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A World of Debt – a “whole city of sky-scrapers” of debt
Youth unemployment continues to plague countries like Spain, Greece and Italy, while France was recently downgraded by Standard & Poor’s and anti-immigrant far right movements are spreading throughout the continent. Is Europe often extolled as a model hybrid of social welfare and capitalism having an identity crisis, or is it simply riding out a sluggish economy? What can be done to improve its socioeconomic health? The ongoing economic crisis has not only caused significant job losses and a general loss of prosperity, it has also generated social loss, putting at risk Europe’s way of life and the sustainability of the European project. In the last 50 years, the usual response to Europe’s economic and social malaise has largely been a combination of statist policies and solidarity. This crisis is different. The European states, struggling to maintain debt repayments and to implement a painful austerity agenda that has been forced on them, no longer have the wherewithal to respond adequately using the tried and tested Keynesian spendingbased paradigm. Meanwhile the differing views on the causes of this crisis and the suffering caused by austerity, has put the very notion of solidarity at grave risk. Young Europeans are now increasingly aware that the answers to their economic woes cannot come only from government and big business, if at all. Many realize that they need to take risks and create their own opportunities, thereby seizing their destiny. Public programs like the much-vaunted Youth Guarantee cannot create new demand, but certainly more dependency on states and state-backed champions. I firmly believe that young Europeans must change their mindset on risk-taking for innovation and entrepreneurship, and equally, be empowered to turn their innovative ideas, talents and energy into successful projects, businesses, products and services to create new jobs and inspire more demanddriven growth. We must create a culture that promotes risk-taking and entrepreneurship instead of dependency on state handouts, a culture that encourages young people to be innovative and assume leadership for change. This is how Europe will find a sustainable way out of its crisis. On the morning of a summer day 2012, I was meeting in Bruxelles with a central bank official of a country at the heart, or so called stable center, of the euro zone. He was telling me that the European Central Bank could do little to rescue peripheral countries like Italy and Spain, whose interest rates were going through the roof.
2 However, later on that same day, to the surprise of my friend (and mine I should say), as well as to the surprise of the “global investors” , the E.C.B. president, Mario Draghi, made his famous declaration that the bank was prepared to do “whatever it takes” to preserve the Euro, and that led to the creation of outright monetary transactions, known as O.M.T., and further down, temporarily saved the euro zone. Today, the risks for the euro zone are much lower. Still, 2013 has been a volatile year, and the crisis in Cyprus showed that the euro zone remains deeply divided over how to resolve the crisis in the periphery of the continent . Inconclusive German elections created new uncertainties in the euro zone’s core states and the Italian government teetered on the verge of collapse more than once. More uncertainties are likely in 2014 if “austerity fatigue” spreads in Greece, Italy, Portugal and Spain and populist parties gain strength in the May 2014 European Parliament elections. So, what next? Can the euro zone survive ongoing crises in Greece, Ireland, Portugal, Spain, Italy, Cyprus and Slovenia? Or will the differences between this shaky peripheral member states and the richer and more stable “core” prove irreconcilable, and lead to a breakup? Back in 2002, when the euro went into circulation, the euro zone was a young and happy marriage of the founders, led by Germany, and the periphery. The partners were very different, to be sure, but economies were growing in Europe and around the world and the hopeful presumption was that the two sides would smooth their differences and change their behavior to achieve a happy cohabitation. Stripped of their own currencies and independent monetary and fiscal policies, all the partners would embrace structural reforms that would generate growth, raising productivity and income across the European Union. Well, that turned out to be wishful thinking and in fact proved to be a marriage of shared bank accounts and credit cards in which one side over saved and the other over spent. This is a well known recipe for problems, and the euro zone is now in the fourth year of crisis. A lot of mutual recriminations have passed between the partners, and huge sums have been transferred to preclude a divorce. It became clear tha the real solution, a true and full union, remains elusive. In retrospect, the problems began from the outset. The E.U. rules requiring a fiscal deficit below 3 percent of G.D.P. were breached first in the core (Germany and France), without incurring any sanctions, and then throughout the zone. Structural reforms either didn’t happen, or they happened too slowly in the periphery while they were accelerated in Germany and other core countries. As a result, the divergences in growth, productivity and competitiveness grew wider rather than narrower, and trade surpluses increased in the competitive core while trade deficits grew in the uncompetitive periphery. In some periphery countries, such as Spain and Ireland, the low interest rates that came with the common currency created a huge housing bubble. Among other periphery members, low interest rates led to poor fiscal and economic policies. All that erupted into a full-blown marital crisis in late 2009. First Greece and then other periphery members tumbled into disarray, forcing them to seek bailout funds from the Union, the E.C.B. and the I.M.F. , and that’s the way that ‘‘troika’’ that became their marriage therapist. On the edge of an ugly divorce, Germany and the EU founders began to bail out the periphery but made such bailouts conditional on fiscal austerity and structural reforms.
3 Perhaps the union was doomed from the start. The partners had marriage rings as a common currency , but they did not have the common values of marital behavior. Historically, successful monetary unions also include a banking union with common deposit insurance and rules for bailing out banks, a fiscal union in which rich regions transfer resources to poor ones and where revenue and spending are pooled, an economic union with a single market, with policies in place to ensure convergence of economic growth rates and a political union to give democratic legitimacy to the central fiscal and economic management.
A brutal lesson in economics
German Finance Minister Wolfgang Schäuble recently gave a German banker the most brutal lesson to date delivered in a series of apparently incidental comments. At a recent press conference, Schäuble launched into one of his notorious lectures on sound fiscal policy in times of crisis. But then, finally, he had an opportunity to air his frustration over the incorrigible banker caste. A journalist asked Schäuble about his response to recent comments by Deutsche Bank CEO Jürgen Fitschen. The previous day, Fitschen had accused Schäuble of irresponsibility and populism, because the finance minister had insinuated that the banks were still bypassing financial industry regulations. "I don't know if Herr Fitschen has understood what I mean," Schäuble complacently replied. He also noted that he had only recently reminded the bank executive that the financial crisis had not been caused by politicians. Then, as if he hadn't already sufficiently lambasted one of the country's leading bankers, Schäuble added: "If Herr Fitschen carefully reviews his statement, he will undoubtedly come to the conclusion that he is incorrect in this matter." And Fitschen has undeniably adopted the wrong tone, he said. The head of the venerable Deutsche Bank reprimanded like a schoolboy? Ouch. Schäuble's slap in the face is a warning to Deutsche Bank. The minister's portfolio includes Germany's Federal Financial Supervisory Authority (BaFin). These days, the Bonn-based financial watchdog is conducting far more than the usual number of investigations into Germany's largest bank, and the consequences of these probes -- for the bank and its co-CEOs Fitschen and Anshu Jain -- are ultimately a political matter.
The European fiscal compact
Almost an entire generation of graduates in the “periphery states” is unemployed and too many have witnessed their parents suffer the same fate. It seems that regardless of whom Europeans elect, their countrie’s economic policies remain immutable. They have thus lost faith in their governments and question the legitimacy of the institutions stamping a boot in their faces. The boot’s “terminus technicus”, austerity, has been made permanent by the fiscal compact (essentially the creation of a fiscal union). While austerity may shrink budgetary deficits, its primary effects have been to eradicate the private sector, decimate job markets and push individuals ever deeper into debt. Greek, Spanish and Cypriot governments have been forced to accept austerity. Their citizens can no longer afford to accept it. The framing of today’s intra-European dialogue bears no resemblance to the ideas on which European integration was based: freedom, social mobility and solidarity. Rather, it is the
4 result of massive power imbalances, primarily between wealthy lender states and technocrats, and those begging for their mercy. This has inevitably driven the debate on Europe’s future to a fragile, murky place. Gone are the days when the Greek electorate was legally able to strike a harder bargain with the "troika" (the European Union, the International Monetary Fund and the European Central Bank). We need to change the fundamental structure of the E.U., now. Fiscally and economically, the E.U. is a super state. The truth of the matter is that the world is in debt, in fact a “whole city of sky-scrapers” of cash. The countries together face a $7600 Billion USD (7.6 Trillion) dollar debt repayment/refinance tab in 2012. The towers are maxed-out at 100 stories of $10 billion dollar platforms. To understand how we got in this borrowing mess, you must trace the path of money, where it comes from and how it is created. For starters: Money is "created" at the Central Banks of the World. Money creation is never taught in school, while being one of the most important things deciding your well being. In USA it comes from the Central Bank (private organization) dubbed the Federal Reserve. We owe to ourselves to understand the fundamentals of money, since money controls us, just like our bosses controls us with money. The message is: if one wants to be a free person... one must understand the forces that control his life. It's up to all of Europe to rethink how that super state functions, or how it should function to be specific. Date: January 19. 2014
Mircea Halaciuga, Esq. 0040-724.58.1078 www.SIPG.ro