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 Day 19

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The Issue is Fairness

The European Debt Crisis Myth

by MIKE WHITNEY

 No one opposes unity. And no one opposes a stronger, more unified Europe. What people oppose is policy; policies that slash workers wages, privatize state assets, increase unemployment, and prolong recession. That’s what people oppose. The people who are burning cars and fighting police in Athens aren’t doing so because the hate unity. What they hate is a policy that shifts all the burden of the financial crisis onto their shoulders. The issue is fairness, not unity.

For over a year we’ve been hearing about a debt crisis that’s spread from one EU country to the next. But, keep in mind, the crisis was predicted long before problems arose in Greece. From the very beginning, experts warned that structural flaws in the make-up of the monetary union would eventually lead to disaster. And so it has. So why is everyone acting so surprised? And why are the politicians and central bankers so eager to blame Greece? This is a structural problem. It has nothing to do to profligate spending, huge budget deficits, or “lazy Greeks”. Those are all just red herrings. The one-size-fits-all currency was bound to end in catastrophe unless steps were taken to level the fiscal playing field. What does that mean? 

We’ll get to that, but first, here’s an excerpt from a post at Delusional Economics that helps put the problem in a larger context: 

“…the European model is based on the fact that Germany is an industrial powerhouse which has suppressed its wages in comparison to its production compared to its neighbours. This has made it a large net exporter into Europe and therefore appear to be running a sustainable economy. But for that to be the case then other European nations needed to be net importers. Given the common currency, countries within Europe with differing productive capacity had a choice between labour markets or debt markets as their response mechanism. Given the liberalisation of the banking system and the illusion of credit risk symmetry across Europe many nations took the path of least resistance. Debt. By doing so they allowed Germany to continue to export into Europe under the illusion of sustainability, but as we have now seen this was a fool’s game. Weak political will in fiscal policy, the loss of national monetary control, de-regulated cross-border banking and the single currency created an environment of massive imbalance.

We have now reached the point where that imbalance has lead to a crisis. The debt that accumulated in the periphery based on this model has now reached a point where it is unserviceable. But this has been a symbiotic relationship. The net exporters need the net importers to continually take on debt or they cannot finance the purchasing of their manufactures or maintain their banking systems that are based on loans to the indebted nations to continually fund those purchases. Demand that the periphery stop spending and down goes the whole ship. That is what we are now seeing.” (“Europe must Choose” Delusional Economics) 

So, ask yourself this, dear reader, how is it that the bigwigs at the ECB couldn’t figure out that humongous capital flows and account balances were going to create a crisis? 

It’s inexcusable, especially since they’d been warned about this very thing over and over again. So, now the markets are in turmoil, workers are rioting in the streets, and the eurozone is careening towards the cliff. Wouldn’t it have been cheaper and less hassle just to pay attention to what the experts were saying at the time? 

Anyone could see that there were going to be imbalances between the deficit countries and the surplus countries. So, when the banks and and other financial institutions started loading up on bonds from the deficit countries–believing that they were just as safe as German bonds– that should have been a red flag for Brussels, right? They should have anticipated that if Greece got in over its head, it wouldn’t be able to repay its debts and the banks would lose billions. But no one said a thing. Why? 

Was it because the banks were raking in the profits off of the slightly higher rates on PIIGS bonds? Is that why the ECB just looked the other way? 

There’s no way of knowing for sure, but the bottom line is that the banks bond-buying binge actually contributed to the present crisis. Just take a look at this from the Streetlight blog:

“The factor that crisis countries have in common is that, without exception, they ran the largest current account deficits in the EZ during the period 2000-2007. The relationship between budget deficits and crisis is much weaker; some of the crisis countries had significant average surpluses during the years leading up to the crisis, while some of the EZ countries with large fiscal deficits did not experience crisis. This is one piece of evidence that a surge in capital flows, not budget deficits, may have been what laid the groundwork for the crisis.” (“What Really Caused the Eurozone Crisis?, The Streetlight blog)

That means that the budget deficits didn’t cause the crisis, in fact, many of these countries were actually in surplus at the time. The problem was the ocean of foreign capital that kept pouring in. Once the capital stopped flowing–BOOM– the crisis began. Here’s more from the Streetlight blog that helps to clarify the point: 

“Putting it all together, it seems that the EZ crisis is more consistent with the systemic causes view than the local causes view. In other words, while they didn’t necessarily make the right decision every time, the peripheral EZ countries were up against powerful exogenous forces – capital flow bonanzas and sudden stops – that tended to push them toward financial crisis. They were playing against a stacked deck.

It’s useful to reevaluate the macroeconomic history of peripheral Europe in light of this interpretation. Rather than large current account deficits being the result of fiscal mismanagement or excessive consumption, the current account deficits were the necessary and unavoidable counterpart to the surge in capital flows from the EZ core.” (“What Really Caused the Eurozone Crisis?, The Streetlight blog)

Oh my. So the crisis wasn’t really caused by “profligate spending” or “lazy Greeks” after all, but by capital flows? Then why haven’t regulations been put in place to control the disruptive movement of foreign capital? 

Well, because that would mean smaller profits for big finance, so the topic hasn’t even come up for debate.

And why are policymakers levying punitive measures against workers in the debt-stricken countries when it’s clearly the job of regulators to prevent monstrous imbalances from developing in the first place?

That’s easy, because workers have no voice in government so the losses can be transferred to them without a lot of fuss. It’s just a matter of lowering wages, slashing benefits and eviscerating pensions. Eventually, the debts get repaid and the bondholders are rewarded for their crappy investments. It’s just plain old class warfare euro-style. 

So, tell me, why would anyone want to be a part of a union like this?

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com