First impact report on the Troika's operations

Last October, I reported on Sven Giegold's initiative for an investigation of the Troika's operations by the European Parliament's powerful Economic and Monetary Affairs Committee (see my post of October 31, 2013: "Halloween in Europe...."). 

Well, the committee members didn't loose any time: they immediately sent out questionnaires to various stakeholders, including representatives of labor unions and high government officials of countries that signed reform programs designed and supervized by the Troika (EU commission, ECB and IMF). Throughout the month of January, EP delegations visited Portugal, Cyprus, Ireland, and Greece; meetings took place between national and EP delegates; and parliamentary hearings were held with key Troika officials, including economics commissioner Olli Rehn, former ECB-chief Trichet, and ESM-chief Regling (see "Auswertung der Troika-Arbeit: Anhörungen und Delegations-Besuche).

On January 28, the first impact report of the Troika's operations was presented, based on a thorough analysis of replies to questionnaires sent to affiliates of the European Trade Union Confederation (ETUC) in Cyprus, Greece, Ireland, and Portugal. The findings are devastating:

The Troika's policies of fiscal consolidation are overly ambitious and poorly designed, with little emphasis on the revenue side. The fiscal consolidation measures, combined with a dismantling of systems of social protection, and the complete lack of counterbalancing measures to promote growth and employment have severely damaged domestic demand and triggered a deep recession. 

The Troika's structural competitiveness reforms promote labor market deregulation, dismantle wage bargaining systems, abolish key workers' rights and enforce cuts in minimum wages, public sector salaries and pensions, often under the threat of ceasing loan instalments (e.g. in Greece).

Economic impact: The deep recession caused by the Troika's fiscal austerity measures has shrunk the economy, worsened public finances and increased public debt levels. It has also led to a fall in or a complete collapse of investment activity, despite severe wage cuts. Troika demands for privatizations of public assets at fire sale prices are bound to lead to private oligopolies.

Social impact: Skilled workers and qualified young people are leaving the crisis countries while the remaining population suffers record unemployment and soaring poverty, rendering a significant part of the population destitute. "There is a tremendous rise in indebted households, with the unemployed and homeless being forced to turn to soup kitchens and food distribution." (e.g. Greece) Inequality is widening, with rising unemployment and the dismantling of social protection measures the main drivers. 

Political impact: The imposition of reform policies by unelected Troika officials are putting democracy under heavy strain. Citizens feel they are being overtaken by rules that are external to them and not in their or their country's best interest but "instead serve to uphold the 'sanctity of debt' at all cost" to spare the banking systems of creditor nations. Only 15% of Southern European citizens trust their countries' government, between 19% (Greece) and 43% (Italy) approve of the EU leadership, and less than 30% maintain their faith in democracy.

Legal impact: The report makes it clear that key provisions of the European Treaty, such as "the obligation of the European Union to recognise and promote social dialogue and the autonomy of social partners (Article 152 TFEU)", have not been respected at all. Instead, the European Commissiion has actively assisted in a breach of these provisions, going "against major principles of the European Social Acquis". The report concludes: "Fundamental principles and key objectives of the European Treaty are there to be respected at all times. .... the failure of the Troika programmes to deliver economic and social results shows that the respect of Treaty provisions is a necessary guarantee to design policies that actually work."

No need to say anymore. This report speeks eloquently for itself !

Adé au savoir-vivre francais ?

"It is evil crystallized in unjust social structures..."

..."In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile....is defenseless before the interests of a deified market..."

(Pope Francis, Evangelii Gaudium, paras 59 and 56)

In October of last year, I reported about the evil empire's renewed attack on Germany in an attempt to install Agenda 2020. To prevent the negative connotation to the much maligned Agenda 2010, they named the new agenda "Chance 2020". Yet, it's still the same old supply-side agenda that clearly caters to the global investor and employer community (currently assembled in Davos ---> more on this in my next post), with a focus on reductions of labor and labor-related costs.

Last week, following a massive PR campaign against France (see here, here and here), including a (misre-) presentation by ECB president Draghi (see here) and a downgrade of the country's credit rating by Standard & Poors (the rating company that assigned AAA-ratings to toxic asset portfolios just before the Great Financial Crash of 2008), France's president Francois Hollande finally surrendered. During a press conference at the Elysée palace on January 14, president Hollande announced several measures that will reduce labor costs and labor-related costs for employers to improve France's competitiveness. Framed as a "responsibility pact", employers are expected to create jobs for the young, the elderly, and other target groups in return for lower labor charges, including:

- a  €30 billion cut in social security charges paid by firms for family welfare, starting in 2014;
- another €50 billion cut in unspecified public spending in 2015-2017, of which at least €18 billion are to be cut in 2015, €18 billion in 2016 and €14 billion in 2017.

With the exception of the job creation aspect, the announced measures represent nothing else than the synthetic (competitive) devaluation approach pioneered by Angela Merkel in 2007, "combining an increase in VAT from 16% to 19% with a cut in employers' social security contributions from 6.5% to 4.2%....designed to lower unit labor costs, the standard measure of competitiveness, and thus increase exports." (see my post of February 2013 in which I mentioned that a similar strategy was being planned in France: "And what about Germany's synthetic competitive devaluation strategy ?") 

The post explains what I mean by 'synthetic' devaluation:

"Just as financial instruments can synthetically replicate risk exposures and generate similar returns as other financial instruments without the need for real assets, economic policies can be designed in such a way as to attain the same effect as a competitive currency devaluation without the need to change nominal currency values. For example, a combination of higher value added taxes (VAT) on consumer goods and a cut in payroll taxes or a payroll tax subsidy lowers unit labor costs and lowers export prices as export goods are exempt from VAT. This fiscal devaluation approach has recently been advocated by Harvard economist Gita Gopinath and colleagues as a response to the loss of competitiveness in the eurozone (see Gopinath et al., 2011: "Fiscal Devaluations") and is now being planned in France to revive the country's competitive edge. Keeping nominal exchange rates unchanged, the recommended combination of policies acts as an effective export subsidy and thus leads to the same outcomes as a nominal currency devaluation, namely an increase in exports". 

In Germany, the combination of fiscal devaluation with the labor cost-lowering Agenda 2010 measures were so successful that the country went from a trade deficit in the early 1990s (as a result of the economic boom following reunification) to huge export surpluses in nearly every year since 2000. However, what is not mentioned by Germany's competitiveness gurus is the fact that the synthetic devaluation approach also resulted in huge current account imbalances within the eurozone and thus has substantially contributed to the euro crisis.

If France employs a similar strategy now, it will not only increase the eurozone's trade surplus and thus subtract from desperately needed global demand but, through its labor cost-lowering policies, it will provide another downward thrust toward the dangerous deflationary spiral already at work in the Southern periphery of the eurozone. Using fears of failing competitiveness and high public debt levels to advance an ideological agenda, the evil empire is playing a dangerous game indeed.

The fight against Germany's economic boneheads, round #4

Ever since the onset of the Global Financial Crisis of 2008, the world has had to contend with German economic policymakers who refuse to go along with the global consensus on the need for economic stimulus and an expansion of aggregate demand - to prevent a collapse of the world economy in 2008, and a tailspin into a deflationary depression in Europe today. Since Germany is not an island but by far the largest economy in Europe, one would think that German policy makers realize their special strategic role in the crisis, not only for Europe but indeed for the global economy. But no, Germany's economic Ayatollahs prefer to show off their boneheads.   

In 2008 (round #1), it took a New York Times article of none other than nobel prize winning economist Paul Krugman (and probably numerous diplomatic interventions by high-level foreign officials) to convince then finance minister Steinbrueck of the need for coordinated fiscal stimulus in Europe, with Germany contributing a significant chunk.

So far, Steinbrueck had steadfastly refused to give in to any demands for fiscal spending. Incensed by this uncooperative attitude, Krugman called Germany's economic policy makers a bunch of boneheads (see citation below). 

"And if Germany prevents an effective European response, this adds significantly to the severity of the global downturn. In short, there’s a huge multiplier effect at work; unfortunately, what it’s doing is multiplying the impact of the current German government’s boneheadedness." 

Steinbrück finally came around.

Round #2 occurred in July 2012 as Germany's finance minister Schäuble was close to pushing Greece out of the euro zone. This time, it took the urgent and concentrated intervention of US finance minister Geithner, France's newly elected president Hollande, former British prime minister Tony Blair and, so rumor has it, even some unequivocal threats from the Chinese to throw their significant holdings of euro-denominated notes and bonds on the market to convince German VSPs that a Grexit would not be in Germany's interest.  

Round #3 was the fight against austerity in the euro zone. It took a concerted effort of economic researchers who destroyed the intellectual edifice of austerity economics (see also the IMF's World Economic Outlook of October 2012), diplomatic cajoling by IMF Managing Director Christine Lagarde, and massive pan-European pressure by civil society organizations, trade unions, and NGOs to convince Germany's economic policy makers of the need to slow down the pace of austerity (see my post of June 2, 2013: "Less Austerity in return for more Competitiveness - a Pyrrhic victory for Europeans").

Round #4 was called in October 2013 and continued in early Januar 2014. This time, it's about the damaging economic effects of Germany's record current account surpluses (7% of GDP in 2012). In a US treasury report of October 30, 2013, it was correctly pointed out that "Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing." .....“The net result has been a deflationary bias for the euro area, as well as for the world economy."(page 25) During a January 8 meeting with finance minister Schäuble, US finance minister Jack Lew again criticized the record German current account surplus and rightly asked for more efforts to strengthen Germany's domestic economy through higher wages and investments so as to boost not only domestic demand but demand for imports from other countries. That should help reduce the economic imbalances and the threat of deflation in the euro zone. Finance minister Schäuble's reaction remained, as always, intransigent.

Meanwhile, following reports that core inflation in the euro zone dropped to 0.7%, German economics professor Kirchhof claims that German savers have a constitutional right for higher interest rates ! Duh?

What will it take this time to make Germany's economic boneheads see the light ? A full-blown deflationary depression in the euro zone ?

Three remarkable events that may influence European elections

Before the campaign for the 2014 European elections begins for real, I'd like to share with you, dear readers, three remarkable events that occurred during the final weeks of the past year: 

First, according to an expertise prepared by Andreas Fischer-Lescano, Professor for European Law at the University of Bremen, the austerity measures imposed by the Troika (EU commission, ECB and IMF) constitute a breach of human rights, other constitutional rights and the EU social charta. The evidence collected will be used for legal action against the Troika initiated by Austrian and European workers organizations. 

Fischer-Lescano argues that the Troika of EU, ECB and IMF has been operating outside of European laws and without consulting the social partners or the European parliament. The EU commission has been active in policy areas for which it does not have a mandate, e.g. in wage setting. The Troika's wage-, pension-, and social-benefit compressing policies inflict particular harm on the human rights of the most vulnerable social groups - children, women, migrants - and have created abject poverty and desperation for an entire generation.

Together with the investigation of Troika activities by the European parliament, the legal action against constitutional and human rights abuses by the Troika is bound to slow down, if not stop, further austerity policies in the euro zone.  And that is excellent news for all the people who continue to suffer under the misanthropic austerity policies imposed on Southern Europeans. 

Second, two days before Christmas, the Frankfurter Allgemeine Zeitung (FAZ) which is the mouthpiece of the German bank(st)er elite published an article that seems genuinely critical of banks, entitled "How we learned to hate banks." The FAZ authors Hahn and von Petersdorff correctly assess that systemic banks still risk the well-being of economies around the world because politicians have only treated the symptoms of the Great Financial Crisis, not the root cause, namely the lack of equity capital. Five years after the crisis, banks still have too little equity to weather a new financial crisis so that the tax payers would have to bail them out again. Hahn and von Petersdorff even agree with the leftist critics of the banks who have long argued that the business model of banks is to privatize profits and socialize losses. This model works only as long as systemic banks can threaten their governments with the collapse of the financial system.

And so, Hahn und von Petersdorff correctly conclude that tax payers have a right not to be importuned by the risks of the banks' business models and that, therefore, banks need to ensure that they have sufficient equity capital to weather a crisis. A recent book by scientists Admati and Hellwig suggests equity quotas of between 25% and 40% which were not unusual in the 19th century when the economy boomed. And what if the banks refuse to raise their equity capital to that level ? Then, Hahn und von Petersdorff say, we have to force them ! Force may be a dirty word for a liberal newspaper, but the word bail-out is much, much dirtier.

I say: way to go, boys !

Third but most important is a bomb that exploded in the Vatican: the Evangelii Gaudium.

To be honest with you, before Pope Francis came along, my opinions of popes fluctuated between disregard, disrespect, ridicule (with respect to the old men's luxurious clothing), and anger about their 'love' of young altar boys and the old men's general audacity of telling young women what to do. 

Then comes Pope Francis: a highly extroverted man who loves to 'bathe' in crowds of 'normal' people, always ready to share a warm smile and some kind words. A man who does not need the luxury trappings and chaffeured limousines of a pope but who prefers to wear normal shoes and drives a small car chaffeured by himself. A man who took the name Francis upon his election as Pope in memory of his beloved Saint Francis of Assisi who abandoned a life of luxury for a life devoted to christianity.

These symbolic gestures were sufficient to earn my respect and admiration for Pope Francis, especially when compared to some of his ridiculous peers in the catholic church, e.g. the German bishop Tebartz-Van-Elst who spent millions of Euros on his Limburg bishop residence, including a $20,000 bathtub with golden faucets, while cutting the salaries of employees.

But the sincerety of Pope Francis' Evangelii Gaudium and the courage to have it published by the Vatican press completely won me over. I, a proud Lutheran, am now officially a fan of Pope Francesco ! He is a very special human being, perhaps an angel, who was sent to us just in the nick of time.... Finally someone who, by the power of his position, can reach hundreds of millions of people on this planet, ask the right questions and tell the unadorned truth in defense of those who don't have a lobby in our globalized economy (see his Evangelii Gaudium, paras 53-61):

"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points ?"...."Can we continue to stand by when food is thrown away while people are starving ?".... "Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless." (para 53)

...."In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power in the sacralized workings of the prevailing economic system." (para 54, boldface by author)

...."The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings...." (para 55)

...."This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born"....."The thirst for power and possessions knows no limits. in this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market.... (para 56)

....."Behind this attitude lurks a rejection of ethics and a rejection of God."...."Ethics - a non-ideological ethics - would make it possible to bring about balance and a more humane social order." (para 57) ...."I exhort you [financial experts and political leaders] to generous solidarity and to the return of economics and finance to an ethical approach which favours human beings." (58)

...."Just as goodness tends to spread, the toleration of evil, which is injustice, tends to expand its baneful influence and quietly to undermine any political and social system, no matter how solid it may appear."...."It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called "end of history", since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized." (59)