Christine LaGuarde, current head of the IMF is having second
thoughts about austerity. Maybe we’re going to fast, she’s said recently. Is
that because unemployment in Spain has just hit 27%, with about 60%
unemployment among youth? Every time unemployment goes up, balanced budgets,
the ostensible reason behind cutting back, become less likely since joblessness
means higher costs and less income for government.
The IMF caught a lot of flack way back in the past for
lending to governments which were so inept and/or corrupt the money was totally
squandered. Thus they decided it was necessary to impose rules on receiving
countries, and, at least in theory, that makes sense. Unfortunately, their
rules are based more on ideology than practicality or benefit to the people at
large. Naomi Wolf wrote a book called the Shock Doctrine which describes how
need for international help places countries in a position where they’re
required to adhere to a conservative bankers’ worldview of how to fix their
economies. For instance, that was behind the insistence that Greece lower its minimum
wage in order to qualify for help. The connection between a country’s minimum
wage and its ability to service its sovereign debt to the banks, the wealthy
and other countries is tenuous at best. It’s just another way to stick it to
the people at the very bottom who’s lives are already on the edge.
If /when your country needs international help to prop up a
corrupt, sleazoid banking system, you’ll need to impose crushing tax burdens on
the poor and heavy job and program cuts on essential public services while you
lower taxes on the wealthy and corporations.
The elite don’t really need the money, but they ‘create jobs’
so if we throw enough money at them, they might deign to put some people to
work. Except… after all the austerity cuts amidst high unemployment the masses
don’t have the money to buy things, or they save because they’re frightened of
losing their jobs, so there’s no reason for corporations or banks to create new
businesses. Instead they use the cash bestowed upon them to speculate on
securities, commodities and property, all of which is detrimental to the needs
of the 99%.
The money referred to in the above paragraph is being
created out of thin air and given to the biggest banks at near zero interest
rates. In America that amounts to $85b per month. In Europe it’s about $50b.
That new money has served the 1% well by sending the stock markets to record
highs at the same time that wages are going down. Maybe you heard that the US
is growing at 2.5% per year. In aggregate that’s true, but when broken down it
turns out that the bottom 80% has lost ground so when tallied up we see that more
than 100% of the gains have gone to the very top.
Europe is different than the states in the sense that they
have relatively strong social safety nets. In America there are no advocates
for the commoners. Aside from a few fringe legislators, nobody in politics
cares. Thus in some ways it baffles me how completely obsessed European leaders
are with austerity. And how tardy they are with creating jobs programs, which
is Europe’s most pressing need. If they can feed their banks with $50b per
month with free printed money, it can’t be that much of a stretch to use it to
create public service or infrastructure jobs.
There needs to be a Europe-wide jobs program financed by the
European Central Bank that would be available to all EU youth and long term
unemployed. Applicants could apply to work anywhere in Europe, though the greater
needs would be in countries having difficulties, so most of the jobs would be
there. These jobs would have a limited duration and wouldn’t pay much but
they’d keep people busy doing useful things and keep them from getting too
discouraged by unemployment. They’d also get the chance to live in and
experience other countries. Since financing would come from the EU as a whole,
it would only improve the bottom line of struggling countries. The EU owes it
to those countries in the Eurozone experiencing difficulties since it’s
membership in the Euro which is causing many of their problems. But other EU
countries outside the Eurozone are also going through financial upheavals so to
be fair it needs to be for all EU countries.
The southern European countries have archaic and ossified
labor laws that preclude flexibility and efficiency. Some also have bloated
bureaucracies. Economic shock will probably force wrenching changes in society,
but regardless people need jobs now, so there’s no reason to punish the
unemployed for the inadequacies of their governments. Or force them wait until
austerity magically begins to work, a dubious proposition at best.
The other thing Europe needs to do is rethink its currency
regime. Part of the problem of countries experiencing difficulties is being
tied to the Euro. The common currency is very important for Europe, but it has
overreached and made several countries’ problems more difficult to tackle.
In regards to Greece and Cyprus I’ve advocated they adopt a
dual currency system similar to Cambodia’s where the US Dollar is used
alongside the riel, the local currency. Actually, between 80% and 90% of all
transactions here are in dollars. They’ve kept the value of the riel within 5%
of 4000 to a dollar for as long as I’ve lived here, about 11 years, so it’s
very stable. However, if need be in a fiscal emergency they could print more
riel, thus having a little flexibility. The Cambodian government periodically
talks about stopping use of the dollar as its main currency, but they receive
big benefits in stability and convertibility so they’re very reluctant to give
up that advantage. As for Greece and Cyprus and any other Eurozone country that
gets into trouble, they have no choice, they’re stuck with the Euro.
I’ve changed my thinking about the Eurozone’s problems to
the point where I now feel that a two tier system needs to be adopted with the
core countries of France, Germany and maybe Netherlands and Belgium using the
Euro exclusively and all the other countries, or rather any one that wanted,
would have its own currency alongside the Euro. That way the Euro would remain
rock solid and available for all the countries of the EU (both inside and
outside the Eurozone) to use, while individual countries gain some flexibility
by having their own currencies alongside the Euro. Whether or not an EU country
is officially part of the Eurozone, there will be large amounts of Euro in
circulation.
The problem with governments and large institutions is a
built-in inertia that resists any kind of change, especially when it looks like
a retraction or reversal, but if they don’t come up with innovative changes
they’ll only sink deeper into the abyss. Investors took a big hit in the recent
Greek rescue plan, but the country is still left with extreme debt levels which
they are never likely to be able to service. They’ll just flail along
indefinitely from one crisis to the next while the people suffer. The only
realistic solution would be a total default and reversion to the Drachma in a
dual currency regime. They also need a wholesale restructuring of their society
and economy. Default and absence of international help would force those
desperately important changes.
Meanwhile is it possible the IMF, etcetera are waking up to
the folly of austerity after ‘only’ 5 years of abject failure? Seems hard to
believe but you never know.