It’s strange to hear Paul Krugman predict the imminent breakup of the Eurozone caused by countries that spent too much but should spend more … and be additionally supported by countries who have followed a course of reasonable fiscal discipline. Indeed, Ireland, Portugal, Greece, and Spain are all drowning in debt – the origin of which is a separate story for each country. U.S. right-leaning conservatives typically get the causal factors wrong when they automatically conclude that what’s happening to Greece, Spain, Portugal, Ireland, and Italy is a result of that evil “Socialistic cradle to grave” European economic model.
Conveniently forgotten is that America is still in a disastrously prolonged recession due to Bush Jr.’s 6 year over-spending message of BUY, BUY, BUY (a house ), SPEND, SPEND, SPEND (on cheap products from China) and LEND, LEND, LEND (at 100% of inflated values from slick lenders) spurred by ever lower taxes for the rich and stagnant wages and insane credit card debt for everyone else! A truly terrific grand economic formula for social-economic progress for ALL Americans! Those export trade deficits just kept piling up to ±$68 billion per month in 2007-08 … putting extreme reliance on a 70% of GDP CONSUMPTION level and Zero Savings to achieve minimum 3-4% GDP growth rates negatively affected by gigantic trade deficits, disgracefully low public and private investments in infrastructure and manufacturing.
And here we are about to reignite that same magical growth formula as trade deficits rebound from a 36% of GDP level in 2010 to an onward sky high trend of 51% of GDP last March and rising … with hopes the middle class will SPEND, SPEND, SPEND with ever lower wages! It’s called junk economics. And junk economics it will remain with enduring high unemployment until we, among many other things, do what European nations have done long ago concerning trade policy with countries like China … namely, enter a phased in agreement that China will bring its exports to U.S. to a par level with U.S. exports to China by 2015. Away with trade deficits!
But back to the problem of Greece. Following are just a few facts concerning the generally non-socialistic origins of Europe’s weak performing countries.
Greecehas been on the verge of bankruptcy for almost half of the last 150 years! Yet, this history and the country’s real financial situation when it was admitted to the European Union were entirely overlooked. As most know, Greece developed phony statistical figures to gain entrance to the Eurozone currency in 2000. Then, while Greece continued producing deficits in the 20th century and on and on through the first decade of the 21st century – fiscal discipline provisions of the Maastricht Treaty were NOT enforced. The current inevitable financial collapse of Greece comes from many factors: lax EU enforcement of fiscal discipline; large trade deficits facilitated by EU banks wildly lending to Greece to stimulate exports to Greece; gross internal mismanagement and a culture of corroding corruption (like that of Russia); a criminally irresponsible socialistic system of flagrant social-nets to keep people dumb and passive and the corrupters safe while they were misappropriating the taxes collected.
Spain and Ireland’s financial chaos situations are NOT due to socialist programs run amok but simply to a greedy, irresponsible investment wave in real estate, including government guarantees of much of the speculative bank lending on real estate projects. Both countries are suffering from the aftermath of a burst property bubble compounded in Spain by a 20% unemployment rate. Prior to its property financial crisis, Spain’s national debt was at a very low 40% of GDP reaching 65% currently. The real estate crisis was intensified by the 2009-2011 mini-depression … a mini-depression sparked and transported to Europe by the U.S. exotic casino bank lending and bank/hedge fund derivative financial poker game played on a mammoth scale over the period 2003 to 2008.
Italy’s crisis is NOT due so much to socialist programs as to an ancient, costly banking system and corrupt gross mismanagement under the chaotic egomaniacal leadership of the business tycoon Berlisconi. Result? Italy, like Greece, has been one of the lowest tax collection countries in Europe. And NOT surprisingly, Italy has the HIGHEST salaries for government bureaucrats, but, surprisingly to most perhaps, has among the LOWEST working class wages in Europe! Of course, the latter is why Italian (and Greek) tax evasion is so high as the working class is forced to operate heavily in the black just to survive with meager wages. Does this ring familiar to our systemic wage/benefit exploitation of our working class? Poor tax collection, stagnant consumption deepened by an ongoing mini-depression is a deficit inducing financial reality for any country operating for so long with a middle-class wage race to the bottom system like Italy and the U.S.
If Greece exits the Eurozone, it’s probably back to the Middle Ages for Greek people and possibly a major financial shock wave for the rest of Europe. Without substantial injections of loan funds in addition to the hundreds of billions already spent and/or committed by the EU and IMF, Greece can’t pay government salaries, pensions, social nets as well as international debts over the next five years. In an exit scenario, the new currency will be a weak currency, wages will fall and expanded unemployment can be expected. When all savings, loans, and contracts with foreign investors are converted to the new currency and many Greeks timely transfer their money to foreign accounts, the Greek bank system could indeed collapse. This in combination with a possible investor withdrawal of funds from other weak performing countries such as Spain, Portugal, Ireland could lead to an implosion of the Eurozone. JP Morgan has estimated that a Greek exit will result in immediate bank losses of €400 billion on loans that will be repaid in a devalued currency. This includes € 130 billion from the EU/IMF, €240 billion in Greek debt, and €25 billion in European banks loans.
On the other hand, banks and private investors just experienced the biggest debt write-off in Greece’s history … a bond swap rescue package of €237 billion amounting to more than 70% of investor holdings going up in smoke. This action was led by the Netherlands and German Financial Ministers, de Jager and Schauble. BUT, the same investors and others who lost so much have not withdrawn from the Eurozone … not even after the Fitch rating agency downgraded Greece’s default rating from CCC to C, indicating Fitch considers the bond swap rescue package a distressed debt exchange making a default more likely.
Meanwhile, the weak Euro members Spain, Portugal, Ireland, Italy have undertaken the necessary austerity measures, unlike Greece. So their financial vulnerability has been somewhat reduced. In addition, the European Emergency Fund and IMF have built up a reserve funds exceeding €650 billion in the event of a Greece exit from the euro. And the Emergency Fund will probably be further increased. But it is highly unlikely much of these funds will be used to save Greece if the country does not come up with an acceptable, credible alternative plan to lower its enormous debt level … now running at 160% of GDP to 120% of GDP by 2020.
The northern EU countries are not about to pour more billions of good money after bad money into Greece. A confidential analysis by the European Central Bank, the European Commission, and the IMF in February projected that Greek debt would still amount to 129% of GDP by 2020 – despite multi billions of loans from the rest of Europe – and could still be as high as 160% of GDP in 2020.
So it's "tough love" time for everyone involved in Greece's financial disaster and contamination possibility to other weak and even strong EU countries. Firewalls are being built up to minimize the damage of a possible Greece exit. It's a devil's dilemma. Europe lends to Greece and loses billions. Europe doesn’t lend to Greece and losses billions. In the final analysis, no one really knows with any degree of confidence what a Greek exit from the euro financially means for all of Europe. The Maastricht Treaty has no provision for expelling a member form the Eurozone. Can there be an orderly exit withminimal damage to all parties?
BUT, are Europeans going to bring about or allow a total breakup of the European Union due to the Greece crisis and its danger of spreading to Spain, Portugal, Ireland? Are Europeans going to revert to 27 different currencies? I seriously doubt that. A solution will be found for Greece to leave the Eurozone in an orderly manner with constructive assistance from the EU or the Greeks will put forward a credible, acceptable austerity and reform alternative to get itself back on a sustainable footing. I’m not optimistic about the latter option.
Irregardless, Paul Krugman’s suggestion that the European Union is about to or could Fall Apart soon is a bit premature and highly improbable!
Everyone is worried that Greece will default on its national debt. That's really not news. By one estimate, since it gained its independence from the Ottomans in 1832, Greece has been in default or restructuring for half this period. The news is that this time, Germany is willing to bail it out.
Throughout the euro-zone crisis, it has become conventional wisdom to regard the Germans as narrow-minded, ungenerous and dogmatically wedded to prescriptions of austerity to treat Europe's problems. Those criticisms are vastly overstated. Consider that Germany is being asked to take its taxpayers' money--in a democracy--and use it to bail out a country like Greece, which is guilty of mismanagement, poor competitiveness and financial fraud. And it has said yes! In return for this, Germans are being called Nazis in Greek newspapers.
Germany was an organizer of and is by far the largest contributor to the European Financial Stability Facility, which totals a staggering 726 billion euros ($924 billion). That number will rise and, when combined with earlier funds and loans, Germany's share will easily exceed the country's total annual federal tax revenues. Imagine the U.S. being willing to guarantee more than $2 trillion to bail out Mexico.
We hear a lot about the German public's opposition to helping the Southern European countries. What's remarkable, given the scale of German aid, is how little opposition there is. This month, Parliament will easily ratify a number of these funding mechanisms as well as a new financial-transaction tax to pay for part of this. (The Germans have the old-fashioned, conservative view that if you spend money, you should pay your bills.) In late February, one of the bailout packages cleared the German Parliament in a 496-to-90 vote. The German government has also relaxed its once rigid opposition to a more aggressive monetary policy. Mario Draghi, head of the European Central Bank, would not have been able to provide cheap loans to Europe's banks--thus staving off a Lehman Brothers--like crisis--without German approval.
There is a lively political debate to be had about whether the U.S. needs austerity measures right now. (I would say no.) But Greece and the other weak euro-zone countries had few options. Markets had become unwilling to lend them money because of their ever rising debt loads. It was as a response to genuine market pressures that these governments began to get their budgets in order. The austerity programs place too little emphasis on growth, but had these nations wantonly spent money, their interest payments would have skyrocketed. Most important, the Germans have not emphasized austerity so much as structural reform--opening up labor markets, liberalizing sectors and dismantling protections. What economies like Greece really need is less austerity and more reform. The lesson of most debt crises is that countries that make these changes ultimately make themselves more competitive.
Southern Europe has a long way to go on that score. In terms of the ease of doing business, the World Bank ranks Italy and Greece last (30th and 31st) among high-income countries. The World Economic Forum ranks Greece and Italy 125th and 126th in flexibility of hiring and firing and 133rd and 140th (out of 142!) in the burden of government regulation. Tax collection is almost nonexistent in both countries, and corruption is rampant.
Largely thanks to European Union (read: German) subsidies, over the past 10 years, wages have risen dramatically in Southern Europe. Unit labor costs in Greece went up by 35% from 2000 to 2010. They went up 2% in Germany.
German leaders have said again and again that they are willing to bail out weak euro-zone countries. But they have asked for reform as a condition of that aid. German Chancellor Angela Merkel is opposed to a sweeping solution like eurobonds not because of their cost--Germany will end up paying more--but because they would take off pressure to reform. The only leverage Germany has with countries like Greece is that the money gets to them incrementally as they enact reforms.
Greece might yet have to default and quit the euro zone. Its competitiveness problem is simply too great and its political leadership too weak. But if it goes down this path, Greece will find that the markets will refuse to lend it money at reasonable rates unless it does pretty much the same things Germany is asking it to do. Life without Germany will mean a lot more austerity than life with Germany.
The French are revolting. The Greeks, too. And it’s about time.
Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing.
Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur!
What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.
What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.
Moreover, there seems to be little if any gain in return for the pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover.
But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives?
One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.
As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, the krona (and also had the courage to let its banks fail and default on their debts). Sure enough, Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t.
Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience.
Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.
So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.
The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.
Who’s an economy for? Voters in France and Greece have made it clear it’s not for the bond traders.
Referring to his own electoral woes, Prime Minister David Cameron wrote Monday in an article in the conservative Daily Telegraph: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts — but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.”
Cameron, whose own economic policies have worsened the daily grind dragging down most Brits, may be sobered by what happened over the weekend in France and Greece – as well as his own poll numbers. Britain’s conservatives have been taking a beating.
In truth, the choice isn’t simply between budget-cutting austerity, on the one hand, and growth and jobs on the other.
It’s really a question of timing. And it’s the same issue on this side of the pond. If government slices spending too early, when unemployment is high and growth is slowing, it makes the debt situation far worse.
That’s because public spending is a critical component of total demand. If demand is already lagging, spending cuts further slow the economy – and thereby increase the size of the public debt relative to the size of the overall economy.
You end up with the worst of both worlds – a growing ratio of debt to the gross domestic product, coupled with high unemployment and a public that’s furious about losing safety nets when they’re most needed.
The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget axe.
If Hollande’s new government pushes Angela Merkel in this direction, he’ll end up saving the euro and, ironically, the jobs of many conservative leaders throughout Europe – including Merkel and Cameron.
But he also has an important audience in the United States, where Republicans are trying to sell a toxic blend of trickle-down supply-side economics (tax cuts on the rich and on corporations) and austerity for everyone else (government spending cuts). That’s exactly the opposite of what’s needed now.
Yes, America has a long-term budget deficit that’s scary. So does Europe. But the first priority in America and in Europe must be growth and jobs. That means rejecting austerity economics for now, while at the same time demanding that corporations and the rich pay their fair share of the cost of keeping everyone else afloat.
President Obama and the Democrats should set a clear trigger — say, 6 percent unemployment and two quarters of growth greater than 3 percent — before whacking the budget deficit.
And they should set that trigger now, during the election, so the public can give them a mandate on Election Day to delay the “sequestration” cuts (now scheduled to begin next year) until that trigger is met.
I happen to like Sarkozy but have sensed that his gap with the working class is too great. His presidency inherited a costly French governmental bureaucracy, an extensive welfare system, and a sputtering economic growth all leading to: a high public debt level at 85% of GDP and public spending at 55% of GDP; a declining industry; and almost double digit joblessness. His closeness with the rich, brash style, inability to reverse France's tough economic situation as well as the growing public impatience with strict austerity measures brought him down in the election yesterday.
Hollande's election puts pressure on Merkel in her elections next year as the German public is also growing a little restless with austerity measures. Should Merkel lose, this would represent a dramatic shift of power to the left in Europe with only the UK, Spain and to a lesser extent the Netherlands and Scandinavian countries as the primary conservative-centrist governments in Western Europe. And it remains to be seem whether the very strongly rising Dutch SP socialist party will win big in September as expected, helped by what's happened in France. Then the Dutch coalition government could well shift to the left from its current slight left of center position ... although this doesn´t concern me as the conservative VVD party is still expected to win a major number of the seats in Parliament and will be a strong force in any new coalition formed after the September elections. This is the inherent beauty and balance of the Netherlands's proportional representation governmental system I described in my last writing.
Francois Hollande's campaign themes give apoplexy to many people of strict conservative mind (no doubt particularly to the American far right) ... who see his election as a "Big Government Nightmare." I find this very amusing as most people were looking favorably upon the financially sharp Strauss Kahn as the next socialist party premier of France until his women escapades put to ashes his political career. However, Hollande will probably use Kahn´s exceptional financial acumen hopefully to great benefit for the nation.
Hollande supports France´s deeply entrenched -- already excessive in my view -- socialist policies. He wants to renegotiate the hard-won European treaty on budget cuts, BUT, he remains a staunch Euro-Federalist (unlike the increasingly popular Dutch SP socialist party). He wants austerity to be tempered with immediate plans to stimulate economic growth and favors increasing France´s already 55% high public spending as a % of GDP. For example, he wants to recruit 60,000 new teachers and lower the retirement age from 60-62 for manual workers who started their work as teenagers. He will pay for this and more and balance the budget by 2017 by: setting a 75% tax rate on income above euro 1.0 million ($1.3 million), increasing taxes on big corporations and implementing a financial transaction tax. He sees the world of finance as his and the nation's real enemy. I couldn´t agree more!
All in all it's a gamble with Francois Hollande as it was with Sarkozy. On the positive side, he's a methodical, quiet working professional who wants to only temper austerity actions while taking firm measures to stimulate growth. He's not against financial discipline but wants it spread out more as the Krugmans and Stiglitzes are pleading for which I think makes sense as long as the equal necessity for financial solidity is not compromised. The problem is that France is the one last major power in Europe that has done the least to reform its very costly social net, health and pension systems.
Hollande's support of his country´s socialist policies may be his ultimate downfall. BUT, he has the chance to come with a refreshing new approach to balancing French private and public initiatives to restore financial stability and growth. While I´m a little nervous, one has to marvel at the diversity of social/economic models and governance styles in Europe ... all learning from each other while at same time addressing the priorities, habits and needs relevant to each country's unique historical culture.
Margaret Thatcher warned:
"Socialist governments traditionally do make a financial mess. They always run out of other people´s money."
But the Iron Lady couldnt fathom that conservative governments can do the same thing with the most recent lesson coming from Pres. Bush Jr. ... who Doubled our national deficit from $5 trillion to $10 trillion in 2008 with his pharmaceutical subsidies and tax reduction policies for the rich causing another ± $2 trillion deficit during Obama´s term.
Will Hollande, the socialist, copy Bush, the conservative, in bringing his country to near financial insolvency? I doubt it. There are simply too many structural checks and balances in the mature, broadly represented government systems in Europe for any one man to behave irresponsibly left or right. Even the UK conservative premier, Cameron, whom I much admire along with his co-premier Clegg, is kept in sensble balance by becoming part of his country's first coalition government in 60 years.
I greatly admire Robert Reich’s tireless energy and knowledge to explain in simple, straight language – to Americans of all colors, convictions, and class – what is truly happening to the U.S. economy and main-stream America. Namely, Social Darwinist inequality is at the heart of the system calling for reduction of the social net, forcing average Americans to rely on their own resources in a competitive environment where the fittest will survive – and the rest will get what they deserve for their lack of work ethic initiative and responsibility.
This ultra-conservative agenda perversely promotes primacy of the market economy over all else – “Reagan’s casual wisdom that “government is the problem not the solution.” This has resulted in Paul Ryan-type social-economic policies that have been driving many working class people to the edge of economic ruin. It has fostered a fertile ground for ultra right political and media pundit demagogues who operate at a demagogic intensity unheard of in Europe … where multiparty coalition consensus systems are generally far more reflective and less doctrinaire.
However, I must take issue with Dr. Reich’s over-generalization that “demagoguesare loose in Europe” (and the U.S), concluding that “In Europe,fringe parties on the left and right are gaining ground”… also suggesting that fringe parties are led by demagogues. First, what exactly is meant by fringe parties? European multi-party proportional representation (PR) government systems, with the Netherlands as an archetypal example, form the very basis of European “social democracies.” Such systems check extremist agendas and effectively marginalized demagogues. Such systems generate a broader competition of ideas where ultimately more balanced and progressive ideas often emerge.
All parties are treated with respect since the number of seats won in the Parliament (House of Representatives comprising 150 seats and 76 being necessary for a majority, i.e., to form a viable coalition government. ) is proportionate to the number of votes received. A party that receives 30% of the votes gets 30% of the seats. There are no electoral districts. Proportional representation (PR) systems tend to produce a proliferation of parties, while single member electoral districts stimulate a two-party system. PR allows small parties to be represented in Parliament which is considered to be a GOOD THING! Such systems facilitate legislative balance, fairness, and alertness to real life happenings, problems, needs in a typical pluralistic society having a uniquely ingrained European national cultural heritage .
As already noted, an exceptionally democratic feature of coalition systems I’ve observed, after 30 years living /working in Europe, is that they insure inclusive legislative policy-making and effectively marginalize “demagogues” from exercising undue influence. I´m referring to fact that in the Dutch Parliamentary government, the Cabinet formation consists of 12 Ministers and 8 Junior Ministers who are divided equally among the coalition members, regardless of their respective size. In other words, the current minority coalition government is comprised of the conservative VVD party with 31 seats and the centrist CDA party with 12 seats. BUT, each of these ruling parties receives 6 Ministers and 4 Junior Ministers!
The Dutch government fell because Geert Wilders´ far right PVV Freedom Party with 21 seats, as a non-coalition member, did not agree with the center-right minority coalition government´s budget plan based on a EU 3% of GDP deficit level in 2013. For the hard-core U.S. conservative Republicans or Democratic liberals, it may seem incomprehensible that Dutch coalition members and non-members do not necessarily blindly follow the party line as happens in America. For example, Geert Wilders far right PVV party is leap years philosophically different than our far right conservative Tea Party. On one hand, he´s against severe budget cuts in welfare, health, unemployment benefits, and opposes any decrease in the purchasing power of pensioners and lower income earners. On the other hand, he wants to scrap the euro, return to the guilder, stop all non-Western immigration including from Eastern EU member countries, and drastically diminish the power of Brussels.
Does this make Wilders a wild demagogue leading a fringe party with 14% of 150 Parliamentary seats, all achieved in less than two years? I think NOT! Is Wilders a team player willing and able to make the necessary coalition compromises in the country’s interest at a most serious economic time? I think NOT! Will some parts of Wilders´ social thinking – and that of the SP socialist party or PvdA labor party – be eventually incorporated in a final budget plan? I think, YES!
A culture of give and take, compromise, merger of the best policy initiatives under multi-party coalition governance systems – where no one party ever secures an overall majority of votes – is a much understated strength and support for consensus democracy in mature EU countries. Of course, another giant plus is the fact that European political representatives and processes are not bought by special interest money.
The U.S. all right or all left purist governing paradigm is avoided. This is reflected in the recently agreed budget plan of the newly formed 5-party interim coalition. Despite a sudden political move to left of center, the 5-party new plan agreed to in two days does NOT represent a complete rejection of austerity measures. ALL parties, including non-member coalition parties, fully recognize the need to balance the budget and implement fiscally responsible austerity measures. The ongoing debate until the September elections will focus on how far these measures should go, where the burden should fall, when should stimulus measures be activated.
In the final analysis, multi-party systems require a precise coordination of coalition strategies, programs, personnel choices that give confidence and a sense of reliability to the vast majority of voters. Assumptions about the goals coalition parties pursue and rules of the bargaining process determine the disintegration or success of multiparty proportional representation systems. On balance, however, effectivePR coalition systems have NOT been an easy playing fieldfor demagogues in their actions as members of traditional, new or rising fringe parties.
To further illustrate the check and balance features of coalition systems, it would seem to be certain political suicide, if not an outright impossibility, that a far right new Dutch until late rising strongly but now falling conservative party led by Geert Wilders, a far left new Dutch risingsocialist party led by Emile Roemer, and a far left French traditionalistsocialist party led by Francois Hollande (now challenging Sarkozy) have almost as much in common as they have at odds with each other … a concurrence of views unimaginable between Democrats and Republicans. None of these party leaders, or any others I can mention, are fringe party demagogues.
All three are against the timing of the EU 3% deficit rule. All three are vehemently opposed to deep budget cuts that reduce purchasing power of the elderly and lower income groups. All three want to set measures to increase economic growth. All three have a deep distrust of globalization. Two argue for a drastic cut back in immigration, especially from Islamic lands – an exception being the Dutch SP socialist party which is more multicultural minded, but has also been critical of immigration policy as a capitalist tactic to drive down wages.
SUMMARY
Lately in Europe, there has been a clear trend of views shifting to left of center in even the fiscally austere countries. Denmark, The Netherlands, Belgium, France, and Germany to a smaller extent are beginning to question the certified wisdom of continuing strict economic austerity programs. New coalitions are forming to force a democratic reassessment of this policy. Some coalition partners want to maintain a reputation for fiscal discipline. Some want a different mix of cuts and tax increases and decreases. Some, like the PVV, SP and PvdA, want a greater emphasis on growth measures.
This is the profoundly unique and healthy contribution of the multiparty governing process in Europe, despite its tendency to political stalemate and lengthy debate. It spurs a natural questioning of assumptions, more sharing of ideas, and realigning of policies to deal fairly, humanly, pragmatically with continuing economic stagnation and high debt situation …while simultaneously tempering the casino game of government ad hoc printing of money to solve all problems and keeping the lid on irresponsible acceleration of national and household debt levels.
In contrast, this is what I don’t see happening in the our broken government system. Absent completely is the European style of questioning sacred, purist ideologically driven dogma; civilly engaging other ideas; striving to adapt, share, merge the best of policy initiatives. If ever there is a healthy playing field for demagogues, it’s the black and white thinking of left vs.right and “winner-takes-all” U.S. political system … that class divides people, fosters constant two-party warfare, and destroys any chance of constructive, balanced policy making in the interest of ALL citizens.
If ever there’s a place where “demagogues are running loose” in force, it’s in the good old USA.
You are not going to believe this, but in 2 days, five Dutch parties including the fallen coalition parties VVD (conservative party) and CDA (centrist party) – but excluding coalition partner PVV (far right party) – have agreed April 26th to a more balanced budget accord that meets the EU rule (recently agreed to by the EU 27 countries) of NOT exceeding a 3% deficit level as percentage of GDP in 2013. Thus, a group of five parties that are generally more left of center did something in TWO DAYS that the existing predominantly right coalition government couldn’t achieve in SEVEN WEEKS !!
The five parties achieved the new budget agreement in a creative, pragmatic, equitable, humanistic BUT still very responsible manner. The conservative governing coalition failed in this task, including the coalition partner PVV - the far right party of Geert Wilders. The five parties STUCK to the 3% deficit rule for 2013 rather than spreading this austerity rule over 2-3 years, for example, ±4% in 2013 dropping to 3% or lower by 2015. As stated in my memo above, I favored the latter approach. But I’m glad the five party “quasi” interim coalition has not walked away from standing behind a deficit rule the Dutch government and especially its Finance Minister, Jan Kees de Jager, has been demanding that all EU countries follow.
The new five party group includes: VVD, CDA, as the former ruling coalition parties, plus D66 (centrist to left party), the Christian party (centrist to left party), and Green party (left) as the new parties joining the fallen VVD and CDA parties . The PvdA labor party, SP (socialist party), and PVV far right party have not joined the “quasi” interim coalition of five parties as these three parties fundamentally disagree with the timing of implementing the 3% deficit rule and want to wait and see what the voters say in September.
Pragmatism, setting aside egos, and making hard concessions in the interests of ALL Dutch citizens and their well-being ruled the day! This kind of courageous cooperation in politics to merge the best and brightest ideas for the benefit of the nation as a whole is tragically IMPOSSIBLE in the broken-down, money-corrupted, ideologically pure, polarized government system America is afflicted with today.
So, the Dutch “quasi” interim coalition government of five parties has turned decidedly to left of center in recognition of the public impatience with indecisive leadership and the extremely serious economic times Holland and Western countries are in. At the same time, the five parties are not walking away from the country’s high household debt level and social net costs. For example, the five parties have agreed to: reform the housing mortgage market by reducing the interest deduction while also reducing the taxes on the purchase price of homes, to undertake necessary reforms in retirement pensions, to raise the VAT tax on certain goods and to initiate a temporary tax increase on the higher income class.
These and other actions have been agreed to in order to reach the 3% deficit target WITHOUT damaging the purchasing power of retirees and the lower income classes … and WITHOUT making serious cuts in EDUCATION, INFRASTRUCTURE, and R&D Investments. While all citizens will feel some pain for 1 or 2 years, the ultimate cost of the new budget agreement is estimated to reduce GDP growth from ±1.4% in 2013 to ±0.75% … a not insignificant but also a not overly costly change. The lower GDP growth rate is a sacrifice the Dutch people, with their culture of ±10-12% savings rates, generally consider bearable and worthwhile to maintain their remarkable triple AAA financial rating as well as to achieve intermediate-term financial stability and GDP growth rates in the 2-3% range.
For the future, the Dutch are now talking seriously of putting into policy motion the practice to set aside a portion of healthy tax revenuereceipts that come in good cyclical times as a reserve to be used in cyclicaldownturns. This will greatly help reduce the wild volatility and risk exposure to cyclical and/or irresponsible financial management-induced macro-micro economic downturns.
All this only reconfirms my lasting respect, trust and pride in the Dutch parliamentary coalition system of government. It does result in fallen governments, loss of continuity of leadership, and added costs. But, from my over 30 years experience living and working here, these drawbacks have not been serious obstacles to Holland’s development and ranking as one of the best performing economic and social societies in the world.
It still mystifies me why the PvdA and SP parties did not join in accepting the new budget plan agreed upon in just two days. But many things could change should these two parties capture a major share of the general public’s votes in the September elections. One often heard criticism of the socialist SP party – now enjoying a widespread popularity under the impressively open, down-to-earth, genuine Emile Roemer – is that the party’s leadership falls short on putting forth a vision and concrete set of ideas for solving the systemic problems the SP party sees under conservative economic model-type thinking and governance. The PvdA labor party also receives much of the same criticism.
So, stay tuned. Holland’s broadly representative coalition governing democracy is alive and well … and the nation is determined to stay true to a unique European principle, “We are all in this life together.”
Britain’s Office for National Statistics confirmed today (Wednesday) that in the first quarter of this year Britain’s economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage make a recession). On Monday Spain officially fell into recession, for the second time in three years. Portugal, Italy, and Greece are already basket cases. It seems highly likely France and Germany are also contracting.
Why should we care? Because a recession in the world’s third-largest economy, combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest.
Remember – it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed into a global capital network extending from Frankfurt to Beijing. That means that notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they’ve been at any time since 2007.
Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them coming from the second and third-largest economies in the world, demand in the U.S. can’t possibly make up the difference. That could mean higher unemployment here as well as elsewhere.
What’s the problem with Europe? Don’t blame it on the so-called “debt crisis.” There was no debt crisis in Britain, for example, which is now experiencing its first double-dip recession since the 1970s.
Blame it on austerity economics – the bizarre view that economic slowdowns are the products of excessive debt, so government should cut spending. Germany’s insistence on cutting public budgets has led Europe into a recession swamp.
German Chancellor Angela Merkel, who has led the austerity charge, and other European policy makers who have followed her, have forgotten two critical lessons.
First, that the real issue isn’t debt per se but the ratio of the debt to the size of the economy.
In their haste to cut the public debt, Europeans have overlooked the denominator of the equation. By reducing public budgets they’ve removed a critical source of demand — at a time when consumers and the private sector are still in the gravitational pull of the Great Recession and can’t make up the difference. The obvious result is a massive slowdown that has worsened the ratio of Europe’s debt to its total GDP, and is plunging the continent into recession.
A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.
The second lesson Merkel and others have overlooked is that the social costs of austerity economics can be huge. It’s one thing to cut a government budget when unemployment is low and wages are rising. But if you cut spending during a time of high unemployment and stagnant or declining wages, you’re not only causing unemployment to rise even further. You’re also removing the public services and safety nets people depend on, especially when times are tough.
And with high social costs comes political upheaval. On Monday, Netherlands Prime Minister Mark Rutte was forced to resign. U.K. Prime Minister David Cameron is on the ropes. The upcoming election in France is now a tossup – incumbent Nicolas Sarkozy might well be unseated by Francois Hollande, a Socialist. European fringe parties on the left and the right are gaining ground. Across Europe, record numbers of young people are unemployed – including many recent college graduates – and their anger and frustration is adding to the upheaval.
Social and political instability is itself a drag on growth, generating even more uncertainty about the future.
What European policy makers should do is set a target for growth and unemployment — and continue to increase government spending until those targets are met. Only then should they adopt austerity.
What are the chances that Merkel et al will see the light before Europe plunges into an even deeper recession? Approximately zero.
The danger here for the United States is clear, but there’s also a clear lesson. Republicans have become the U.S. party of Angela Merkel, demanding and getting spending cuts at the worst possible time – and ignoring the economic and social consequences.
Even if the U.S. economy (as well as President Obama’s reelection campaign) survives the global slowdown, we’re heading for a big dose of austerity economics next January – when drastic spending cuts are scheduled to kick in, as well as tax increases on the middle class. But the U.S. economy isn’t nearly healthy enough to bear this burden.
If nothing is done to reverse course in the interim, we’ll be following Europe into a double dip.
BERLIN — With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.
“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”
A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.
Spain officially slipped back into recession for the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.
The political upheaval drove stock markets on the Continent sharply lower, with Germany’s DAX index finishing the day down 3.4 percent. The sell-off in Europe dragged American indexes down around 1 percent. A survey of European purchasing managers showed an unexpected plunge in confidence this month.
The Netherlands, a staunch supporter of the German position, became the latest European country forced into early elections by the European crisis, just one day after the first round of presidential voting in France raised the possibility that the incumbent, Nicolas Sarkozy, would be unseated by his Socialist challenger, François Hollande, in a runoff election.
From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund, Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy F. Geithner has called repeatedly for Europe to defer budget cutting in favor of some form of stimulus spending.
Pressured by the presidential campaign, even Mr. Sarkozy, once Ms. Merkel’s most prominent ally, has begun to talk of the need for growth.
Despite the rising criticism, Berlin did not seem ready to concede defeat for its austerity plan.
“We certainly still have many difficult reforms, measures and times ahead of us,” said Martin Kotthaus, spokesman for the Finance Ministry. “But the path appears to be correct. At least that is what the development of the last weeks and months proves, and also — as far as I can tell — the surveys of the populations of the European Union.”
It was only in March that leaders from 25 of the 27 European Union countries gathered to sign the fiscal compact championed by Ms. Merkel. Her plan, combined with $1.3 trillion in cheap loans injected into the banking system by the European Central Bank in December and March, raised hopes that the worst of the crisis had passed.
But those hopes have been dashed as growth has faltered and interest rates on the debt of struggling countries like Spain and Italy have shot up to dangerous levels again.
“If significant numbers of the coalition wobble or fall, then Berlin has a problem,” said Constanze Stelzenmüller, a senior fellow in Berlin with the German Marshall Fund of the United States.
However, while there is a growing consensus on the need for new growth policies, it is far from obvious what those policies should be, particularly for the heavily indebted countries already having trouble selling government debt.
“You have this dilemma because you have to borrow more money to finance growth measures, but that is also likely to stir up the financial markets,” said Tanja Börzel, a professor of European Union politics at the Free University in Berlin. “Then the money you need will be more expensive to borrow.”
The European Central Bank cannot be counted on to deliver major monetary stimulus in the manner of the United States Federal Reserve because the bank is required by treaty to combat inflation above all else. One option is to allow debtor countries more time to bring their deficits under control, but that is seen more as damage control than as a way to foster growth.
Another possibility, which Germany will be under renewed pressure to accept, is some form of common European debt, generally referred to as Eurobonds, which any member of the currency zone could tap. It is a step that Ms. Merkel’s conservative bloc has opposed forcefully, but with more than 17 million people in the euro zone out of work and the unemployment rate at 10.8 percent, the need for urgent steps is growing.
Marie Diron, an economic adviser to the consulting firm Ernst & Young, said Germany could slow down its own drive to balance its budget and do more to encourage domestic consumption. Other European states would benefit if Germany bought more of their goods.
“Austerity has to fit into a wider policy context,” Ms. Diron said.
Taking advantage of growing voter outrage, fringe parties like the Greek ultranationalist group Golden Dawn and France’s far-right National Front, which won nearly one in five votes Sunday, are gaining strength, evoking comparisons to the Weimar era, which ushered the Nazi Party into power. That has only added urgency to the push for programs that would create jobs.
“You see an incredible public uproar against the strict austerity measures,” Ms. Börzel said. “It’s mostly the populist parties that now become ever more critical of the austerity policies.”
Even in Germany, where unemployment is low and the crisis seems a faraway phenomenon, the political landscape has grown unpredictable. The computer hackers of the Pirate Party, which supports Internet freedom, have emerged from relative obscurity to challenge the Green Party as the third most powerful faction in opinion polls.
Ms. Merkel’s coalition partners, the pro-business Free Democrats, have been the most prominent victims of the political instability. In trying to stave off its total collapse, the party has become a less and less reliable partner, especially when European rescue packages are up for votes in the German Parliament.
“In a nutshell, you need growth and employment or else debt reduction doesn’t work. We’re seeing that right now in Spain,” Sigmar Gabriel, the head of Germany’s opposition Social Democrats, said on German public radio, adding that Ms. Merkel’s policies had failed in southern Europe. “The success of Hollande was in sending a signal beyond France that the politics of Merkel and Sarkozy are not without alternatives.”
Over the years of the euro crisis, Ms. Merkel has moved on the problems at a deliberate pace, a tactic of brinkmanship meant to achieve debt reduction across the euro zone while limiting German exposure to other countries’ liabilities and, therefore, minimizing political damage at home. So far it has largely worked in Germany, and her support in Europe is broader than it appears, with smaller countries like the Baltics, Finland and Austria — and even the larger and increasing supportive Poland — content to stand quietly behind her.
Ms. Merkel has proved herself a masterful tactician time and again. She was adept at working with the Social Democrats as her partner in the previous German government, and Mr. Hollande might be even more amenable than Mr. Sarkozy to ceding French sovereignty in economic policy in exchange for help on growth, Mr. Vaquer from the Barcelona Center for International Affairs said.
“She will have to backtrack on austerity anyway,” Mr. Vaquer said. “Germany can now extract a much more unified Europe in terms of economic governance than it ever could have before.”
A supporter wears a T-shirt depicting French Socialist Party candidate François Hollande and the legend “H is for hope,” echoing the Obama campaign of 2008.
I went to Lille in northern France a few days before the first round of the French presidential election to attend a rally held by the socialist candidate François Holland. It was a depressing experience. Thunderous music pulsated through the ugly and poorly heated Zenith convention hall a few blocks from the city center. The rhetoric was as empty and cliché-driven as an American campaign event. Words like “destiny,” “progress” and “change” were thrown about by Holland, who looks like an accountant and made oratorical flourishes and frenetic arm gestures that seemed calculated to evoke the last socialist French president, François Mitterrand. There was the singing of “La Marseillaise” when it was over. There was a lot of red, white and blue, the colors of the French flag. There was the final shout of “Vive la France!” I could, with a few alterations, have been at a football rally in Amarillo, Texas. I had hoped for a little more gravitas. But as the French cultural critic Guy Debord astutely grasped, politics, even allegedly radical politics, has become a hollow spectacle. Quel dommage.
The emptying of content in political discourse in an age as precarious and volatile as ours will have very dangerous consequences. The longer the political elite—whether in Washington or Paris, whether socialist or right-wing, whether Democrat or Republican—ignore the breakdown of globalization, refuse to respond rationally to the climate crisis and continue to serve the iron tyranny of global finance, the more it will shred the possibility of political consensus, erode the effectiveness of our political institutions and empower right-wing extremists. The discontent sweeping the planet is born out of the paralysis of traditional political institutions.
The signs of this mounting polarization were apparent in incomplete returns Sunday with the far-right National Front, led by Marine Le Pen, winning a staggering vote of roughly 20 percent. This will make the National Front the primary opposition party in France if Holland wins, as expected, the presidency in the second round May 6. Jean-Luc Mélenchon’s leftist coalition, the Front de Gauche, was pulling a disappointing 11 percent of the vote. But at least France has a Mélenchon. He was the sole candidate to attack the racist and nationalist diatribes of Le Pen. Mélenchon called for a rolling back of austerity measures, preached the politics “of love, of brotherhood, of poetry” and vowed to fight what he termed the “parasitical vermin” who run global markets. His campaign rallies ended with the singing of the leftist anthem “The Internationale.”
“Long live the Republic, long live the working class, long live France!” he shouted before a crowd of supporters Saturday night.
Every election cycle, our self-identified left dutifully lines up like sheep to vote for the corporate wolves who control the Democratic Party. It bleats the tired, false mantra about Ralph Nader being responsible for the 2000 election of George W. Bush and warns us that the corporate technocrat Mitt Romney is, in fact, an extremist.
The extremists, of course, are already in power. They have been in power for several years. They write our legislation. They pick the candidates and fund their campaigns. They dominate the courts. They effectively gut regulations and environmental controls. They suck down billions in government subsidies. They pay no taxes. They determine our energy policy. They loot the U.S. treasury. They rigidly control public debate and information. They wage useless and costly imperial wars for profit. They are behind the stripping away of our most cherished civil liberties. They are implementing government programs to gouge out any money left in the carcass of America. And they know that Romney or Barack Obama, along with the Democratic and the Republican parties, will not stop them.
The abrasive Nicolas Sarkozy is France’s oilier version of Bush. Sarkozy, along with German Chancellor Angela Merkel, has done the dirty work for bankers. He and Merkel have shoved draconian austerity measures down the throats of Ireland, Portugal, Greece, Spain and Italy. The governments of all these countries, not surprisingly, have been deposed by an enraged electorate. And if the new governments in these distressed European states continue to be ineffectual—which is inevitable given the sacrifices demanded by the banks—the instability will get worse.
Politicians such as Obama—and, I fear, Holland—who carry out corporate agendas while speaking in the language of populism become enemies of liberal democracies. Labor unions, environmentalists, anti-war activists and civil libertarians, blinded by the images and lies disseminated by public relations offices, stop watching what these politicians do. They mute their criticism to give these politicians, whose rhetoric is rarely matched by reality, a chance. The result accelerates our disempowerment. It is also, more ominously, a discrediting of traditional liberal democratic values. The longer the liberal class does not vigorously denounce expanded oil drilling, our corporate health insurance bill and the National Defense Authorization Act, simply because these initiatives have been pushed through by the Democrats, the more marginal the left becomes. If Bush had carried these policies, “liberal” pundits would have thundered with feigned outrage. The hypocrisy of the American left is too blatant to ignore. And it has effectively left us disempowered as a political force.
The political theater staged by the Democrats and Republicans, bloated with corporate money, will not work much longer. The game will soon be up. There are four countries in Europe with socialist governments—Belgium, Austria, Denmark and Slovenia. All have had to implement austerity programs. None have effectively defied the power of the banks. This paralysis is a ticking bomb both in the U.S. and abroad. And when it explodes it will be far more deadly than anything cooked up by a group of radical jihadists.
Paris was convulsed by riots led by unemployed youths in 2005, many of them immigrants living in the depressing high-rise housing projects in the poor suburbs of Paris known as banlieues. These riots swiftly spread across France. The French government declared a state of national emergency. Now, the simmering rage of the underclass could easily boil over again. The French unemployment rate of 10 percent is the highest in 12 years, but for those in the banlieues the rate is more than 40 percent. We in the United States have similar numbers, only without France’s health care system or safety net. And public unrest could soon pit the disorganized rage of the dispossessed against organized crypto-fascists such as Le Pen, who once compared Muslims praying on French streets in front of overcrowded mosques to the Nazi occupation.
A breakdown of liberal democracy, which seems to be where we are headed, may not bring with it a salutary change. The most retrograde forces within the corporate state, such as the Koch brothers, will lavish racists, homophobes, demagogues, birthers, creationists and gun-carrying, flag-waving idiots with money once the political center crumbles. The left in Europe, and most certainly in the United States, could prove to be too weak to battle against figures like Le Pen or those in the U.S. who rally around the perverted ideologies of the Christian right and the tea party and who receive tens of millions of dollars in corporate backing. The left, in short, may find that it has done too little too late to be an effective counterweight. And widespread discontent could very easily be manipulated by the corporate elites to ensure our enslavement. I watched this happen in the former Yugoslavia. This is the real battle before us. And it has nothing to do with the election charade between Obama and Romney and, I expect, Holland and Sarkozy.
Seven weeks of Government talks have broken down on the issue of more spending cuts – above €18 billion already agreed upon giving a 4.6% budget deficit in 2013 – to reach 3% EU deficit limit. This brings Holland’s credibility at risk as it has been the fiercest promoter of the 3% deficit rule and the severe austerity plan for Greece. Result? The coalition government of the conservative VVD party and centrist CDA party has fallen Saturday. This minority government has depended on an agreement with the ultra right PVV party, the Freedom Party, to achieve a required parliamentary majority (by the slim margin of one vote).
This development illustrates what I’ve been saying for quite some time about the built-in balancing, self-correcting , countervailing featuresof European coalition governments … a governance system that moderates and can prevent excessive ideological swings left or right. Not even a Paul Krugman or Joseph Stiglitz fully comprehend this European coalition governance dynamic, let alone the U.S. media or average American. When a coalition government can’t agree on fundamental issues, it can fall. New elections are then held where the people decide. It’s called democracy.
So, the Dutch government fell yesterday, necessitating new elections in September or October. After 7 weeks of negotiations, the ultra-conservative PVV party, led by the anti-Islam, anti-immigration, anti-Brussels Geert Wilders, concluded that added budget cuts to reach the 3% deficit level in 2013 fall disproportionately on pensioners and low-income people. Wilder’s party and other leftist-leaning Dutch parties are of the opinion the budget cuts to bring deficits to 3% of GDP should be taken in measured concrete steps over 3 years and that there should be more incentive and investment emphasis on encouraging job growth. Where in America today would you hear of a Republican conservative promoting a combination of right and left policy actions as Wilders does? This can happen under coalition government systems which put more pressure on balanced, effective compromise than our U.S. “winner-take-all, pay and play” autocratic government decision-making in the hands of the ultra-richand “corporate citizens” who are simultaneously bleeding the federal government by paying little or no taxes.
I’m not a fan of Geert Wilders although I agree with his position about the 3% deficit timing. He’s too much of a soloist, populist politician for my likes who has the “my way or the highwayegocentric syndrome,”so diametrically unDutch in character. He’s a control freak who wants to micro-manage everything from A to Z, including the activities of his own party members. His wild one-liner remarks have potential of doing real damage to Holland’s commercial export potential (with Turkey, for example) and ageless reputation for being a tolerant nation for those who integrate well, learn the language, and follow the rules.
New elections will likely result in a more balanced, hopefully stable, coalition scenario along some variation of the following lines:
VVD :conservative party led by Mark Rutte with ±1/3 of votes in new elections
SP : left party led by Emile Roemer with ±1/5 of votes in new elections
PVDA : labor party led by Diederik Samson or possibly a coalition of 2 parties with ±1/5 of votes in new elections
This brings me to another example of the self-correcting dynamic of coalition governance systems. Over the past two years, the SP left-leaning party led by Emile Roemer has zoomed in popularity. The ultra right PVV party of Wilders has peaked and is now almost disintegrating. The PVDA labor party has lost much ground but shows promise of new life with a clever, just nominated young leader (also educated in the sciences). Of course, I know the typical Republican demagogic remark would be that, “Holland is thus going more socialistic in the direction of biggergovernment and higher taxes for the rich.”
Nothing could be further from the truth. The SP party and other parties such as PVDA labor party, D66 centrist party, the Green leftist party and the the SPG centrist party fully recognize the utter necessity of getting the country’s fiscal house in order for future generations and to retain its excellent financial rating. Holland has been a leading example of entrepreneurship, financial soundness and societal equity for generations. BUT, the above-mentioned parties, including especially the SP, correctly want this financial austerity executed in abetter-timed,wiselybalanced humanistic manner that does not take the mass of citizens down the“race to the bottom” … a societal devastating disease systemically paralyzing and polarizing America so completely for so long now.
The extremely important $64,000 dollar question is: Can the current interim coalition of VVD and CDA join with others parties and act responsibly to pass an intelligent budget plan of pain and gain fairly shared that sets transparent goals of where the country needs to go?
This should be done NOW and NOT postponed until the new coalition is formed in the September or October elections. Will the usually sound Dutch values of political sensibility, fairness, and pragmatism come forward in reaching a budget compromise in the interests of all Dutch citizens? Having lived and worked over 30 years in Holland, I’m eternally hopeful this will happen!
There are some inherently democratic lessons and processes here ourU.S. leaders might learn from.
The Dutch governing coalition collapsed on Saturday when far-right politician Geert Wilders pulled out of budget cut talks, saying it was not in the Netherlands’ interest to meet the deficit of three per cent imposed by the new European fiscal pact.
EU-imposed austerity measures have cost leaders in southern European countries, including Greece, Italy, and Spain, their jobs. With the fall of the conservative Dutch government, and the possibility that Nicolas Sarkozy may lose the French presidential election that begins on Sunday, the damage seems to have spread to Europe’s prosperous north.
Highlighting widespread voter anger over EU-imposed budget cuts, Mr. Wilders said he could not allow Dutch citizens to “pay out of their pockets for the senseless demands of Brussels.”
“We don’t want to follow Brussels’ orders. We don’t want to make our retirees bleed for Brussels’ diktats,” Mr. Wilders said.
The loss of Mr. Wilder’s support left the conservative government of Mark Rutte, Prime Minister, with just over a third of the seats in parliament. Mr. Rutte and other party leaders said that made new elections inevitable. He is expected to offer his cabinet’s resignation to the Dutch Queen on Monday, but leave the cabinet in place as a caretaker government until elections are held, probably in September.
The fall of Mr. Rutte’s government is ironic because the Dutch were among the most vociferous supporters of strict budget limits during negotiations over Europe-wide fiscal reforms at Brussels summits last year.
After the slowing Dutch economy led the Netherlands’ own 2013 deficit estimates to jump to 4.6% of GDP, Mr. Rutte was forced in early March to launch negotiations with his coalition partners – the Christian Democrats (CDA) and Mr. Wilder’s PPV party, the Party of Freedom – over new cuts.
While awaiting elections, the conservative caretaker government will be forced to seek agreement on a budget with leftwing opposition parties. The leaders of the opposition Labor and left-conservative D66 parties said they might back some cuts with a view to long term deficit reductions below 3%. But they said they were not interested in ensuring that the deficit met the 3% limit in 2013.
D66 leader Alexander Pechtold said the government would need to go “hat in hand” to Brussels to see whether a smaller package of cuts would be acceptable. But a person with knowledge of the government negotiations said that the Conservatives and Christian Democrats were both determined to reach the 3% goal, and that it might be possible to create shifting coalitions to pass different measures to reach that goal.
The fall of the government has unpredictable ramifications for the future of Mr. Wilders. On Saturday, Mr. Rutte and Christian Democrat leader Maxime Verhagen rushed to paint him as irresponsible for having triggered the collapse of talks.
Mr. Rutte said the negotiators were “completely done.”He said an agreement on budget cuts had already been reached when Mr. Wilders abruptly said Saturday he was no longer willing to approve them. Exiting the government at this stage will allow Mr. Wilders to disclaim any responsibility for unpopular budget cuts. But the biggest winner in elections could be the far-left eurosceptic Socialist Party (SP), which has seen its support rise to as much as 20% (if not 30%) of the electorate over the past year.
Meanwhile, Dutch analysts said the inability of even the prosperous, deficit-averse Netherlands to generate voter support for Europe-directed budget cuts called the sustainability of the EU fiscal pact into question.
“Enforcing the pact would always be difficult. Punishing countries is a naïve concept,” said Arnold Boot, a professor of finance at the University of Amsterdam. Mr. Boot saidfiscal harmonization would be impossible once theEuropean economy returns to normal growth, but thattrying to execute it in times of crisis causes “undue pain, which would lead to too much opposition to EU enforcement.”
The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.
What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.
Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."
Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.
The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.
So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.
In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.
All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.
In February 2009, the European Parliament adopted a resolution on social economy which among other things called for “experimentation with new economic and social models” and declared that the social economy is “important, both symbolically and in terms of performance, for the purpose of strengthening industrial and economic democracy”. We see here a clear statement of support for alternative models, and specifically for economic democracy. The resolution was passed by an 89% majority, indicating that the concept of economic democracy can win broad support in Europe. Three years have gone by – a serious effort should now be made to turn this idea into reality.
While the resolution was not exactly a ringing manifesto to transform the existing economic order, it was a green light to accelerate its pluralisation through development of alternative, more democratic, forms of enterprise, ownership, and investment. The crisis of 2008-2009, whose effects are still with us, including the ongoing debt crisis, highlighted the need for alternatives to the status quo with a view to greater equality in the distribution of economic power and, with it, of wealth and income.
Social democracy as a counterweight to economic undemocracy has been difficult to sustain, and is struggling under the onslaught of the neo-liberal anti-social model, whose values, policy prescriptions, and real-life consequences undermine the European Social Model. Now, the way forward is quite straightforward: we need to get on the road to economic democracy, and that means challenging the undemocratic, unaccountable corporate power that has been at the heart not only of neo-liberalism, but of traditional Keynesianism and the “social market economy” as well. Of course, under neo-liberalism, this power is unleashed to a much greater extent, with fewer constraints imposed by the state, unions, or other social forces. It’s time to change this. It’s time to make a sustained multi-pronged effort to pluralise, democratise, and de-corporatise the economies of the European Union.
Moving towards Economic Democracy – Challenging the Status Quo
Europe already has noteworthy islands of micro-level economic democracy in the form of worker cooperatives and employee-owned companies, as well as works councils and co-determination. Spain’s large Mondragon cooperative group is proof that industrial firms can function just fine without wealthy owners and shareholders and massively overpaid executives. Britain’s Scott Bader, a highly successful chemical company, is further proof: it is owned by a charitable trust that belongs to its workers and is run democratically by them. Germany’s Bosch, like all bigger German firms, practices co-determination (as required by law), but in addition is largely foundation-owned and channels its profits mostly into philanthropic activities.
Companies like these, without external shareholders or private owners (or with only limited roles for them), besides being immune to takeovers, are not connected with a wealthy investor class and corporate oligarchy. They show that firms can prosper without this class, while empowering workers and serving society. Mondragon, in fact, has its own bank that provides capital for start-ups and investments within the group, and Italy’s large cooperative sector, especially prominent in the Emilia-Romagna region, has its own investment funds, like Coopfond, which support the creation and growth of cooperatives.
But at the same time shareholding can be a powerful tool for economic democracy in the form of multi-company worker ownership where working people collectively invest in dozens of companies and gain substantial ownership of them, with the aim of boosting employment, supporting local economies, and achieving other worthy objectives, as we see in Canada with the Quebec Solidarity Fund, a labour-sponsored pension-based investment fund. Multi-company worker investment was also proposed under Sweden’s ingenious Meidner Plan of the 1970s which envisioned employee ownership in sector-based groups of large companies being built up over time through mandatory annual allocation of shares to wage-earner funds, amounting to 20% of profits.
Economic Democracy at the Societal Level
We need more Mondragons, more Scott Baders, more Emilia-Romagnas, and more Quebecs. But we also need economic democracy at the macro or societal level, i.e. mechanisms through which citizens can democratically steer economies – and the large corporations at their core – to serve their interests. One such mechanism could be a National Investment Fund that allocates resources in line with democratically set priorities. It can take the form of a public trust, a national-scale but decentralised foundation-plus-bank – with its governance representing both the current balance of political forces and civil society stakeholders. (When necessary, the National Funds would act in concert at EU level.)
Here’s one possible scenario: We divide companies into two groups – large shareholding corporations, which form the main power base of the corporate oligarchy, and all the rest. We democratise the first group by giving the National Fund ownership of one-sixth of each corporation but control of one-third (through shares with double voting power) and at the same time we institute the Meidner Plan to build up worker ownership (through standard shares) to a point where wage-earner funds and the National Fund together gain majority control of these corporations. In exchange, we abolish corporate taxes on these companies. Internally, we implement co-determination where it isn’t in place already.
Regarding the rest, we set a target of converting one-third of them into employee-owned firms (including cooperatives) and foundation-owned firms (with co-determination) over a ten-year period – and we also set up Quebec-style funds that can acquire equity in companies within this group. Naturally, we provide the necessary state support and incentives. Last but not least, we set up regional public investment councils (with broad-based representation) to vet major investments by firms in either of the two basic groups to ensure they don’t harm workers or communities.
The result of all this would be greater pluralism, both vertical (i.e. within the large corporations) and horizontal, a true mixed economy with a substantial democratic content. This combined with financial sector democratisation (a big topic in itself!), wealth taxation, income ratios (stipulating maximum intra-organisational differentials), and greater unionisation would lead to much more democratic and egalitarian societies in Europe. What we now need is political parties, trade unions, cooperative federations, the employee ownership sector, and civil society groups to take up the cause of economic democracy. Perhaps we can start with a new resolution by the European Parliament – this time focusing exclusively on economic democracy, and a little more ringing, a little more transformational!
Energy industry experts, researchers within the Congressional Research Service (CRS) the U.S. Energy Information Agency (EIA) have been publishing truly excellent reports dissecting and forecasting global fuel mix, growth and prices. These energy outlook analyses are vital to the debate on sustainable, secure energy sources. But, such detailed studies fall short in generating a Wake-Upcall to theurgency of newthinking to achieve energy independence from imports and polluting fossil fuels – and emphasizing how this goal is affected by the broaderworld energy marketsupply-consumption balance among key countries, the finite sustainabilityof fossil fuel energy use, particularly oil, and environmental risks, including drilling in deeper and deeper waters.
The choices we make in fuel mix and in producing, importing, consuming energy involve severe technical, economic, and ecological constraints. The strategic implications of those choices remain a mystery to most people. This information void applies, for example, to the world forces pushing fuel prices to ever higher support levels despite modest growth in demand for gasoline. Who or what is to blame? No one has a clear explanation. Public speculations and anger abound over the consistent upward path of gasoline prices, now at an average U.S. price of $4.00 per gallon and ±$100 per crude oil barrel. Ongoing oil price increases to at least $150/barrel by 2020 and $200/barrel by 2030 are more than just likely.
Demand and sustainability are key to understanding the stark reality that the trend of rising fossil fuel costs – households now spend 10% on energy, mostly on fossil fuels – is irreversible. Little wonder escalating fuel prices, an oil import dependence that accelerates colossal trade deficits, and high CO2 emissions from oil and coal are fueling uncertainty about future energy supply developments and the potential of devastating ecological/environmental damage. U.S. domestically produced oil/gas supply shortages, technological advances, and ballooning fuel prices are driving offshore drilling to more difficult, deeper waters of 800 - 1,000 meters or more … where development risks are exponential, where actual increases to total proven reserves from major offshore finds have been relatively modest in recent years. That is why world oil reserves are being depleted faster than the number and size of new offshore fields discovered … another subtle pressure on fuel prices.
Oil companies thrive on high pump prices that deliver the profits needed to pursue high-cost projects in high-risk offshore waters. This also adds to public cynicism and confusion about the right mix of renewable and traditional energy exploitation policies, their long-term effect on economic development and climate change in the context of transitioning to a clean, secure energy economy.
The key issue explored in this paper is that the cost of fossil fuels, especially oil, and total energy consumption are certain to rise significantly the next two to three decades. This means the cost differential of transitioning to alternate green fuels is fast becoming marginal. And that is why Denmark is on a mission to remove carbon-polluting fossil fuels entirely by 2050 without introducing nuclear energy(coal power combined with carbon storage is an option but is not yet commercially feasible or environmentally friendly).
Other factors pushing fossil fuel prices ever higher include the composition of oil, natural gas, and coal supplies by country – the growing rejection of nuclear – and increasing concentration of oil/gas supplies in a few countries. These macro-factors also give commodity speculators and hedge fund investors a perfect playing field to apply their manipulative commodity shorting/longing trading expertise to milk the system – and to Hell with the rest of society!
The central theme in this paper is that there is a strategic necessity to make faster development of alternative green energy production an urgent national priority. The oil industry has no fiduciary or corporate responsibility to aggressively develop commercial alternatives to fossil fuels. U.SGovernment policy of getting out of the way of the oil industry – combined with generous subsidies, tax reduction gifts –and not participating as an active partner ( e.g. Norway’s example ofa state oil company) has led us to the energy dependence we have today. Denmark and Germany realize this, but we still don’t.
DISCUSSION
PART I: Sustainability and Denmark´s Road to Fossil Fuel Independence
“A sustainable process or state is one that can be maintained at a certain level indefinitely. It should provide optimal conditions for ALL organisms affected by it and not threaten, even indirectly, the viability of any organisms. … The current level of human activity is unsustainable. That it has been at all is due to the use of fossil fuels, a non-sustainable resource, whose use is by definition unsustainable.”
Denmark and Germany have accepted the reality message behind this definition. They have resisted the temptation to consider renewable green energy sources as merely a modest and not a dominant contributor of net energy supplies. While the world population is still growing , though more slowly, these two countries realize the Earth’s oil and gas resources are severely limited and that carbon storage and pollution from coal are an environmental nightmare.
These two countries recognize that the Earth's ability to absorb global warming emissions of ±7 billion tons of carbon dioxide annually from fossil fuels is also limited and very costly. These two countries are getting behind the lifestyle changes and potential net savings of investing heavily in clean, sustainable wind, biomass, and solar energy. As everyone knows, Germany has decided to phase out its nuclear plants. Denmark has no nuclear plants.
This brings me to a brief overview of Denmark´s remarkable societal unity and pioneering commitment to a 100% clean, sustainable energy economy. For a detailed description of Denmark’s plan to convert to renewable, clean energy, see “Energy Strategy2050,” The Danish Government, Feb. 2011. The Danish define independence from fossil fuels as producing sufficient renewable energy to cover at least 100% of energy demands in 2050. This would meet a EU policy goal of reducing greenhouse gas emissions 80% by 2050 vs. 1990 emissions. Renewables cover 29% of total electrical production today. Tables 1 and 2 reveal the sheer audacity of Denmark’s accelerated path to renewable energy. ______________________________________________________________ TABLE 1 : DANISH GROSS ENERGY CONSUMPTION IN 2050
Remarkably, Denmark already produces 20% of its total energy needs fromrenewables versus 8% for the U.S. today. Denmark will increase this percentage to 33% by 2020, meeting the EU 2020 target of 30% comprising wind, biomass, biogas, biofuels, solar. The above range of gross energy consumption mixes in 2050 under different energy scenarios are calculated to meet expected energy demand in 2050 of 600-700 petajoule (PL) per year.
Alternative 1 assumes continued use of fossil fuels. Alternative 2 assumes elimination of fossil fuels. Both scenarios assume an “Unambitious”international climate policy, i.e. that rates of CO2 emissions reduction will remain essentially unchanged and fossil fuel scarcity continues to push energy prices higher. Unambitious emissions reduction policies are assumed to result in moderate prices for biomass and CO2.
Alternative 1, is a possible but less attractive scenario. It includes the combining of less renewables and much coal with carbon capture and storage (CCS). Alternative 2 assumes an aggressive expansion of biomass and wind energy sources where prices are expected to be low. Biomass production used in the energy system in 2050 is limited to relatively the same sustainable food production amount and agricultural area as exist today. Biomass will grow in relation to its price competitiveness with other renewable energy sources.
Alternative 3 represents Denmark’s ideal scenario to eliminate fossil fuel use under an “Ambitious”international climate policythat restricts ratesof atmospheric carbon levels to450 parts per million, i.e.limiting human-caused global warming to within 2 degrees C. This requires western nations to reduce 1990 net greenhouse gas emissions by at least 80% by 2050. Under ambitious emissions reduction policies, it is assumed fossil fuel prices will rise more slowly while biomass and CO2 prices will increase. A 25% reduction in total energy consumption by 2050 is predicted and comes from significant energy efficiency improvements , e.g. broad deployment of efficient cost-effective heating pumps, and substantial rises in wind and solar supplies.
For all alternatives, wind and biomass play a crucial role as does a broad range of cost-effective energy efficiency initiatives including for example:
raising the energy savings target energy firms must implement for their customers by 50% starting in 2013 and by 75% during 2017-2020
tightening building codes, energy standards, e.g. renovation of buildings
implementing an intelligent energy network and electric meters
phasing out of oil and gas furnaces, no installations starting 2017
converting to electric vehicles and 2050 goal that vehicles and average home are using 29% and 40%, respectively, of energy used today
deploying heat pumps for individual, district, and industrial heating
providing financial incentives for wind energy through cooperatives
While costs of heat and electricity will rise moderately, homeowners will be given the opportunity to lower energy costs by greater efficiency. A broad range of renewable energy initiatives will not only promote more efficient energy use but will also encourage a switch to biomass in power plants of cities and increase the consumption of renewable energy.
Denmark’s path to fossil fuel independence along with an 80% reduction in net greenhouse gas emissions by 2050 is ambitious and smart. The near-term goal to double electricity from renewables by 2020 is impressive if achieved.
TABLE 2 : Denmark’s % Share of Renewables in Electricity Production, 2009 Compared to 2020 Goal
A spectacular 62% of electricity generation is expected from renewable sources by 2020, largely wind and biomass. The doubling of wind capacity to the 42% goal of electricity generation will come from construction of new offshore wind turbines at the Kriegers Flak wind farm, coastal wind turbines, and land-based turbines. Wind energy will go from a 3 GW capacity now to a 10 GW to 18 GW by 2020-2050. More intensive energy efficiency efforts will reduce gross energy consumption by 6% in 2020 compared to 2006, increasing to 25% by 2050 assuming an “Ambitious” international climate policy.
The Danish are not waiting to learn that fossil fuels are a finite global resource. Protecting future energy security and reducing greenhouse gas emissions are driving Denmark’s transition to a new energy strategy, NOW. The country’s planning for fossil fuel independence is thorough, covering all contingencies – a far cry from our seemingly “business as usual” market approach to energy supply security, environment, and financing policy initiatives. Danish clean energy investments will be offset by lower fossil fuel expenditures and CO2 reductions and a proposed security of supply tax. Denmark’s Commission on Climate Change Policy sums up the gradual increased pressure on public budgets as the result of tax revenues lost by reduced use of fossil fuels as follows:
“The government’s objective is to be independent of fossil fuels. This has the effect, that fossil fuels that are highly taxed will be replaced by other, more environmentally friendly types of energy taxed at a lower rate and in some cases tax exempt. In order to offset this detrimental effect on tax revenues, other energy taxes may be increased, provided the overall tax burden is not increased.”
SUMMARY
A Danish research team put in perspective the cost of Denmark’s visionary conversion to renewable energy quite well:
“It may seem surprising that the total phase out of oil, gas, and coal use will not involve large costs for society in the long term. However, there are several reasons for this: Firstly, transition of the energy system will take place gradually over a long period of time (just as Denmark has done by starting with wind energy in 1970 to now being the world leader in this electrical energy source), so that existing capital stock (infrastructure) will be exploited. Secondly, over this time period, an increased global demand for energy will make traditional alternatives to renewable energy sources still more expensive. Simultaneously, technological development will gradually make many renewable energy sources more competitive and emission reduction targets will have a cost if Denmark continues to use fossil fuels. Finally, total expenditure on energy services constitutesonly a minor 5-6% share of GDP in 2050 under all scenarios. Thus, although total expenditure on energy services rises about 5% because of the transition to fossil fuel independence, the cost measured as a % of GDP decreases in significance.”
PART II. Strategic Policy Implications of U.S. Energy Supply, Demand, Price Trends, and Concentration of World Supplies
The 2,500 year-old Parthenon – still standing while Greece crumbles
Yesterday European finance ministers agreed a second bailout for the Greek Government, worth more than 130 bn Euros. In light of the country’s staggering debt, and the risk it poses to the health of the entire Eurozone, it now appears that Greece should not have been permitted to join the Euro in the first place. So, why was it?
Nick Dunbar’s film on last night’s BBC Newsnight set out to provide at least part of the explanation.
The film shed new light on a slight of hand orchestrated by the investment bank Goldman Sachs, that allowed a large chunk of Greek public debt to seemingly disappear, and for the country’s finances to appear in better shape than they were in reality.
Back in 2001, the Greek government was pondering how it could meet the conditions of Euro membership. A key requirement of the Maastricht criteria, five criteria that determine whether an EU country is ready to adopt the euro, was that member states show ‘directionality’ in their public debt.
This meant that the country’s debt ratio needed to be going down year on year: ‘The national debt should not exceed 60% of GDP, but a country with a higher level of debt can still adopt the euro provided its debt levels are falling steadily’.
The solution they came up with was not to cut spending or raise taxes, as Dunbar incredulously points out, but to attempt to hide their debt. Enter Goldman Sachs, global investment banking and asset management company.
Newsnight revealed that one of the Goldman Sachs bankers hatched an ingenious plan to strike a financial deal called a ‘swap’ with the Greek Government, using it to hide 2.8bn Euros of national debt. The deal was legal but completely secret.
Back in 2003, Nick Dunbar revealed the existence of this deal. Far from ‘making something out of nothing’, as the Greek authorities alleged, Dunbar was very much on the right track. The new revelation made in last night’s film was that of the role played, or perhaps more accurately not played, by the European accounting agency, Eurostat.
Goldman Sachs passed Newsnight an email showing that they covered themselves by discussing the deal with Eurostat. Eurostat dismiss this discussion as having only concerned ‘general clarifications’, and maintain that they only became aware of the deal in 2010.
But regardless of exactly when European institutions, such as Eurostat, became aware of this deal, major concerns remain over why more attention was not paid to the employment of untested and unregulated financial products by European States. emerging from the innovation boom in the banking sector.
The deals were commonplace, Goldman Sachs said in their statement to Newsnight: ‘The swaps were one of several techniques that many European governments used to meet the terms of the [Maastricht] treaty.’
Last night’s film gained access to one of the key figures responsible for the deal, Christoforus Sardelis, then head of the Greek Public Debt Management Agency. He had been tasked with the job of bringing the national finances in line with Maastricht criteria.
With hindsight, it’s apparent to Sardelis that the deal was problematic. Under its terms, Goldman Sachs has made millions from the Greek government, yet the original 2.8bn Euros of debt has now ballooned to 5.7bn Euros. Nevertheless, this is a drop in the ocean of Greece’s £350bn debt.
To Sardelis, the deal may have been a bad one, but it wasn’t the cause of his country’s current woes, he says in the film. ‘It was a very sexy story, between two sinners, but the European crisis is not the child of the sex we had with Goldman Sachs’, he, rather salubriously, commented.
The following is a transcript from Dan Rather's show on hdnet. Videos may be found at http://www.hd.net/danrather
ACT 1: GREECE
The economic crisis is becoming a disaster to many Greeks with the fallout spreading to children. Some parents are sending their children to live with relatives because they can no longer afford to keep them. Also, the story of a journalist who's taking on a dictator in Europe.
A Greek Tragedy
DAN RATHER (ON CAMERA)
GOOD EVENING. A FOUNDING MISSION, HERE AT DAN RATHER REPORTS, HAS BEEN TO TELL IMPORTANT STORIES FROM AROUND THE WORLD THAT ARE NOT GETTING ENOUGH ATTENTION IN THE AMERICAN PRESS. TONIGHT WE HAVE COMBINED THREE SUCH STORIES INTO A SPECIAL HOUR OF INTERNATIONAL REPORTING. WE WILL TAKE YOU TO THE BRAZILIAN RAINFOREST AND THE FIGHT AGAINST DEFORESTATION. AND WE WILL TRAVEL YOU TO THE SELDOM SEEN COUNTRY OF BELARUS – AN AUTHORITARIAN THROWBACK IN THE HEART OF EUROPE. BUT WE BEGIN IN GREECE, WHERE THERE’S BEEN A LOT OF VIEWS ABOUT BAILOUTS, AUSTERITY MEASURES AND THE NEED TO PROTECT THE WORLD ECONOMY. BUT MISSING FROM THE HEADLINES IS THE PLIGHT OF HUNDREDS OF THOUSANDS OF GREEK FAMILIES WHO ARE NOW SUFFERING UNIMAGINABLE ECONOMIC PAIN.
RATHER (VOICE OVER)
TODAY, ATHENS IS A CITY OF ANXIETY. YOU CAN SEE IT IN THE SHUTTERED
BUSINESSES... THE LEGIONS OF NEW HOMELESS... EVEN IN THE FACES OF THOSE WHO,
FOR NOW AT LEAST, HAVE JOBS AND A PLACE TO LIVE. THERE’S A SENSE THAT
WHATEVER YOU MAY HAVE NOW, COULD BE GONE IN AN INSTANT.
THERE IS NO QUESTION THAT GREECE HAD A REMARKABLE PAST... THE QUESTION IS,
DOES THIS COUNTRY HAVE A FUTURE...AND THAT QUESTION IS CAUSING A LOT OF
WORRY.
RECENTLY THIS IS THE IMAGE THE WORLD HAS SEEN OF ATHENS...A CITY ON FIRE.
MASSIVE PROTESTS WHERE THOUSANDS RIOTED. EARLIER THIS MONTH, ALMOST A
HUNDRED BUILDINGS WERE BURNED. BUT WE CAME HERE TO TELL A DIFFERENT
STORY…FOR EVERY PROTESTER IN THE STREETS THERE ARE THOUSANDS OF REGULAR
GREEKS SUFFERING IN THE SHADOWS...
THIS IS A TIGHT-KNIT SOCIETY WHERE, FOR GENERATIONS, FAMILY AND FRIENDS
RELIED ON EACH OTHER IN TIMES OF NEED. BUT THE GREEKS NOW FIND THAT SOCIAL
FABRIC, ALONG WITH THEIR ECONOMY, IS BEING TORN APART.
YOU CAN FIND EXAMPLES OF THIS MODERN-DAY GREEK TRAGEDY AT THE COUNTRY’S
BIGGEST PORT. WHEN THE ECONOMY WAS HUMMING, SO TOO WAS THE SHIPPING
BUSINESS HERE. BUT THOSE DAYS ARE GONE. SO EVERY MORNING DESPONDENT MEN
WHO WERE ONCE THE BREADWINNERS FOR THEIR FAMILIES NOW GATHER HERE AT
THEIR UNION HALL JUST INSIDE THE GATES OF THE PORT, HOPING FOR AN ODD JOB.
THAT’S WE WHERE WE FIRST MET CHRISTOS PITSOUNIS. FOR 23 YEARS, HE HAD A
GOOD-PAYING JOB WELDING SHIPS. BUT HE HASN’T HAD STEADY WORK FOR THREE
YEARS.
CHRISTOS PITSOUNIS, UNEMPLOYED WELDER ( translated from Greek)
I worked for 46 days in 2009, 18 days of work in 2010, no days of work in 2011.
RATHER (VOICE OVER)
HE SEES THE STRAIN FOR HIMSELF AND HIS COUNTRY.
PITSOUNIS (translated from Greek)
There is no life in Greece anymore. They finished us. We’ve reached desperation.
RATHER (VOICE OVER)
WHEN THINGS WERE GOOD, CHRISTOS WAS ABLE TO BUY AN APARTMENT ABOUT A
MILE FROM THE PORT IN A WORKING CLASS NEIGHBORHOOD. HE TOOK US HOME TO
MEET HIS WIFE AND TWO YOUNG CHILDREN.
WHEN HE LOST WORK, AT FIRST HE DID WHAT MOST GREEKS DO WHEN THEY’RE
STRUGGLING, TURN TO HIS FAMILY FOR HELP PAYING THE BILLS. BUT NOW, THEY
HAVE THEIR OWN PROBLEMS.
PITSOUNIS (translated from Greek)
How do we live? We’re on welfare. A friend brings some stuff, a bit from my mother and my sister. And that’s over with because my mother and my sister, my mother has had her pension cut and my sister, who works at the hospital of the city of Preveza had her wages slashed. They can’t help anymore.
RATHER (VOICE OVER)
SO THEY’RE TRYING TO COPE ON THEIR OWN. THE POWER COMPANY DISCONNECTEDGEORGE AND HIS FRIEND LEO ARE TWO OF THE NEW HOMELESS. WE MET THEM AT AFOUNDATION. THE GREEK GOVERNMENT WAS SPENDING MUCH MORE THAN IT WAS
THE ELECTRICITY WHEN THEY DIDN’T PAY THE BILL. AND THERE IS NO HEAT.
ANI PITSOUNIS, WIFE OF CHRISTOS PITSOUNIS (translated from Greek)
There’s no job, there’s no job, there’s no job. Wherever you go and ask. And me, when I tried to find a job there was nothing. People were saying to me, “Madam, where are you going? We’re not working, where do you think you’re going to find a job?”
CHILD (translated from Greek)
And then we found a job?
ANI PITSOUNIS (translated from Greek)
Sure, only in dreams my dear child.
RATHER (VOICE OVER)
CHRISTOS AND HIS WIFE HAVE TAKEN THE PAINFUL STEP OF BREAKING UP THEIR
FAMILY. THEY SENT THEIR 8-YEAR-OLD DAUGHTER TO LIVE WITH HER GRANDMOTHER
FIVE HOURS AWAY IN WESTERN GREECE BECAUSE THEY SAY THEY CANNOT AFFORD
TO RAISE ALL THREE CHILDREN
THE PITSOUNIS ARE AN EXAMPLE OF A PHENOMENON SWEEPING GREECE -- A FAMILY
BARELY HANGING ON AND FORCED TO MAKE HEARTBREAKING DECISIONS.
AT THIS PRIVATELY RUN FOSTER HOME IN GREECE THEY HAVE SEEN A STARTLING
SPIKE IN THE NUMBER OF CHILDREN COMING FROM FAMILIES THAT CANNOT AFFORD
TO KEEP THEM. TURNING A CHILD OVER TO STRANGERS IS DEEPLY SHAMEFUL IN
GREECE.
AND MANY GREEKS HAVE LOST HOMES. HARD NUMBERS ARE TOUGH TO COME BY BUT
THERE ARE AT LEAST A FEW THOUSAND OF WHAT GREEKS ARE CALLING THE “NEW
HOMELESS”, THESE AREN’T THE USUAL KINDS OF PEOPLE YOU FIND LIVING ON THE
Interview with Costas Panayotakis, author and associate professor of sociology at New York City College of Technology, conducted by Scott Harris
European finance ministers agreed on Feb. 21 to a second bailout of the Greek economy, avoiding for now the threat of default, which many observers fear could trigger a crisis that would endanger the survival of the Eurozone. The so-called “troika,” made up of the European Central Bank, the European Commission and the International Monetary Fund negotiated a deal that will cut the principle on Greek bonds and lower the interest rate paid.
In exchange for the $172 billion loan, European officials demanded the Greek government approve harsh austerity measures to reduce the nation’s debt-to-GDP ratio to 120 percent by 2020. Although tens of thousands of Greeks marched and rallied in militant protests opposing the austerity measures across the country, the Greek parliament approved a package that included 150,000 layoffs from government jobs by 2015 and steep cutbacks in the minimum wage, health care budget and pensions. Another controversial provision of the debt deal forced Greece to amend its constitution, giving priority to "debt servicing payments" before any other national obligations are met.
With an unemployment rate of 21 percent, many economists say the austerity policies will only worsen economic conditions in Greece with no hope to reverse the decline. Between the Lines’ Scott Harris spoke with Costas Panayotakis, associate professor of sociology at the New York City College of Technology and author of the book, “Remaking Scarcity: From Capitalist Inefficiency to Economic Democracy.” He assesses growing public resistance to austerity measures in Greece and the overall Eurozone crisis.
COSTAS PANAYOTAKIS: There is a massive assault on working people and ordinary citizens in Greece right now and we see people's living conditions and incomes have collapsed, and unemployment is skyrocketing. We're talking about 21 percent of the population; 50% of young people. As a result, there's a growing resistance. People see that these policies are not leading anywhere and they are no longer willing to give the government the benefit of the doubt. The government tries terrify people into submissions, telling them that without austerity policy, there will be chaos. But increasingly, people see that is chaos is all around them precisely because of these policies.
BETWEEN THE LINES: The austerity measures that were just recently adopted by the Greek parliament have caused a lot of people to be very concerned for their nation's future. There was a 22 percent cut, I believe, in the minimum wage threshold; 150,000 layoffs in coming years and maybe you could discuss a bit about the kind of pain that this is causing the average Greek citizen.
COSTAS PANAYOTAKIS: Yes, every segment of the Greek society has been affected by the measures. The reduction of the minimum wage is accompanied by a destruction of labor rights and collective bargaining that is likely to reduce the wages of all private sector workers. There have been successive pay cuts for public sector workers and for pensions. And as a result, there is a growing sense of desperation, rising poverty rates, homelessness, hunger and these phenomena are increasingly affecting even people who were recently solidly middle class. So we're talking increasingly about a humanitarian crisis. I was listening to the report by the Doctors of the World who are active in Athens, and they were calling for people to donate food. And they were saying that what they see in Greece right now is the kind of thing that one would normally expect from really low-income countries in Africa.
BETWEEN THE LINES: What are the alternatives? What can the Greek people do as opposed to just accept these austerity measures? There is resistance in the streets as has been widely reported. But to what end? There are elections that are expected as early as April. Are there alternative political ways to handle this crisis that have emerged during these months of people looking for alternative solutions?
COSTAS PANAYOTAKIS: Well, I think the most important thing is for people to say no to these policies and in essence, it doesn't make sense for Greece to keep borrowing more and more money to service a debt that is already unsustainable. And there are sort of other platforms and proposals by political parties, especially on the left in Greece and those are by economists and there is no sort of one platform, one alternative platform that has universal sort of assent among the critics of austerity, but there is a debate about whether Greece should exit the Euro and devalue its currency or whether it should just basically declare default within the Eurozone and put pressure on Europe to change these austerity (unintelligible) that is leading nowhere and that is deepening the crisis even within Europe and the Eurozone.
But the problem, of course, is that as the opposition to austerity increases, there is growing pressure from European political and economic elites not to allow Greeks to basically have a say over the decisions that will seal their fate for the coming decades. So now, Greece has an unelected prime minister who's a former banker. He basically pushes these measures to a parliament that no longer reflects the wishes of Greek citizens. His government is supported by them, by what used to be the two major parties in Greece, the socialists and the conservatives.
But, the support, according to all the polls, to all these parties has collapsed. So you have basically a parliament that does not reflect the current opinion of Greek citizens and this parliament is pushing a loan package and the measures that will basically commit Greek governments in the future to policies that Greek citizens have not had a chance to have a say on.
BRUSSELS — At the same meeting where Greece’s latest economic plans were greeted with blunt skepticism, a television microphone accidentally recorded a very different exchange between a minister from Germany and a colleague from another bailout recipient, Portugal.
If Lisbon, which faces an austerity-driven economic slump similar to Greece’s, needed to ease its bailout terms, “we would be ready to do it,” said the German finance minister, Wolfgang Schäuble.
“That’s much appreciated,” replied his counterpart from Portugal, Vitor Gaspar.
The conversation, broadcast on the private Portuguese network TVI, illustrated a stark fact as the euro zone’s debt crisis enters its third year: While Portugal, Ireland and other countries may be struggling, Greece has found itself in a category of its own — a nation the rest of Europe no longer trusts.
The gathering Thursday night of finance ministers from the 17-nation euro zone, together with leaders of the European Central Bank and the International Monetary Fund, was supposed to bless a much-delayed agreement among Greek politicians on austerity measures required to win a new bailout of €130 billion, or $171 billion.
Instead, the ministers made it plain that they did not believe the figures, saying that Greece needed to find €325 million extra in savings before the bailout was signed off on, hopefully next Wednesday.
The Greek Parliament and main political parties will have to endorse the austerity measures. And if Greece gets its new bailout, the money may be paid into a special account that would cover debt repayments before any money was released to general government spending.
According to some unofficial estimates, up to 70 percent of Greece’s bailout money might be spent this way.
The rebuff from euro zone ministers was greeted with violence on the streets of Athens during a general strike Friday, while five politicians resigned, plunging the government into a new crisis before the pivotal vote in Parliament on Sunday.
After a period of relative calm, financial markets and the euro fell. The Euro Stoxx 50 index, a barometer of euro zone blue-chips, fell 1.65 percent, while the FTSE 100 index in London fell 0.73 percent. In New York, the Standard & Poor’s 500 index was down 0.92 percent by midafternoon. The euro declined to $1.3175 from $1.3286 late Thursday in New York.
The failure to reach a final deal and the disorder in Athens have “been an excuse to deflate some of the Greek-related optimism in the market,” Gary Baker, an equity strategist at Bank of America Securities Merrill Lynch in London, said, though he cautioned against reading too much into the market moves.
It is not in the interest of the euro zone or of Greece to see the country default, and all parties are hoping that the Greek Parliament will approve the deal on Sunday.
Even if that happens, there is work to be done. A deal with the European Central Bank to help ease Greece’s debt burden by giving up profits on its holdings of Greek bonds has not yet been struck. In Berlin, Mr. Schäuble, briefing lawmakers, said that current plans would leave Greece’s debt as high as 136 percent of gross domestic product by 2020, as opposed to 120 percent foreseen in the country’s second bailout, Bloomberg News reported.
Behind closed doors in Brussels the lack of trust was evident, and it is this that may have put the entire bailout at risk.
In one of several tough exchanges, the Greek finance minister, Evangelos Venizelos, was taken to task by Mr. Schäuble for having failed to begin the required negotiations with labor unions to enable the minimum wage to be reduced. Mr. Venizelos had been reluctant to do that before knowing the bailout would be approved; his European partners saw this as time-wasting, according to one official briefed on the talks but not authorized to describe confidential discussions.
Ministers vented their frustration in public as well. “We cannot live with a system where promises are made and repeated and repeated and implementation measures are from time to time too weak,” said Jean-Claude Juncker of Luxembourg, who chairs meetings of the 17 euro zone finance ministers.
“The Netherlands and some other countries have outlined a lot of demands which should be clarified,” added Jan Kees de Jager, the Dutch finance minister. “It is the implementation that we have seen lacking, so we did ask a series of critical questions.”
Worries that the Greek public administration is both bloated and chronically weak appear to have been borne out. The process of selling off state assets has been so slow that Greece is to be given longer to raise the €50 billion it once said it would use to pay down its debt. Now the plan is to produce €19 billion from initial state asset sales by the deadline of 2015, with the remaining €31 billion to be produced later.
On Thursday the country’s deputy finance minister, Pantelis Economou, said that the state had issued penalties worth €8.6 billion for tax evasion and other offenses during the past two years. But according to Kathimerini, a daily newspaper, only 1 percent of the €8.6 billion has been collected, meaning that less than €100 million made it to public coffers.
For their part, Greek officials believe they have been placed in an impossible position by the so-called troika of international lenders — the European Commission, European Central Bank and International Monetary Fund — that is administering the bailouts.
Demands keep changing and the program is a “moving target” as Greece is pushed deeper into recession, said one European official who, like many involved in the talks, was not authorized to speak publicly.
With the plans reviewed every three months, and with the economic outlook deteriorating steadily, Greece was being asked for ever tougher measures to hit its targets. And elected politicians were finding it an impossible sell.
“How much can you do in three months?” asked one Greek official.
Failure by the international community to confront the unsustainability of Greece’s debt burden has led to a somewhat chaotic bailout process. For example, private investors in Greek bonds were initially told they would be repaid in full, then asked to accept losses of 21 percent, which subsequently rose to 50 percent and may now amount to 70 percent.
In Italy, the arrival of a technocratic prime minister, Mario Monti, has helped restore confidence in the country’s ability to pull itself out of its crisis. But a change at the top has failed to work the same magic in Greece, where Lucas D. Papademos, a former vice president of the European Central Bank, is a caretaker leader.
“Monti is trusted by European partners,” said one European minister. “Papademos has a much more difficult situation. In Italy the situation is not good, but it is more manageable. In Greece you see how difficult it is just to bring three political parties together to agree measures.”
While Portugal’s economic predicament is close to that of Greece, one senior E.U. official argued that the Portuguese, at least, had a functioning administration.
“It is increasingly understood that Greece is a very unique case,” added a European diplomat. “It is not holding up to its commitments. In Ireland, Portugal, Spain and Italy things are not rosy, but they are in a different class.”
(Reuters) - Greece's prime minister scrambled on Sunday to convince lenders and politicians to sign off on a 130 billion euro ($171 billion) rescue, after his finance minister said just hours remain before the euro zone abandons the country to its fate.
A technocrat appointed in November, Prime Minister Lucas Papademos is trying to ensure cash-strapped Greece avoids sinking into a chaotic default when big bond redemptions come due next month.
His finance minister said Athens had only until Sunday night to clinch a second financing package from lenders, after euro zone ministers bluntly told him they were ready to abandon Greece without proof it could push through painful cuts.
"We are on a knife edge," Finance Minister Evangelos Venizelos said on Saturday after what he called a "very difficult" conference call with euro zone counterparts.
"The moment is very crucial."
Papademos's first mission on Sunday is to agree at least a preliminary deal with the "troika" of foreign lenders on reforms included in the bailout, after several days of talks failed to resolve the thorny issue of cutting wages and spending.
Greek officials have emerged increasingly despondent after each round of talks, complaining that the European Central Bank, European Union and International Monetary Fund troika were stubbornly refusing to yield on demands to cut the minimum wage level, axe holiday bonuses and fire public sector workers.
Papademos then faces an even tougher task convincing party chiefs in his own national unity coalition to back the reforms demanded by the lenders at the risk of ruining their chances at national elections expected in April.
He is expected to meet the lenders in the early afternoon before huddling with the socialist, conservative and far-right party leaders in his coalition later in the day.
The conservative New Democracy and the far-right LAOS party in particular have staunchly opposed further wage and spending cuts, arguing that risks pushing Greece into an even deeper recession and imposing more pain on struggling Greeks.
"The truth is that people are tired. They can't put up with more austerity," New Democracy spokesman Yannis Michelakis told the Real News weekly.
LAOS leader George Karatzaferis, meanwhile, rejected what he called the "ultimatum" to strike a deal on Sunday.
Papademos's government implored them to be more cooperative.
"We have carried out superhuman negotiations. And so political leaders must help us now," a senior government official said, adding that the party chiefs were free to join the Sunday talks with lenders if they wanted.
Greece's lenders, who want spending cuts worth about 1 percent of GDP - or just above 2 billion euros - this year, have demanded all political leaders endorse the cuts irrespective of the outcome at the polls.
LIMITED PROGRESS
Athens has wrangled without success for weeks on the bailout package and a debt restructuring plan, putting itself dangerously close to bankruptcy as 14.5 billion euros of debt falls due in mid-March.
The lack of agreement has kept financial markets on tenterhooks as investors fret a messy default could cause shockwaves across the financial system, triggering a credit crunch and sending the global economy back into recession.
Athens says it has notched up some progress by agreeing a plan to recapitalize Greek banks and details on privatization, even if bigger issues on reform remain unresolved. A senior banker told Reuters the recapitalization would occur mainly via common shares with restricted voting rights.
The talks have moved slowly also because the troika wants agreement on all parts of the complex Greek rescue deal - including any contribution by public creditors like the ECB - before approving the bailout, a source close to the talks said.
The rescue package, drawn up in October, also includes a bond swap under which banks and insurers will take real losses of about 70 percent on the Greek debt they hold in a bid to ease Greece's debt burden by 100 billion euros.
But Greece's deteriorating economic prospects and struggles with reform have fed concern that will not be enough to get its debt back to a manageable level and Athens wants public creditors like the ECB to also take part in the bond swap.
Representatives for the banks and insurers were expected to continue talks in Athens over the weekend on the bond swap, which Venizelos has said is now the easier part of the overall process to save Greece.
The debt swap and bailout was designed to bring Greece's debt down to 120 percent of GDP by 2020, but EU sources say euro zone governments may now have to cough up an extra 15 billion euros on top of the 130 billion agreed for that to happen.
We mustn’t forget that Carmen Reinhart and Kenneth Rogoff in their massive economic research highlighted in part in a paper entitled, “Growth in a Time ofDebt,” came up with the central conclusion that nations grow slower when their public debt levels rise above 80-90% of GDP. Another conclusion was that private debt tends to fall off sharply after financial crises which is also another factor slowing down growth.
U.S. total private and public debtexploded from $26 trillion in 2000 to $53 trillion in 2008 or 9.5% annually – private non-financial debt rose from $17.5 trillion to $36.4 trillion and public debt from $7.2 trillion to $ 12.3 trillion in same period – increasing to $17.8 trillion now, including government debt needed to replace funds confiscated from the Social Security Fund. Public debt has risen over $5 trillion since the end of 2008. During 2000-2008, household debt rose from 68% of GDP to over 100% by 2008. On the positive side, private debt has fallen almost $5 trillion since the end of 2008. Since the 3rd quarter of 2008, there have been 12 consecutive quarterly declines as total household debt has fallen by almost $1 trillion. (data from Ned Davis Research) But, this ongoing private debt deleveraging process, while vitally necessary, simultaneously slows GDP growth made worse by a 100% plus public debt to GDP ratio (as Reinhart/Rogoff concluded in their study that countries face limits for Debt/GDP levels above which the effects on economic growth are non-linear).
This brings up point noted earlier that I believe U.S. is afflicted with an inherently, unstable out-of-balance economic model where GDP growth must be achieved by an excessive, debt-inducing dependence on Consumption (at 70% of GDP) in combination with low savings, stagnant wages, soaring trade deficits from unfair trade, loss of manufacturing base knowhow, relatively low public and private investments, and declining rate of tax revenue growth – all together accelerating public debt, credit card debt, and consumer spending beyond our means. Resulting U.S. huge trade balance deficits have been contributing a negative 3-4 percentage points to annual GDP growth … driving the vicious cycle of high Consumption with stagnant wages, and ever higher export deficit to the next worse financial crisis. We critically need to counter gross unfair trade practices and to shift R&D and productive investment resources to a more export led growth pattern. This requires a vast improvement in the contribution of net exports to GDP growth even if this means a 1% percentage point negative impact on GDP growth rather than historical 3-4%.
TABLE 5 gives a rather shocking picture of just how far our nation has become addicted to debt to achieve GDP growth. Note particularly that starting in the early 80s, total U.S. debt relative to GDP took a gigantic jump upwards!
During the period 1949-1959, total debt of $337.6 billion was incurred to generate $268 billion of GDP – resulting in a Debt/GDP ratio of 1.36. In simple language , this means that in the decade 1949-1958 it took $1.36 of total debt to generate $1.00 of GDP. As stated, the last three decade trend of total Debt to GDP ratios showing how much debt is necessary to generate $1.00 ofGDP is truly disturbing to say the least:
TABLE 5: TRENDS IN RATIO OF DEBT TO GENERATE $1.00 GDP –1959-2009
1959 to 1969 1.53 = $1.53 Debt to generate $1.00 of GDP
1969 to 1979 1.68
1979 to 1989 2.93
1989 to 1999 3.12
1999 to 2009 6.02 (deregulation, stock, housing bubbles)
Source: Ned Davis Research Using Data from Commerce & Labor Departments
During the 1980s and beyond, the amount of U.S. total debt sharply accelerated relative to GDP as consumers were pressured to buy, buy, buy – at 70% of GDP using flaky consumer credit vehicles accompanied by stagnant wages – more goods and services than they needed. This was facilitated by convenient necessity to buy artificially cheap (often low quality) Chinese products thanks to that country’s grossly undervalued currency and “the devil’s contract” of buying our Treasury bonds to finance resulting huge national trade deficits and persistent federal budget deficits … with debt growing much faster than GDP.
Ned Davis Research confirms the correlation between an increase in total debt (public and private) as a % of GDP and the growth rate in real GDP as follows:
1947-1980: total debt was less than 160% of GDP and GDP growth averaged 3.7%
1980-2000: total debt was 270% of GDP and GDP growth went south to 3.2%
2000-2011: total debt has risen to 350% (vs. 375% in 2008) of GDP and annualized GDP growth has plummeted to less than 1.8%.
Conclusion? Our over-debted and undercapitalized financial system spells slower average growth over next few years until sensible debt to equity and deficit ratios (budget deficits past three years have been at a sky-high historical level of +-10%) are effectively implemented and enforced … precisely what the EU 27 nations have recently agreed to do with the appropriate legislative adjustments and sanctions.
Contrary to what Paul Krugman is saying about the financial failure of EU countries as a whole to date, the total debtrelative to GDP ratios of EU mature countries over last 30-40 years are not anywhere near the U.S. development shown above. Yes, there are 5 financially very troubled EU countries, but how does this compare to 48 troubled states whose budgets are in the red with many also near insolvency … where in a number of states public employees are being fired and scanty social nets are being further marginalized left and right? How does this compare to a EU credit card use and debt level far below that of the U.S.? How do household debt levels of the mature EU countries compare when taking into consideration the millions of U.S. home foreclosures vs. the relatively tiny number of foreclosures in most EU countries? How does the U.S. debt situation compare to that of the mature EU countries whose austerity measures do not also include cutting back on continued strong investments in education, R&D, innovation, infrastructure? The EU social-economic picture is not as black as reputable economists are painting with exception of the problem countries.
We need new policies to correct the structural, destabilizing imbalances in the GDP growth components at work in our economic model. We need to listen much more closely to Reinhart and Rogoff’s warning that, “The sharp run-up in public debt will likely be one of the most enduring legacies of the 2007-2009 financial crisesin U.S. and elsewhere. High debt levels of 80-90% ofGDP and above are associated with notable lower growth outcomes.Seldom do countries grow themselves out of deep debt burdens.”
In short, our excessive reliance on a mounting pyramid of public and private debt to achieve GDP growth is a formula for repeat financial crises, carrying the middle-class further down the bare survival-wage, poverty line.
Greek coins are displayed on an advertisement in Athens, where the new Greek government is in dual-track talks with private and public sector creditors.
LONDON — Even as Greece tries to convince creditors that its debt-reduction efforts are on track, gloomy new International Monetary Fund forecasts about its long-term economy are threatening to derail talks meant to secure the nation’s next big installment of bailout funds.
The concerns, stemming from an analysis that the I.M.F. has been quietly sharing with European officials and Greece’s creditors in recent weeks, come at a crucial time for Athens.
The new Greek government is in dual-track talks with private and public sector creditors, trying to make the case that its program for reducing long-term debt is working. The government seeks to persuade private creditors to provide relief by taking some losses on their bond holdings, and to persuade its public sector lenders to release a scheduled allotment of bailout money, possibly as much as 30 billion euros ($39 billion).
Without that next payout, the nation is almost certain to default when a bond repayment of 14.4 billion euros ($18.7 billion) comes due in March.
The repercussions of a default would be hard to predict. But it could create a contagion of financial fear that could spread to other weak euro zone economies and force Greece to become the first nation to leave the 17-member euro currency union, a departure whose social and political ramifications might also defy prediction.
A key to securing the next bailout payment could be Greece’s reaching a new debt-revamping agreement with its private sector bondholders. Charles H. Dallara of the Institute of International Finance, the group representing the private creditors, was to meet Thursday evening in Athens with the Greek prime minister, Lucas D. Papademos. There was no word about the status of those talks by late Thursday.
Negotiations between the two sides have foundered twice already over disagreement on how much loss private investors should be willing to absorb on bonds.
As Greece’s woes have escalated, so have its demands on the amount of loss the creditors should accept. While creditors have said they would be willing to accept a loss of 70 percent on their new bonds, Greece and its backers have been pushing for more by demanding that these securities carry an interest rate below 3.5 percent.
Greece is effectively bankrupt, staggering under a debt load that the I.M.F. now estimates as equal to about 160 percent of its gross product, with an economy so weak the government can no longer meet debt payments on its own. That is why it is to receive as much as 130 billion euros ($169 billion) in bailout money under an agreement struck last October with the so-called troika: the European Union, the European Central Bank and the I.M.F.
In return for regularly scheduled installments of that money, however, Greece is supposed to be meeting strict economic reform and budgetary targets.
Greece’s last bailout package was underpinned by an I.M.F. analysis that forecast a debt-to-G.D.P. ratio of 120 percent by the year 2020. Now the I.M.F. is forecasting a ratio that could rise to 135 percent by that year, largely because of a collapsing economy that shows no sign of reversing course.
The new projections cast new doubt on whether Greece can ever escape its downward financial spiral without defaulting on its debts.
Greece’s economy is estimated to have shrunk by more than 6 percent in 2011. Some specialists say they believe that the downturn for this year could be as much as 5 percent. And the general sense among economists from the troika of public institutions financially supporting Greece is that the economy has not yet found the floor.
“We have become much less optimistic on growth,” said one official from the group, who was not authorized to speak publicly. “And if growth falters, the debt-to-G.D.P. ratio goes up. One cannot be in denial of this reality.”
Bankers familiar with the details of the new I.M.F. forecast say it has been held up as the main reason private sector bondholders should be forced to accept a larger loss on their Greek securities. In recent days, top European officials and the managing director of the I.M.F., Christine Lagarde, have talked about how European institutions might have to contribute more funds to keep Greece afloat.
Adding to lenders’ worries is the possibility of trouble in other heavily indebted parts of the euro zone. Borrowing costs in Italy and Spain — the big economies whose debt loads have caused the most worry after Greece —have been coming down lately. But the yield for 10-year Portuguese bonds are near 14.3 percent. The high yield reflects growing concern that Portugal, another recipient of bailout funds, might default as well.
Greece’s most recent bailout agreement was based on two assumptions: that the private sector would voluntarily accept at least a 50 percent loss on its debt, and that these savings, together with other changes to be undertaken by the government, would bring Greece’s debt down to 120 percent of G.D.P. by 2020.
But the new I.M.F. forecast for Greece presents the disturbing prospect that even after years of spending cuts and tax increases, Greece will have a debt burden in 2020 that is not sufficiently lower than its current load.
The fund’s gloomier outlook has been influenced by three primary factors, bankers and officials say. One is the economic slump within the entire euro currency region that I.M.F. economists are forecasting for 2012, a problem that economists refer to as an external shock for Greece beyond its control.
But the other two elements stem from the nation’s continuing difficulty in meeting targets set for it by the European Union and the I.M.F.
The second element is Greece’s budget deficit, for which a target had been set at no more than 8 percent of G.D.P. for 2011. Economists now estimate that the actual deficit number was around 10 percent, because of weak tax collection and continued high spending within the public sector.
The third factor is the new Greek government’s continued difficulty in passing legislation that would lead to the long-term economic change its European rescuers are demanding. This week, for example, Greek legislators rejected a proposed law that would have forced the nation’s pharmacies — long seen as a symbol of the protected and uncompetitive local economy — to stay open more hours each day.
Although the Greek Parliament did pass other laws that liberalized areas of the economy, the defeat of the pharmacy bill, and continuing union opposition to government demands for lower wages, underscore how difficult it will be for Greece to return to a path of economic growth.
BERLIN — Throughout the month, countries caught in the eye of the European financial storm, including Italy, Spain and France, have repeatedly defied expectations, selling big batches of bonds to the public at interest rates significantly lower than investors demanded at the height of the euro crisis late last year.
The surprisingly successful auctions owe little to improving economic data around the region. On the contrary, many of the countries that use the euro as their currency appear to be confronting a renewed recession, and pessimism about their growth prospects remains abundant. Just last week, Standard & Poor’s stripped France of its coveted AAA rating for the first time in recent history and downgraded eight others.
Instead, most of the credit seems to go to the European Central Bank, which in late December under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments.
The central bank, based in Frankfurt, used typically understated and technical language to describe its actions, but it appears to have done what its leadership said throughout 2011 that it would not do: namely, flood the financial markets with euros in a Hail Mary attempt to make sure that the region’s sovereign debt crisis does not lead to a major financial shock.
Though on a smaller scale and in a subtler manner, it has in many ways taken a page from the United States Federal Reserve’s playbook for the 2008 financial crisis, which has been roundly criticized in Europe as a reckless bailout that risks setting off uncontrolled inflation. And, at least for now, the effort has worked. Spain’s 10-year bonds carry interest rates that hover around 5.5 percent, compared with 7 percent and higher in November, and Italy’s five-year bonds are approaching 5 percent, down from nearly 8 percent at their peak.
There have been moments before when European leaders declared the crisis contained, only to see it return with renewed fury. But the central bank’s incentives, combined with a push from the private banks’ home governments, seem to have convinced investors that this time may be different, and financial markets in Asia, Europe and the United States have responded with strong gains this year.
Fears of a bank collapse — the so-called Lehman Brothers moment, when one financial institution’s failure threatens the stability of the entire system — have subsided. And Greece appears to be closer to a deal with its creditors to pare back its debt obligations rather than a disorderly default that could plunge the financial system back into chaos.
That encouraging situation seemed highly unlikely as recently as early December, when panic over the European debt crisis was reaching a peak, just before a European Union summit meeting in Brussels. While national leaders postured and pursued their parochial interests, Mr. Draghi, told reporters at the central bank’s headquarters that he would conduct “two longer-term refinancing operations” (in plain English, emergency financing) for cash-starved banks for three years instead of one year.
The European economy was on the brink, and threatening to take the rest of the world with it, and Europe’s new top central banker did not seem to get it. “Why is it so impossible for the E.C.B. to act like the other central banks, like the Federal Reserve system or the Bank of England?” a reporter asked him. “Why do you not act more directly to help European countries by buying up the debt on a massive scale?”
Mr. Draghi said he was bound by the European treaty, which “embodies the best tradition of the Deutsche Bundesbank,” the German central bank, code for strict inflation-fighting and the furthest thing from a wholesale emergency bailout.
European stocks fell. Financial experts declared that Mr. Draghi had disappointed. The world demanded a bazooka, but he had shown up with a water pistol, or so it seemed.
Less than two weeks later, on Dec. 21, the bank announced the results of its technical maneuver: the banks had taken $630 billion as part of the program. In the weeks that followed, the banks appear to have used a sizable share of the cash to buy the European bonds so desperately in need of customers. It was as if the European Central Bank had injected lenders with steroids, then asked them to do the heavy lifting. The strategy appears to be paying off. Even in the face of recession warnings and the agency’s downgrades, the European debt market keeps improving.
Financial experts say the central bank’s intervention seems to have catalyzed a virtuous circle: As new governments come in and promise to deliver spending cuts, tax increases and balanced budgets, once gun-shy banks have an added incentive to tap new financing from the central bank and jump back into bond markets that they were running from just a few months ago.
The question now is whether the E.C.B.’s action merely delayed the inevitable reckoning for the euro zone’s weakest members or whether falling interest rates and improved growth will become entrenched, bringing the critical phase of the Continent’s debt crisis to a close.
“I think that they have mastered it to the extent that this isn’t going to get a whole lot worse,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “We do have in my opinion fairly credible signs of stabilization.”
The central bank under its previous chairman, Jean-Claude Trichet, had long resisted more aggressive action, unwilling to flood the market with money the way the Fed did in 2008 until governments committed to reining in spending and deregulating their economies. “By refusing to act decisively at an early stage, they in a sense perpetuated the crisis, creating a situation where in the end the euro-area politicians had no other choice than to do the right thing,” Mr. Kirkegaard said.
The central bank is preparing another infusion in February, and many banking experts expect it to be even bigger. The unspoken quid pro quo — that banks need to buy government debt in exchange for the central bank’s largess — seems to be working.
The strategy is not without risks, warned Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “It may please some of the purists as it looks purer, but the banks may become addicted,” Mr. Mayer said. There is a limit to how much of this debt the banks can buy, he said. “Near-term relief of government bond deals may come at the cost of making the banks’ balance sheets more toxic.”
Policy makers say they are aware that all the central bank has done is give them breathing room to set their houses in order; the bonds are due in just three years. So the summit meeting of European leaders scheduled for Jan. 30 is likely to focus on finding ways to spur growth as well as on reining in budget deficits.
“The fetishizing of austerity by European leaders, clamping down on growth so severely, may create political backlash that will not be manageable,” said Kathleen R. McNamara, director of the Mortara Center for International Studies at Georgetown University. “But I give kudos to the E.C.B. for managing what really has been a tightrope situation.”
The amounts the central bank has spent directly are much smaller than some economists and political leaders would like, but over time have grown substantial. It has spent $280 billion intervening in government debt markets since May 2010. Last week alone, it spent nearly $5 billion in bond markets.
The political deliberations and negotiations in Brussels and, increasingly, in Berlin have been as important as the central bank’s moves. They were a precondition for the bank’s actions, and continue to carry importance.
“I don’t think it’s a coincidence that this happened only after we had a change of government in Italy and Spain,” said Mr. Kirkegaard, the research fellow. “From the perspective of the E.C.B., they have fairly consistently in my opinion not done anything big in this crisis without getting a big juicy quid pro quo,” he said.
Jack Ewing contributed reporting from Frankfurt, Landon Thomas Jr. from London, and Steven Erlanger from Paris.
LONDON — Hedge funds have been known to use hardball tactics to make money. Now they have come up with a new one: suing Greece in a human rights court to make good on its bond payments.
The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.
The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.
Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation — and in Europe, property rights are human rights.
The bond restructuring is a critical element for Greece to receive its latest bailout from the international community. As part of that 130 billion euro ($165.5 billion) rescue, Greece is looking to cut its debt by 100 billion euros through 2014 by forcing its bankers to accept a 50 percent loss on new bonds that they receive in a debt exchange.
According to one senior government official involved in the negotiations, Greece will present an offer to creditors this week that includes an interest rate or coupon on new bonds received in exchange for the old bonds that is less than the 4 percent private creditors have been pushing for — and they will be forced to accept it whether they like it or not.
“This is crunch time for us. The time for niceties has expired,” said the person, who was not authorized to talk publicly. “These guys will have to accept everything.”
The surprise collapse last week of the talks in Athens raised the prospect that Greece might not receive a crucial 30 billion euro payment and might miss a make-or-break 14.5 billion euro bond payment on March 20 — throwing the country into default and jeopardizing its membership in the euro zone.
Talks between the two sides picked back up on Wednesday evening in Athens when Charles Dallara of the Institute of International Finance, who represents private sector bondholders, met with Prime Minister Lucas Papademos of Greece and his deputies.
While both sides have tried to adopt a conciliatory tone, the threat of a disorderly default and the spread of contagion to other vulnerable countries like Portugal remains pronounced.
“In my opinion, it is unlikely that this is the last restructuring we go through in Europe,” said Hans Humes, a veteran of numerous debt restructurings and the president and chief executive of Greylock Capital, the only hedge fund on the private sector steering committee, which is taking the lead in the Greek negotiations.
“The private sector has come a long way. We hope that the other parties agree that it is more constructive to reach a voluntary agreement than the alternative.”
At the root of the dispute is a growing insistence on the part of Germany and the International Monetary Fund that as Greece’s economy continues to collapse, its debt — now about 140 percent of its gross domestic product — needs to be reduced as rapidly as possible.
Those two powerful actors — which control the purse strings for current and future Greek bailouts — have pressured Greece to adopt a more aggressive tone toward its creditors. As a result, Greece has demanded that bondholders accept not only a 50 percent loss on their new bonds but also a lower interest rate on them. That is a tough pill for investors to swallow, given the already steep losses they face, and one that would be likely to increase the cumulative haircut to between 60 and 70 percent.
The lower interest rate would help Greece by reducing the punitive amounts of interest it pays on its debt, making it easier to cut its budget deficit.
To increase Greece’s leverage, the country’s negotiators have said they could attach collective action clauses to the outstanding bonds, a step that would give them the legal right to saddle all bondholders with a loss. This would particularly be aimed at the so-called free riders — speculators who have said they will not agree to a haircut and are betting that when Greece receives its aid bundle in March, their bonds will be repaid in full.
If the collective action clause is used — and Greek officials say it could become law next week — these investors, who bought their bonds at around 40 cents on the dollar, are likely to suffer a loss.
That, in turn, could prompt suits from investors claiming in the Court of Human Rights that their property rights had been violated.
“Because Greece is changing the bond contract retroactively, this can become an issue in a human rights court,” said Mathias Audit, a professor of international law at the University of Paris Ouest.
Not all funds are pursuing such a strategy. Such a case would take years and would have to run its course in Greece before being heard by human rights judges in Strasbourg, France.
But with their considerable financial resources, some funds may be willing to pursue such a route, and they point to similar cases won by hedge funds in Latin America. While the prospect of Greece paying an investor any time soon is slim, the country wants to avoid a parade of lawsuits across Europe, which would restrict its ability to raise money in international markets.
Argentina, which defaulted on its debts in 2002, still faces legal claims from investors that have made it nearly impossible for the country to tap global debt markets.
“It cannot be Angela Merkel that decides who suffers losses,” said one aggrieved investor who was considering legal action and did not want to be identified for that reason. “What Europe is forgetting is that there needs to be respect for contract rights.”
It is not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed among themselves the possibility of demanding a side payment, as they describe it, as a price Europe and Greece must pay if the two want the funds to participate in the agreement.
With the stakes so high, a compromise may well be reached. Germany and the I.M.F. may realize that if the private sector is pushed too hard, the deal will collapse and they will have to pay even more money to keep Greece afloat in the coming years.
Eager to put the issue behind them, private sector creditors may accept a larger loss and exchange their nearly worthless Greek bonds for more valuable securities that would also offer enhanced protection if Greece had to restructure in the future.
As for the holdouts, they could run up millions of dollars in legal bills chasing after Greece in European courts.
But beyond all the byzantine wrangling, a crucial question is how this would benefit Greece. Even with the deal, Greece’s debt would be no less than 120 percent of G.D.P. in 2020 — which seems to be slight progress given the austerity and pain its citizens must endure during this period.
“The real issue is not who participates in the deal,” said Jeromin Zettelmeyer, the deputy chief economist at the European Bank for Restructuring and Development and an authority on sovereign debt. “The question is whether there is enough debt relief for Greece, and there may not be, because the fiscal and growth situation in Greece is quite dire.”
Over Half the Eurozone Is Downgraded – Italy as Creditworthy as Kazakhstan? (also a few words on what private sector “involvement” will really mean with respect to Greece
The members of the European Monetary Union, as a fundamental structural solution to the Eurozone crisis, have sought to leverage their blended credit in the capital markets (via the EFSF and ultimately the ESM) to push the present lack of peripheral sovereign creditworthiness (and, by extension, the creditworthiness of the core nations’ banks) far into the future.
Today’s downgrade is a decided negative to the extent that such creditworthiness comes further into question (as it certainly has, long before today’s downgrade), or makes the financing of the liquidity necessary to straddle until overall macroeconomic improvement occurs, more in doubt or more dear. This is the principal difference between the downgrade of the U.S. (which, at any time of its choosing could monetize its own debts) and the downgrade of Europe.
The S&P downgrade puts more pressure on Germany to support EFSF and ESM, as the credit of its fellows in the EMU is diminished.
The creditworthiness of longer-term EFSF debt issuance has, from the announcement of the EFSF initiative, always been in doubt because of the perceived lack of credit support from those nations that were effectively guaranteeing their own debt. The downgrade memorializes that concern.
The credit issues leading to the downgrade derive from excessive peripheral sovereign debt and a more widespread excess of private sector debt in Europe (extending even into certain core economies) together with an unwillingness to resolve it and re-capitalize the core holders of that debt.
Creditworthiness is ultimately derived from a combination of wealth (worth) and relative competitiveness. The periphery fails on both those measures and lenders to the periphery are challenged as a result.
Nevertheless, the problem in the Eurozone ultimately rests in the unwillingness of the core, especially Germany, to monetize the problem debt and start over with greater fiscal integration (and the corresponding restrictions on sovereignty) and a better capitalized banking system. Until that changes – more of the same.
On the subject of “more of the same,” there is a reason why there is no deal between Greece and its creditors: What is on the table does not work for the other side. It is fantasy of politicians and bureaucrats in the core, whose banks have now dumped what they could of Greek indebtedness to holders who owe no duty or allegiance to core governments (which are now about to see what true private sector “involvement” really means).
Published on Tuesday, January 17, 2012 by Common Dreams
Strikes affect public transportation, other services
- Common Dreams staff
Agencies are reporting that thousands of Greeks have taken to the streets and have taken part in strikes in ongoing protests over the country's harsh austerity measures.
Greece has entered its fifth consecutive year of austerity-fuelled recession, with unemployment reaching a record high of 17.7 per cent. (photo: Getty)
The Guardianreports on the timing of the strikes:
The industrial action -- the first of 2012 -- has been timed to coincide with the return of technical teams from the European Union, the IMF and the ECB.
The Associated Pressreports huge numbers taking part in the protests:
Some 10,000 protesters took part in rallies in central Athens over potential pay cuts in the recession-battered private sector. Anti-austerity strikes in the capital disrupted public transport and other services. Journalist unions also launched a 48-hour strike.
"We demand that austerity policies are abandoned and that the legislation that crushes our labour and insurance rights and turns workers into slaves is abolished," the EKA labour union, which represents workers in Athens, said in a statement.
Al Jazeerareports that the austerity measures have coincided with high unemployment rates:
Greece has entered its fifth consecutive year of austerity-fuelled recession, with unemployment reaching a record high of 17.7 per cent.
Six lessons we should take to heart when dealing with our own economic problems
NEW YORK — Europe’s leaders must be longing for the good old days of 2008, when America’s financial lunacy nearly tipped the world into a Depression and politicians in Europe had their “I told you so” moment.
Back then, French President Nicolas Sarkozy intoned that “Laissez-faire is finished. The all-powerful market that always knows best is finished.”
“Anglo-Saxon capitalism,” as the deregulated U.S. and British variety is called on the continent, “was as simple as it was dangerous,” declared Germany’s finance minister at the time, Peer Steinbruck. “The world will never be as it was before the crisis.”
Today, it may be tempting for Americans to believe that Der Schuh is on the other Fuss. That would be delusional. For as complex and uniquely European as the current turmoil “over there” may be, the euro zone sovereign debt crisis holds important lessons that the United States ignores at its own peril.
Of course, the comparisons are not perfect. The euro zone has a structural problem that America does not face. Unlike Europe, America has a centralized federal budget that addresses regional economic imbalances — so Mississippi’s low output isn’t as relative to New York doesn’t strain the U.S. economy and the dollar the way the lopsidedness between Greece and Germany hurts the euro zone.
Here are some lessons from Europe’s crisis that are applicable to America’s current economic problems:
GROW OR DIE:
When the size of the PIIGS’ (Portugal, Ireland, Italy, Greece and Spain) debt mountains became clear, the policy response dictated by Germany — the nation with the most at stake in terms of the subsequent bailout — turned out to be disastrous. German taxpayers, understandably, find it difficult to swallow the idea that they must sacrifice for the benefit of countries less fiscally prudent than themselves — as they had in joining the euro and in reunifying with East Germany.
As a result, they have demanded punitive austerity on the Greeks, Irish, Portuguese, Italians and Spanish. This has only worsened the crisis. Austerity has slowed growth and even caused recession, particularly in Greece. As such, markets grew pessimistic that the mixture of debt and low or negative GDP growth could be sustained.
The lesson here for America is simple: When tackling enormous, long-term debt that needs to be refinanced on global markets, radical, mindless cuts in government spending will worsen the crisis. A moderate approach that keeps growth alive through short-term stimulus — while laying out a medium-term plan for curbing government obligations — is the way through the minefield.
INFLATION IS AN INFLATED RISK:
Since 2008, voices on the right in the U.S. and in Europe (primarily German voices over there) have warned that keeping interest rates near zero risks unleashing 1930s-style hyperinflation. And yet, since 2008, the Fed has held the course, and inflation remains the least of our problems.
Unfortunately, German’s historic fears of inflation have forced the European Central Bank to raise rates in 2009 as the financial crisis began, causing the euro to rise in value, and reducing the PIIGS economies’ already-low competitiveness.
The ECB compounded the mistake in July, raising rates again because of arcane pricing pressures. The new ECB chairman, Mario Draghi, reversed course as soon as he replaced Jean-Claude Trichet in November, but many believe the reversals have come too late to help the weaker European economies.
Today, facing an existential crisis, the ECB has belatedly started to do precisely what the Fed has been doing all along – cutting rates, buying the bonds the market is shunning, and doing everything it can to keep growth alive.
Unfortunately, Germany still will not allow the ECB to become the lender of last resort to the euro zone. This is keeping market volatility alive and well. Americans should be thankful that their own central bank’s charter mandates the maintaining employment along with stabilizing prices, and is not beholden to politicians to the extent that the ECB is.
BANK LOSSES CANNOT BE WISHED AWAY:
Throughout the euro zone crisis, one of the great concerns has been the fact that past practices encouraged banks — especially large German and French ones — to lend recklessly to Greece, Portugal, Ireland and other now shaky countries.
It is clear that the exposure of some banks — including such giants as Societe Generale, Commerzbank, BNP Paribas and others — could fail. This would tip not only Europe into crisis, but also threaten to pull down all these banks’ business partners in the U.S. and around the world, just like Lehman Brothers in 2008.
To stave off these risks, the EU conducted “stress-tests” of the continent’s banks, modeled on similar audits the Fed conducted in 2010. The results: flying colors! While some small banks were listed as at-risk, most of the potential disaster was papered over. In some ways, this made sense, since it gave banks time to meet new requirements that they increase their reserves. But absent the “lender of last resort” powers for the ECB described above, the risk still remains high that a default of, say, Italy, or even a continuation of the current death-by-a-thousand-cuts, could cause major bank failures.
The lesson for the U.S. is clear: while the Fed’s bank audits have been more credible, it too was inclined to “pass” many banks that have major balance sheet problems. For instance, Chris Whalen, one of the country’s leading bank analysts, believes Bank of America — which swallowed up mortgage giant Countrywide right before the crisis — now has bad debts of more than $100 billion on its books and “should declare bankruptcy.” Bank of America rejects this, and the Fed and other regulators back them up. But math is math: in a crisis, Bank of America and several others could be holding out the begging bowls again. This reality should be dealt with upfront before a crisis. Otherwise, the choice again becomes another Toxic Asset Relief Program, or Depression.
RATINGS CAN BE HAZARDOUS TO YOUR HEALTH:
Americans, who tend to shrug off things that happen to other people since we’re so exceptional, shrugged off the fact that bond markets recently turned on Germany.
Think about it: Germany — a country with a quarter the population of the U.S. that earns more from exports than we do — had trouble borrowing on international markets. The following week, international ratings agencies put Germany, as well as 15 other Euro zone countries, on notice that their credit ratings might be downgraded.
To simplify the consequences, think of it this way: no matter who wins in November 2012, American government borrowing is going to continue. None of the GoP or Democratic plans calls for a balanced budget by 2013 (indeed, none of them even get their in a decade). Furthermore, debts outstanding have to be rolled over when the bonds come due. At each point, the country is exposed to market rates for the next batch of borrowing. If the U.S. thinks continued downgrades will have no consequences, just look at Europe. Italy, the eighth largest economy in the world and the producer of world-class brands like Ferrari, Fiat (Chrysler), Dolce Gabanna and Parmalat, is paying credit card interest rates at its bond sales. (For the solution to avoiding this, reread #1).
There are other, simpler lessons as well:
DEMOCRACY MATTERS:
The European Union has repeatedly done end-runs around its voters and those voters are very, very angry. Whatever the pain, decisions need to be exposed to public opinion, explained carefully and not snuck through (the way TARP was in 2008). The governments dumped by voters across Europe since 2010 are all evidence of this folly.
CHINA PLAYS THE LONG GAME:
When given a chance recently to pick up some bargains in Europe — a car maker, perhaps a bank — in exchange for helping bail Italy out, China demurred. China knows that time is on its side, and bailing out Europe perpetuates a world where China is a second tier power. While China has a lot more at stake in America’s economic health, the long game is a Chinese specialty.
Homeless people at a New Year's meal in Athens. Poverty is visibly growing in the capital, but European officials say Greece still has not put into effect needed austerity measures.
ATHENS — As Greece and its lenders prepare for another week of tense negotiations, European officials now say that the task is less to help the country through its troubles than to avoid the sort of uncontrolled default that many experts fear could threaten the global financial system.
Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March.
Adding to the anxieties in financial markets, talks broke down Friday between the Greek government and private lenders over a plan to reduce Greece’s debt by $130 billion, a “voluntary” default that the troika has demanded before extending more aid. Those negotiations, aimed at forcing hedge funds and other private holders of Greek debt to accept large losses in order to make the country’s debt load more manageable, will resume Wednesday amid rising concerns about the consequences of failure.
The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.
Fanning those fears is a growing conviction among the Greek political establishment and the country’s lenders that the old dynamic — with Greece pretending to make structural changes and its lenders pretending to save it from default — has become untenable, people close to the talks say.
As recently as November, Greece and its lenders were optimistic that the country’s newly installed prime minister, Lucas Papademos, a well-respected financial technocrat, would stabilize Greece’s soaring debt and help nurse the country back to health.
But since then, his interim government — stocked not with technocrats but with politicians gunning for national elections as soon as March — has been paralyzed. Although it passed the 2012 national budget, it has failed to put into effect most of the unpopular changes mandated by the loan agreement that the previous government made back in 2010, when the country first admitted it was broke.
“The prime minister is a fine personality — he’s educated, he’s honest, he’s the best you can get around. But no one is helping him,” said George Kirtsos, the owner of a weekly newspaper, The Athens City Press. “Those that take the decisions at a national level believe that Greece will not make it.”
There is considerable posturing in these sorts of negotiations, and the troika has threatened to withdraw aid in the past, only to approve the next loan installment. It may do so again despite its misgivings, because the alternative of an uncontrolled default is too risky. But it will do so only if negotiations with private bondholders can be completed successfully.
But, amid a stream of gloomy news from Europe, including the downgrade of the debt of France and eight other countries, the sense that default is inevitable is growing. “When you simply go over the bare figures I can’t really imagine another scenario,” said Michael Fuchs, a leading member of Chancellor Angela Merkel’s Christian Democratic Union in the German Parliament.
“Mathematics is mathematics, and one plus one has to equal two and not five,” he said, describing how, even with a significant restructuring of its debt, the Greek government’s deficit would still be too large and its economy not competitive enough to put the country back on a sound footing.
That sense can be self-reinforcing as well, making it even harder for Mr. Papademos to push through the changes Greece needs to survive the current crisis.
Greece’s dire economic condition can hardly be overstated. After two years of tax increases and wage cuts, Greek civil servants have seen their income shrink by 40 percent since 2010, and private-sector workers have suffered as well. More than $75 billion has left the country as people move their savings abroad. Some 68,000 businesses closed in 2010, and another 53,000 — out of 300,000 still active — are said to be close to bankruptcy, according to a report issued in the fall by the Greek Co-Federation of Chambers of Commerce.
“It’s an implosion — it’s an endless sequence of implosions from bad to worse, to worse, to worse,” said Yanis Varoufakis, an economics professor at the University of Athens and commentator on the Greek economy. “There’s nothing to stop the Greek economy losing 60 percent of its G.D.P., given the path it is at.”
Still, more than 70 percent of Greeks say they want to stay in the euro zone — and they continue to believe that Mr. Papademos is the right man for a tough job. Yet the prime minister faces stiff, if stealthy, resistance from politicians who calculate that it makes no sense to risk their careers backing radical changes in the Greek economy that may ultimately fail to solve the problems.
There is ample evidence of Greece’s political dysfunction. About a year ago, after missing earlier fiscal targets, Greece promised to sell off $65 billion in state assets as a condition for receiving emergency loans. So far, though, it has sold only about $2 billion worth, because of domestic opposition and a reluctance to part with assets at what the government says are fire-sale prices.
The country also pledged to lay off public-sector workers, overhaul tax collection, and make its economy more competitive. But it has fallen short in those areas as well. A law passed in the fall called for cutting 30,000 public jobs by shifting workers into a labor reserve at much lower pay, but only 1,000 workers have been so assigned.
Adding to the sense of déjà vu, last week, the Greek Parliament began debating a bill that would streamline some state entities and open the professional associations governing lawyers and truck drivers, among others — measures it passed in 2010 but never put into effect.
Greece’s political troubles contrast with the performance in Italy, where another financial technocrat, Prime Minister Mario Monti has succeeded in pushing through an ambitious austerity package. Crucially, Mr. Monti was able to appoint his own cabinet, all nonpoliticians, with new elections not due until 2013, while Mr. Papademos’s government is composed of members of three Greek political parties and a new election is expected in March or April.
The center-right New Democracy Party, which ruled from 2004 to 2009, is expected to win that election, riding a wave of antiausterity sentiment and discontent with the Socialists, who left power in November to make way for Mr. Papademos.
The politicians are not making things easy for the prime minister. “Papademos wants to accelerate, and New Democracy applies the brakes,” Mr. Kirtsos said. Meanwhile, the third of the three parties, the rightwing Popular Orthodox Rally, has said it will stop backing Mr. Papademos if the three parties cannot agree on economic policy.
“If no common line can be established, my party will withdraw,” George Karatzaferis, the president of the party, said last week. “I want this to happen before the troika arrives again.”
As the possibility of default looms larger, many Greeks are worried about what it would mean. “Despite the hardships that, granted, are devastating, I don’t think we’ve reached the point where we can say: ‘Forget it, let’s default,’ ” said Nikiforos Stavrakakis, a restaurant owner in Athens. “For one simple reason: I don’t know what it would mean, and how much worse it would be.”
Nicholas Kulish contributed reporting from Berlin, and Dimitris Bounias from Athens.
Complexity, misunderstandings, frustration abound over ECB (European Central Bank), NCBs (National Central Banks) and EU policy approaches to debt and deficit crisis. Without getting too technical, this paper will address questions on how the EU banking system works.
Multiple factors must be taken into account when it comes to ECB, NCB and government handling of HIGH sovereign debt problems for Ireland, Greece, Portugal, Italy and HIGH privatebank debt situations run amok in Ireland and Spain. In latter countries, booms were financed with unsustainable capital inflows – caused by profligate real estate bank loans and bank debt guaranteed by the Irish government, exploding its sovereign debt as well. Weak country local banks were funded by European banks with German and French banks having heavy exposure to Greek, Spanish, Portuguese and Irish bonds. Then there is the HIGH ±$1.5trillion euro zone debt governments must repay in 2012 – in the first-half of 2012, $695 billion of debt matures for Italy, Germany and France alone! This has all led to an interlocked web ofsovereign debt and banking crises, expandingrisk exposure for banks and taxpayers across Europe.
Any workable solution requires a step-by-step, well-coordinated, multi-faceted action plan. This does NOT necessarily mean the ECB should ipso facto aggressively expand its balance sheet debt by large-scale purchases of euro zone government bonds. The EU Treaty of Maastricht and Statute of the Eurosystem of Central Banks (ESCB) prohibits the ECB to balance its single monetary objective of pricestability against other aims such as growth stimulus, job creation or currency speculation. In contrast, the Federal Reserve's objectives are far more broadly defined taking into account output, growth stimulus and employment, in addition to inflation targets. The ECB and NCBs are prohibited from lending money to the public sector. [ed. note: Why? Could it be that they are influenced and/or controlled by private bankers who don't want to give up their vigorish?]
This shields central banks from pressure by governments to grant monetary financing using ECB and NCB bank money. [ed. note: Yes, but it doesn't shield governments from pressure by Goldman Sachs to take on more debt.] This prohibition covers the buying of sovereign debt – but not bank debt – on the primary market. Prohibited also are "backdoor" ECB funded bailouts as Congress and Federal Reserve did during the financial crisis and recession of 2008-09. Important, however, are the €750 billion of euro zone loan guarantees (€440 billion) and an IMF loan (€250 billion) for the European Financial Stability Fund (EFSF) to help bail out weak, debt-stressed countries under strict rescue conditions. Germany alone has contributed almost 50% of the total euro zone loan guarantees. The ECB has circumvented the treaty rule on buying public debt by buying billions of weak country bad debt on the secondary market [ed. note: Yes, but the primary market still yields the vigorish to private bankers.], justified as part of its responsibility to stabilize monetary prices. Also, the ECB greatly eased the credit-squeeze of EU banks not lending to each other by a €489 billion ($639 billion) liquidity injection of cheap 1% interest, 3-year collateralized loans to 523 euro zone banks. Some see this as a "backdoor" way of supporting the government bonds of weak countries since much of this liquidity injection was placed in sovereign bonds [ed. note: at much higher interest rates yielding fantastic profits for the banks!]. However, the ECB will not lend to the IMF so it can manage the stabilization job from Washington. But, this is a possibility for the NCBs. For now, ECB and Merkel rule out selling Eurobonds guaranteed by euro zone members. Germany’s anti-Keynesian approach of fiscal discipline, pricestability, and quasi-automatic rules governing future such crises has won out.
QUESTION 1: Who Are The Owners of The ECB and NCBs?
Owners and shareholders of the ECB are the ESCB (central banks) of the EU 27 Member States comprising 17 euro area and 10 non-euro area NCBs. Each country’s NCB is owned by that country’s government, thus making the taxpayers of each Member State indirectly the ultimate owners. Neither the ECB or NCBs nor any member of their decision-making bodies can ask for or accept instructions from any other body. [ed.note: Good, no lobbying!] EU institutions and governments must accept this principle and abstain from giving instructions or influencing the ECB and NCBs in the exercise of their exclusive functions and competence centered around monetary policy.
Since the financial crisis began in 2008, the ECB and NCBs have not joined the Federal Reserve and US Congressional bandwagon of printing and plowing back trillions of dollars to come out of the debt crisis …and they did this while unknown trillions of high-risk bank/hedge fund default swap contracts flooded markets, including insuring euro zone member bank loans as well. Is it any wonder some U.S economists have been urging the ECB to jump into the quantitative easing, money creation game. Since 2008, the scale of U.S. money creation and bank/hedge fund gambling in derivatives has been mind-boggling. Ellen Brown, research author of “Web of Debt,”found that government bailout funds for the financial institution culprits who caused the financial crisis started with $700 billion in Sept. 2008; rose to $800billion in Oct. 2008; exploded to $8.5 trillion in Nov. 2008 including all guarantees, commitments, and loans, and leaped exponentially to a potential $24 trillion in July 2011! In Brown’s words, “This mountain of U.S. debt risk exposure is TWICE the Federal Debt and TWICE GDP! BUT, concerning Q1/Q2 quantitative easing actions, one can legitimately ask where would the U.S. be today in terms of a DEFLATION MENACE with global scale implications if the Federal Reserve had not aggressively increased the money supply by quantitative easing while federal and state authorities have been slashing government budgets? (ed. note: there doesn't seem to be any inflation as a result of all the quantitative easing in the US as a result, so what is the downside? It may be that the huge quantity of dollars owned by foreign governments and individuals will eventually be used to by up large amounts of real assets in the US. In fact that is already happening.) Still, Germany has never been in love with the Anglo-Saxon model of short-term finance capitalism versus its model of robust export growth, strict budget discipline, innovative manufacturing, and long-term investment in the real economy. In my opinion, I don’t believe Europe will, nor should, walk down a pyramid money creation lane as the magical answer for stabilizing and resolving serious short/long-term deficit and debt problems in the weak euro zone countries. [ed. note: This is important as the US Fed's expansion of the money supply was an expansion of the money supply in the financial economy and not in the real economy. I speculate that this is why it was non-inflationary as well as contributing to increased casino speculative gambling which will possibly some day lead to another major financial crisis.)
In a pattern that has been repeated all over the world, most notably in Chile, Argentina and Bolivia, a country gets itself into huge debt and then comes to the IMF (International Monetary Fund) for a bailout. The IMF is nothing more than an arm of right wing ideologues of the Chicago School whose prescriptions and demands for the possibility of help turn out to be the ususal right wing nostrums: privatization, free trade and AUSTERITY. Naomi Klein nailed the IMF in her book Shock Doctrine:
Like the UN, the World Bank and the IMF were created in direct response to the horror of the Second World War. With the goal of never again repeating the mistakes that had allowed fascism to rise in the heart of Europe, the world powers came together in 1944 in Bretton Woods, New Hampshire, to create a new economic architecture. ... The World Bank would make long-term investments in development to pull countries out of poverty, while the IMF would act as a kind of a global shock absorber, promoting economic policies that reduced financial speculation and market volatility. When a country looked as though it was falling into crisis, the IMF would leap in with stabilizing grants and loans, thereby preventing crises before they occurred. The two institutions, located across the street from each other in Washington, would coordinate their responses.
Although the IMF originally was supposed to promote "economic policies that reduced financial speculation and market volatility," that hasn't turned out to be the case. In fact just the opposite has occurred. Klein continues:
John Maynard Keynes, who headed the UK delegation, was convinced that the world had finally recognized the political perils of leaving the market to regulate itself. "Few believed it possible," Keynes said at the conference's end. But if the institutions stayed true to their founding principles, "the brotherhoof of man will have become more than a phrase".
The IMF and the World Bank did not live up to that universal vision; from the start they allocated power not on the basis of "one country, one vote," like the UN General Assembly, but rather on the size of each country's economy - an arrangement that gives the United States an effective veto over all major decisions, with Europe and Japan controlling most of the rest. This meant, when Reagan and Thatcher came to power in the eighties, their highly ideological administrations were essentially able to harness the two institutions for their own ends, rapidly increasing their power and turning them into primary vehicles for the advancement of the corporatist crusade.
The colonization of the World Bank and the IMF by the Chicago School [a school founded by right wing economist Milton Friedman that advocated laissez-faire capitalist economic principles] was a largely unspoken process, but it became official in 1989 when John Williamson unveiled what he called the "Washington consensus." It was a list of economic policies that he said both institutions now considered the bare minimum for economic health - "the common core of wisdom embraced by all serious economists." These policies, masquerading as technical and uncontentious, included such bald ideological claims as all "state enterprises should be privatized" and "barriers impeding the entry of foreign firms should be abolished." When the list was complete, it made up nothing less than Friedman's neoliberal triumvirate of privatization, deregulation/free trade and drastic cuts to government spending [i.e. austerity!]. Joseph Stiglitz, former chief economist of the World Bank and one of the last holdouts against the new orthodoxy, wrote that Keynes "would be rolling over in his grave were he to see what has happened to his child."
So what is happening in Hungary today and througout the EU is nothing more nor less than that the IMF is demanding structural change according to its radical right wing ideology in return for an economic bailout. American rating agencies such as Fitch have downgraded Hungary's credit rating to junk status making it difficult for Hungary to borrow in the bond market to refinance its debt - the same old story as in Greece, Italy, Spain etc. etc. If Hungary then wants the IMF to help, it must accede to IMF demands which is to say it must give up some of its autonomy as a country.
Fitch kept a negative outlook on Hungary, indicating a more than 50 percent chance for another downgrade on the Central European nation of 10 million people within the next two years. The move followed similar action from Moody’s and Standards & Poor’s [also American agencies!].
Hungary’s shaky finances have been battered this entire week. Its currency, the forint, fell to all-time lows during two consecutive days and the government suffered through a rough bond auction Thursday in which the interest rates it had to pay to borrow jumped more than 2 percentage points in just a few weeks.
So let's be clear about the dynamic of what's going on here. An American rating agency downgrades Hungary's credit rating which causes the Hungarian currency to drop in value and causes investors, which are mainly large international banking institutions, to demand a higher interest rate just to roll over existing debt, not to borrow more money. It is widely known that speculators are involved in driving down the value of a nation's currency, and investors (who may be one and the same as speculators) control the interest rate that a country must pay. And now for the denouement, enter the IMF, helpfully offering to bail Hungary out in return for Hungary giving up its autonomy to the IMF and imposing austerity on its countrymen and women. And this all because Hungary is in debt to private banking institutions not to the publicly owned European Central Bank (ECB).
Fitch Ratings’ decision to cut Hungary’s credit rating one notch, to BB+ from BBB-, was triggered partly “by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF-EU deal,” said Matteo Napolitano, Director in Fitch’s Sovereign Group.
In other words you (Hungary) will do what bond market investors, the IMF and EU demand ... or else. This begs the question, why does the EU put its member countries in the position of being at the whims of international investors, i.e. the bond market, namely big banks such as Goldman Sachs and Deutsche Bank? Why doesn't the ECB (European Central Bank) bail out Hungary itself at least to the extent of stabilizing the interest paid on its preexisting bonds? The average Hungarian worker is not reponsible for this predicament. Why should he or she be expected to pay for it? It's the rising interest rates brought on by the rating agency's downgrades that are causing the financial crisis in the first place. Yet the price to be paid is the same old right wing price of demanding austerity and letting the IMF order them around. The EU seems to be complicit in this whole process.
Since sweeping to power in 2010, [Hungarian] Prime Minister Viktor Orban’s Fidesz party has tightened its grip on the media and the top constitutional court, taken over private pension funds and slapped Europe’s biggest tax on banks — prompting a series of international protests and unnerving markets.
The plot thickens! Orban had the temerity to socialize the pension funds. That's a no-no as far as the IMF is concerned. The IMF demands privatization of public assets, not socialization of private assets. And Orban slapped a big tax on banks - another no-no. The IMF wants the people to pay the price of Hungarian economic woes - austerity - not the banks. The Occupy movement's slogan, "The banks got bailed out, we got sold out," turns out to be true! This is just another mechanism to foist debt on the people and liberate the banks from taxes and regulation, just what Milton Friedman and the Chicago School wanted!
What is happening in Europe now is nothing new. The US backed IMF and World Bank has been carrying on the same road show for decades - first in Pinochet's Chile, later in Argentina and Bolivia. The neoliberal agenda was also prescribed for Iraq. Regarding Iraq Paul Krugman wrote:
... Bush appointees were obsessed with imposing a conservative ideological vision. Indeed, with looters still prowling the streets of Baghdad, L. Paul Bremer, the American viceroy, told a Washington Post reporter that one of his top priorities was to “corporatize and privatize state-owned enterprises” — Mr. Bremer’s words, not the reporter’s — and to “wean people from the idea the state supports everything."
Just another example of Naomi Klein's Shock Doctrine. Now Hungary is undergoing the Shock Doctrine and the IMF in collaboration with the EU is following in the tradition of Reagan and Thatcher and demanding higher tribute in taxes (on the poor, not on the banks!) and elimination of government jobs and programs in return for a handout. Oh, excuse me, a bailout. Please, Mr. IMF, could you spare a forint? And where is the ECB? MIA!
BUDAPEST, Hungary — Fitch downgraded Hungary’s credit rating to junk status on Friday, citing a standoff between the government and international lenders like the IMF and the European Union over possible rescue loans.
Fitch kept a negative outlook on Hungary, indicating a more than a 50 percent chance for another downgrade on the Central European nation of 10 million people within the next two years. The move followed similar action from Moody’s and Standards & Poor’s.
Hungary’s shaky finances have been battered this entire week. Its currency, the forint, fell to all-time lows during two consecutive days and the government suffered through a rough bond auction Thursday in which the interest rates it had to paid to borrow jumped more than 2 percentage points in just a few weeks.
Investors are deeply unsure about the government’s economic policies and whether it can agree upon a rescue loan with the International Monetary Fund.
Fitch Ratings’ decision to cut Hungary’s credit rating one notch, to BB+ from BBB-, was triggered partly “by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF-EU deal,” said Matteo Napolitano, Director in Fitch’s Sovereign Group.
Hungary late last year requested financial aid from the EU and the IMF. But the two institutions broke off preliminary negotiations in December amid concerns over new laws that hurt the independence of Hungary’s central bank.
“Even if a (loan) agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability,” Fitch said.
Government spokesman Andras Giro-Szasz said the downgrade was “surprising” considering statements from Prime Minister Viktor Orban and Tamas Fellegi, Hungary’s chief financial negotiator, confirming the country’s intention to soon reach an agreement with international creditors and affirming its support for the independence of the central bank.
Earlier Friday, Orban met with National Bank of Hungary President Andras Simor and the government’s top economic officials. Orban dismissed market speculation that his conservative government was planning to raid central bank reserves to prop up the state budget and said it would do everything it can to support the central bank’s efforts to stabilize the economy.
On Friday, the forint strengthened to around 215 per euro after falling as low as 224 per euro on Thursday.
Despite government pledges, investors are wary of government policies that boost budget revenues without unpopular austerity measures — such as windfall taxes on banks, telecommunications firms and others. They are also unnerved by Hungary’s new constitution and new laws that have centralized political power and eroded democratic checks and balances.
Hungary has also been deeply affected by the eurozone’s debt crisis — nearly 80 percent of its exports go to EU countries. Its domestic consumption has been weakened by high levels of household debt, including many mortgages held in soaring Swiss francs.
Many experts see the country falling back into a recession this year, though not as deeply as the 6.7 percent contraction in 2009.
Hungary was given a bailout of €20 billion ($26 billion) in 2008 after the collapse of U.S. investment bank Lehman Brothers. Yet Orban, whose Fidesz party gained a two-thirds majority in parliament in April 2010 elections, chose to end the deal so IMF would not oversee Hungary’s economic policy.
Protesters hold a banner which reads "no to the austerity policy, raise the salaries" during a demonstration to protest against austerity measures in Paris, Tuesday, Dec. 13, 2011. (AP Photo/Michel Euler) "Europe’s leaders are bracing their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.
"French President Nicolas Sarkozy will meet Jan. 9 with German Chancellor Angela Merkel to discuss a new fiscal treaty intended to impose stringent budget requirements on European Union nations.
"Saying that Europe was facing its 'harshest test in decades,' Chancellor Angela Merkel of Germany warned on New Year’s Eve that 'next year will no doubt be more difficult than 2011' — a marked change in tone from a year ago, when she praised Germans for 'mastering the crisis as no other nation.'
[...]
"The Continent’s economic outlook will take center stage on Jan. 9, when Mrs. Merkel and President Nicolas Sarkozy of France will discuss a new fiscal treaty intended to impose stringent budget requirements on European Union nations. Then on Jan. 30, European Union leaders will gather in Brussels to discuss ways to spur growth."
"The problems are manifold. First, several deadlines for rolling over sovereign debt hit in the first quarter of the year, so bond prices will have a chance to fluctuate. Spain and Italy hold major borrowing auctions on January 12-13, for example, and France has one this week. Second, the signs of recession are apparent. Manufacturing in the Eurozone fell for a fifth straight month in December. Austerity measures that will cut against economic recovery are sure to be continued, and much of the rhetoric about a 'tough 2012' employed by European leaders will be used to justify the austerity. Even regional cutbacks should have a dampening effect on growth in some countries, like Spain.
"This is total folly, a recipe for higher deficits and more borrowing as the peripheral economies crumble. Ultimately it’s this miserable economic performance rather than some lack of will that will undo the Eurozone."
LONDON - Almost $6.3tn was erased from global stock markets this year as the eurozone financial crisis reverberated across the world in the latter half of 2011, calling into question the future of the world’s largest currency bloc.
Global stock market capitalisation dropped 12.1 per cent to $45.7tn according to Bloomberg data, while the euro ended the year as the worst performing major currency after finally starting to succumb to the continent’s financial and economic woes in December.
The euro had proved resilient for much of the year – burning hedge funds that bet on a steeper decline – but on Friday touched a 10-year low against the Japanese yen, and is near lows against the dollar last touched a year ago.
“Investors were more optimistic at the start of the year, but as the year progressed they were forced to come to grips with the debt levels in the western world,” said Navtej Nandra, the international head of Morgan Stanley’s asset management arm.
The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 per cent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 per cent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.
Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 per cent this year, Hong Kong’s Hang Seng index 20 per cent and the Shanghai Composite 22 per cent.
Assets considered to be relative havens amid the turmoil have fared better. UK government yields hit a record low on Friday and gilts were the best performing major government bonds in 2011 – notching up 17 per cent returns, compared with US Treasuries’ 9.8 per cent returns and 10 per cent for German Bunds.
Despite efforts by policymakers to shore up the eurozone, analysts and bankers expect next year to start on a glum note, as Europe continues to grapple with its debt crisis.
One of the biggest immediate tests will be the hundreds of billions of euros worth of government and bank debt that comes due in the first three months of the year.
Countries on Europe’s periphery, on the other hand, face funding costs that remain at near record highs, despite a series of summits that have unveiled various measures to restore investor confidence in the eurozone.
There is more than €457bn of eurozone government debt due to be repaid in the first quarter of 2012, according to calculations by Citigroup. Italy has to repay almost €113bn in the first three months of next year – at a time when its funding costs remain elevated.
“Markets would love to think that this will be solved swiftly, but dealing with all these problems will take time,” said Philip Poole of HSBC Asset Management. “Bond yields will remain high until it’s clear how deep the eurozone recession will be and austerity packages are more fully implemented.”
The European Central Bank lent €489bn to more than 500 banks earlier this month to ease concerns over bank funding, but has so far fought pressures to more actively buy eurozone government bonds directly.
While the US economy is showing signs of recovery and most emerging market countries are still growing at a healthy clip, some investors fear that China’s economy could be facing a “hard landing” next year, posing yet another danger to the fragile global economy.
PARIS — Moody’s Investors Service has cut Hungary’s credit rating to below investment grade, or junk, just a week after the country said it would seek aid from the International Monetary Fund to help it maintain an investment grade.
Moody’s said late Thursday that it was cutting Hungary to a speculative rating of Ba1 from Baa3, its lowest investment grade, and was maintaining a negative outlook on the debt. The agency cited its doubts about whether the government of Prime Minister Viktor Orban would be able “to meet its targets on fiscal consolidation and public-sector debt reduction over the medium term, in view of higher funding costs and the low-growth environment.”
The benchmark Budapest stock index fell 3 percent, while the currency, the forint, and Hungarian bond prices sagged.
While Hungarian bonds had been trading at levels suggesting investors already treated the debt as junk, Mr. Orban had said Nov. 18 that Hungary would seek “an insurance-type agreement” from the I.M.F. in a last-ditch effort to keep its investment grade.
The Economy Ministry, in a statement cited by Reuters, called the ratings agency’s move the latest in a string of “financial attacks against Hungary.”
The Hungarian downgrade was just one of several to European Union countries. On Friday, Standard & Poor’s cut its rating for Belgium to AA from AA+, still investment grade, but said the outlook was negative. And Fitch Ratings on Thursday cut its rating on Portugal to junk, citing similar concerns about the trajectory of government finances.
The biggest ratings question hanging over Europe now is whether France, which holds a coveted triple-A rating from all the major agencies, will be able to hang on to its status. A downgrade of France would have painful repercussions for the European bailout fund and for the euro.
Hungary’s public debt is uncomfortably high for an emerging-market country, equivalent to about 81 percent of its gross domestic product, a figure the government hopes to reduce to 50 percent by 2018. The budget deficit is relatively benign, and Mr. Orban has made keeping it under control a hallmark of his leadership, targeting a level of 2.5 percent of G.D.P. next year.
Moody’s warned that the outlook for the economy and government finances was being increasingly clouded by slowing growth, higher interest rates stemming from the euro crisis and the weakening of key export markets. Those risks are magnified by the fact that two-thirds of government debt is denominated in foreign currencies.
Hungary got a €20 billion, or $26.5 billion, bailout from the I.M.F. and European Union in 2008; it exited the fund’s stewardship last year.
Mr. Orban has enacted tough measures, widely described as “unconventional,” to keep the economy afloat. He has nationalized pension funds, imposed new taxes on services and decreed that Hungarians, many of whom borrowed in other currencies to finance their homes during the credit boom, can pay off their foreign-currency-denominated mortgages at artificially favorable rates — at the expense of mortgage lenders.
But those measures, many of which are one-time events, have run afoul of the I.M.F. and European Union, and some of them will probably have to be dismantled as the price of any new deal.
Tathagata Ghose, an economist with Commerzbank, wrote in a research note that the credit downgrade was not unexpected, as the Economy Ministry had itself suggested the action was imminent. “The negative connotation in terms of dwindling foreign capital participation is obvious,” Mr. Ghose said. “But, there could also be a positive outcome: We think that a much needed reversal to the present policy framework may finally be in prospect.”
FRANKFURT — To some people, the European Central Bank seems like a fire department that is letting the house burn down to teach the children not to play with matches.
The E.C.B. has a fire hose — its ability to print money. But the bank is refusing to train it on the euro zone’s debt crisis.
The flames climbed higher Friday after the Italian Treasury had to pay an interest rate of 6.5 percent on a new issue of six-month bills — more than three percentage points higher than a similar debt auction on Oct. 26. It was the highest interest rate Italy has had to pay to sell such debt since August 1997, according to Bloomberg News.
But there is no sign the E.C.B. plans a major response, like buying large quantities of the country’s bonds to bring down its borrowing costs. The E.C.B. “is not the fiscal lender of last resort to sovereigns,” José Manuel González-Páramo, a member of the executive board of the bank, told an audience at Oxford University on Thursday, a view that has been repeated by members of the bank’s governing council in recent weeks.
To many commentators, the E.C.B.’s attitude seems so incomprehensible that they assume the central bank is just putting pressure on politicians to make sure they keep their promises. Rather than let the euro break apart, the thinking goes, the bank will eventually relent and drench the economy with cash as the United States Federal Reserve and Bank of England have done.
But another possibility is that when the E.C.B. says “no,” it in fact means “no.”
“I think markets are going up a blind alley thinking there’s going to be a common euro bond or thinking that the E.C.B. is going to act as a lender of last resort,” Norman Lamont, the former British finance minister, told Bloomberg on Friday. “I think Germany would rather leave the euro than see the E.C.B.’s integrity affected.”
Instead, the E.C.B. insists, euro area governments must amend their errant ways. “Governments need to ensure, under any circumstances, the achievement of announced fiscal targets and deliver the envisaged institutional and structural reform programs,” Mr. González-Páramo said in London on Friday.
E.C.B. policy makers have been consistent in arguing that huge purchases of government bonds would violate the bank’s mandate and not solve the crisis.
Mr. González-Páramo even accused investors of cynical self-interest when they pleaded for a European version of quantitative easing, the use of large purchases of securities to encourage economic growth.
“Market participants that call for the E.C.B. to play this role may care only about the nominal value of their assets and the need to avoid losses,” he said in Oxford.
To outsiders, it may seem that the E.C.B., based in Frankfurt and steeped in the conservative culture of the Bundesbank, would rather let the euro go up in smoke than compromise its principles. But policy makers do not see the choice in those terms.
To them, the best way to address the crisis is to stick to principles, the most important of which is preserving price stability. That is set out in the first sentence of the statute that defines the E.C.B.’s tasks. “The primary objective” of the European system of central banks “shall be to maintain price stability,” the statute reads.
E.C.B. policy makers also believe that their charter forbids them from using bank resources to finance governments. If they expanded the money supply to provide debt relief to Italy, policy makers believe, they would be breaking the law. They would also effectively be transferring the debt burden from countries like Greece and Italy to countries like Germany or the Netherlands.
The E.C.B. has been buying Italian government bonds and debt from other troubled countries, but in relatively modest amounts and always on the ground that intervention was needed to maintain control over interest rates and prices.
Mr. González-Páramo argued this week that the restriction on E.C.B. action, far from a handicap, was a good thing. It helps policy makers resist the temptation to print money rather than make painful changes.
“The monetary financing prohibition, in this way, is a spur towards better policies and better governance — in other words, a closer economic union,” Mr. González-Páramo said in the Oxford speech, which encapsulated arguments made by other top E.C.B. officials.
But there might be a situation in which the E.C.B. would intervene significantly in bond markets. If there were credible signs that inflation was coming to a standstill and that deflation threatened, the bank would have a strong justification for pumping up the money supply.
“Things would be very different if the E.C.B. started to think there is a risk of deflation,” said Eric Chaney, chief economist of the insurer AXA Group. “In that case, there would be a good reason to buy bonds, to lower interest rates. Then it would be done for price stability objectives, not for saving Country X or Y.”
Inflation in the euro area is 3 percent on an annual basis, still above the E.C.B. target of about 2 percent, though the central bank has forecast that price pressures will ease as the economy slows.
The E.C.B., though formally immune from political influence, would in practice need the approval of European governments, especially Germany, to intervene. Any move would have to be tied to new treaty provisions to enforce greater spending discipline on governments in the future, said Daniel Gros, director of the Center for European Policy Studies in Brussels.
For now, opponents of greater bond buying on the E.C.B. governing council appear to hold sway. Jens Weidmann, president of the German Bundesbank and an influential council member, has been particularly vocal.
If there are members of the 23-member council who favor some form of quantitative easing, they have been quiet about it. But Mr. Gros said support could grow as borrowing costs soar in more countries.
Despite acute tensions on markets, policy makers argue that the crisis is not as acute as it seems, and they refuse to be rushed into making decisions they might later regret.
If the E.C.B. miscalculates, though, the result could be breakup of the euro area. Mr. Gros said it was reassuring that Mario Draghi, president of the E.C.B. since the beginning of the month, seemed to have an impressive grasp of market dynamics.
“He has a lot of experience in the markets,” Mr. Gros said of Mr. Draghi, an economist who worked briefly at Goldman Sachs before becoming governor of the Bank of Italy and then E.C.B. president.
“I presume Draghi has all the market information in real time at his disposal,” Mr. Gros said. “What can we do but trust him?”
I've been thinking a lot about these issues but so far have not found the time to put my thoughts down. I think Europe has followed the US with the neoliberal (here called neocon) model involving privatization, austerity and kowtowing to the bond market and the large banks. I noticed today on the European news some kvetching about the fact that the US rating agencies are downgrading some European countries including Belgium and the fact that there aren't any European rating agencies.
The ECB is following the model of the US Federal Reserve which isn't allowed to loan money directly to the US government - only to the big banks. Similarly, the ECB isn't allowed to loan money directly to European countries. These laws or rules totally favor the private banking system at the expense of the taxpayers of the respective countries.
Once the banks get the countries in debt as they did in South America, then the IMF and the World Bank want them to institute austerity and privatization programs.
I thought the article I reprinted on the blog today was a good one about how the European philosophy has changed from Keynsian right after WW 2 to now neo-liberal, basically the same philosophy that's being implemented in the US - shutting down public institutions, austerity for the middle class and privatization to get money to pay debts on all levels - municipal, state and national.
Best,
John
John,
All the talk in so many circles that Europe is going down the neo-liberal route of the United States started at least 18 months ago and has been picking up steam lately in some provocative writings. For quite some time now, I too have been confronted with this fear by some Dutch people I have met in my lecturing and training sessions every week. Such talk has hit a crescendo lately because of the "tough love" i.e., austerity treatment that's being given to the financially bad performing countries.
As I''ve said to you before, without pretensions of perfect wisdom, I believe this fear is entirely overstated. WHY? Because the coalition governance systems prevalent in all EU countries will not allow such a neo-liberal transformation. Just yesterday, for example, the Dutch public voted the Socialist Party leader, Emile Roemer, as the most outstanding politician in 2010. Denmark's conservative ruling party coalition is expected to lose in next year's elections. So, as Steven Hill correctly noted and I have witnessed for over 35 years now, Europeans have the multi-party political, counter-balancing flexibility and institutions in place to adjust to new market/financial realities. And, they make adjustments when necessary, like in significant financial stress cycle we are in now -- a more severe recession followed by a financial crisis. BUT adjustments are not undertaken with the direct intention of impoverishing the middle class as is the goal of the ultra-extreme conservatism prevalent in the U.S. What's happening in Spain, Greece, Italy, Ireland, Portugal appears conservative, ruthless and mean only because these countries have sunk so badly deficit and debt- wise.
This has many causal factors ... some national, some EU related. EU authorities simply have never enforced the 3% of GDP deficit rule thereby allowing poorly managed countries to build up wild debts, low tax collection, corrupt budgeting and reporting processes, unsustainble retirement terms and pension plans. In addition, national rulers and financial authorities in the weak countries grew accustomed to living, spending, and speculatively investing beyond their countries' means resulting in a flood of evolving debt at both public and private levels.
Now the rest of the EU 17 countries --who generally followed financially responsible rules --must save the irresponsible countries and thus the euro. The well-run countries have already provided up to €100 billion euros so Greece and Ireland can pay their daily bills. BUT, the well-managed countries are correct, in my humble opinion, to insist on disciplined reforms and budget austerity for all High Debt and High Deficit members to master control of the very deeply infiltrated causes of their financial breakdown. Otherwise, the money that is currently being sent to Greece and the others and more that will be sent will simply be money down the drain for Dutch, French, German taxpayers, etc. If financial discipline doesn't take root, the financial breakdowns will repeat themselves, and that could well bankrupt all EU countries. So, the near term approach to the financial crisis is "tough love" as the Frances, Germanies, Hollands know how serious the financial consequences will be if Greece, Italy, Spain, Portugal, Ireland all at the same time were left to survive on their own without the euro currency. Might one or two of these countries ultimately willingly or forcibly be required to leave the eurozone? Yes, of course, but the goal for this to happen must be organized in an orderly way, much like any company bankruptcy.
Another WHY neo-liberal transformation of EU is an overdone misplaced popular cry of researchers and pundits (especially from left-leaning economists in U.S.) is that they fail to understand that -- with exception of the weak EU countries that have put themselves in a dangerous financial situation over the last 20 years -- the strong countries have the Margin of Financial Cushion in their social nets and budgets to Squeeze their fiscal budgets in response to new market realities of a rapidly expanding aging of society exploding retirement/health care costs, and the slower GDP growth prospects given scarcity of basic resources and extreme, often unfair competition of China and India. BUT the mature EU countries will undertake a multi/task approach to austerity that includes progressively raising taxes and investing so as not to impoverish the middle class as America as been doing ... where social nets are ALREADY BAREBONE and yet are being cut further!! As I said in a prior writing, our social-economic situation is not too dissimilar from how the America team of brave soldiers summed up their situation and mission in the "Saving of Private Ryan" ... "FUBAR."
So, I sense the austerity situation and impact of same between the U.S. and the EU 17 healthy nations is entirely different and does not warrant the general claim that Europe is going down the socially destructive neo-liberal track America has followed the last 30 years. This apocalyptic assumption is also wrong because it fails to recognize that the EU states -- in terms of labor mobility, inherited cultural habits, norms, nationalism -- are all uniquely and light years historically different compared to the 50 U.S. states. This means each EU coalition government has always been, by necessity and by general public and cultural accomodation, first and foremost focused on an equitable and fair distribution of capitalism's rewards and punishments. I don´t expect this heritage to change. That's WHY EU democracies are referred to as "Social Democracies" which are slightly right, left or center. This is in sharp contrast to America's "Winner-Takes-All" in a die/hard liberal vs. conservative name calling democracy where quality of life, income and wealth levels
are at other extremes from the European patterns.
I'm not trying to say that all is perfect with Europe's struggle to save the euro, to sacrifice some sovereignty to achieve an independent oversight of national fiscal budgets. The struggle to go from monetary to include fiscal union where nations retain bulk of their sovereign decision power is by far not over. Nearly 50% of the ECB's capital reserves come from Germany and France, the most influential eurozone members ... both of whom are putting the brakes on opening the money printing press for expanding the European Financial Stability Facility (EFSF) from planned Euro 750 billion level to at least Euro 1 to 1.5 trillion, as some are recommending. This can be seen as a weakness of the ECB since it is not completely independent from the most dominant EU members. This can also be seen as an obstacle to be overcome for other EU members to have an equal voice in the final fiscal austerity mechanisms, and the effective implementation and operation thereof.
In my over 30 years of living and working in Europe, in my view what's going on now is Europe's usual pragmatic, step-by-step adjustment process to new challenges and market/financial realities. The adjustment task is slower and much, much grander this time ... more seriously testing EU unity given the interlocking depth of the financial breakdowns in weaker EU member countries. I have greater faith Europe will overcome the obstacles than I do that Republicans and Democrats will ever come together to solve our own equally, if not worse, financial and job development crises in a sane, constructive, fair way that brings ALL Americans foreward as opposed to only the top 1%, 5%, 10%, 20%
Time will tell who´s right about the claim Europe is also moving towards the kind of destructive, money-only-counts casino capitalism and oligarchic rule that has already taken over our democracy.
Best,
Frank
John,
Easing of the euro and credit crunch crisis by the ECB's just announced $639 billion loan liquidity offer -- at a very low benchmark interest rate of 1% and loan terms of 3 years -- to over 500 EU banking institutions BUYS TIME to solve longer-term issues such as:
reducing very high government or household debt among EU member countries noted in TABLE 1
achieving real EU 17 and EU 27 fiscal unity including: consistentcy and harmonization in financial reporting, transparency, and effective operation/enforcement of EU rules for government deficit and debt levels
implementing Basel III stricter capital (equity) reserve requirements for banks of 3% of total assets among other provisions
Concerning debt levels, the Dutch have come up with a thoughtful idea. Authorities are now serioiusly considering offering new and existing homeowners an income tax benefit if their home mortgages are paid off more quickly. As TABLE 1 shows, the Netherlands has an excessive level of household debt amounting to +-130% of GDP.
Over thirty years living in the Netherlands has taught me never to give up on the Dutch multi-party coalition governance to ultimately reach balanced solutions to serious societal challenges -- like the Dutch multi-faceted strategy approach to the current financial crisis of CUT, REFORM, RAISE TAXES, and INVEST. And the goal is to try to undertake these actions simultaneously so as not to create a long period of "stand-still" growth as the Japanese experienced in their 1992-2002 self-inflicted prolonged economic
stagnation.
Best
Frank
Frank,
Have you taken into account that the bond speculators are driving Greece into default by betting that they will default? This has nothing to do with how well European leaders respond to the crisis and everything to do with what international speculators may be doing to drive up Greek and Italian interest rates by shorting their bonds. Speculators prey on the weakest countries and can drive them into default by betting huge sums of money that they will fail. This is what caused MF Global to go bankrupt: they had bet their depositor's money that Greece would default, and then, when it didn't, they couldn't cover their bets.
There's still the business of naked shorts where the bettor doesn't even need to own any securities. I think the EU banking system is no different from the US banking system in the respect that it is private and not immune to the machinations of Goldman Sachs and the whole international banking crew and their mania for derivatives which can drive up interest rates for weak countries and ultimately could cause them to default. Huge sums of money are being bet on outcomes for Greece and Italy which could ultimately become self-fulfilling prophecies.
Is the ECB owned by the EU or is it private? Does interest accrue to the EU or to private bankers for the money it loans?
More next week...
Regards,
John
John,
I'll spare you before Xmas from a long email response about financial speculators. In short, suffice it to say one key goal of a financial transaction tax, I just wrote about at length, is to put a damper on all sorts of financial speculations and make them consummately transparent. It's a fast growing reprehensible out-of-control international activity close to or often actually being outright criminal. Sophisticated huge money players like Goldman Sachs and other greedy manipulators play the short and long speculation game.
George Soros, who I happen to admire, made billions as a speculator among other ways. Financial speculation has been around since stock/ bond/currency exchanges have existed. The ugly excesses and abuses are still ineffectively controlled. Recently though, I've noticed EU authorities are getting more and more behind a financial transactions tax, hopefully in spite of Geithner's opposition. It will be interesting to learn what the recent Basel III meetings and discussions have concluded, if anything, about this deeply-rooted problem that's just another form of casino capitalism benefiting the wealthy and powerful.
Will converse more with you on this subject later.
In her excellent book, "Web of Debt," Ellen Brown questions the whole notion that governments, whether they be the US or the Eurozone, should have to go into debt to private bankers such as Goldman Sachs and Deutsche Bank to get the money they need to finance their operations. Consider the Federal Reserve which is the primary creator of the money supply in the US. It is neither Federal nor is it a reserve. It is a private bank which creates money as an accounting entry on a computer screen. Recently, it loaned over $7 trillion to private banks at a ridiculously low .01% interest rate. That wasn't money it held in reserve; it was money that was "printed" or rather created out of whole cloth. And who do you think sits on the Board of the privately owned Federal Reserve? Jamie Dimon, CEO of JPMorgan Chase! Do you think that the Federal Reserve acts in the interest of anyone other than the large, too big to fail, banks? The banking system prints or creates money all the time, and not only central banks do it. It has been a longstanding practice of banks everywhere to loan out more money than they hold in deposits. This is called "fractional reserve" banking. For example, when a bank takes in $100 in deposits, it will loan out $1000 figuring that that will be sufficient for depositors who wish to redeem their deposits. Unless there's a run on the bank, that usually is sufficient. So money is created by the private banking system all the time and on a daily basis. Many multiples of the banks' deposits are then loaned out at interest.
Individuals, businesses, corporations and governments then borrow money from private banks to meet their needs for expansion and simply to pay their bills. The US government, for example, borrows the money it needs to function essentially from Goldman Sachs and other large banks and then pays interest to those banks. This happens because the US sells Treasury bonds to those large institutions in return for money to fund its wars and pay social security and medicare recipients among other things. The taxpayers are then on the hook for paying the interest on these bonds. Goldman Sachs got the money in the first place from the Federal Reserve so that by means of a little bit of subterfuge (the Federal Reserve cannot by law loan money directly to the US government), money is transferred from the privately owned Federal Reserve bank, which it created out of thin air, to the US government with interest to be paid by the taxpayers to private banking interests. This begs the question that Ms. Brown makes a central point of her book: if a private central bank can increase the money supply by creating money out of thin air as an accounting entry on a computer screen, why can't the government itself create the money to fund its needs? In particular, if the government created the money instead of the private banking system, taxpayers wouldn't be on the hook for the interest payments which are rapidly eating up an ever increasing share of the Federal budget. Interest on the national debt is projected to be $241.6 billion in FY 2012; it will only increase every year as the national debt goes up. The question is why should US taxpayers pay interest to private bankers on the money loaned to the US government which was created by private bankers when the US government itself could just as well have created the money interest free?
The same line of reasoning holds for the Eurozone which is caught up in a debt crisis in which the private banking system is raising interest rates for countries that it considers weak. The rising interest rates make countries such as Spain and Italy even weaker and all this is being fueled by speculators who are shorting the bonds of these countries. Derivative trading such as shorting drives up interest rates since it makes it seem that investors are selling rather than buying the bonds of those countries.
The process of shorting can be simply explained as follows. Suppose my neighbor buys a lawnmower for $500. I then ask to borrow my neighbor's lawnmower to mow my yard. As I'm mowing, another neighbor drives by and offers to buy the mower for $450. As it happens, I know about a sale at the local Sears where I can buy the same exact lawnmower for $400. So I sell the lawnmower for $450., rush down to Sears and buy another one for $400., return the mower to the neighbor I originally borrowed it from and then pocket the $50. profit. Now in the dark world of derivatives markets it's not even necessary to borrow anything from a preexisting owner in order to short sell. These trades are called "naked shorts." The whole effect will drive up interest rates in Greece and Italy making their borrowing costs to turn over their loans even more expensive and hasten the day when these countries will default. Speculators stand to make big money if and when a Eurozone country does default because they have placed large bets on this outcome. It is to be noted that the European Central Bank (ECB) has the same deal that the US Federal Reserve has in that it can't give money directly to one of its member countries. Monies have to be funneled through banks. This means that they are subject to the machinations of the bond market and speculators. If the ECB created the money directly and then loaned it to member countries, the interest rate could be maintained constant as speculators would be eliminated and it would be lower as the private bankers would not be getting their cut.
If the whole notion of a central government creating the money supply as opposed to a private central bank creating it seems radical to you, please bear in mind that this is exactly what Abraham Lincoln did to fund the Civil War and the economic expansion following it including the transcontinental railroad, the land grant colleges and the Homestead Act which gave away free land to settlers in the west. Greenbacks were government created currency which was spent into the market. Today Federal Reserve notes are created by the privately owned Federal Reserve and are the official US currency. Ellen Brown maintains that any government can create a fiat currency. This simply means that the government created currency is declared to be the legal currency of that government. It doesn't have to be backed by gold or anything else. It is the official currency just because the government says it is. Ellen Brown characterizes the Greenback era as follows:
How was all this accomplished with a Treasury that was completely broke and a Congress that hadn't been paid themselves? ... Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. Officially called United States notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war.
The Greenback system was not actually Lincoln's idea. but when pressure grew in Congress for the plan, he was quick to endorse it. The South had seceded from the Union soon after his election in 1860. To fund the War between the States, these Eastern banks had offered a loan package that was little short of extortion - $150 million advanced at interest rates of 24 to 36 percent. Lincoln knew the loan would be impossible to pay off. He took the revolutionary approach because he had no other real choice. The government could either print its own money or succumb to debt slavery to the bankers.
So the war and the economic development following it were financed with goverment created fiat money, the Greenback. This would be perfect today for funding the $2 trillion in infrastructure repair and rebuilding that the IEEE claims is needed - in other words an infrastructure bank. This would solve a lot of the US' unemployment problems as well as bringing the US infrastructure up to par with China and other countries which are modernizing their infrastructure at rates far exceeding the US. The Eurozone ECB could also print or create euros without borrowing or funneling them through private bankers and subjecting the economies of certain countries to the whims of speculators. For the US it would be simple to move the Federal Reserve into the Treasury Department, transfer ownership to the public sector and keep the fact that the chairman would be appointed by the President. To keep its autonomy, Congress should not have the ability to interfere with the newly created Federal Reserve just as the situation exists now. So what would change? Only that the money created would be the equivlent of Greenbacks which would be non-interest bearing notes. Government created money would not be money that the government would have to pay interest on to private sector banks. These Greenbacks could coexist with Federal Reserve notes so that there would be two forms of currency in circulation both of which would be legal tender. Therefore, Federal Reserve notes would not have to be recalled. The new system could be created overnight with a minimum of disruption to commerce.
The Eurozone probably operates the same way. I'm not an expert but I surmise that the large European banks such as Deutsche bank, Societe Generale and ING loan money to Eurozone countries at interest. Even Goldman Sachs, since it is an international bank, probably has its finger in the pie of Eurozone money creation. Even money created by the ECB needs to be funneled through these banks before it gets into the coffers of the respective Eurozone countries. This means that not only are countries such as Greece and Italy paying interest to the large European and international banks but the interest rates they are paying are subject to market speculation which drives them up even more. If the ECB issued euros directly instead of letting the large banks do it, the interest rate could be carefully controlled, the rates wouldn't be subject to speculation and the interest paid would go into the coffers of the ECB instead of into the coffers of large private banks.
Individuals and families in the US and throughbout the world are increasingly indebted to private banks for mortgage debt, student loan debt and credit card debt. Easy credit and low initial interest rates as well as declining wages have induced much of the population to go into debt in the same way that countries have gone into debt. Ultimately, these levels of debt are unsustainable especially if today's historical low interest rates start to rise. Of course the banks' major goal is to have everyone in debt paying interest money to them as a major part of their expenditures. If everyone is a debt slave, the banks are in the position of owning most of society's assets. Ellen Brown's ideas about taking money creation out of private bankers' hands and putting it into the hands of central governments strikes at the core of capitalist economics which assumes that money creation remains entirely privatized. However, other countries such as China have shown that government owned large banks can be a boon to economic development and growth.
Also in the US state owned banks such as the Bank of North Dakota maintain that state in a healthy economic condition compared to the US as a whole. Interest collected on loans goes back into state coffers defraying taxpayer expenses. So lower taxes are the result of a state owned rather than a privately owned bank. The same could be true for countries as well. Also loans can be more carefully controlled so that they go for socially useful purposes rather than fueling speculative investment. Finally, many countries including China and Norway have sovereign wealth funds which act to make those countries more creditworthy than countries which have no assets and only debts. As any banker knows, an individual's creditworthiness represents the difference between his assets and his debts. The same holds true also for countries. If governments created their own money, it could be loaned directly to families that are being foreclosed on instead of relying on private bankers to work out deals with them which they have been reluctant to do thus exacerbating the foreclosure crisis. Greater leniency could also be granted to student loan debtors than is the case now.
Lincoln saved the US an incredible amount of interest repayments by issuing Greenbacks instead of borrowing the money:
In 1972, the United States Treasury Department was asked to compute the amount of interest that would have been paid if the $400 million in Greenbacks had been borrowed from the banks instead. According to the Treasury Department's calculations, in his short tenure Lincoln saved the government a total of $4 billion in interest, just by avoiding this $400 million loan.
Finally, a quote from Thomas Edison from an interview in the 1921 New York Times:
If the Nation can issue a dollar bond it can issue a dollar bill, The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays noboldy but those who contribute in some useful way. It is absurd to say that our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.
Therefore, the "full faith and credit" of the US government and the ECB could apply to currency as well as bonds, and private bankers and speculators could be eliminated from the loop.
In the narrative of the economic and political elites that have long shaped it, the European project has put an end to the series of bloody wars that afflicted the continent up through the first half of the 20th century. In reality, of course, the process of European unification reflected and reinforced, from its beginnings, new kinds of divisions that continue to shape Europe’s social and economic landscape. In the early postwar period the gradual formation of the European Community helped to bring together the various European countries on the capitalist side of the Cold War divide, while in more recent decades the deepening economic integration of the continent, most dramatically exemplified by the adoption of a common currency by 17 of the European Union’s member states, has increased economic and class inequality by restructuring European societies along neoliberal lines. In addition to eroding the gains that the postwar “golden age” of capitalism brought to European working classes, this neoliberal model is now in grave crisis, as the contradictions underlying the eurozone project have begun to unravel.
While mainstream U.S. media often attribute the crisis to the overspending of European countries, the reality is that the philosophy structuring European institutions has long prioritized the pursuit of low deficits, debt and inflation even at the expense of chronically high unemployment. In this respect, the European Union has been in line with the neoliberal paradigm that has prevailed in most parts of the world since the postwar model of development came to an end in the 1970s. While the deficit and debt targets were often violated by most countries in the eurozone (and not just by Greece and the countries on the European periphery), the main thrust of the European project has been to move away from the immediate postwar model, which was predicated on Keynesian social-democratic policies that sought full employment and the growth of social services and welfare states designed to give capitalism a human face.
While the postwar model of “welfare Keynesianism” was predicated on an international economic structure known as the Bretton Woods system, which protected the autonomy of economic policy-making on the national level, the deepening economic integration within Europe has pushed a model of economic development less dependent on the growth of domestic demand and more dependent on international competitiveness. Thus, while rising wages and productivity, as well as a growing welfare state, helped support economic growth in the postwar model, in the neoliberal era rising wages and a large welfare state are viewed as drags on economic growth that damage national competitiveness and reduce exports.
As has been the case in other parts of the world, this shift from the postwar Keynesian model to today’s neoliberal model has been devastating for ordinary workers and citizens, even as it helped European capital to recover from the crisis of the postwar model in the 1970s. The process of economic unification up to and including the formation and crisis of the eurozone has, moreover, encapsulated the problems with neoliberal globalization more generally.
While neoliberals never tire of presenting free trade as universally beneficial, scholars who have studied the history of national economic development often point out that none of today’s economic powerhouses developed by adopting an open-market policy in their early stages of development. Indeed, it is the technologically and economically most advanced countries that are usually the most ardent supporters of free trade, since they (and especially the capitalist groups within them) benefit the most from such policies. This dynamic has certainly been present within the eurozone and contributed to the regional divisions that overdetermine the present crisis.
The adoption of a common currency was especially beneficial to German industrial capital, since the economically less powerful countries on the European periphery could no longer protect their competitiveness by periodic devaluations or by industrial strategies that sought to challenge their subordinate position within the European division of labor. Unsurprisingly, the adoption of a common currency did not just increase the penetration of Southern markets by German industrial products but also decimated the industrial capacity of economically less strong countries.
This regional imbalance was further aggravated by Germany’s tendency to bolster the competitiveness of its products even further by squeezing the wages of its workers. Those who present Germany as the model that the black sheep on the European periphery have to emulate usually neglect to mention that because of this “competitiveness” policy Germany has in recent years experienced rapidly rising poverty rates even among citizens who are employed.
In another sense, of course, Germany is a model of the contradictions that result from the neoliberal shift from a developmental model based on domestic demand to one based on exports. There is something paradoxical about the intense pressure on countries on the European periphery to emulate Germany by adopting an export-oriented development strategy that supposedly requires a brutal assault on wages, collective bargaining and labor rights. Those who advocate this strategy seem to forget that not everybody can emulate Germany’s trade surpluses for the simple reason that for some countries to achieve such surpluses some other countries have to incur corresponding deficits.
The other contradiction of global neoliberalism operative within the eurozone relates to the inherent instability of liberalized financial markets. Financial liberalization may benefit the financial sector, which has been as influential in shaping the European project as it has been in shaping economic policy in other parts of the world, but it has again and again wrought terrible havoc on the lives of billions of people, whenever asset bubbles burst and in the ensuing climate of panic businesses close down, jobs are lost and people’s lives are ruined.
The formation of the eurozone a decade ago inaugurated a short-lived period of easy credit. This easy credit was made available by banks in more affluent European countries, such as Germany and France, to the citizens and governments of less affluent countries on the periphery. From the point of view of countries on the receiving end of these loans, easy credit fueled a period of prosperity that, as we know from the experience of other countries, such as the United States, might not have been possible at a time of growing economic inequality. The creditors, by contrast, underestimated the risks inherent in doing business within a eurozone that was not economically and technologically homogeneous.
As has often happened in the last few decades around the world, an external shock is often enough to turn unrealistic euphoria into extreme pessimism, giving rise in the process to debt crises that reverberate across the global economy. Thus it was that the financial crisis triggered three years ago by the subprime loans fiasco has over time come to threaten the very survival of the eurozone.
When the European debt crisis first surfaced in Greece, the first response of the mainstream media in the United States and Europe alike was to attribute it to the “profligacy” of Greeks and the defective political culture that allegedly fueled it. In addition to misrepresenting the manifestation of a broader systemic problem as a “national” one, this interpretation is giving rise to new divisions within Europe, as the citizens of the so-called PIGS (Portugal, Ireland/Italy, Greece and Spain) have in effect been racialized and treated as the convenient scapegoats for a crisis flowing from the structural imbalances inherent in the neoliberal architecture of the eurozone project.
This racialization provides ideological cover for the brutal assault on the living conditions, pension and labor rights not just of Greeks but of working people across the European periphery. Being at the forefront of the crisis, Greece exemplifies the inability of these policies to address the debt problem. By leading to the collapse of internal demand, the closing of thousands of small businesses, skyrocketing unemployment and the further weakening of a banking sector at the brink of bankruptcy, austerity policies that seek to reduce deficits by cutting spending fail because they simultaneously lead to a collapse of tax revenues.
In this context, workers and citizens across Europe are proving more perceptive than their political and economic leaders. Social and class conflict across Europe is escalating as political and economic elites insist on a self-defeating strategy that has not contained the crisis to the periphery but has led it to spread, deepen and knock at the door of the largest eurozone countries, including Spain, Italy and, increasingly, France and Germany.
At the same time, however, the risk of losing the benefits coming from the eurozone has forced European political elites to take some incremental steps to address the crisis. Being too little and too late, these measures have not prevented the crisis from deepening. And as the crisis grows, so do the fractures within the European capitalist elites. One of the central issues under debate has been whether the European Central Bank should play a greater role in supporting countries in trouble by lending to them directly and functioning, like most central banks, including the U.S. Federal Reserve, as a lender of last resort.
The ECB has up to this point tried to stabilize the borrowing costs of countries in trouble by buying these countries’ bonds in the open market, but it is not allowed to lend to countries directly. This proscription, which contrasts with private banks’ easy access to low-interest loans from the ECB, is one example of tailoring the eurozone project around the needs of European financial capital. Germany is opposed to the ECB adopting a less restrictive policy stance, but as the crisis spreads to the core of the eurozone, it finds itself increasingly isolated. Germany has also been opposed adopting Eurobonds, which could ease the market pressure on the most vulnerable countries, preferring to postpone any such talk until even more draconian fiscal restrictions on eurozone countries make austerity permanent.
Meanwhile, Germany and other countries of the European core have profited from the crisis, since, until recently, the investors who fled the bond markets of the countries on the European periphery turned to safer alternatives, such as German and Dutch bonds.
This development has reduced the core countries’ interest rates, saving them tens of billions of euros. In addition, the interest rates such core countries earn on the loans that formed part of the rescue packages extended to countries like Greece, Ireland and Portugal exceed the interest rates they themselves have to pay, thus further adding to the benefits the “rescuers” reap from the rescue operation. In a typical ideological maneuver, the true beneficiary of the rescue operation appears as a benefactor, while the citizens in the periphery who are losing everything to keep servicing their countries’ debt appear as leeches supposedly living off the largesse of German and Northern European taxpayers.
Needless to say, this maneuver leaves the other great beneficiaries of the rescue operation — the French, German and European banks holding European sovereign debt — out of the picture, thus making large parts of the rescue packages available for the continued support of zombie banks. To add insult to injury, a banker is now Greece’s new prime minister, inaugurating a new trend of unelected technocrats favored by European capital presiding over the bleeding of their countries. Thus, the evolving eurozone crisis brings to the surface the long-standing contradiction between capitalism and democracy. As European elites’ inept attempt to defend the former threatens to sink the eurozone, it falls on ordinary European citizens and workers to defend the latter by taking to the streets and escalating their resistance against a European capitalist class that has long abandoned the pretense of presiding over a social model that lends capitalism a human face.
Costas Panayotakis is a professor of sociology at New York City College of Technology/CUNY. He is the author of Remaking Scarcity: From Capitalist Inefficiency to Economic Democracy.
ROME/BERLIN | Fri Dec 16, 2011 9:44pm EST from Reuters
(Reuters) - The credit rating agency Fitch has told euro zone countries it believes a comprehensive solution to their debt crisis is beyond reach, putting six euro zone economies including Italy on watch for potential downgrades in the near future.
It reaffirmed France's top-notch triple-A rating but even here said the outlook was now negative, meaning it could be downgraded within two years.
Underscoring the tensions within the bloc over a crisis that has spread relentlessly over the past two years, Italy's prime minister urged European policymakers on Friday to beware of dividing the continent with efforts to fight its debt crisis.
In a swipe at Germany, he warned against a "short-term hunger for rigor" in some countries.
Germany has led resistance to allowing the European Central Bank to ramp up its buying of government bonds on the open market to a big enough scale to douse the crisis, but Fitch late on Friday added to the pressure for just such a move.
It said that, following the EU summit a week ago, it had concluded that "a 'comprehensive solution' to the euro zone crisis is technically and politically beyond reach."
"Of particular concern is the absence of a credible financial backstop," it said. "In Fitch's opinion this requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States."
It put Belgium, Spain, Slovenia, Italy, Ireland, and Cyprus on negative watch, which could mean a downgrade within three months.
Later another agency, Moody's, cut Belgium's credit rating by two notches, saying the euro zone debt crisis raised funding risks for countries with high public debt burdens, and said a further downgrade was possible within two years.
Standard & Poor's had already warned 15 of the currency bloc's 17 members they were close to a downgrade.
"The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region," Fitch said.
The euro edged higher against the dollar but still suffered its worst weekly performance against the greenback in three months.
German Chancellor Angela Merkel gained some respite from domestic pressure to take a tougher line in the crisis when eurosceptics in her junior coalition partner, the Free Democrats, lost a grassroots party referendum aimed at blocking a permanent euro zone rescue fund.
A victory for the eurosceptics could have brought down Merkel's centre-right coalition, but the outcome still left the FDP split, with its public support in tatters.
Meanwhile, a first draft of a planned fiscal compact among euro zone countries and aspiring members, published on Friday, showed that countries could be taken to the European Court of Justice if they did not meet agreed budget goals.
AUTOMATIC SANCTIONS
Merkel - under pressure from the revered Bundesbank to force debt-saddled euro zone countries to reform and save their way out of crisis with austerity measures - has led a push for automatic sanctions for deficit "sinners" in the bloc.
This has fed concerns that excessive belt-tightening in southern countries could send their economies into a negative spiral with no prospect of growing out of crisis, while feeding resentment in the prosperous north.
Italian Prime Minister Mario Monti said Europe's response "should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigor in some countries."
"To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us ... the risk of conflicts between the virtuous North and an allegedly vicious South," he told a conference in Rome.
French officials have sought to prepare the public for the likelihood that Paris will lose its top-notch rating from S&P for the first time since 1975, playing down the potential setback and focusing attention instead on neighboring Britain. President Nicolas Sarkozy had vowed to keep the top rating, and it could become an issue in next year's election campaign.
"The economic situation in Britain today is very worrying, and you'd rather be French than British in economic terms," Finance Minister Francois Baroin said in a radio interview, a day after Bank of France Governor Christian Noyer said that if ratings agencies were even-handed, Britain deserved to be downgraded before France.
Deputy Prime Minister Nick Clegg said French Prime Minister Francois Fillon had called him to explain that "it had not been his intention to call into question the UK's rating but to highlight that ratings agencies appeared more focused on economic governance than deficit levels."
Clegg's office said he accepted the explanation "but made the point that recent remarks from members of the French government about the UK economy were simply unacceptable and that steps should be taken to calm the rhetoric."
World Bank President Robert Zoellick said he was "deeply troubled" by the exchanges.
He said politicians needed to be careful because "you've got a tinderbox out there in both political and economic terms."
Euro zone officials said potential downgrades, particularly from S&P, could raise the cost of borrowing for the region's existing EFSF bailout fund, but would not make a big difference to its operations.
EFSF FIREPOWER
EFSF chief Klaus Regling told the Rome conference about 600 billion euros was available to fight the crisis.
"If Italy and Spain were to ask for support, their gross financing needs for 2012 are less than that and I don't think they would need to be taken off the market," he said.
The EFSF has the option of providing first-loss insurance on new bond issues, but the country concerned would have to make a formal request and negotiate conditionality, while the sum guaranteed would have to be agreed unanimously by EFSF members, subject to German parliamentary approval.
Euro zone countries will hold talks next Monday on the draft text of the euro zone fiscal compact and on bilateral loans to the International Monetary Fund, officials in Brussels said.
Slovak Finance Minister Ivan Miklos told Reuters they would commit 150 billion euros to boost the IMF's lending capacity.
The United States has refused to offer additional funding and it remains to be seen how much countries such as China, Russia, Brazil and India are willing to commit.
The European Central Bank has resisted calls for unlimited purchases of euro zone sovereign bonds to quell the debt crisis, putting the onus on governments and their collective financial firewalls.
ECB President Mario Draghi said on Thursday that euro zone governments were on track to restore market confidence and the ECB's bond-buying plan was "neither eternal nor infinite."
But in one intriguing hint on Friday, Bank of Italy governor Ignazio Visco told the Rome conference: "The impression is that there is only one way to convince markets, and we'll work on that." He did not elaborate.
Banks appear to be resisting pressure from governments to help debt-choked euro zone countries by using cheap money lent by the ECB to buy more sovereign bonds.
The chief executive of UniCredit, one of Italy's two biggest banks, said this week that using ECB money to buy government debt "wouldn't be logical."
Euro zone governments need to sell almost 80 billion euros of fresh debt in January alone, and the stand-off between policymakers and banks could turn the slow-burning debt crisis into a conflagration in the New Year.
In Greece, where the debt crisis began two years ago, a senior official of the EU/IMF troika team negotiating terms for a second bailout package said there was no guarantee that talks on the private sector's contribution would lead to a voluntary deal involving the bulk of its creditors.
Agreement has been held up by wrangling over issues ranging from the credit status and interest coupons on the new bonds to legal guarantees to be offered by the official sector. One key question is how many sign up to a private sector debt swap.
Failure to secure agreement could force a disorderly default that might trigger a wider emergency across the euro zone.
Asked if there was a risk of a disorderly Greek default, the troika official said: "Our objective is still to have a voluntary operation. If you ask me 'Is there a guarantee that there will be a voluntary operation?', of course there can never be a guarantee."
Dean Baker's article is valuable in illuminating the time phasing of deficits as a percentage of GDP before and after the crisis. Public and Household Debt generally always increase in recessions but rose to an extremely high level in 2008-09 recession which was really a "mini depression", now an ongoing double-dip recession for most EU countries. When Debt rises, growth falls which in turn expands Debt and thus intensifies the downward spiral of an already weak growth rate.
So adding significantly more debt when it is already so high is NOT the solution adopted to date by EU authorities as Krugman proposes. The focus for the time being is primarily on solving the fiscal problems and keeping savings high. This approach and the ongoing recession will expand unemployment as is now happening in the Netherlands (unemployment rate is now near 6% from 4.8% six months ago. But there are ample unemployment benefit funds to cover this setback. Such benefits amount to €180/day( $240/day up to maximum of ±$42,000/year) for up to 36 months ... more than sufficient to weather the double dip recession. These social nets, as I've said many times, are very important "economic stabilizers" in economic down times which America does not have.
Paul Krugman tends to underestimate the stabilizing effects of European social nets which historically have generally made recession downturns slower and less steep in mature EU countries and recoveries slower than in the U.S. But, let's face it: EU authorities failed egregiously in not enforcing the fiscal rules passed in 1991. This left Italy to go its reckless corrupt ways and left Greece, Ireland, Portugal, Spain (and Iceland) to go their reckless financial ways. Greece and Italy share the lead as being the worst tax collection countries in Europe. The ECB never paid any attention to this among other things.
Italy’s ignored public debt is at such a level that their austerity program is also being directed at politicians whose incomes are substantially above the EU average. While Italian workers’ salaries are among the lowest in Europe, monthly take-home pay for lawmakers ranges from $18,000 to $28,000 plus excellent medical insurance, a car and driver, and free travel within Italy. Little wonder Italy’s Parliament costs about $2.0 billion a year or $33 per capita for a population of 60 million. This compares to our U.S. Congress which costs about $2.2 billion a year to maintain or $7 per capita for a population of 315 million!! This underscores EU focus on weak countries getting their financial houses in order before opening the fiscal stimulus floodgates.
Carmen Reinhart and Kenneth Rogoff’s exhaustive study of recessions and the financial crises after recessions confirms that results vary broadly depending on how policy makers respond to the crisis. Their research showed that nations already at high debt levels and/or in an unhealthy financial state have historically not responded well to fiscal stimulus measures. For example, China and South Korea have recovered quicker than the U.S. and Europe because the fiscal status of these countries was far sounder before the recession hit them. In Reinhart and Rogoff’s opinion, the policy response to the banking system which caused the crisis is far more important. To make a system less vulnerable to a financial crisis, they warn there must be no hesitation in implementing and enforcing appropriate rules and regulating on the banking system. Europe is doing this now as well as seeking disciplined enforcement of a 3% of GDP deficit brake and a 60% of GDP public debt brake.
The theme in the paper, "The Real Effects of Debt,"is that a country trying to go too far to buy itself out of a recession only makes the already High Debt situation and intermediate term inflation risk even worse. Better to tighten spending, reform social nets, and raise taxes progressively, support banks with longer term loans. low interest benchmark rates and, and stick as much as financially possible to planned sustainable investment projects. Name economists forget that Ireland and Iceland are now slowly recovering from economic disaster with the former receiving modest support from the ECB and the latter practically nothing (except some aid from Norway).
The following ratios of Debt as a percentage of GDP come from the Federal Reserve Bank paper. They are alarming, and the Debt mix management problem is quite different for most countries:
One can quickly see why the Netherlands is undertaking a sharp five year budget reduction of €23-26 billion particularly with its very high household debt ratio ... which is also very high for U.S., UK, and Spain but surprisingly low for Greece.
U.S., France, Italy, and Greece have very high government debt ratios. Non-financial debt ratios are extremely high for Spain and France and rather high for all other countries, but very low for U.S. and, again surprisingly, very low for Greece.
The Federal Reserve Bank paper concludes after exhaustive study that certain thresholds should not be exceeded for the three forms of debt above. These thresholds are: 85% for government debt; 85% for household debt; and 75-90% for non-governmental debt. The research paper concludes that going above these thresholds begins to have a significant impact on GDP growth.
This is a main factor behind the EU's reluctance to print large sums of money now or purchase excessive bundles of bad debt. The next step is to come to agreement on some innovative bail-out funding solution for the ECB that is financially responsible ... while still holding both financially weak and strong countries to the agreed fiscal discipline rules.
Easing of the euro and credit crunch crisis by the ECB's just announced $639 billion loan liquidity offer -- at a very low benchmark interest rate of 1% and loan terms of 3 years -- to over 500 EU banking institutions BUYS TIME to solve longer-term issues such as:
reducing very high government or household debt among EU member countries noted in TABLE 1
achieving real EU 17 and EU 27 fiscal unity including: consistentcy and harmonization in financial reporting, transparency, and effective operation/enforcement of EU rules for government deficit and debt levels
implementing Basel III stricter capital (equity) reserve requirements for banks of 3% of total assets among other provisions
Concerning debt levels, the Dutch have come up with a thoughtful idea. Authorities are now serioiusly considering offering new and existing homeowners an income tax benefit if their home mortgages are paid off more quickly. As TABLE 1 shows, the Netherlands has an excessive level of household debt amounting to +-130% of GDP.
Over thirty years living in the Netherlands has taught me never to give up on the Dutch multi-party coalition governance to ultimately reach balanced solutions to serious societal challenges -- like the Dutch multi-faceted strategy approach to the current financial crisis of CUT, REFORM, RAISE TAXES, and INVEST. And the goal is to try to undertake these actions simultaneously so as not to create a long period of "stand-still" growth as the Japanese experienced in their 1992-2002 self-inflicted prolonged economic
Welcome to a new era of polarization as financial oligarchy replaces democratic government and reduces populations to debt peonage.
by MICHAEL HUDSON
The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum. Bank strategists learned not to risk submitting their plans to democratic vote after Icelanders twice refused in 2010-11 to approve their government’s capitulation to pay Britain and the Netherlands for losses run up by badly regulated Icelandic banks operating abroad. Lacking such a referendum, mass demonstrations were the only way for Greek voters to register their opposition to the €50 billion in privatization sell-offs demanded by the European Central Bank (ECB) in autumn 2011.
The problem is that Greece lacks the ready money to redeem its debts and pay the interest charges. The ECB is demanding that it sell off public assets – land, water and sewer systems, ports and other assets in the public domain, and also cut back pensions and other payments to its population. The bottom 99% understandably are angry to be informed that the wealthiest layer of the population is largely responsible for the budget shortfall by stashing away a reported €45 billion of funds stashed away in Swiss banks alone. The idea of normal wage-earners being obliged to forfeit their pensions to pay for tax evaders – and for the general un-taxing of wealth since the regime of the colonels – makes most people understandably angry. For the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or evade paying must be made up by the population at large is not a politically neutral position. It comes down hard on the side of wealth that has been unfairly taken.
A democratic tax policy would reinstate progressive taxation on income and property, and would enforce its collection – with penalties for evasion. Ever since the 19th century, democratic reformers have sought to free economies from waste, corruption and “unearned income.” But the ECB troika is imposing a regressive tax – one that can be imposed only by turning government policy-making over to a set of unelected technocrats.
To call the administrators of so anti-democratic a policy “technocrats” seems to be a cynical scientific-sounding euphemism for financial lobbyists or bureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalf of their sponsors. Their ideology is the same austerity philosophy that the IMF imposed on Third World debtors from the 1960s through the 1980s. Claiming to stabilize the balance of payments while introducing free markets, these officials sold off export sectors and basic infrastructure to creditor-nation buyers. The effect was to drive austerity-ridden economies even deeper into debt – to foreign bankers and their own domestic oligarchies.
This is the treadmill on which Eurozone social democracies are now being placed. Under the political umbrella of financial emergency, wages and living standards are to be scaled back and political power shifted from elected government to technocrats governing on behalf of large banks and financial institutions. Public-sector labor is to be privatized – and de-unionized, while Social Security, pension plans and health insurance are scaled back.
This is the basic playbook that corporate raiders follow when they empty out corporate pension plans to pay their financial backers in leveraged buyouts. It also is how the former Soviet Union’s economy was privatized after 1991, transferring public assets into the hands of kleptocrats, who worked with Western investment bankers to make the Russian and other stock exchanges the darlings of the global financial markets. Property taxes were scaled back while flat taxes were imposed on wages (a cumulative 59 percent in Latvia). Industry was dismantled as land and mineral rights were transferred to foreigners, economies driven into debt and skilled and unskilled labor alike was obliged to emigrate to find work.
Pretending to be committed to price stability and free markets, bankers inflated a real estate bubble on credit. Rental income was capitalized into bank loans and paid out as interest. This was enormously profitable for bankers, but it left the Baltics and much of Central Europe debt strapped and in negative equity by 2008. Neoliberals applaud their plunging wage levels and shrinking GDP as a success story, because these countries shifted the tax burden onto employment rather than property or finance. Governments bailed out banks at taxpayer expense.
It is axiomatic that the solution to any major social problem tends to create even larger problems – not always unintended! From the financial sector’s vantage point, the “solution” to the Eurozone crisis is to reverse the aims of the Progressive Era a century ago – what in 1936 John Maynard Keynes hopefully termed “euthanasia of the rentier”. The idea was to subordinate the banking system to serve the economy rather than the other way around. Instead, finance has become the new mode of warfare – less ostensibly bloody, but with the same objectives as the Viking invasions over a thousand years ago, and Europe’s subsequent colonial conquests: appropriation of land and natural resources, infrastructure and whatever other assets can provide a revenue stream. It was to capitalize and estimate such values, for instance, that William the Conqueror compiled the Domesday Book after 1066, a model of ECB and IMF-style calculations today.
This appropriation of the economic surplus to pay bankers is turning the traditional values of most Europeans upside down. Imposition of economic austerity, dismantling social spending, sell-offs of public assets, de-unionization of labor, falling wage levels, scaled-back pension plans and health care in countries subject to democratic rules requires convincing voters that there is no alternative. It is claimed that without a profitable banking sector (no matter how predatory) the economy will break down as bank losses on bad loans and gambles pull down the payments system. No regulatory agencies can help, no better tax policy, nothing except to turn over control to lobbyists to save banks from losing the financial claims they have built up.
What banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment. Research and development takes too long. Finance lives in the short run. This short-termism is self-defeating, yet it is presented as science. The alternative, voters are told, is the road to serfdom: interfering with the “free market” by financial regulation and even progressive taxation.
There is an alternative, of course. It is what European civilization from the 13th-century Schoolmen through the Enlightenment and the flowering of classical political economy sought to create: an economy free of unearned income, free of vested interests using special privileges for “rent extraction.” At the hands of the neoliberals, by contrast, a free market is one free for a tax-favored rentier class to extract interest, economic rent and monopoly prices.
Rentier interests present their behavior as efficient “wealth creation.” Business schools teach privatizers how to arrange bank loans and bond financing by pledging whatever they can charge for the public infrastructure services being sold by governments. The idea is to pay this revenue to banks and bondholders as interest, and then make a capital gain by raising access fees for roads and ports, water and sewer usage and other basic services. Governments are told that economies can be run more efficiently by dismantling public programs and selling off assets.
Never has the gap between pretended aim and actual effect been more hypocritical. Making interest payments (and even capital gains) tax-exempt deprives governments of revenue from the user fees they are relinquishing, increasing their budget deficits. And instead of promoting price stability (the ECB’s ostensible priority), privatization increases prices for infrastructure, housing and other costs of living and doing business by building in interest charges and other financial overhead – and much higher salaries for management. So it is merely a knee-jerk ideological claim that this policy is more efficient simply because privatizers do the borrowing rather than government.
There is no technological or economic need for Europe’s financial managers to impose depression on much of its population. But there is a great opportunity to gain for the banks that have gained control of ECB economic policy. Since the 1960s, balance-of-payments crises have provided opportunities for bankers and liquid investors to seize control of fiscal policy – to shift the tax burden onto labor and dismantle social spending in favor of subsidizing foreign investors and the financial sector. They gain from austerity policies that lower living standards and scale back social spending. A debt crisis enables the domestic financial elite and foreign bankers to indebt the rest of society, using their privilege of credit (or savings built up as a result of less progressive tax policies) as a lever to grab assets and reduce populations to a state of debt dependency.
The kind of warfare now engulfing Europe is thus more than just economic in scope. It threatens to become a historic dividing line between the past half-century’s epoch of hope and technological potential to a new era of polarization as a financial oligarchy replaces democratic governments and reduces populations to debt peonage.
For so bold an asset and power grab to succeed, it needs a crisis to suspend the normal political and democratic legislative processes that would oppose it. Political panic and anarchy create a vacuum into which grabbers can move quickly, using the rhetoric of financial deception and a junk economics to rationalize self-serving solutions by a false view of economic history – and in the case of today’s ECB, German history in particular.
* * *
Governments do not need to borrow from commercial bankers or other lenders. Ever since the Bank of England was founded in 1694, central banks have printed money to finance public spending. Bankers also create credit freely – when they make a loan and credit the customer’s account, in exchange for a promissory note bearing interest. Today, these banks can borrow reserves from the government’s central bank at a low annual interest rate (0.25% in the United States) and lend it out at a higher rate. So banks are glad to see the government’s central bank create credit to lend to them. But when it comes to governments creating money to finance their budget deficits for spending in the rest of the economy, banks would prefer to have this market and its interest return for themselves.
European commercial banks are especially adamant that the European Central Bank should not finance government budget deficits. But private credit creation is not necessarily less inflationary than governments monetizing their deficits (simply by printing the money needed). Most commercial bank loans are made against real estate, stocks and bonds – providing credit that is used to bid up housing prices, and prices for financial securities (as in loans for leveraged buyouts).
It is mainly government that spends credit on the “real” economy, to the extent that public budget deficits employ labor or are spent on goods and services. Governments avoid paying interest by having their central banks printing money on their own computer keyboards rather than borrowing from banks that do the same thing on their own keyboards. (Abraham Lincoln simply printed currency when he financed the U.S. Civil War with “greenbacks.”)
Banks would like to use their credit-creating privilege to obtain interest for lending to governments to finance public budget deficits. So they have a self-interest in limiting the government’s “public option” to monetize its budget deficits. To secure a monopoly on their credit-creating privilege, banks have mounted a vast character assassination on government spending, and indeed on government authority in general – which happens to be the only authority with sufficient power to control their power or provide an alternative public financial option, as Post Office savings banks do in Japan, Russia and other countries. This competition between banks and government explains the false accusations made that government credit creation is more inflationary than when commercial banks do it.
The reality is made clear by comparing the ways in which the United States, Britain and Europe handle their public financing. The U.S. Treasury is by far the world’s largest debtor, and its largest banks seem to be in negative equity, liable to their depositors and to other financial institutions for much larger sums that can be paid by their portfolio of loans, investments and assorted financial gambles. Yet as global financial turmoil escalates, institutional investors are putting their money into U.S. Treasury bonds – so much that these bonds now yield less than 1%. By contrast, a quarter of U.S. real estate is in negative equity, American states and cities are facing insolvency and must scale back spending. Large companies are going bankrupt, pension plans are falling deeper into arrears, yet the U.S. economy remains a magnet for global savings.
Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%. The reason for this disparity is that they lack a “public option” in money creation. Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe. Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay (although they may do this as a policy choice). Given that the U.S. Treasury and Federal Reserve can create new money, it follows that as long as government debts are denominated in dollars, they can print enough IOUs on their computer keyboards so that the only risk that holders of Treasury bonds bear is the dollar’s exchange rate vis-à-vis other currencies.
By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due. Future historians no doubt will find it remarkable that there actually is a rationale behind this policy – or at least the pretense of a cover story. It is so flimsy that any student of history can see how distorted it is. The claim is that if a central bank creates credit, this threatens price stability. Only government spending is deemed to be inflationary, not private credit!
The Clinton Administration balanced the U.S. Government budget in the late 1990s, yet the Bubble Economy was exploding. On the other hand, the Federal Reserve and Treasury flooded the economy with $13 trillion in credit to the banking system credit after September 2008, and $800 billion more last summer in the Federal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodity prices are not rising. Not even real estate or stock market prices are being bid up. So the idea that more money will bid up prices (MV=PT) is not operating today.
Commercial banks create debt. That is their product. This debt leveraging was used for more than a decade to bid up prices – making housing and buying a retirement income more expensive for Americans – but today’s economy is suffering from debt deflation as personal income, business and tax revenue is diverted to pay debt service rather than to spend on goods or invest or hire labor.
Much more striking is the travesty of German history that is being repeated again and again, as if repetition somehow will stop people from remembering what actually happened in the 20th century. To hear ECB officials tell the story, it would be reckless for a central bank to lend to government, because of the danger of hyperinflation. Memories are conjured up of the Weimar inflation in Germany in the 1920s. But upon examination, this turns out to be what psychiatrists call an implanted memory – a condition in which a patient is convinced that they have suffered a trauma that seems real, but which did not exist in reality.
What happened back in 1921 was not a case of governments borrowing from central banks to finance domestic spending such as social programs, pensions or health care as today. Rather, Germany’s obligation to pay reparations led the Reichsbank to flood the foreign exchange markets with deutsche marks to obtain the currency to buy pounds sterling, French francs and other currency to pay the Allies – which used the money to pay their Inter-Ally arms debts to the United States. The nation’s hyperinflation stemmed from its obligation to pay reparations in foreign currency. No amount of domestic taxation could have raised the foreign exchange that was scheduled to be paid.
By the 1930s this was a well-understood phenomenon, explained by Keynes and others who analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out of current domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of the Chilean and other Third World hyperinflations, economists have found a common causality at work, based on the balance of payments. First comes a fall in the exchange rate. This raises the price of imports, and hence the domestic price level. More money is then needed to transact purchases at the higher price level. The statistical sequence and line of causation leads from balance-of-payments deficits to currency depreciation raising import costs, and from these price increases to the money supply, not the other way around.
Today’s “free marketers” writing in the Chicago monetarist tradition (basically that of David Ricardo) leave the foreign and domestic debt dimensions out of account. It is as if “money” and “credit” are assets to be bartered against goods. But a bank account or other form of credit means debt on the opposite side of the balance sheet. One party’s debt is another party’s saving – and most savings today are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion is stripped down to a simplistic relationship between the money supply and price level – and indeed, only consumer prices, not asset prices. In their eagerness to oppose government spending – and indeed to dismantle government and replace it with financial planners – neoliberal monetarists neglect the debt burden being imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spain and Portugal.
If the euro breaks up, it is because of the obligation of governments to pay bankers in money that must be borrowed rather than created through their own central bank. Unlike the United States and Britain which can create central bank credit on their own computer keyboards to keep their economy from shrinking or becoming insolvent, the German constitution and the Lisbon Treaty prevent the central bank from doing this.
The effect is to oblige governments to borrow from commercial banks at interest. This gives bankers the ability to create a crisis – threatening to drive economies out of the Eurozone if they do not submit to “conditionalities” being imposed in what quickly is becoming a new class war of finance against labor.
Disabling Europe’s central bank to deprive governments of the power to create money
One of the three defining characteristics of a nation-state is the power to create money. A second characteristic is the power to levy taxes. Both of these powers are being transferred out of the hands of democratically elected representatives to the financial sector, as a result of tying the hands of government.
The third characteristic of a nation-state is the power to declare war. What is happening today is the equivalent of warfare – but against the power of government! It is above all a financial mode of warfare – and the aims of this financial appropriation are the same as those of military conquest: first, the land and subsoil riches on which to charge rents as tribute; second, public infrastructure to extract rent as access fees; and third, any other enterprises or assets in the public domain.
In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.
When debts cannot be paid or rolled over, foreclosure time arrives. For governments, this means privatization selloffs to pay creditors. In addition to being a property grab, privatization aims at replacing public sector labor with a non-union work force having fewer pension rights, health care or voice in working conditions. The old class war is thus back in business – with a financial twist. By shrinking the economy, debt deflation helps break the power of labor to resist.
It also gives creditors control of fiscal policy. In the absence of a pan-European Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on behalf of banks, the ECB seems to favor reversing the 20th century’s drive for progressive taxation. And as U.S. financial lobbyists have made clear, the creditor demand is for governments to re-classify public social obligations as “user fees,” to be financed by wage withholding turned over to banks to manage (or mismanage, as the case may be). Shifting the tax burden off real estate and finance onto labor and the “real” economy thus threatens to become a fiscal grab coming on top of the privatization grab.
This is self-destructive short-termism. The irony is that the PIIGS budget deficits stem largely from un-taxing property, and a further tax shift will worsen rather than help stabilize government budgets. But bankers are looking only at what they can take in the short run. They know that whatever revenue the tax collector relinquishes from real estate and business is “free” for buyers to pledge to the banks as interest. So Greece and other oligarchic economies are told to “pay their way” by slashing government social spending (but not military spending for the purchase of German and French arms) and shifting taxes onto labor and industry, and onto consumers in the form of higher user fees for public services not yet privatized.
In Britain, Prime Minister Cameron claims that scaling back government even more along Thatcherite-Blairite lines will leave more labor and resources available for private business to hire. Fiscal cutbacks will indeed throw labor out of work, or at least oblige it to find lower-paid jobs with fewer rights. But cutting back public spending will shrink the business sector as well, worsening the fiscal and debt problems by pushing economies deeper into recession.
If governments cut back their spending to reduce the size of their budget deficits – or if they raise taxes on the economy at large, to run a surplus – then these surpluses will suck money out of the economy, leaving less to be spent on goods and services. The result can only be unemployment, further debt defaults and bankruptcies. We may look to Iceland and Latvia as canaries in this financial coalmine. Their recent experience shows that debt deflation leads to emigration, shorter life spans, lower birth rates, marriages and family formation – but provides great opportunities for vulture funds to suck wealth upward to the top of the financial pyramid.
Today’s economic crisis is a matter of policy choice, not necessity. As President Obama’s chief of staff Rahm Emanuel quipped: “A crisis is too good an opportunity to let go to waste.” In such cases the most logical explanation is that some special interest must be benefiting. Depressions increase unemployment, helping to break the power of unionized as well as non-union labor. The United States is seeing a state and local budget squeeze (as bankruptcies begin to be announced), with the first cutbacks coming in the sphere of pension defaults. High finance is being paid – by not paying the working population for savings and promises made as part of labor contracts and employee retirement plans. Big fish are eating little fish.
This seems to be the financial sector’s idea of good economic planning. But it is worse than a zero-sum plan, in which one party’s gain is another’s loss. Economies as a whole will shrink – and change their shape, polarizing between creditors and debtors. Economic democracy will give way to financial oligarchy, reversing the trend of the past few centuries.
Is Europe really ready to take this step? Do its voters recognize that stripping the government of the public option of money creation will hand the privilege over to banks as a monopoly? How many observers have traced the almost inevitable result: shifting economic planning and credit allocation to the banks?
Even if governments provide a “public option,” creating their own money to finance their budget deficits and supplying the economy with productive credit to rebuild infrastructure, a serious problem remains: how to dispose of the existing debt overhead now acting as a deadweight on the economy. Bankers and the politicians they back are refusing to write down debts to reflect the ability to pay. Lawmakers have not prepared society with a legal procedure for debt write-downs – except for New York State’s Fraudulent Conveyance Law, calling for debts to be annulled if lenders made loans without first assuring themselves of the debtor’s ability to pay.
Bankers do not want to take responsibility for bad loans. This poses the financial problem of just what policy-makers should do when banks have been so irresponsible in allocating credit. But somebody has to take a loss. Should it be society at large, or the bankers?
It is not a problem that bankers are prepared to solve. They want to turn the problem over to governments – and define the problem as how governments can “make them whole.” What they call a “solution” to the bad-debt problem is for the government to give them good bonds for bad loans (“cash for trash”) – to be paid in full by taxpayers. Having engineered an enormous increase in wealth for themselves, bankers now want to take the money and run – leaving economies debt ridden. The revenue that debtors cannot pay will now be spread over the entire economy to pay – vastly increasing everyone’s cost of living and doing business.
Why should they be “made whole,” at the cost of shrinking the rest of the economy? The bankers’ answer is that debts are owed to labor’s pension funds, to consumers with bank deposits, and the whole system will come crashing down if governments miss a bond payment. When pressed, bankers admit that they have taken out risk insurance – collateralized debt obligations and other risk swaps. But the insurers are largely U.S. banks, and the U.S. Government is pressuring Europe not to default and thereby hurt the U.S. banking system. So the debt tangle has become politicized internationally.
So for bankers, the line of least resistance is to foster an illusion that there is no need for them to accept defaults on the unpayably high debts they have encouraged. Creditors always insist that the debt overhead can be maintained – if governments simply will reduce other expenditures, while raising taxes on individuals and non-financial business.
The reason why this won’t work is that trying to collect today’s magnitude of debt will injure the underlying “real” economy, making it even less able to pay its debts. What started as a financial problem (bad debts) will now be turned into a fiscal problem (bad taxes). Taxes are a cost of doing business just as paying debt service is a cost. Both costs must be reflected in product prices. When taxpayers are saddled with taxes and debts, they have less revenue free to spend on consumption. So markets shrink, putting further pressure on the profitability of domestic enterprises. The combination makes any country following such policy a high-cost producer and hence less competitive in global markets.
This kind of financial planning – and its parallel fiscal tax shift – leads toward de-industrialization. Creating ECB or IMF inter-government fiat money leaves the debts in place, while preserving wealth and economic control in the hands of the financial sector. Banks can receive debt payments on overly mortgaged properties only if debtors are relieved of some real estate taxes. Debt-strapped industrial companies can pay their debts only by scaling back pension obligations, health care and wages to their employees – or tax payments to the government. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.
This is the financiers’ business plan. But to leave tax policy and centralized planning in the hands of bankers turns out to be the opposite of what the past few centuries of free market economics have been all about. The classical objective was to minimize the debt overhead, to tax land and natural resource rents, and to keep monopoly prices in line with actual costs of production (“value”). Bankers have lent increasingly against the same revenues that free market economists believed should be the natural tax base.
So something has to give. Will it be the past few centuries of liberal free-market economic philosophy, relinquishing planning the economic surplus to bankers? Or will society re-assert classical economic philosophy and Progressive Era principles, and re-assert social shaping of financial markets to promote long-term growth with minimum costs of living and doing business?
At least in the most badly indebted countries, European voters are waking up to an oligarchic coup in which taxation and government budgetary planning and control is passing into the hands of executives nominated by the international bankers’ cartel. This result is the opposite of what the past few centuries of free market economics has been all about.
This was first published in the Frankfurter Allgemeine Zeitung on December 3, 2011, as “Der Krieg der Banken gegen das Volk.”
It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.
On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.
Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.
First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony.
Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.
Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.
Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.
Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.
And in at least one nation, Hungary, democratic institutions are being undermined as we speak.
One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.
Fidesz won an overwhelming Parliamentary majority last year, at least partly for economic reasons; Hungary isn’t on the euro, but it suffered severely because of large-scale borrowing in foreign currencies and also, to be frank, thanks to mismanagement and corruption on the part of the then-governing left-liberal parties. Now Fidesz, which rammed through a new Constitution last spring on a party-line vote, seems bent on establishing a permanent hold on power.
The details are complex. Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.
Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.
It’s not clear what can be done about Hungary’s authoritarian slide. The U.S. State Department, to its credit, has been very much on the case, but this is essentially a European matter. The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.
And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.
Frank's remarks go first as he is living in the Euro zone and much more knowledgable than John. John's remarks, which are more speculative come later. Perhaps this can be an ongoing dialogue between our two correspondants.
Frank's Remarks:
On December 8, 2011, EU history was made as all EU 27 members (subject to Parliament approval by 3 or 4 countries) -- except the UK -- agreed to cede some sovereignty in accepting tough financial fiscal-budgeting rules that members had earlier pledged to follow under the original Maastricht Treaty. In short, apocalyptic expectations of the euro's demise have been proven wrong as the EU takes one small but great step towards fiscal and monetary union without an unbearable loss of sovereignty. More intensive discussions will no doubt occur on latter point.
The European Court of Justice will ultimately have central oversight of national budgets making sure that budget deficits do not exceed 3% of GDP and total overall debt does not exceed 60% of annual economic output. Debt brakes will be put into law or constitutions committing countries to these fiscal discipline measures. The 3% rule was put into effect in 1991, but it has been given scant attention and has never been enforced. Sound familiar? Politicians have a tendency of flouting, not standing behind, or resorting to subtle ways to shirk enforcement of their statutory legislative actions. But that behavior will be harder for EU members this time as serious sanctions face those who disobey the tough rules. Sanctions might include possible expulsion or willful withdrawal from EU membership.
Premier Cameron found the fiscal-budget oversight measures too much of a threat to UK sovereignty and an intrusion into the City's powerful financial trading services. Thus, his veto of the reinforced fiscal measures means the UK is stepping out of further discussions about the euro, deficits and debt reduction, and funding of the EU central bank. This is not surprising as Cameron has been under extreme pressure from party members who want no part of this development. The UK wants it both ways. They want to have influence but not pay the price of joining the eurozone. This veto means that only the EU 17 have formally or legally committed to accepted central fiscal oversight control and enforcement.
Once the detailed operating mechanisms are worked out, the next step will likely be a prudent, innovative plan to add liquidity to the financial system to restore confidence and put to rest any market panic. In the interim, the European Central Bank (ECB) will reduce the banks' benchmark interest rate from 1.25% to 1.00% to offset the current credit crunch. Also, the ECB will offer banks more long-term loans of up to 3 years versus current 13 months. This will make it easier for banks to lend money in the market place and will offset the flight of private investor capital from EU financial institutions.
To date the ECB has been modestly buying the distressed debt of Greece and Portugal. The ECB is strongly commited to intervene in the bond markets to keep interest rates under control for financially weak countries that are finding it more and more expensive to borrow money on the bond market. However, the ECB will do no more than that now and is not about to print money or buy a large amount of government bonds. The game is to keep the pressure on politicians of financially weak and strong countries to start carrying out tough fiscal measures and debt reduction to make sure this kind of crisis problem never happens again. The Netherlands, Finland and Germany have been the keen initiators of uniting on a policy of strictly enforced fiscal-budget discipline as a first step before exploring the role and funding of the ECB in bailing out insolvent governments, requiring a change to the Maastricht treaty. It's all about coming down hard on the financial recklessness of southern European countries while adhering to the original goal of European fiscal and monetary unification under the euro.
Another complication is that the ECB (unlike the U.S. Federal Bank) is prevented by treaty law from financially coming to the aid of EU member governments. The EU's single legal mandate is monetary stability. It can only aid companies/people by supporting the banks. And that's just what the Germans want and preferably no more. Bailing out and restructuring the bad debt of an insolvent government must be a very last resort action by the ECB after a country's belt-tightening actions have failed. The Germans and Dutch are uncompromising about this principle.
Europe does not want to get on the fast track of wholesale printing of money or selling of EU bonds (or buying up billions of bad debt) in the easy ways the U.S. money system works (e.g. trillions in quantitative easing and selling Treasury bonds). There are many reasons for this: first, the most obvious being the fear of inflation 3-5 years down the road -- a risk Paul Krugman and other economists erroneously consider as highly unlikely with very low inflation today --; secondly, there's the fear of exacerbated debt growth as some countries relax their controls thinking they will always be saved by the taxpayers of the finacially well-managed countries. It's called Moral Hazard.
Another concern is that printing euros on a large scale in Europe is far more inflation-risk intensive than in the U.S. This is because the euro is a relatively small regional currency while over the past 60 years the dollar is better protected against this kind of inflation-risk by being deeply distributed and planted in worldwide banking and transactions' systems. As stated, EU leadership is reluctant to open the money faucets until there is clear evidence of at least a "de facto" fiscal discipline in process. And in all cases the ECB should be the lender of last resort to governments. Presently, there is about €850 billion in the Euro Emergency Fund. Some are advocating this Fund should be increased to €1.5-2.0 trillion to scare the pants off the treacherous currency speculators. So far, EU officials are not buying this advice.
One thing is certain. It's not a question of choosing between the euro falling or fiscal unity. The vast majority of European leaders realize that suggesting or even contemplating the fall of the euro is NOT an option -- it's a self-fulfilling DISASTER scenario affecting the entire world economy. The globalization and advanced data transfer technology processes have bound the financial world into a tight, supremely complex, irreversible interconnection like the attachment of early twins in the womb. Abandoning the euro would trigger a wave of financial collapses, negative growth and a duplication of the 1930s depression. Allowing the euro to fail with the hope of building the system up again with multiple currencies is, as one financial advisor lightly remarked, "like thinking an egg can be broken up and put back together again." Impossible! Furthemore, one currency versus multiple fluctuating currencies makes it far, far easier to undertake long-term investments, cross border transactions and to grow businesses. But of course this requires that fiscal policies of EU 17 are brought in line. A common currency without fiscal and monetary harmony is very problematic as Europe is learning the hard way.
I'm confident EU countries will resolve the loss of sovereignty pain and come up with the right emergency funding actions to calm financial markets and assure long-term fiscal stability and debt control. Already, general agreement is near to raise the banks' reserve requirement to 9% from 6% which could be further increased as a bank gets globally bigger. This responsible financial thinking is in contrast to the U.S. where compromised politicians continue playing the banks' casino games with a paltry 6% reserve requirement and massive bonus payments. The EU bank bonus system will also be sharply reformed. Meanwhile, U.S. authorities cowardly pussy-foot around this insidiously destructive practice. Another more aggressive step being considered is legislation that will allow a failed insolvent (as opposed to illiquid) government to declare bankruptcy or to willingly withdraw from eurozone membership. But, of course this idea, if feasible, must be structured in a highly regulated, orderly way
This is a complex serious matter. The EU mature countries, with the Netherlands as an excellent example, are already taking a tough but balanced, equitable austerity approach to the ongoing recession and to maintaining fiscal sanity. The Netherlands' approach involves four strategies: CUT (for example: waste, culture/social-net budgets, foreign aid, possibly mortgage interest deduction); REFORM (health care, social-nets, financial institutions/systems); INVEST (in sustainable job-producing projects, i.e., education, infrastructure, green energy, R&D, Innovation; and RAISE TAXES (but not on lower income earners).
When European leaders finally come together as they have and say they are fully behind the euro and fiscal discipline, I'm convinced they mean business.
Best,
Frank Thomas
The Netherlands
December 9, 2011
John's Remarks:
I note that Germany and Angela Merkel are calling the shots here followed closely by the Netherlands, France and Finland. The northern European countries, which are far more economically successful and seem to have a much greater work ethic, are imposing their solution on the weaker southern European countries of Greece, Italy, Spain and Portugal. This bothers me in the sense that it could create a rift in the Euro zone with the weaker countries feeling that the austerity measures imposed on them by the stronger northern European countries are unfair. Of course, the northern European countries are maintaining that the southern countries need to get their act together, pull their own weight and not expect Germany to bail them out. This could backfire in that the average "middle class" Greek, for example, might find the austerity measures imposed on him unfair and unbearable especially if he loses his job because of them. A macroeconomic solution by itself might not play well in the microeconomic world.
In a way Merkel is playing the role of conservative Republicans in the US who want fiscal problems solved by cutting expenses rather than raising revenues. While the Occupy movement in the US is calling for taxing the rich to solve the deficit/debt crisis, Republicans and Merkel seem to be calling for cutting spending. Why isn't their a greater call for taxing the European rich? I did notice, however, that Merkel has called for a Financial Transaction Tax (FTT) which is why Britain backed out of the agreement which all the other Euro zone countries have agreed to. Why does Britain, which doesn't even use the euro, have any say in the matter whatsoever, and does this mean that there will be a FTT in the euro zone sans Britain? If so, this could alleviate some of the austerity which is being advocated.
I also notice the parallel between the Republican war on government workers in the US and the fact that there is a large percentage of the Greek work force involved in government work. I assume that it is Merkel's intention to cut that government work force as part of her austerity measures. But what are those laid off workers supposed to do? I don't think Greece has much of an export economy or even much of a private sector. If the austerity measures are too severe, there will be rioting in the streets as if there hasn't been already. But there will be more.
I think Merkel's approach will probably bring the speculative markets under control and allow Greece, Italy, Spain and Portugal to get a handle on their debt problems. It's interesting that the ECB cannot loan money directly to governments but only (for all intents and purposes) to banks. That is similar to the US Federal Reserve which has offered extremely low interest loans to banks - over $7 trillion of quantitaive easing at an interest rate of .01% - while not dealing directly with the average middle class citizen whose lot is to deal with the banks which offer them no such advantageous deal. The ECB seems to be relying on the fact that bailing out the banks (in advance) will help Euro zone countries with their debt problems because the banks then will be able to loan to the countries involved at a lower interest rate than would otherwise be the case. This still leaves the problem of what to do with all the unemployed workers who will lose their jobs due to the belt tightening.
Redistribution of wealth from the hardworking, thrifty and frugal northern Europeans to the "La Dolce Vita" loving Italians and the "Who me, pay taxes?" Greeks is something that Angela Merkel is adamant against just as in the US the Republicans are adamant that the "job creators" should not pay any more in taxes to help the poor. The rich, whether individuals in the US or countries in the EU, seem to think that they are entitled to keep what they perceive they have earned and not be forced to give it up to those who have squandered their resources. They have worked hard while the others have been lazy and goofed off so why should they have to bail them out?
However, redistribution from rich to poor, whether in terms of individuals as in the US or in terms of countries in the EU, might be the more preferable and humane solution compared to the prospect of rioting in the streets. In order to keep the wolves at bay, it might be desirable for the more conservative elements in both societies to give a little even as reforms are being implemented. It may be necessary for northern Europeans to "carry" their "little brothers" in the south for the sake of maintaining peace and harmony in the EU just as it may be necessary for the weathy in the US to give up some of their enormous gains in wealth and income over the last 30 years in order to stabilize society.
In the last 30 years average workers in the US have made hardly any wage gains while most of the gains have gone to the upper 5%. 30 years ago CEOs made about 30 times the wage of the average worker whereas today they make 300 times the average worker's wage. The middle class has only been able to keep its head above water by going into debt and participating in the bubble economy only to lose big time when the bubbles have burst - first the stock market bubble in 2000 and then the housing bubble in 2008. These two bubbles dropped the floor out from beneath the middle class. Since Europe, especially Britain, has followed the US in its fiscal and monetary policies to some extent over the last 30 years, I imagine that some of the maladies in the economy of the EU are similar to those in the US especially in banking.
In the final analysis, taxing the rich may be necessary in the interests of social stability as opposed to balancing budgets on the backs of the poor and middle class. Perhaps northern Europeans need to relax their work ethic while southern Europeans need to step up to the plate and strengthen theirs. All the countries of the EU need to pull together or it will come apart with disastrous consequences as has happened all too frequently in past history.
Frank's Further Remarks:
Your speculative analysis overall is excellent, but I feel goes way too far in equating EU country tough treatment of the weak nations to that of the Republicans treatment of "the losers" and poor in America. As noted in my writing, Europe will come to the aid of Spain, Greece, Italy, and Portugal eventually as a lender of lastresort but only after they show evidence of their committment to get their debt and fiscal house in order. I have no doubt that the EU Emergency Fund will be increased in a sane manner. Don't forget that 26 of the EU 27 countries have just agreed to sacrifice some precious sovereignty in accepting central oversight control of national budgets that will be enforced by tough penalties. This is a major, major change! These 26 nations reflect a population base of over 400 million. It's totally unimaginable that 99% of all states in America with 300 million people would ever agree to such a concept of central budget oversight control. This would be immediately met with screams of a "communistic tyranny" and "down with the government" !!
John's Further Remarks:
Similar to the poor and gullible in the US who took on sub-prime loans which they didn't have a prayer of ever paying back especially after the ARMs reset, the Greek government took on debt that it couldn't pay back which, if the banks didn't actually force on them, they certainly used pursuasion and encouragement to get them to go in debt way over their heads. So in both situations it was the banks who "helped" the Greeks and individual would be mortgagees in the US take on more debt than they should have. Sure one can blame the debtor who wasn't exactly forced to sign on the bottom line, but the banks surely acted as pushers to the debt addition both in the EU and in the US. Unfortunately, the weaker countries such as Greece, Italy and Spain fell for the banks' ploys just as weaker persons in the US fell for the easily obtained credit without realizing what they were getting themselves into.
This is why I think both the Greeks and debtors in the US should be cut some slack. In the final analysis, if it weren't for the banks' policies of making credit easily available to unworthy debtors, crises in both countries could have been avoided. The big banks encouraged individuals and countries to go into debt way over their heads.
Frank's Further Further Remarks:
Improved bailout resources, ECB's support of the banking sector, and fiscal austerity and overhauls where budget deficit and debt limits will be incorporated in national constitutions all give governments time to prove they are serious about financial discipline as well as to finalize a new intergovernmental treaty. The EU's firm, unified commitment that the euro does not fall also means no one is about to let the weak countries go down the tubes providing they move on the financial pack agreed to by the Euro Zone core 17 and the 9 remaining EU states.
by Peter G Tatchell, from Huffington Post, November 29, 2011
Up to two million trade union members are expected to strike this Wednesday, in protest against the government's attack on pensions and cuts in public services. Their grievances are real. But their solutions don't go far enough.
Pressing the government for fairness isn't the answer. Staging a protest is second best. These are reactive, defensive responses to fundamental flaws and failings in the way our economy is organised and run.
The perennial failing of most trade unions is that their horizons are so limited. They seek a better deal for their members within the economic status quo, when the real solution is to reform the system of economy that, by its very nature, leaves the vast majority of working people powerless, disenfranchised and marginalised. When it comes to the economy, the average person has no meaningful say in the decisions that affect their jobs, wages, pensions and working conditions.
We expect political democracy. Why not economic democracy too?
Behind the cosy democratic facade, Britain is a cut-throat economic dictatorship. A rich and powerful economic elite makes all the key economic decisions, excluding millions of employees and consumers.
Our country's democratic political transformation - pushed forward by the Levellers, Chartists and Suffragettes - has never been matched by a corresponding economic democratisation.
'One person, one vote' has been won in the political sphere (albeit imperfectly) but not in the realm of economics. Britain's democratic revolution, which begun four centuries ago, remains unfinished.
It is time to put economic democracy on the political agenda; to bring the economy into democratic alignment with the political system.
Extending the economic franchise is about democracy and justice. It can help create a greater plurality and diversity of economic power, and also lay the foundations for a more equitable and productive economic partnership between all those who contribute to wealth creation and to the provision of public services, from local councils to the NHS.
Whatever people think of the current economic system, one thing is indisputable: it is characterised by an absence of democracy, participation, transparency and accountability.
Employees and their representative bodies - the trade unions - are frozen out of economic influence and decision-making.
Big business rules. The captains of industry, commerce and finance have almost total power.
They run their enterprises on totalitarian lines. All decision-making is concentrated in the hands of a tiny, privileged cabal of major shareholders, directors and managers. They alone determine how the company operates. Employees - without whom no wealth would be created and no institution could function - are powerless and disenfranchised. They are little more than glorified serfs of the moneyed classes and their government.
Not much has changed in two centuries of capitalism. There have been no major democratic reforms of the economy. Although millions of people bought shares in privatised public enterprises like BT, their individual holdings are minuscule and marginal. They have no real influence. Big corporate interests retain the decisive economic power. This power is as centralised and autocratic as ever. A few determine the fate of the many.
The advent of nationalised public industries, utilities and services changed nothing. They have been run in much the same centralised, dictatorial manner as their privately-owned counterparts. There was never any economic democracy in the state-run railways or coal mines. The system of ownership changed but not the system of management. The bosses of public utilities and nationalised industries were almost as powerful as the captains of private enterprise. Their employees remained locked out of the decision-making process. It was state capitalism, not socialism. The Labour Party and the trade unions have made a huge mistake in over-emphasising public ownership, to the neglect of public control.
The same applies today in the NHS and other public services. They are administered according to the classic capitalist model of top-down command and control. NHS big-wigs have almost as much power as private medical bosses. Doctors, nurses and ancillary staff are excluded from policy-making in both public and private medicine. Their years of accumulated hands-on, frontline service knowledge is disregarded when it comes to policy-making. This is a huge waste of human resources.
Wherever we look, in all sectors of the economy, the democratic deficit is universal. Power is concentrated and wielded in ways that is contrary to the democratic, egalitarian spirit of modern, twenty-first century Britain. The time for economic democracy is now.
This is the second in a two part series considering whether or not drugs and prostitution should be legalized in the US as many libertarians including Ron Paul have advocated. Part 1 can be found here.
Prostitution is legal in some form or other in many countries of the world. In many other countries, including Muslim countries, polygyny, which means that one man can have multiple wives, is completely legal. Does prostitution serve some beneficial social purpose or is it something entirely reprehensible that should be criminalized and prosecuted? Or is it a necessary evil that should be regulated and managed but discouraged while not being criminalized. We shall examine some of these ideas in this article. Of course prostitution isn't the societal problem that drugs are. There is no "prostitution war" equivalent to the "drug war" that is ravaging Mexico. Billions of dollars aren't involved in prostitution in the same way that they are in the lucrative drug trade. Prostitution as a societal problem is almost beneath the radar compared to the drug problem where competing cartels have waged war and numerous people have been killed.
There are some 13,000 porn films made every year in the United States, most in the San Fernando Valley in California. According to the Internet Filter Review, worldwide porn revenues, including in-room movies at hotels, sex clubs, and the ever-expanding e-sex world, topped $97 billion in 2006. That is more than the revenues of Microsoft, Google, Amazon, eBay, Yahoo!, Apple, Netflix, and EarthLink combined. Annual sales in the United States are estimated at $10 billion or higher. There is no precise monitoring of the porn industry. And porn is very lucrative to some of the nation's largest corporations. General Motors owns DIRECTV, which distributes more than 40 million streams of porn into American homes every month. AT&T Broadband and Comcast Cable are currently the biggest American companies accommodating porn users with the Hot Network, Adult Pay Per View, and similarly themed services. AT&T and GM rake in approximately 80 percent of all porn dollars spent by consumers.
Evidently, it's not illegal to pay a woman to have sex so long as it's packaged and sold as an illusion, and it adds to the bottom line of corporate profits and as long as the man paying her isn't the man who is actually having sex with her.
The web has made pornography accessible and free. A Newsweek article in the December 5, 2011 issue states: "An estimated 40 million people a day in the US log on to some 4.2 million pornographic websites, according to the Internet Filter Software Review. And though watching porn isn't the same as seeking out real sex, experts say the former can be a kind of gateway drug to the latter."
The problems with the profession of prostitution are mainly visited on the low end prostitutes, the street walkers and hookers, who are regularly brutalized and even serially murdered by their clients. Sex trafficing affects girls and women who are promised a ticket out of some miserable homeland only to find themselves landed up as sex slaves. If prostitution were legalized and regulated, the people who would be helped the most are the low end prostitutes, the poor prostitutes who are exploited by pimps and sex trafficers. Perhaps this is why prostitution remains illegal in the US where disregard of the poor is a tenet and bedrock belief of Republican philosophy. After all legalization and regulation would mean more government bureaucracy even though it might reduce violence and sexually transmitted diseases. In other countries legalization means that prostitution is regulated to make sure that exploitation and disease are minimized under the theory that human behaviour can't be legislated but it can be managed and regulated.
In Holland where prostitution is legal, prostitutes even have their own union! Prostitution is legal in many countries including Canada, Mexico, Israel, England, France, most other European countries, most all of South America including Brazil, Australia and New Zealand. Even Iran has "temporary wives" which can last for only a few hours. Legalizing prostitution not only protects prostitutes and their customers, but it represents a service that can be taxed and can bring in government revenues. Libertarians in the US are all for legalizing drugs and prostitution. The joke is that libertarians are Republicans who want to smoke dope and get laid. The question why do men go to prostitutes is of less interest here than the sociological question of whether legalization or criminalization of such activity produces a more healthful and more crime free society. Societies in which drugs and prostitution are legal tend to have lower incidences of rape and other violent crimes than the US according to the Liberator report. And the US is the world's chief hypocrite in this regard as it tolerates and even encourages prostitution in countries which contain US military bases due to demand from soldiers, sailors, marines and airmen.
Before I go on though, there is a joke along these lines: A middle aged couple went to the county fair. As they were perusing the livestock barns they came across the prize bulls, those who had won blue ribbons. The wife exclaimed to the husband, "Look at that bull. He sired 150 calves last year. That means he had sex 150 times. If that bull can have sex 150 times in a year, surely you can do as good as that bull. They walked a little farther and the wife exclaimed again, "That bull sired 250 calves last year. He had sex 250 times. If that bull can do it, you should be able to do it too. They walked a little farther and the wife said,"Look at that bull. He had sex 350 times last year because he sired 350 calves." Just then the husband piped up, "Yeah but it wasn't always with the same cow!"
The "same cow" syndrome, as I call it, or sexual boredom explains in part why men who seemingly have everything, including the most beautiful wives in the world, cheat. Why do such men as Tiger Woods, John Edwards, Eliot Spitzer, Arnold Schwarzenegger, Jesse James and now even Ashton Kutcher cheat? Rich and famous men in particular have more opportunities for one thing because women are attracted to them. Rock stars, professional athletes and entertainers have women throwing themselves at them in many cases. They have ample opportunities. These are people who can go out and buy anything they want. If they want another home they simply go out and buy it. Another car? No problem. Another yacht? Same thing. They are used to being able to have anything they want. So it seems that what a lot of these men want in addition to all the other stuff is to have sex with a woman other than their wives even when they are married to the most beautiful women in the world. Men who stay monogamous may have the same desires but don't act on them due to the consequences and loss, both financial and emotional, that would ensue if they were found out. They may be altruistic enough to consider the consequences of breaking the heart of someone they love even if they are attracted to other women. Men seem to be able to divide love and sex into two distinct, sometimes non-overlapping, compartments of their minds. A girlfriend told me once that love and sex are all mixed together in a woman's mind whereas for men they are two distinct phenomena.
Take the case of superstars and multimillionaires Jennifer Lopez and Marc Anthony who supposedly had a fairy tale marriage and two adorable twin kids. That lasted about seven years. Marc decided that he wanted to spend more time with his ex-wife, a former Miss Universe. Jennifer decided she wasn't "passionately in love" any more. Friends said Marc had an eye for other women. There you have it folks. The fairy tale didn't last. Someone I dated once told me that fairy tale relationships don't last. She and her ex-boyfriend initially had passion that wouldn't quit. They couldn't get enough of each other. Then the passion started to diminish and after seven years they were sleeping in separate bedrooms and couldn't stand each other. Is this where the seven year itch comes in? I think the lesson here is that passionate fairy tale marriages or relationships won't last without concomitant commitment and sometimes even committed relationships won't last particularly if the participants can have anything they want without restrictions of finance or opportunity.
"Till death do us part” is a compelling idea, but with the divorce rate exceeding 50 percent, many people would very likely agree that humans have a biological impulse to be nonmonogamous. One popular theory suggests that the brain is wired to seek out as many partners as possible, a behavior observed in nature. Chimpanzees, for instance, live in promiscuous social groups where males copulate with many females, and vice versa.
But other animals are known to bond for life. Instead of living in a pack like coyotes or wolves, red foxes form a monogamous pair, share their parental and hunting duties equally, and remain a unit until death.
For humans, monogamy is not biologically ordained. According to evolutionary psychologist David M. Buss of the University of Texas at Austin, humans are in general innately inclined toward nonmonogamy. But, Buss argues, promiscuity is not a universal phenomenon; lifelong relationships can and do work for many people.
So what distinguishes the couples that go the distance? According to several studies, a range of nonbiological factors can help pinpoint which pairings are built to last—those who communicate openly, respect each other, share common interests and maintain a close friendship even when the intense attraction wanes.
Monogamy which isn't prevalent in the non-Western world is having a rough go of it in the US despite the "family values" crowd. Despite their family values politicians such as Newt Gingrich and now Herman Cain turn out to be serial adulturers. Others such as Republican David Vitter and Democrat Eliot Spitzer have been found out for visiting prostitutes. Vitter was able to keep his job in Congress; Spitzer wasn't able to hold on to the governorship of New York.
Muslims can have multiple wives. And according to the Bible Solomon had seven hundred wives and three hundred concubines. King David had eight wives and ten concubines. The Biblical example doesn't bode well for monogamy as the bedrock of western civilization. Monogamy in the western world is undercut by serial marriage which movie stars such as Elizabeth Taylor (8 marriages) indulge in. The marriage vow "till death do us part" has become irrelevant for large numbers of people who fail to even include it as part of their marriage ceremony. And in the western world one can simply remain single and have multiple boy or girl friends. The sanction against sex outside of marriage no longer exists. But still for some people monogamy remains a strongly desirable value and way of life. The fact that there are many ways around monogamy including prostitution is probably a good thing as it relieves sexual tension and pressure for those who are unable or unwilling to maintain strict monogamy. This pressure relief valve probably prevents equivalent energy release in more anti-social and even criminal modalities.
Frank has written an excellent essay on prostitution in Holland where it is legal, as it is in most other countries of the developed and undeveloped world, which we present here:
LEGALIZED PROSTITUTION IN THE NETHERLANDS
Introduction
The Netherlands has undergone a long transformation of first viewing prostitution as a dishonorable profession with few rights under the law; to seeing the prostitute as a victim of criminal exploitation by procurers and traffickers; to adopting a public policy of regulated tolerance; to legalizing and accepting adult prostitution in 2000 as a legitimate “right” and form of occupation by consenting adults. The Dutch practical approach to prostitution was evident as far back as 1413 in a decree from the city of Amsterdam:
“Because whores are necessary in big cities and especially in cities of commerce such as ours – indeed it is far better to have these women than not to have them – and also because the holy church tolerates whores on good grounds, for these reasons the court and sheriff of Amsterdam shall not entirely forbid the keeping of brothels.”
One caution to readers. This writer makes no pretenses that the Dutch approach to prostitution today is transferable to the U.S. For every nation has its unique social-cultural history affecting attitudes towards social problems like prostitution, drug abuse, rape, abortion, teenage pregnancy, euthanasia. The legal spectrum for prostitution extends to the death penalty in some Muslim countries to treating sex workers as legally independent, tax-paying business entrepreneurs in the Netherlands. US public policy decisions on prostitution have long been driven by traditional religious-based moral values making prostitution a criminal offense. Costly time consuming court cases are pursued penalizing prostitutes while knowing prostitution is impossible to eliminate. U.S. officials often end up taking a schizophrenic blind eye to its presence and abuses.
Since the 17th century, the Dutch have slowly developed a more permissive culture of pragmatism and tolerance towards the “oldest profession.” Although Calvinistic moral absolutism strongly colored government policy on prostitution in the 17th century, the criminalization of brothels died down as old habits continued. Dutch authorities gradually left brothels alone if they were not a public nuisance. Moral arguments to justify certain laws came to be overshadowed by a jurisprudence based on a cultural value of utilitarianism. Thus, religion, sin, morality are rarely the driving emotions in policy-making for social phenomena in the Netherlands. The Dutch are above all a practical, realistic, open people … characteristics nurtured by centuries of doing business across continents in diverse languages with few pre-conceived prejudices about race, political creed, culture, or religion. No wonder, surveys show that 78% of Dutch citizens favor legalization of prostitution.
In contrast, Sweden sees prostitution as a sex-specific act of violence against women, as an act essentially involuntary and morally repugnant. Sweden’s goal is to suppress and ultimately abolish it. Prostitutes are seen as a victim group and prostitution as a “gross violation of a woman’s integrity.” Prostitutes need to be rehabilitated not punished. In 1999, Swedish law decriminalized the sale of sex and took the historical step of making it a criminal offense to pimp, traffic, and buy sex. Men who buy sex are subject to public exposure and fines or up to six months in prison. Thus, clients as well as pimps and traffickers are seen as oppressors. All face the threat of being punished under criminal law. This plus the Swedish threat of "naming and shaming" the client by publication are generally accepted methods of abolishing prostitution, achieving true gender equality, and protecting women from violence.
Officially reported results are positive. Street prostitution has been eliminated. The number of prostitutes has dropped 40%, and criminal human trafficking gangs tend to avoid Sweden.
Sweden’s abolitionist policy is very un-Dutch. People here regard prostitution as a social phenomenon that cannot be eliminated. Interestingly enough, however, the Dutch are now considering adopting Sweden’s practice of "naming and shaming" the client – to be directed to buyers of sex from women or brothels not legally registered or licensed, to buyers from prostitutes who are minors, and to buyers who commit acts of coercion or violence. Studies show most men who bought sex would likely be deterred by the risk of a pillorying by public exposure in the local newspaper. Heleen Mees, Dutch economist and lawyer, concluded that for many men (including former New York Governor Eliot Spitzer), the promise of anonymity may be the most appealing aspect of buying sex.
How the Dutch System of Legal Regulation Works
The Dutch have long believed banning prostitution makes it ever more difficult to control and counter abuses. Accordingly, prostitution itself has never been illegal in the Netherlands. A 1911 Act banning the owning of a brothel and profiting from prostitution was lifted in 2000. The 1911 Act had only been used against brothels and sex clubs engaging in criminal activities or disturbing public order. It was replaced by Article 250a of the Dutch Criminal Code which made it legal under strict conditions to operate a brothel or solicit clients for a prostitute while prohibiting exploitation of prostitutes.
Like the Netherlands, Germany also legalized prostitution in 2002. The criminal aspect and spiraling violence were overriding factors compelling both countries to legalize and regulate the sex industry.
Dutch law brings tough penalties for the following offenses:
Forcing another person to engage in prostitution, inducing a minor to engage in prostitution, recruiting, abducting or taking a person in prostitution in another country, receiving income from a minor or a person forced to engage in prostitution and forcing another person to surrender income from prostitution.
The Ministry of Justice formulated six key aims of the new Prostitution Act:
Improve monitoring and regulating possibilities for legal prostitution through a municipal licensing system for prostitution businesses and work/residence permits for prostitutes. Curb illegal prostitution and intensify efforts to combat exploitation and forced prostitution. Reduce if not stamp out trafficking of minors, illegal immigrants and individuals without a valid residence permit. Protect minors below 18 against sexual exploitation. Safeguard position, mental integrity, and rights of prostitutes. Separate prostitution from the criminal activities associated with it.
Criminal offences carry a fine and a sentence of up to six years extended to eight or ten years for aggravating circumstances related to exploitation, trafficking, forced prostitution and use/abuse of children.
Guidelines and regulations to control brothels, self-employed sex workers, sex clubs and streetwalkers are set by local municipalities. The Association of Netherlands Municipalities publishes a common set of guidelines. Police, urban district councils, and local municipal health services are responsible for enforcing the laws, formulating and implementing the rules and policies regulating prostitution. This includes safety, hygiene, fire precautions, condoms, panic buttons, hot and cold running water. This also includes warnings, issuing/withdrawing business licenses and sex-worker residence or work permits, temporarily or permanently closing down a business for violation of license conditions, relocation of brothels for reasons of public order.
Workers in the oldest profession are now beginning to feel the pressure of European austerity by paying taxes like everyone else. In the Netherlands, the sex industry generates over $800 million annually in gross revenues. The sex trade went almost entirely untaxed until legalization in 2000. Sex workers are registered as one-woman, self-employed businesses. Authorities are now actively pursuing prostitutes who should be paying an average 33% tax many have managed to avoid. Research indicates about 40% of window prostitutes in Amsterdam pay some income tax. A spokesman for the Tax Service said, “We began at the larger places, the brothels, so now we are moving on to the window landlords and the ladies.”
Of course, an option for the prostitute is to work in the unlicensed, illegal sector. But if the client can find a prostitute there, why can’t a Dutch tax administrator? The prostitute and business establishment thus face real risks of losing their residence/work permits and license to work plus fines and possible jail terms.
As part of the Tax Service’s new tactics, officials are touring the red light districts (Amsterdam, for example) checking that the ladies – along with their required residence/work permits – are aware they must be paying taxes and making sure they have filled in all proper forms. In a notice given in Amsterdam’s city newspaper, landlords and window prostitutes were told they would be audited in typically bureaucratic fashion, “Agents of the Tax Service will walk through various elements of your business administration with you, such as pricing, staffing, agendas and calendars. The facts will be used at a later date in reviewing your returns”
Planned drop-in sessions by tax inspectors will be key in helping the Dutch government receive its share of the lucrative sex industry. For tax enforcement and collection efforts to be really effective, communication is crucial as the first language for most women is not Dutch and few speak English. Around three-quarters of the women working in Amsterdam’s sex industry – involving 8,000 prostitutes of all kinds and 3,000 working behind windows – are from Eastern Europe, Asia, and Africa. Another complication is that the industry is an all-cash business making it problematic to apply tax law, despite the fact that sex workers have residence or work permits. As one lady of the profession said, “How can they tell how many people come inside each day or how much money changes hands once the curtain is drawn? Not many customers ask for a receipt.”
What Are the Lingering Problems With the Dutch System of Legalized Prostitution?
The Dutch have been busy reducing the size of the red-light district in Amsterdam out of fear the business is getting out of control in recent years – exacerbated by sharp increases in the flow of women from poorer, less-developed countries. The abuse of prostitutes and illegal trafficking activity have been on the rise. As Job Cohen, former mayor of Amsterdam said in 2008, “We’ve realized this is no longer about small-scale entrepreneur businesses, but about big crime organizations involved in trafficking women, drugs, killings and other criminal activities.” Mr. Cohen added, “It is not that we want to get rid of our red-light district. (Fifty percent of the business comes from tourists). We want to reduce it. Things have become unbalanced and if we do not act we will never again regain control.”
In 2008, Amsterdam authorities began reducing half of the city’s 400 prostitution windows and closing a third of its brothels and some of the city’s 70 sex clubs and marijuana cafes. Simultaneously, there has been an intense crackdown on human traffickers who deceive victims by offering work in hotels, restaurants or child care while later forcing them into prostitution. Recent prison terms for small crime gangs have ranged from 4 to 7.5 years. The police conduct frequent controls of brothels to pick up signs of human trafficking.
In 2009, the Dutch Justice Ministry appointed a special public prosecutor responsible for closing down prostitution and coffee shops connected to organized crime. As has been the practice since the legalization of prostitution, withdrawal or refusal to grant a brothel license may occur for moral or ethical reasons or if:
• The brothel owner is unable to produce a police clearance certificate issued by the local authorities.
• The brothel employs a minor or an illegal resident or any person under coercion.
• The intended location conflicts with zoning plans.
• It is in the interest of public order.
• It makes the area less desirable to live in.
Other proposed stiffening up of legal requirements now nearing the last stage of the approval process include:
(1) Minimum age of sex worker will be increased from 18 to 21.
(2) Prostitutes must receive a registration pass with a photograph and a registration number but no name and personal data; clients will be required to check this pass.
(3) License requirements will be extended to escort and internet agencies, home sex outlets, adult movie theaters.
(4) An advertisement of an individual prostitute or of a sex company must show the registration number and license number, respectively; the outside and inside premises of a sex company must display a sign showing it is licensed.
(5) Clients engaging in sex at unlicensed establishments, or with non-registered prostitutes or with minors, or clients guilty of unacceptable treatment of a prostitute will also be subject to a naming and shaming threat of public exposure similar to regulation practice in Sweden.
What Are the Benefits of the Legalization of Prostitution from the Dutch Experience?
From Dutch perspectives, the advantages of legalizing prostitution are several for all parties, i.e., prostitutes, local governmental authorities, communities:
• The rights of prostitutes are asserted as autonomous self-employed businesswomen in a legitimate form of labor offering all the protections/benefits of the labor laws (participating in pension planning and workman’s compensation) as well as the obligations related to tax and social insurance contributions. Prostitutes are self-determining. No longer under control by pimps, they can accept or reject clients, decide when to work and when to retire. Pimping services are disappearing helped by regulations prohibiting pimps from earning a livelihood off the wages of prostitutes.
• Prostitutes are able to report violent and abusive crimes (rape, assault, coercion, extortion) without fear of prosecution or abuse by law enforcement agents – thus being far less vulnerable to predators like clients, pimps, madams, crime gangs, police. Abuses are more easily detected when prostitutes operate publically and legally. Strengthening the rights of women engaged in the oldest profession is seen as the best way to combat sexual violence.
• Prostitution in the “open sunshine” as a registered and licensed profession means the health needs of prostitutes are more likely to be self-addressed by prostitutes and by local health authorities. By local law, brothels must allow health services or interest groups unrestricted access to their premises. •
• While medical checkups are not obligatory, prostitutes self-employed or employed in the legal sector generally comply with the request to have medical checkups four times a year. Employers of prostitutes must pursue safe-sex policies and encourage their employees to have regular checkups for STDs.
• Brothels must meet standards of housing safety, basic hygiene facilities, zoning regulations, quality of life of the community, confinement to designated areas leaving most parts of a community prostitution-free. Streetwalking is less than 5% of all prostitution in the Netherlands. Some municipalities refuse to license window prostitution and streetwalking.
There’s a special phone line for members of the public to anonymously report suspicious activities. This and regular inspections by law enforcement agencies produce valuable information to follow and prosecute offenders in both the regulated and illegal prostitution sectors.
Summary
The Dutch have had a long history of tasting the more prohibitionist, morally-driven approach to prostitution. Then in 1911 came a policy of prohibiting brothels and “living off the avails of prostitution”, (sharing in earnings of a prostitute) together with a discretionary enforcement of the law … a kind of de facto “regulated-tolerance.” Finally, legalization of brothels and formal legitimization and de-stigmatization of prostitutes came in full force in October 2000. Prostitutes can work as regular employees (with a labor contract), although the vast majority now work as independent contractors.
The Dutch approach to legalizing prostitution frees up the justice system from wasting enormous monies and time on nuisance cases. More time is available for getting better control and prosecution of the real vicious culprits … organized crime gangs who continue with the exploitation of minors, human trafficking, coercion, violence, and drugs. The Dutch realize they must do much, much better in breaking down the illegal clandestine underworld of prostitution. And they will get the job done. But they are also realistic in recognizing that banning social phenomena makes them much more difficult to get under control.
And now in true Dutch pragmatic fashion, the red-light districts can expect a business-only visit by the tax inspector. Besides the improving government oversight of all facets of the sex industry, there is the important spin-off of a grass–roots enforced tax policy which is expected to generate much needed tax revenues. Although the 2008 financial crisis was weathered fairly well by the Netherlands, the government ran a deficit of 6% of GDP in 2010. It is now cutting spending +-20% and raising taxes over the next four years in the hope of balancing the budget by 2015. The lucrative sex industry must do its part.
REFERENCES: Legalized Prostitution in the Netherlands ________________________________________________________________
1. “Human Trafficking and Legalized Prostitution in the Netherlands,“ by Dina Siegel Prof. of Criminology at the Willem Pompe Institute, Utrecht University of the Netherlands, March 2009
2. “Prostitution in the Netherlands,” by Radio Netherlands Worldwide, Sept. 18, 2009
3. “Does Legalizing Prostitution Work,” by Helen Mees, Feb.3, 2009
4. “Prostitution in the Netherlands – History,” Wikipedia
5. “Prostitution in the Netherlands Since the Lifting of the Brothel Ban,” by A.L. Daalder of the WODC (Wetenschappelijk Onderzoek en Documentatiecentrum), 2007
6. “The Legalization of Prostitution: Myth and Reality” – A Comparative Study of Four Countries (Including the Netherlands, pages 55-69), Naomi Levenkron of Hotline for Migrant Workers, 2007
7. “The Act Regulating the Legal Situation of Prostitutes” – Implementation, Impact, Current Developments: Findings of a Study on the Impact of the German Prostitution Act (which adopted somewhat the Dutch liberal drugs model), by Prof. Dr. Barbara Kavemann, Ass. Jur. Heike Rabe, Sept. 2007
8. “How the Dutch Protect Their Prostitutes,” by Patrick Jackson of BBC News, Dec. 16, 2006
9. “Legalized Prostitution – Regulating the Oldest Profession,” by Mark Liberator, Dec. 8, 2005
10. “Dutch Policy on Prostitution,” Questions and Answers: Publication by the Netherlands Ministry of Foreign Affairs, 2004
11. “Prostitution in the Netherlands: Transforming the World’s Oldest Profession into the World’s Newest Industry,” by Gary Feinburg of Crime & Justice International, July/Aug. 2003, Vol. 19, No. 75
12. “Prostitution Laws – Toronto, Ontario and Canada,” (Live off the avails of prostitution) Posted by Toronto Defense Lawyers (TDL), Mar. 8, 2010
End of Frank's Essay
Comments on Frank's essay by John:
Frank says: "US public policy decisions on prostitution have long been driven by traditional religious-based moral values making prostitution a criminal offense." But prostitution is legal, not a criminal offense, in Nevada. Currently eight out of Nevada's 16 counties have active brothels (these are all rural counties). As of June/July 2008, 28 legal brothels existed in Nevada.
Frank brings up the Swedish attitude of legalized prostitution but "naming and shaming" the clients or Johns. (In Holland the "naming and shaming" only applies to clients of illegal forms of prostitution such as intercourse with underaged girls.) In Sweden the women are viewed as victims, and prostitution, though tolerated, is viewed with disapprobation. This begs the question 'is there any individual or social good at all in prostitution or the exchange of money for sex?' I would maintain that there is a relative social and individual good in prostitution. First, under the right conditions, it allows certain women to make a good living who otherwise might be unemployed. Second, prohibition only drives the industry underground and makes exploitation and disease, more, rather than less, likely. Third, it provides an outlet for men who are not in a position, temporary or otherwise, to form a normal emotional, as well as sexual, relationship with a woman.
The Chinese government has intervened in commercial sex work in China in order to alleviate the growing HIV/AIDS problem there. Even though prostitution is illegal, the government thought it necessary to provide condoms, establish clinics to provide check-ups and other measures to prevent the spread of disease.
Consider the two cases of Eliot Spitzer and John Edwards. Spitzer was outed as having visited a prostitute, and, as a result, he was shamed into resigning as New York State Governor. But in short order he has rehabilitated himself and his public image having become a pundit on TV and having had his own talk show on CNN for a period of time. Since there was no emotional attachment, his wife, evidently, has forgiven him, and his marriage remains intact. Edwards, on the other hand, formed an emotional and sexual relationship, a full blown affair, with Rielle Hunter that resulted in the birth of a child while Edwards was married to his wife who was dying of cancer. Edwards has been much reviled and is facing five Federal counts for misusing campaign funds which may land him in jail and cause the loss of his attorney's license and the loss of custody of his children not to mention a stiff fine. If only Edwards had visited a prostitute instead of getting involved in a very personal affair, he might not be in the very serious situation he's presently in which could result in his children becoming parentless for an extended period of time if Edwards goes to jail. Edwards probably rues the day he ever got involved with Hunter not to mention the fact that his affair probably cost a hundred times more in monetary terms than did Spitzer's dalliance with a high priced prostitute. Spitzer has had to come to terms with his sexuality vis a vis his wife and why he felt it necessary to seek sex outside of marriage, but that is between him and his wife and is not a public matter.
End of John's comments.
Wesley's Comments:
As far as prostitution goes, in this country it should be regulated as it is in Holland. I have never been there or sampled the fruits of their labor, but from my readings in Newsweek, Time, and the like it seems to be working. At least by regulating it, organized crime's involvement is reduced and health standards maintained. All good, but in any government entity, there is inherent corruption; just not as violent and final as organized crime's methods that would necessitate laws to control it. More laws!!! That means more government employees to "supervise, enforce, document, inspect, study, propose more regulations", and the list is endless.
Take government out of the picture and street level entrepreneurs (pimps and organized crime) will fill the void. The best solution is the most expensive - as usual.
Our present laws are rooted in the colonial standards where one would be either jailed, stocked, dunked, or humiliated in some way for not attending church on the Sabbath. Witches and anyone else with talents that were not understood were executed. The carry over is our present prohibition on anything deemed sexually explicit.
It can be argued that such regulation serves the common good in that it sets the boundaries of moral conduct and makes for a stronger society. Is it OK for someone with supervisory control over children to abuse them in any way? Is it OK for someone to force a young person into prostitution? If that conduct were not prohibited, would our society be any less corrupt? In my view it would be disastrous and government control is the only viable option. At least the taxes and fees collected may cover a small portion of the cost to taxpayers for regulating it.
As to porn. A multi BILLION dollar world wide business and thanks to the internet, not sanctioned or controlled by our government. But they want to - desperately want to.
Who in the hell does it hurt? Psychologists maintain that it is the first step in the release of sexual repression that may evolve to violent sexual behavior. Is it like the first puff of MJ where some say that you are on the fast track to addiction? Is it a sign of underlying hatred or disrespect of the female gender?
BS! Guys have testosterone and their brain is wired differently - end of story. Maybe some do not get beyond the 3rd grade experience of sneaking a peek up a class mate's dress. Others wish they had and that peek becomes the top playground subject for the week. Could this be the foundation where reputations are built? After all, some guys and some girls will have one by their senior year and many sooner. Is this where porn is started? The unspoken desire to see more!
We are indoctrinated at a very early age "not to look". I heard it from my mother, grandmothers, teachers, clergy, and I can't count the rest that uttered that admonition. But I still did! And they knew it!!! Do I still? I'll never tell. So you head readers out there have fun with that. Am I or am I not a pervert?
Regulate it - Hell No. BUT then what about child porn and MBLA? Well, some regulation is in order. Now the pool of government workers grows a bit more. (Go back to the first paragraph).
There is not freedom without government regulation. With regulation there is not freedom.
As far as prostitution goes, no matter how legal it becomes there will always be a stigma because of those with religious beliefs, and those in public office will still be held to a higher standard if for no other reason than muck raking. In this case, Spitzer and the like might not have committed a crime, but might not have survived an election either. That will be interesting.
Legalizing would be an easy solution, but here again the bureaucracy governing the career field will run out of control. I use the term "career field" because with legalization it will supposedly be a choice freely entered into by the person. Person, because prostitutes come in both sexes and the male side has never been as fully disclosed as the female side.
Breaking the present hold on the "business agents" involved today will be difficult even with licensing, health inspections, and field agents. My original feelings were opposite, but after much consideration I feel that involvement of organized crime and street level pimps, gangs and the like will never be eliminated. In fact, keeping corruption out of even legalized entities will be nigh impossible because the dollar amounts are astronomical.
But if enacted into law, the passage of time will mollify public opinion and both prostitution and drugs will become socially acceptable to some degree.
End of Wesley's Comments
John's Comment on Wesley's Comments
As you point out, legalizing something does not mean that criminal elements will not continue to be involved. I think Frank pointed out that Holland recognizes that fact and provides for monitoring both the legal and illegal aspects of prostitution.
This is the first part of a two part article considering whether or not drugs and prostitution should be legalized in the US. Part 2 on the legalization of prostitution can be found here.
A recent documentary by Ken Burns on Prohibition brought to light the harmful effects of trying to outlaw an activity deeply ingrained in human culture - the drinking of alcohol - which was prohibited by constitutional amendment from 1920 to 1933 when the amendment was repealed. Not only did the prohibition of alcohol not diminish the actual drinking of it, nor did it reduce alcoholism, but prohibition opened up previously unavailable opportunities for organized crime. It also produced an epic level of hypocrisy among politicians who disparaged alcohol publicly while indulging in it privately. Revenues due to excise taxes which funded the Federal government for much of its history up till then dried up. Drug use and prostitution are related since many drug users are prostitutes and many prostitutes are drug users. Many people feel that you can't legislate morality so the government should stay out of trying to control people's personal habits. One such person is libertarian and Republican Presidential candidate Ron Paul. Listen to what he has to say.
Politicians, most notably Eliot Spitzer, former Governor of the great state of New York, have been embarassed, scandalized and driven from office over dalliances with prostitutes while rock stars, athletes and entertainers glorify and seemingly get away with drug use and sexual practices somewhat removed from the mainstream. While virtually no one is subjected to harsh jail sentences as a result of prostitution, minor drug offenses lead to jail time. The US has the highest incarceration rate in the world - about 1% of the entire adult population - largely due to minor drug offenses. What amounts to a war is raging on the US Mexican border due to criminal drug syndicates in Mexico which cater to the American appetite for illegal drugs. Of the two - drugs and prostitution - drugs are by far the greater problem due to the illegal importation of them, the killing in Mexico because of rival drug gangs fighting each other for dominance and the large incarceration rate mainly of African-Americans in the US. 9.2% of African-American adults were in prison in 2008. The prisons to house these inmates are costing taxpayers a huge amount of money while the taxes that could be collected on legalized drugs go uncollected in an economy that's in desparate need of revenue.
Jazz singer Anita O'Day in her autobiography "High Times Hard Times" commented about the fact that marijuana, which was legal in the US up till 1933, was made illegal precisely when alcohol was legalized again:
People ask me when I first smoked grass. Well, I smoked it before it became illegal in 1933, although it really wasn't legal for me to smoke anything then. But before going into our dance, George and I would share what we called a reefer. It was no big deal when I was twelve or thirteen. If you lived in the Uptown district, you could buy a joint at the corner store, if not nearer. I never read the newspapers so I didn't know when pot was outlawed and beer became legal. One night I asked George for a hit on a joint and I thought he was going to flip out. 'Do you want to get us arrested?' he hissed. Then he told me what had come down. It didn't make sense. One day weed had been harmless, booze outlawed, the next, alcohol was in and weed led to 'living death.' They didn't fool me. I kept on using it, but I was just a little more cautious.
Other famous jazz musicians such as trumpeter Louis Armstrong were lifelong devotees of marijuana. It didn't seem to hurt his career any. Pianist and composer Thelonious Monk was denied a cabaret card in New York City for many years which meant he could not earn a living playing in clubs, due to a minor drug offense. In some cases musicians were set up and drugs planted on them by police. Habits formed when marijuana was legal were hard to break particularly in the African-American community when marijuana became illegal in 1933. The persistence of cultural patterns of smoking MJ probably has something to do with the large number of African-Americans incarcerated today because of its use. The hypocrisy of a system which makes beer legal one day and marijuana illegal the next does nothing but breed disrespect for the law which is what happened during the Prohibition era.
The history of cocaine has a similar trajectory. Cocaine was perfectly legal in the US up to 1914. In early 20th-century Memphis, Tennesee, cocaine was sold in neighborhood drugstores on Beale Street, costing five or ten cents for a small boxful. In the 1890s the Sears & Roebuck catalogue, which was distributed to millions of Americans homes, offered a syringe and a small amount of cocaine for $1.50. Stevedores along the Mississippi River used the drug as a stimulant, and white employers encouraged its use by black laborers. In 1914, the Harrison Narcotics Tax Act outlawed the sale and distribution of cocaine in the United States. However, the use of cocaine was still legal. Cocaine was not considered a controlled substance in the United States until 1970, when it was listed in the Controlled Substances Act. Until that point, the use of cocaine was open and rarely prosecuted in the US. Since 1970 the jails have filled up with people prosecuted for minor drug use.
From 1898 through 1910 diacetylmorphine, the technical name for heroin, was marketed under the trademark name Heroin as a non-addictive morphine substitute and cough suppressant by the German corporation Bayer. The name was derived from the Greek word for Heros because of its perceived "heroic" effects upon a user. Bayer marketed the drug as a cure for morphine addiction before it was discovered that it rapidly metabolizes into morphine. As such, diacetylmorphine is essentially a quicker acting form of morphine. Contrary to Bayer's advertising as a "non-addictive morphine substitute," heroin would soon have one of the highest rates of dependence amongst its users.
In the USA the Harrison Narcotics Tax Act was passed in 1914 to control the sale and distribution of diacetylmorphine and other opioids, but allowed the drug to be prescribed and sold for medical purposes. In 1924 the United States Congress banned its sale, importation or manufacture. It is now a Schedule I substance, which makes it illegal for non-medical use in signatory nations of the Single Convention on Narcotic Drugs treaty, including the United States.
In 1923, the U.S. Treasury Department's Narcotics Division (the first federal drug agency) banned all legal narcotics sales, forcing addicts to buy from illegal street dealers. Soon, a thriving black market opened up in New York's Chinatown.
Today a majority of people in the US favor the legalization of marijuana. At the same time more deaths occurred last year due to prescription drugs than to illegal drugs. These two facts seem to indicate that prescription drugs are a greater problem than marijuana.
On the other hand, Zurich's experience with its "drug park" is a cautionary tale for the liberal tolerance of drug use and its legalization. The following article from the New York Times is so interesting and informative that we reprint it here in its entirety:
After years of steadily rising crime and other drug-related problems, this city once associated more with banking and solid civic virtue than with marauding groups of addicts has ended its innovative experiment with an open drug market in a public park here.
The smashed windows of a Chanel store and a central branch of Credit Suisse, as well as the shooting of an unidentified man on Thursday, betray the sharp tensions that have stemmed from the closing last week of the Platzspitz, a park where the illicit activities of thousands of drug addicts and dealers were tolerated in recent years in a policy of containment of the drug problem.
Andres Oehler, a municipal spokesman, said the City Council had decided to shut the park, now sealed behind 10-foot iron fences hastily erected on the adjoining bridges, because "it was felt that the situation had got out of control in every sense."
But closing the park left several unresolved issues, including the fate of what has become a large international community of addicts in Zurich and the question of what exactly went wrong with an initiative originally aimed at helping drug abusers.
Addicts were drawn from all over Europe in recent years by the Socialist City Council's decision to offer clean syringes, the help of health officials and a large measure of tolerance in the Platzspitz, a once-elegant garden behind the stately National Museum.
The city characterized its approach as an enlightened effort to isolate the drug problem in an area away from residential neighborhoods, curb AIDS and foster rehabilitation. Its policy reflected a strong current of feeling among some European experts that it is the illegal and clandestine nature of the drug business, rather than the drugs themselves, that causes many of the associated problems.
But the situation gradually degenerated. "You give a little finger, and they want the whole hand," said a senior city official who insisted on anonymity. "You turn a blind eye to the small deals, and the big ones come. It was a spiral."
Regular users of the park swelled from a few hundred at the outset in 1987 to about 20,000, with about 25 percent of them coming from other countries. Then, Mr. Oehler said, dealers from Turkey, Yugoslavia and Lebanon moved in last year. Thefts and violence increased, with 81 drug-related deaths in 1991, twice as many as in 1990.
"We were having to resuscitate an average of 12 people a day, with peaks of 40 a day on some days," said Dr. Albert Weittstein, the city's chief medical officer. "Our people were running up around the park blowing oxygen into people's lungs. We started with three doctors, but recently had to put in two more. It has become an impossible strain."
Groups of as many as 50 addicts now gather in the streets adjoining the park, where they are jostled by police officers with orders to disperse them. "This is a crazy decision, we'll be in the whole city now," said one young man, a syringe casually tucked behind his ear, as a policeman pushed him away. He declined to be identified.
On a nearby bench another youth, apparently oblivious to the approaching police officers, calmly tightened a belt around his upper arm before plunging a needle into a bulging vein below his elbow.
Christoph Schmid, a 21-year-old Swiss addict who has been using the park for the last two years, took a measured view of the action. He said the closing and the police crackdown would cause him and others "enormous difficulties" -- heroin has become harder to get and its price has already doubled to about $230 per gram -- but he also said the Platzspitz had recently become too violent. "Too many kids were getting hooked too easily," he added.
The park -- beautifully situated at the confluence of the Sihl and Limmat Rivers, which isolated it from neighbors despite its central location -- is now a monument to vain utopian hope and sordid devastation. "Anarchy is possible," proclaim graffiti scrawled across the National Museum. A bronze statue of a stag has been adorned with the word "Dope" in fluorescent orange paint.
On the ground lie thousands of discarded syringes and syringe packets, now being collected by garbage crews. The rhododendrons that once lined the paths are dead; so, too, are many of the trees. Most of the expanses of grass have been reduced to mud.
Peter Stunzi, the director of the city's parks, said that because the park had become what he called "Zurich's municipal urinal," the soil is such that it will be difficult to plant anything in the near future.
He added that he believed it was right to close the Platzspitz because "Zurich could not be responsible for the drugs of Switzerland and the rest of Europe." But he added, "My worst nightmare is that these people will now have nowhere to go."
The city government wants all those who are not from Zurich to leave. Signs have been posted around the city warning that the authorities will no longer tolerate the public shooting up or handling of drugs or gatherings of groups of addicts. All those not from the city should "go back to the communes, where they will be helped."
Checking for Outsiders
Mr. Oehler, the city's spokesman on drug matters, said that by April hostels in Zurich where addicts are allowed to sleep for about $3 a night will no longer accept anyone who does not have an identity card proving Zurich residency. But he conceded that "the problems will take a long time to resolve."
The city's new measures appear to be coming into force amid tensions in the nine-member City Council. One member, Emilie Lieberherr, who is responsible for social affairs, has protested the action as ill-considered. And there seems to be a general feeling that while mistakes were made, frontal attacks on drug abuse are not the answer either.
"We hoped we could minimize the social costs by creating an open market where people could get help," Dr. Weittstein said. "We thought we'd ferret out the dealers, but we failed, and we did not consider the dynamics of a still illegal business, which meant that dealers and users were attracted from far afield."
He added that the failure of the park did not, in his view, resolve the argument over whether drug prohibition makes matters better or worse. "I believe and most Swiss experts believe, that prohibition does a lot of damage," he said.
Drugs used in the park were still technically illegal. But attempts by plainclothes police officers to clamp down on dealers achieved little.
There are an estimated 30,000 drug addicts in Switzerland, a country whose industrious precision has created enormous wealth and a sparkling order, but also a conspicuous alienation among youths.
About $1.5 million will now be spent on renovating the park, Mr. Stunzi said, and it is hoped that a pristine Platzspitz might reopen by the spring of 1993 at the earliest.
By then, Zurich hopes, its self-created reputation as a drug capital will have faded. But for now, its streets are full of the confused ebb and flow of a disoriented mass of youths. Outside the park's closed gates, when the police move off, hordes of addicts quickly return to try to salvage with spoons some precious white powder that had spilled to the ground.
The lesson here, I believe, is to not create a central location for drug addicts, offer free needles and attract them from all over the world. Zurich effectively created a drug addict's nirvana while their efforts at rehabilitation were insufficient. They more or less said that drug users will inevitably always be with us so let's just herd them into one central location. Intervention as opposed to incarceration might be a better approach. This would mean taking the addict off of the street, denying them access to drugs and then offering them treatment and rehabilitation before letting them go free again. This requires societal resources, but might maximize the probability that a particular addict might stay clean once he or she goes back into society.
The question of drug legalization has to do with which drugs are to be legalized - just soft drugs like marijuana or hard drugs like cocaine, heroin and methamphetamine too. Ron Paul is for legalizing all drugs on the grounds that government should not dictate people's personal habits, and most people would not try heroin anyway even if it were legal. Certainly, legalizing marijuana would cut the cross border illegal trade considerably while doing nothing more than legalizing a substance which had been previously legal in the US up till 1933. The Prohibition era for marijuana would be over as it was for alcohol in 1933. The growing and selling of marijuana could provide jobs for many people in a jobless economy. Taxing marijuana could provide much needed government revenues. The diminution of the prison population would be a social good. I honestly don't see any downside. Probably taxes should be kept low for the first five years so that the crime syndicates in Mexico would not be able to undercut the price, and would be largely put out of business. For hard drugs I would advocate legalization also but very tough regulation and high taxation to make them very expensive. In addition to lowering the prison population, legalization of drugs would reduce the killing in Mexico and the cross border illegal shipments of guns and cash from the US. The border situation with illegal guns, money and immigrants could be normalized. It would be a step in the right direction towards increasing border security.
Along with legalization of drugs, education about the effects of using drugs and addiction in general whether it be drugs, food or sex as well as programs for getting people who want to quit the drug habit off of drugs should be stepped up. Public schools should teach students not only about drugs but other life skills such as how to deal with finances. Sex education is a necessity if for no other reason than US media culture is permeated and saturated with gratuitous sexual messaging. The cultural winds blowing on impressionable minds glorify sex, drugs, violence and consumerism. Public education needs to combat these forces. Perhaps this is why Republicans are dead set on destroying the public education system.
Wesley's Comments
As far as I am concerned if someone wants to indulge themselves with a present day illegal substance, let them. No stigma, but absolute enforcement of laws governing conduct, driving and work place sobriety standards. Give no quarter and make the penalties extremely severe.
I don't give a damn if someone dies of an overdose whether it be drugs or alcohol. If a person has so little self control, or self respect, perhaps society would be better off without them. You use it and end up hooked, you have no one to blame but yourself - suffer the consequences. If the government is involved (which it will be), there has to be a way of recouping expenses besides excise taxes. Those desiring rehabilitation can volunteer for it, and those convicted of non-injurious drug use should be sentenced to a project similar to the CCC or WPA of the Depression era. Anyone convicted of drug use resulting in injury or death of another should be executed.
You and some readers might think me insensitive and unreasonable at the least, and, more than likely, far worse. So be it. It is time our society wakes up to the fact that we, individually, are responsible not only to ourselves, but to society as a whole. It is not mine, nor anyone else's financial responsibility, to support the indulgent behavior of others, and that will be the 800 pound gorilla in the room. More public assistance to the weak willed, over and above the tax revenues collected, is not called for.
In my estimation the only things not eliminated by legalization of drugs are things for which one can be prosecuted due to other infractions of the law not having anything to do with drugs per se. Every other aspect whether legal or illegal should remain the same, but will probably get worse if drugs are legalized because of the additional laws and standards required. Catch 22 comes to mind.
I did not isolate my stand on drugs to MJ. Legalize them all just as it was up to the early parts of the 20th century. Opiates were an over the counter remedy for everything. Hells bells, there were even door to door salesmen peddling the stuff. Addiction, yes there was, but the primary difference today is that people are driving cars at 70 miles an hour. Now, thanks to OSHA, nearly all factory and work place tools and machinery are idiot proof so perhaps a mild buzz could be acceptable. Maybe even a little meth prescribed to senior citizens would speed up their reactions and the little old blue hair ladies that can barely see over the steering wheel can maintain freeway speeds.
I can foresee a definite improvement in traffic flow; and that time distance reaction thing, that is an acquired skill. I should know. I practiced steadily for a number of years with some of Kentucky's finest. Never had or caused an accident while under the influence of the stuff; it was the sober hours that were a problem. Probably a hangover thing and from what I have been told that is not a problem with MJ.
And as I wrote, if you cause injury or death while under the influence of drugs or alcohol, you should face a MANDATORY death sentence. No incarceration, no rehab, no counseling, no appeals. The sentence to be carried out right after being found guilty. NO delay.
End of Wesley's Comments
John's Comment on Wesley's Comments
Wayne, what about a minor injury? Surely you wouldn't recommend putting someone to death for that even if under the influence of drugs or alcohol. I can see it for a head on collision in which innocent people in the other car are killed. There was a case like that here recently. I think the drunk guy who lived got 20-30 years in jail. I am for capital punishment in open and shut egregious cases, but not for those convicted based on eyewitness testimony which is notoriously inaccurate resulting in the incarceration and death of a lot of innocent people. A drunk driver causing an accident, on the other hand, is pretty much an open and shut case.
Frank's Essay:
DUTCH POLICY TOWARDS HARD ANDSOFT DRUGS
Introduction
A country’s drug policy evolves slowly and reflects national conditions and culture. As punitive or other model drug laws have evolved in countries over the past century, so have the unique drug policy enforcement solutions pioneered by the Dutch. Their open minded attitudes toward illicit drugs, like toward prostitution, are driven by their peculiar societal values – a realistic, humane approach to social problems like drugs as a health-centered and social well-being matter, not primarily as a problem of the police and judiciary – values that embody:
First, a long history of tolerance and pragmatism.
Second, a strong belief in individual freedom, like deciding about private matters such as one’s own health, while also having a strong sense of responsibility for the community’s well-being.
Third, a view of drug issues as manageable health and harm reduction matters – as “normal social problems” with real-life, scientific distinctions in relative risks – not an alien threat, a “forbiddenfruit” perennially punishable by the criminal prosecution and imprisonment apparatus.
Fourth, a non-absolutist ideological approach to social problems where criminal law is not perceived as enforcing social or religious morality, and government is expected to act with reserve on issues involving religion and moral questions.
Fifth, a belief that hiding or taking a blind eye to negative social problems does not make them go away but only makes them more difficult and costly to control.
What is the Historical Trend in Drug Policy?
Repressive and indiscriminate drug policies adopted under the 1919 Opium Act slowly gave way to very grave doubts as to the effectiveness of that approach. In the 50s and 60s, harsh sentencing practices for drug offenses including cannabis did not deter a notable increase in consumption. So in 1976, the Dutch parliament amended the Act to focus on battling the risks of drug abuse for society and individuals rather than just fighting consumption itself. The pre-1976 policy of prohibition and penal measures paid scant attention to the human, social, psychological, economic fallout of hard and soft drug use and the need to prevent further human suffering and disease.
While the Opium Act criminalized drug possession, cultivation, trafficking, importing and exporting, the 1976 amendments and subsequent amendments have established two classes of drugs: (1) hard drugs deemed to be an unacceptable risk to public health including heroin, cocaine, amphetamines, LSD, ecstasy, hallucinogenic (magic) mushrooms; (2) tolerable traditional hemp-product soft drugs, marijuana and hashish. Dutch drug policy has pragmatically reverted to a new guideline of distinguishing drugs and related punishable acts based on their harm to the individual and to public health – a policy of minimizing the hazards and abuse of drug use rather than just suppressing all drugs … a policy addressing demand and supply that supports a certain degree of tolerance and non-prosecution rather than indiscriminate law enforcement.
The now amended 1976 Opium Act incorporates some unique strategies for reducing the harm of drug use and abuse:
The prevention or alleviation of social and individual risks caused by drug use.
A rational relation between those risks and policy measures, e.g., possessing, dealing in, selling, and producing drugs are criminal offenses with severe penalties for hard drugs. Drug possession for dealing is also more severely punished than possession for personal use which police generally take a soft approach to.
A differentiation of policy measures that considers risks of legal and medical drugs.
A police and judiciary that gives high priority to tackling the large-scale drug trade and production of drugs.
Recognition of the inadequacy of criminal law concerning other aspects (i.e., apart from trafficking) of the drug problem.
Not taking action against possession of small quantities of soft or hard drugs for personal consumption; tolerating (de facto legalizing) under strict conditions the consumption and traffic in soft drugs in youth centers and coffee houses where threshold quantities and the intent to deal determine personal possession, use, and trafficking offenses.
A high law-enforcement priority of cracking down, levying stiff penalties on hard drugs trafficking and production – including exportation and importation, large-scale commercial cultivation of cannabis, ecstasy, amphetamines, and LSD.
A “normalization” policy that treats drug problems as normal social problems, not as punishable deviant behavior only making societal control problems worse; a policy of integration and social rehabilitation of addicts; a policy of low threshold treatment acceptance, minimum paperwork, routine medical treatment services … all to avoid delaying care, marginalizing, stigmatizing, or isolating drug users.
Early focus on health promotion to young people in particular of the benefits of universal drug prevention … through curricular school-based programs such as, “The HealthySchool of Drugs” program – comprising lectures in secondary school on alcohol, tobacco and cannabis – and prevention outside school under the, “Going Out, Alcohol and Drugs” program – aimed at reducing health and safety problems among young people using drugs in recreational and party settings. Also, a wide range of support programs are offered to addicts with the goals to prevent and relieve risks of drug use for addicts, their immediate environment, and society as a whole.
What Are the Enforcement Principles and Rules?
The amended 1976 Opium Act still holds the possession of marijuana/hashish to be a petty misdemeanor today. But, even that offense is seldom enforced under the “expediency principle” in Dutch criminal law. This principle gives authorities discretionary powers to refrain from prosecuting certain offenses “on grounds derived from the public interest.” It applies to cases involving small quantities for personal use where there’s no dealing or other drug-related crime. Thus, cannabis and hashish are technically illegal but “tolerated.”
The “expediency principle” helps separate to the extent possible the recreational soft drug market – posing a minimal risk to society – from the true hard drug, criminal markets. The goal has been to separate distribution channels thereby greatly reducing the gateway from soft drugs to heroin and cocaine. It is felt this policy and the early educational school programs prevent experimenting youth from getting drawn into the dangerous criminal elements of the hard drug culture.
For the Dutch, drug use is a health matter not unlike the use of tobacco and alcohol. A paradigm of arresting and incarcerating thousands of citizens for minor drug possession or use offenses is not accepted. In stark contrast, Sweden views all forms of drug possession and use, regardless of quantities or drug type, as an abuse – while Portugal has decriminalized ALL drugs with favorable results. Each country must find its own way. For the Dutch, freedom to decide about matters relating to one’s own health is fundamental. So a visible, manageable retail market for cannabis was allowed to develop. But, as stated, wholesale dealers, traffickers, and large-scale cultivators of cannabis or hard drugs will be rewarded by the full force of the penal laws.
The Dutch do not see the separation of soft drugs from hard drugs and flexible law enforcement measures as some magical cure-all. The prime aim is prevention of health risks and the negative consequences for society arising from drug abuse. This involves educational measures where a restricted tolerance approach enables authorities to monitor and control better the social phenomena of drug abuse. Abuses are also fought by healthmeasures such as treatment monitoring centers, extensive demand reduction and detoxification facilities, a free methadone supply program for heroin users, a free syringe exchange program, and free testing of ecstasy pills.
The lure of stepping-up to hard drugs is checked by allowing purchase of cannabis in alcohol-free coffee-shops. For evidence shows this separation of the market for illicit drugs means youthful cannabis users are less likely to slip into contact with hard drugs. Also, surveys show the vast majority of Dutch people never try marijuana. Most who do try it don’t continue to use it very often, much less hard drugs. Moreover, users know that cannabis is far safer than hard drugs and less addictive than even caffeine, alcohol, tobacco, and many prescription drugs.
Coffee-shop regulations are very strict. Operators are legally and strictly bound to adhere to following rules:
No alcohol or hard drugs may be sold or consumed in a coffee house. Driving under the influence of soft drugs is considered as driving under the influence of alcohol. Police check for this.
No advertising, active promotion, web sites are allowed.
Cannabis can only be sold to people aged 18 or over. No minors are allowed around or in coffee-shop premises.
No sale of large quantities is allowed – the limit is 5 grams to one person in one day. This maximum amount is tolerated, not prosecuted, even though technically illegal.
The coffee-shop must not be causing a public nuisance, e.g., must not be located within 250 meters of a school.
The coffee-shop operator is allowed a maximum level of cannabis stock for selling of 500 grams, but local authorities can impose lower limits. Of course, no selling of hard drugs is allowed.
The decision whether or not to tolerate coffee-shops lies entirely with the local municipalities. Smoking cannabis is banned in public places. (As of 2005, 72% of the 467 municipalities pursued a zero policy with regard to the number of tolerated coffee-shops).
The local mayor is entitled to close a coffee-shop for violating any of the above rules (including being a public nuisance, e.g., disturbing a neighborhood’s public order and safety).
Why Drug Decriminalization and Tolerance?
The Dutch have normalized and decriminalized the soft and hard drug problem as a practical compromise between the extremes of an intensified war on drugs and legalization. Drug use is a fact of life. It must be discouraged, and the harm and risks minimized in a flexible, realistic manner. Under the Opium Act during 1919 to 1976, the Dutch learned this lesson the hard way when severe and disproportionate penalization failed to stop a steep rise in drug users and abusers. Continuing an all-out fight risked driving more and more drug users into the fringes of the underworld, making them hidden and beyond reach of any “helping” institution, other than the justice system. In short, a repressive, prohibitive approach led to negative side effects both for the individual and Dutch society.
The amended Opium Act of 1976 relegates criminal law to a relatively minor role in preventing individual drug abuse. However, as noted, cannabis and all other drugs are still statutorily illegal. But the law is not enforced for possession of small amounts for personal use or sale of small amounts in coffee-shops. So over the last 35 years, the goal has been to avoid situations where cannabis consumers suffer more damage from criminal proceedings than from use of the drug itself. A policy of tolerance for selling soft drugs in coffee-shops evolved on grounds it stops many users from contacting drug dealers and experimenting with hard drugs. Facts support this conclusion as the number of convictions, addicts, drug casualties in the Netherlands is one of the lowest in Europe and far below that of the US.
From Dutch perspectives, trying to eradicate drugs or drug addiction by criminal law makes the cure worse than the disease. On the other hand, unilateral formal legalization of soft drugs is not a goal and is unnecessary – not only because cannabis retail prices would drop further thus creating ever more “drugs tourism” – but mainly because Dutch courts have ruled that institutionalized non-enforcementin past years constitutes de facto decriminalization, i.e., a roughly legal regime for soft drugs. One thing is certain, however. Hard drugs are illegal and are unlikely to be legalized, at least in the near future. Some feel that the best argument for legalization is that it undermines outside-the-country drug cartels, often protected by terrorist groups. The Netherlands has never had the massive smuggling industry or a "next door" land route to the heart of drug country like the US has with Mexico. But imported drugs, for example, from Afghanistan to Dutch harbors and then channeled to the rest of Europe do remain a serious problem.
The outright banning of all coffee-shops is also not an option as it will not solve the problems of crime, street-drug trade, nuisance, and health. For the Dutch, it comes down to striking a careful balance between the rights of cannabis consumers and coffee-shop retailers and the Dutch government’s responsibility to public health and safety. This means setting fair and very strict limits of what can and cannot tolerated by all concerned.
Over-dramatization, criminalization, or moralization of the drug problem has thus given way to prevention,harm reduction and treatment policies… i.e., the promotion of healthylifestyles. While comparisons to other countries show the Netherlands’ tolerant policy has worked well for decades, the country has its share of drug problems. But these are no more and often far less than many modern democracies which have much harsher drug laws and penalties.
Serious attention is being directed to the nuisance related by cannabis use by “drugs tourism” and by foreign drug addicts residing illegally. Amsterdam and Dutch cities near Germany and France have been under strain from the flow of EU “drugs tourists” who are taking advantage of the Netherlands’ more liberal soft drug laws. In Maastricht alone, 70% of the 2 million visitors to Maastricht’s 14 coffee-shops come from abroad. This has increased nuisance complaints regarding the hazards of drug runners luring tourists to coffee-shops, petty crime, and the smell of weed smoke. In their constant efforts to correct such policy shortcomings, the Dutch are about to implement nation-wide a “weed-pass” system to contain “drugs tourism.”
Coffee-shops will be turned into private clubs requiring proof of membership by a pass issued to adult Dutch citizens for use in one club only. Maastricht has already banned foreigners’ access to coffee-shops except neighboring Germans and Belgians … at some economic cost. For example, foreign visitors to Maastricht’s or Amsterdam’s coffee-shops spend up to €75/day ($100/day) for cannabis compared to €125-250/day ($90-180/day) on shopping, eating out and lodging.
Cannabis Penalization Policies and Penalties
Dutch penalization policy makes a sharp distinction between drug users and drug traffickers. Drug use is seen primarily as a public health, harm-reduction issue poorly addressed by a paradigm of punishment-based prohibition. Adult people can buy, possess or use small quantities without criminal sanctions. Research clearly shows that cannabis is a very safe drug. But possession of this soft drug for commercial purposes is a serious criminal offense, subject to some tough penalties. In 2010, one of the largest Dutch cannabis-selling coffee shops was fined €10 million ($13.5 million) and a 4 month prison term for keeping more than the allowed 500 grams of stock cannabis in the shop.
Today, Dutch cannabis is grown locally and only up to 40% is sold locally – the majority is exported. Producing and exporting cannabis, ecstasy or amphetamines illegally is thus becoming a major Dutch enforcement and penal priority given organized crime’s rising interest in the lucrative European cannabis market. Dutch police are under pressure to aggressively pursue, prosecute, and punish large-scale possession, dealing and cultivation of cannabis.
In this regard, decriminalization of soft drugs has brought key manpower and income benefits that can be redirected to healthy and productive public ends: (1) it frees up police enforcement manpower from petty abuses to fight commercial drug trafficking and production; (2) it yields substantial police, judiciary, and detention cost savings, and it generates €400-500 million ($540-675 million) in coffee-shop tax revenues yearly. These funds finance a wide range of drug actions: aggressive prosecution of illegal trafficking and production; a high standard of preventive care, counseling and educational information, medical treatment services for addicts, and special housing for long-term addicts. Little wonder that the numberof addicts and deaths by overdose in the Netherlands is near the lowest in Europe and far lower than the US.
Furthermore, the Dutch government has announced it will classify cannabis with a THC level above 15% as a high potency, hard drug. Those coffee-shops selling cannabis with 17-18% THC levels today will have to use milder cannabis variants. This action plus strict regulation of a fast growing number of synthetic drugs; closure of coffee-shops within 250 meters of a school; shutdown of over 400 coffee-shops from 1179 in 1997 to ± 680 today (a 40% decrease) for reasons of nuisance, disturbance and other violations; a “weed pass;” and a stepped-up attack on trafficking and Dutch production of cannabis reflect a determination to adjust the country’s drug policy to new market realities – even if that means reversing tolerance policies.
Here’s a brief summary of the penalties for drug offenses:
Possessing up to 30 grams of cannabis for personal use is a minor offense with a maximum detention of 1 month (and/or a fine of €2,250/$3,000). But this penalty is not usually enforced.
Possessing more than 30 grams of cannabis, regardless of the quantity, is a criminal offense with a maximum detention of 2 years (and/or a fine of €25,000/$34,000).
Importing/exporting soft drugs is a criminal offense with a maximum detention of 4 years (and/or a fine of €45,000/$60,000). Penalties are increased for repeated offenses.
Buying, selling, producing, transporting soft drugs for commercial purposes is a criminal offense with a minimum detention of 1 month (and/or a fine) up to 8 years (and/or a fine of €45,000/$60,000) depending on the quantity.
Selling more than 5 grams to a client in any one day by a coffee-shop is a criminal offense. Coffee-shop owners or operators risk prosecution and being closed down (and/or big fines) for violating this or other coffee-shop rules as noted above.
What Are the Successes of Dutch Drug Policy?
Ambitious politicians, media, and other “experts” can’t resist spreading wildly exaggerated myths, misunderstandings, and misinformation in their disagreement with Dutch drug policy. This is not only dishonest but strange considering more and more global leaders have declared the “war on drugs” to be destructive and a failure. Many countries (and a small number of US states) have moved to various forms of decriminalizing low-level drug possession and adopting health-centered approaches to cut consumption, improve public health, and weaken the power of organized crime.
The pragmatic, pioneering Dutch approach of setting tolerance guidelines that make drug policy more visible are methods adopted by most EU countries. Decriminalizing the possession of soft drugs has not led to a rise in their use. There’s ample empirical evidence that removal of criminal provisions for cannabis possession does not markedly increase the prevalence of cannabis or any other illicit drug. Studies by the Trimbus Institute on drug addiction and mental health show that 5% of Dutch citizens smoked marijuana or hashish in the past year compared to an average of 7% in the rest of Europe. Supporting statistics are noted in TABLE 1:
The US percentage of total marijuana arrests was 52% of total drug arrests with arrests for possession increasing significantly from 34% in 1995 to 46% in 2010. No wonder US prisons are bursting with drug offenders, most of whom would probably not be in prison now if possession of 1 ounce or less had not been criminalized in a majority of states. As one expert said, “The U.S. has 5% of the world’s population but 25% of its prisoners.”
The above demonstrates that de facto legalization to purchase marijuana in the Netherlands has not given rise to marijuana levels of use – nor cocaine or heroin use – significantly higher than those in countries like France, Sweden and the US which pursue repressive drug policies. The Dutch intense policy of prevention and care has made drug addicts healthier and HIV prevalence even lower than in many countries where HIV infections are already very low. The Dutch government reports there are about 25,000 hard drug addicts or 1.6 per 1000 people. This is well below the EU average.
TABLE 3 illustrates the relative drug health treatment intensity for selected countries:
US, France, and Sweden have prohibitionist drug regimes for all drugs while Germany and the Netherlands have de facto decriminalization regimes for soft drugs. The US has at least 6 times more drug-user treatments/rehabs per 100,000 people than the Netherlands where HIV infections are also very low. This situation and the US doorway to a gigantic flow of drugs from its close-by neighbor, Mexico, make US legalizing or decriminalizing of drugs more complex and problematic. In contrast, the Dutch produce all of their cannabis consumption needs locally. And the level of hard drug consumption is very low. Another factor is that the Netherlands, third most densely populated country in the world, has 16.5 million people living on a land territory one-fourth the size of New York state (or one-half the size of my state of Maine). This also makes hands-on policy implementation, oversight and control of drugs relatively easier.
Tolerating cannabis use and taxing it works for the Dutch … with the exception of ongoing new market challenges that are causing a rethink of tolerance policies, e.g., drugs tourism, coffee-shops’ selling to minors and creating a public nuisance, potentially dangerous ecstasy and synthetic drugs, and illegal export of cannabis abroad.
Dutch success emphasizing prevention and health care shows up in the number of drug related deaths which are very low averaging 120/year or less than .75 per 100,000 people. Deaths related to overdose of cannabis are unheard of. Hard drugs, or synthetic drugs combined with alcohol or prescription drugs can have certain bad medical, even deathly effects. While hard drug users are seldom prosecuted and heroin junkies have vanished from the streets into heroin-assisted treatment centers, potential intensification of health hazards and toxic addiction are key Dutch arguments for sticking by their decriminalized “harm-reduction” policy rather than legalizing all drugs at this time. But, debate and studies of this option live on.
“The trend in cocaine and heroin addiction in theNetherlands is stabilizing, even decreasing. One percent of Dutch people aged between 15 and 34 is a recent cocaine user, well below the European average of 2.2%. The number of heroin clients in addiction care and rehabilitation facilities has decreased as well as has property-related crime ascribed to heroin users. But there are signs of an increase of (injected) heroin usage due to an influx of (mainly homeless) Eastern European immigrants.”
Summary
Rather than wage war on drugs or legalize all drugs, the Dutch have taken a public health approach emphasizing “de facto decriminalization” and “normalization”… aimed at harm reduction, the integration of drug users in society, and the avoidance of stigmatizing, marginalizing, and isolating drug users.
Decriminalization has not resulted in any unusual increase in cannabis and hard drug use or abuse that poses a public threat … as confirmed by a 30-year Dutch experience and a truly excellent 2004 study by Craig Reinarman, PhD and his associates, “The Limited Relevance of Drug Policy:Cannabis inAmsterdam and in San Francisco.” However, trafficking, production, importing and exporting of drugs necessitates a relentless police pursuit and judicial prosecution effort.
The Dutch demand and supply approach to reducing the risks and harm of drugs has proven to be sane and successful. Cannabis and hard drugs are better controlled openly in a safe environment rather than in the wilds of the dangerous street-drug trade or in a prison complex.
Since hard drug use is seen as a social and medical issue not punished for the behavior alone, the emphasis is on health risk reduction and treatment. The Dutch government is able to aid about 90% of help-seeking addicts for detoxification programs. Regional and local authorities are responsible for the organization, implementation, and coordination of addiction care. Treatment is mainly delivered by non-governmental organizations on a regional level, followed by private organizations including physicians, hospitals, and private clinics. And treatment costs are at least 6 times less than trying to reduce consumption by mandatory prison sentences .. more enforcement .. higher penalties .. all leading to a dead end.
Finally, there’s that very important cash flow from coffee-shop value added taxes and income tax revenues that can be applied to drugs enforcement, prevention and treatment.
REFERENCES : Dutch Policy Towards Hard Drugs and Soft Drugs ______________________________________________________
1. European Monitoring Centre For Drugs and Drug Addiction (EMCDDA), Annual Report 2010 – “The State of the Drugs Problem in Europe”
2. Report to the EMCDDA by the Reitox National Focal Point: “The Netherlands Drug Situation in 2010,” Dec. 22, 2010
3. “Trends in Drug Usage in Europe,” A Response to the EMCDDA 2010 Annual Report, 2011
4. Reaction of Trimbus Institut to the EMCDDA Annual Report 2011, by Margriet van Laar, Head of Drug Monitoring, November 15, 2011
5. “Dutch Reclassify High-Potency Marijuana As Hard Drug,” Associated Press, Toby Sterling, Oct. 7, 2011 and World News Netherlands, Oct. 7, 2011
6. Get the Facts- Drug War Facts.Org.: “The Netherlands Compared to the U.S.,” 2009
7.“The Limited Relevance of Drug Policy: Cannabis in Amsterdam and in San Francisco,” 2004, by Craig Reinaraman, PhD; Peter Cohen, PhD; Hendrien Kaal, PhD., 2004
8. “National Drug Policy: The Netherlands,” by Benjamin Dolin of Law and Government Division, Parliament of Canada, Aug. 15, 2001
9. “Dutch Drug Policy: A Model for America?” In press for: JOURNAL OF HEALTH & SOCIAL POLICY, by David F. Duncan, Dr. P.H. CAS, Thomas Nicholson, PhD, 1997
10. “The Dutch Harm Reduction Model of Addiction Treatment,” Addiction Services, Amsterdam Wiki, April 3, 2009
11. “Normalization of the Drugs Problem: An Outline of the Dutch Drugs Policy,” by Otto Janssen, June 1992
12. “Marijuana: The Myths Are Killing Us,” by Karen P. Tandy of DEA, June 17, 2005
13. “The Myths of Drug Legalization,” AMERICA, The National Catholic Weekly, March 16, 1996, by Joseph A. Califano, Jr.
14. “Drugs Policy in the Netherlands,” by UK Ministry of Health, Welfare and Sport, The Netherlands, April 1997
15. “Dutch Drug Policy In A European Context,” by Tim Boekhout van Solinge, Journal of Drug Issues – Vol.29, No.3, 1999
16. “Soft Drugs in the Netherlands,” By Radio Netherlands Worldwide, Sept. 2009
17. “Honor Thy Promise: Why the Dutch Drug Policies Should Not Be a Barrier to the Full Implementation of the Schengen Agreement,”BostonCollege International & Comparative Law Review (Vol.23, Issue 1, Article 8)) by Susan H. Easton, Dec. 12, 1999
Frank Thomas The Netherlands November 15, 2011
John's Comment on Frank's Essay:
Clearly, the Dutch methods are working and superior to those in the US. First, effective and thorough studies of the problem reveal what does and what doesn't work. Then Dutch pragmatism and a willingness to implement those policies that are working and reject those policies that are not working lead to a rational solution to the problem. Instead of viewing drug policy as strictly a law enforcement problem, the Dutch have an integrated approach which includes treatment while allowing for the recreational use of soft drugs which under well defined circumstances can even be considered a social good much as the recreational use of alcohol can be considered a social good when used in moderation. At a time when a majority of the American population favors legalization of marijuana, US policy makers should study the Dutch policy on drugs as an example of what works. Last year in the US there were more deaths from the misuse of prescription drugs than from illegal drugs. Drug use in general is a problem that needs to be solved by education, treatment and rehabilitation instead of relying on the criminal justice system while allowing for the moderate use of recreational drugs just as alcohol, caffeine and nicotine when used in moderation have been tolerated for many years. All in all the Dutch approach is intelligent and humane without a lot of moralizing or implementation of preconceived prejudices.
The economic news out of the eurozone is getting worse every day, and so is the contagion to the rest of the world. The OECD (Organization for Economic Co-operation and Development), the club of 34 mostly high-income countries, has now lowered its projection for eurozone growth for 2012 from 2 percent (in May) to just 0.2 percent. According to their report, the 17-member eurozone economy already “appears to be in a mild recession.” For the U.S., the forecast for next year was lowered from 3 percent to 2.1 percent.
Forecasts for China, India, and Brazil have also been lowered significantly since May. From Asia to Latin America, the problems of the eurozone are reverberating as international banks contract credit, big investment projects are canceled or postponed, stock markets and real estate prices fall, and investor and consumer confidence drops.
And the OECD projections assume that Europe “muddles through” its current financial crisis without any significant financial disaster. But as the eurozone economy worsens, this assumption gets increasingly less tenable.
The simplest solution to the crisis is for the European Central Bank (ECB) to buy enough of the Italian and Spanish debt – and possibly other eurozone countries’ debt – to push down interest rates to a safe level. On Tuesday, Italy paid a record 7.89 percent yield for three-year bonds that it auctioned, well above the 7 percent level that was seen as a threshold for Greece, Ireland and Portugal to move from market financing to the International Monetary Fund (IMF) and European authorities. With lower borrowing costs, Italy and Spain would not be facing a “debt crisis.”
In fact, this whole crisis and recession could have been prevented very easily if the European authorities had simply intervened to maintain low interest rates on the Greek debt a year and a half ago. It is possible that some restructuring might still have been necessary, but the cost would still have been very small relative to the available resources of the European authorities. Because they refused to do this, and instead shrank the Greek economy, increased its debt burden, and allowed its borrowing costs to skyrocket – the crisis spread to the weaker countries of the eurozone, including Italy.
And now capital – including American money market funds – is fleeing Europe’s banking system, threatening a systemic financial crisis of unknowable proportions.
This failure to act – then and now – shows clearly that this is not a “debt crisis” at all but rather a crisis of failed policies. Eurozone finance ministers met Tuesday but failed again to come up with any credible solution that would stabilize the situation.
ECB intervention to stabilize eurozone bond markets is the most obvious, and possibly the only practical solution for several reasons. First, it is the only institution that can move quickly to bring the situation under control at a moment in which we really don’t know how far we are from a meltdown. Nobody anticipated that Germany, for example, would have trouble selling its bonds last week – there will be other unanticipated events that could possibly set off a panic at any time. Second, the ECB can buy the sovereign bonds of Italy or Spain at no cost to the European taxpayer. This is a serious issue, since the amounts of money involved could be large enough to present a political problem in Germany and other better-off eurozone countries. Just as the U.S. Federal Reserve has created $2.3 trillion since 2008 and used it to buy securities in the United States, the ECB could do the same in Europe where such buying is much more desperately needed. And just as there was no measurable effect on inflation in the United States, we would not expect any problem with inflation in Europe. Inflation in the eurozone is currently projected to fall to just 1.6 percent for next year.
The problem is that the ECB, and other European authorities led by the German government, are still playing the same game of brinkmanship that they have been playing for the past two years. They are more worried about forcing austerity policies on the weaker eurozone countries than they are about tanking the European and global economy. They continue to see the crisis as an opportunity to force through unpopular “reforms” – such as cutting jobs and pensions, raising the retirement age, privatizations, and reducing the size and scope of the welfare state. They have already caused a recession in the eurozone and seem more than willing to let it deepen in order to get what they want. The big question now is whether their recklessness will bring on a financial crisis that triggers a world recession.
Some of us have called for the Federal Reserve to intervene before this happens and do the ECB’s job for them. It has the capacity to do so, and like its prior quantitative easing in the U.S., would be costless to the taxpayers. It might cause a bit of a political storm, but that would be a small price to pay to avoid a recession that would throw millions more people out of work – in the United States, Europe, and much of the world.
ATHENS, Greece -- In recent days, technocrats have taken control of Italy and Greece, after debt-related political turmoil toppled the democratically elected leaders of both countries.
In Athens, the new prime minister is Lucas Papademos -- a smart guy who is expected to keep Greece out of bankruptcy by staying above party politics. He was sworn in Friday, and tasked with securing a massive bailout. He replaced George Papandreou, who was chased out of office after proposing that Greek voters decide on the bailout.
In Italy, Prime Minister Silvio Berlusconi resigned on Saturday. He had lost his parliamentary majority earlier in the week, and borrowing costs on Italy's massive debt skyrocketed to potentially unsustainable levels.
On Sunday, respected economist Mario Monti was tapped to take Berlusconi's place.
Markets have applauded these new leaders. Stocks rallied as Greece resolved its political crisis. And pressure on Italian bonds eased Thursday on news that Monti was the frontrunner to replace Berlusconi.
Investors welcome Papademos and Monti because they are viewed as fixers. French President Nicolas Sarkozy and German Chancellor Angela Merkel -- who hold the reins of the euro zone's bailout fund -- like them for the same reason.
The catch is this: Nobody voted for them. They are unelected technocrats called on to do the sometimes messy task of governing.
It's a short-term solution. New elections are expected in Greece, and likely later in Italy. But it's leading some to ask whether the euro zone crisis is undermining democracy.
"We don't have a real democracy here in Greece," said Stratos Georgoulas, a sociologist at the University of the Aegean.
"People who believe Lucas Papademos is the best person to run the country are bankers, business people in the capital, and the media," he said. "He's not a politician. He's a banker. He's not one of us."
The developments in Greece and Italy highlight concerns in some capitals that the European Union disregards the will of the people -- especially as the euro zone crisis has worsened.
Observers including Trevor Evans, an economics professor at the Berlin School of Economics and Law, say a small group of power brokers are calling the shots.
"It's a shift toward an undemocratic, authoritarian way of making decisions in Europe on economic policy," Evans said.
"Effectively, economic democracy has been suspended for Greece and Portugal and Ireland," he said of euro zone countries that have received bailouts. "They have no voice in what's going on. It's going to be a real problem for legitimacy of the institution."
The so-called "Frankfurt Group" of power brokers who have largely taken charge includes Merkel, Sarkozy, European Central Bank president Mario Draghi, IMF director Christine Lagarde, leaders of the European Commission, the Eurogroup of finance ministers and the European Council.
During the continuing euro zone crisis, they've structured bailouts that come with tough conditions, such as austerity measures that make recipient governments unpopular with their citizens.
Leaders who challenge them -- even in the name of democracy -- do so at their peril.
Papandreou, tired of pushing austerity measures with his party's slim majority, called for a referendum a few days after completing negotiations on a $180 billion bailout package that includes a 50 percent write-off of privately held Greek debt.
In response, Merkel and Sarkozy called an emergency meeting with the Greek leader. A "no" vote on a referendum would send Greece into default and possibly undermine the euro itself.
On the eve of the meeting, Papandreou said his message would be that decisions must be made "which will ensure democracy prevails over any desires of the markets." He later said ratings agencies "cannot have greater power than the parliaments."
But when they warned that Greece could be kicked out of the euro zone, Papandreou scrapped the referendum. Having spent his political capital, he announced he would step down.
Papademos, an MIT-trained economist, is a former vice president of the European Central Bank. He's also a past governor of the Bank of Greece, having overseen Greece's currency switch to the euro. Now his job is to make sure parliament approves the bailout.
Even the tough-talking Berlusconi was taken to task by his European partners for failing to implement badly needed reforms, leaving the EU's third-largest economy at risk of being unable to roll over its debt because of high borrowing costs.
The Italian billionaire barked back, in an Oct. 24 statement: "Nobody in the Union can appoint themselves administrators and speak in the name of elected governments and the peoples of Europe. No one is in a position to be giving lessons to their partners."
But within two weeks, he was on his way out. His expected successor, Monti, a former European commissioner, will try to rebuild market confidence and oversee reforms.
While not elected, the new Greek premier and likely new Italian leader have financial expertise to steer their countries out of trouble -- and would seem to be less beholden to political interests.
Another consideration is that it was elected officials who put their countries at risk in the first place. Before Papandreou took office two years ago, Greek officials lied to the EU about the country's debt, amassed by years of overspending. And then opposition parties refused to help Papandreou deal with the mess. In Italy, Berlusconi was unwilling to push reforms.
And in times of crises, referendums carry high risks. Voters in tiny Slovenia rejected pension reforms in a June referendum but the country's borrowing costs have risen ever since -- potentially putting it on a path for a bailout. A snap election scheduled next month will bring a new government that, observers say, will have little choice but to impose the reforms that voters rejected.
Merkel, in a recent speech to the German parliament, said these are dangerous times. Unless contained, the crisis could cause a global recession and bring down the EU. She wasn't apologizing for aggressive moves taken to protect the union.
There's a "historical obligation," she said, to protect Europe's unification process begun more than 50 years ago "after centuries of hatred and bloodshed."
The Dutch minister of internal affairs said at a speech during free press day this year: "Law-making is like a sausage, no one really wants to know what is put in it." He was referring to how expensive the Freedom of Information Act is, and was suggesting that journalists shouldn't really be asking for so much governmental information. His words exposed one of the core problems in our democracies: too many people don't care what goes into the sausage, not even the so-called law-makers, the parliamentarians.
If the 99% want to reclaim our power, our societies, we have to start somewhere. An important first step is to sever the ties between the corporations and the state by making the process of lawmaking more transparent and accessible for everyone who cares to know or contribute. We have to know what is in that law sausage; the monopoly of the corporate lobbyist has to end – especially when it comes to laws regulating banking and the internet.
The Icelandic nation only consists 311,000 souls, so we have a relatively small bureaucratic body and can move quicker then in most countries. Many have seen Iceland as the ideal country for experimentation for new solutions in an era of transformation. I agree.
We had the first revolution after the financial troubles in 2008. Due to a lack of transparency, corruption and nepotism, Iceland had the third largest financial meltdown in human history, and it shook us profoundly. The Icelandic people realized that everything we had put our trust in had failed us. One of the demands during the protests that followed – and that resulted in getting rid of the government, the central bank manager and the head of the financial authority – was that we would get to rewrite our constitution. "We" meaning the 99%, not the politicians who had failed us. Another demand was that we should have real democratic tools, such as being able to call directly for a national referendum and dissolve parliament.
As an activist, web developer and poet, I never dreamt of being a politician and nor have I ever wanted to be a part of a political party. That was bound to change during these exceptional times. I helped create a political movement from the various grassroots movements in the wake of the crisis. We were officially created eight weeks prior to the election, and based our structure on horizontalism and consensus. We had no leaders, but rotating spokespeople; we did not define ourselves as left or right but around an agenda based on democratic reform, transparency and bailing out the people, not the banks. We vowed that no one should remain in parliament longer then eight years and our movement would dissolve if our goals had not been achieved within eight years. We had no money, no experts; we were just ordinary people who'd had enough and who needed to have power both within the system and outside it. We got 7% of the vote and four of us entered the belly of the beast.
Many great things have occurred in Iceland since our days of shock in 2008. Our constitution has been rewritten by the people for the people. A constitution is such an important measure of what sort of society people want to live in. It is the social agreement. Once it is passed, our new constitution will bring more power to the people and give us proper tools to restrain those in power. The foundation for the constitution was created by 1,000 people randomly selected from the national registry. We elected 25 people to put that vision into words. The new constitution is now in the parliament. It will be up to the 99% to call for a national vote on it so that we inside the parliament know exactly what the nation wants and will have to follow suit. If the constitution passes, we will have almost achieved everything we set out to do. Our agenda was written on various open platforms; direct democracy is the high north of our political compass in everything we do.
Having the tools for direct democracy is not enough though. We have to find ways to inspire the public to participate in co-creating the reality they want to live in. This can only be done by making direct democracy more local. Then people will feel the direct impact of their input. We don't need bigger systems, we need to downsize them so they can truly serve us and so we can truly shape them.
The capital city of Reykjavík has launched a direct democracy platform, where everyone can put in a suggestion in a community forum about things they want to be done in the city. The city council has to take the top five suggestions and process them every month. Next step is to have a similar system for the parliament, and the logical step after that is to have the same system for the ministries.
From conversations I have had with people from Occupy London it is obvious we are all thinking along the same lines. All systems are down: banking, education, health, social, political – the most logical thing would be to start a fresh system based on values other than consumerism, which maximises profit and self-destruction. We are strong, the power is ours: we are many, they are few. We are living in times of crisis. Let's embrace this time for it is the only time real changes are possible by the masses.
Amid Europe’s economic turmoil, a question nags: Where is the IMF? Created in 1945 — and reflecting the breakdown of global cooperation in the Great Depression — the International Monetary Fund was intended to prevent a few countries’ problems from dragging down the world economy. Countries that got in trouble would borrow temporarily from the IMF. Under IMF supervision, they would adjust their economies gradually so that they wouldn’t destabilize the entire system. Well, that’s exactly the danger now posed by Europe.
It’s tempting to think that new governments in Rome and Athens will resolve Europe’s deepening economic crisis. Perhaps they will, but the odds against this are long: more like 20-1 than 2-1. Already, high interest rates have barred Greece, Portugal and Ireland from borrowing in private markets. In 2012, Italy has to refinance 360 billion euros (nearly $500 billion) of maturing debt. If it can’t, it will default or require a huge rescue that, for the moment, seems beyond any European or global entity.
The fallout could be tumultuous. A default would probably cause mass failures among Italian banks, which hold 164 billion euros ($220 billion) of Italian government debt. Depositors might stage a run. French banks, with 53 billion euros of Italian debt ($72 billion), would also be imperiled. If Italy defaulted, bond buyers might abandon France and Spain. Already, financial markets have raised interest rates on Italian, Spanish and French debt.
Facing these grim possibilities, the IMF has been mostly missing in action. It has provided some funds for Greece, Portugal and Ireland. But more is needed, as economist Arvind Subramanian of the Peterson Institute makes clear in an open letter to IMF Managing Director Christine Lagarde. What the IMF should do is organize a huge rescue fund — at least $1 trillion to $2 trillion, says Subramanian — to backstop Europe in case more countries lose access to private credit markets.
Countries could tap it in return for agreeing to IMF conditions to overhaul their economies. This way, the IMF might fulfill its basic mission. It couldn’t avert a European recession, which may have already started. But it could preempt a chaotic implosion of credit, confidence and spending that would threaten the wider world economy.
Three realities define Europe’s situation.
First, the crisis is as much political and social as it is economic. The “European model” of generous social benefits and secure jobs is besieged. Welfare states have become too costly for many countries’ economies to support. Benefits must be curtailed. The austerity now being imposed or recommended inflicts direct hardship and assaults beliefs and expectations that have been nurtured for decades.
Second, Europe can no longer rescue itself. There are too many potentially needy debtors and too few credible lenders. The main rescue mechanism — the European Financial Stability Facility (EFSF) — has already committed about 250 billion euros of its 440 billion euros to Greece, Ireland and Portugal, reports the Institute of International Finance, an industry group (and the source of most data cited here). Even an expanded EFSF probably couldn’t handle Italy and certainly not Spain and France. The European Central Bank — Europe’s Federal Reserve — could buy unlimited amounts of government bonds. But it has so far disdained this role, fearing the inflationary consequences.
Finally, the IMF is in no position today to rescue Europe. At last count, it had about $400 billion in available funds. This wouldn’t cover Italy’s refinancing needs for a year. So the IMF needs more money.
Getting it would be a chore, notes Subramanian. The Europeans don’t want to admit they need help. The United States, he says, is resistant because its own high debts would prevent it from contributing, thereby diminishing its power. China fears being hoodwinked into throwing good money after bad; but without China, contributions from other countries (Brazil, India, Saudi Arabia) would be meaningless. Against these obstacles, he says, Lagarde could argue that absent IMF help, a financial meltdown might cause a new global slump.
When created, the IMF was a political institution dedicated to stabilizing the world economy. Does it still work? “A tectonic shift has occurred in the global economy,” Subramanian writes. Traditional creditors (rich countries) and traditional debtors (poor countries) have switched places. Meanwhile, the social contracts written by most advanced nations, including the United States, will be rewritten by either design or events. Economic stability depends on managing political change.
Can China, Brazil, India and some major oil exporters deploy their financial power for the collective good — including the health of their export markets? Can Europe modify its welfare systems without being paralyzed by civil strife and feuds among nations? Or are we on a collision course with some future crisis whose advancing outlines we can dimly perceive but seem powerless to stop?
Study without desire spoils the memory, and it retains nothing that it takes in.
- Leonardo da Vinci
Advertising may be described as the science of arresting the human intelligence long enough to get money from it.
--Stephen Leacock
Canadian economist & humorist (1869 - 1944)
They can't put you in jail for what you're thinking.
--Clifton E Lawrence
If we can't create a good impression, we can at least try to create a bland impression.
-- Ben Weinbaum, my supervisor at General Dynamics
Men are generally idle, and ready to satisfy themselves, and intimidate the industry of others, by calling that impossible which is only difficult.
-- Samuel Johnson
There's a vas deferens between us.
--Paul Desmond to a girlfriend
Lawrence, how do you manage to go through so much shit and come out smelling like a rose?
--a college classmate
Lawrence, you're better on paper than you are in person.
--Guy Carlisle
Lawrencie, you're smart in school, but dumb in life.
--Arthur Hill
In politics you must always keep running with the pack. The moment that you falter and they sense that you are injured, the rest will turn on you like wolves.
--R. A. Butler
Don't put off till tomorrow what you can do today.
--Florence C Lawrence
There's no time like the present.
--Florence C Lawrence
One hand washes the other.
--Clifton E Lawrence
You have to take the bitter with the better.
--Clifton E Lawrence
An inventor is simply a fellow who doesn't take his education too seriously.
--Charles F Kettering
A problem well stated is a problem half solved.
--Charles F Kettering
Any sufficiently advanced technology is indistinguishable from magic.
--Arthur C. Clarke, "Profiles of The Future", 1961 (Clarke's third law) English physicist & science fiction author (1917 - )
The least of learning is done in the classrooms.
--Thomas Merton
Tastes pretty good for an old dead cow.
--Clifton E Lawrence at a family picnic
If the shoe fits, wear it.
--anonymous
If the shoe doesn't fit, don't wear it.
--John Lawrence
Doug Ramsey: Take Five: The Public and Private Lives of Paul Desmond This is a great book! Paul Desmond and Dave Brubeck formed the heart of one of the best all time jazz groups. Paul was the quintessential intellectual, white jazz musician. A talented writer, he never published anything. However author, Doug Ramsey has collected Paul's letters here. How ironic that now his writing in the form of letters to his father and ex-wife, among others, is finally published showing another window on the mind of this talented person.
A sideman, for the most part, his entire life, the Dave Brubeck Quartet might never have happened at all due to the fact that Paul had managed to offend Dave to the point where he never wanted to see him again. It had to do with a gig that Paul actually was the leader of. Paul wanted to take the summer off to play another gig, and Dave wanted Paul to let him take over the gig at the Band Box in Palo Alto, CA. Paul wouldn't let him and Dave, married with two children, proceeded to starve.
Due to an elaborate publicity campaign, when he realized the error of his ways, Paul managed to worm himself back into Dave's good graces. The rest is history.
This book is remarkable for the insight it gives into a working jazz musician's mind, wonderful pictures and interviews with the significant figures in Paul's life. Author Ramsey, not a remarkable penman himself, has nevertheless done a magnificent job of assembling all these various materials. Unlike a lot of jazz authors, he doesn't overly idolize his subject with the result that you get the feeling that you have met a real person and not a idealized version. That's high praise indeed for any biographer. (*****)
In February 2009, the European Parliament adopted a resolution on social economy which among other things called for “experimentation with new economic and social models” and declared that the social economy is “important, both symbolically and in terms of performance, for the purpose of strengthening industrial and economic democracy”. We see here a clear statement of support for alternative models, and specifically for 
Protesters hold a banner which reads "no to the austerity policy, raise the salaries" during a demonstration to protest against austerity measures in Paris, Tuesday, Dec. 13, 2011. (AP Photo/Michel Euler) "Europe’s leaders are bracing their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.
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