of tax havens. They see no reason to stop there.

This is not a crisis for everyone and the European leadership is no more stupid than its counterparts elsewhere. It is, however, entirely subservient to the desires of finance and the largest corporations. Certainly, neoliberal ideology plays a key role in its programme but serves especially to emit thick smokescreens and pseudo-explanations and justifications so that people will believe There Is No Alternative. Wrong: the banks could have been socialized and turned into public utilities, like other utilities that run on public money; tax havens closed down, taxes levied on financial transactions and many other remedies applied. But such thoughts are heretical to neoliberalism (although 11 Eurozone countries will start taxing financial transactions in 2014).

I am a fervent European and want Europe to thrive, but not this Europe. Against our will we have been plunged into class warfare. The only answer for citizens is knowledge and unity. What the one per cent has imposed, the 99 per cent can reverse. But we’d better be quick about it: time is running out.




Susan George is Board President of the Transnational Institute and author of 16 books, most recently Whose Crisis, Whose Future? and How to Win the Class War, on her website in June for electronic download and print on demand along with six ‘Susan George Classics’.

Footnotes

[1‘The more things change, the more they stay the same.’

[2Public debt is money owed by a government in the form of loans obtained on the financial markets rather than other forms of lending.

Translation(s)

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