The Cedar Lounge Revolution

I like the Euro, perhaps you do too… but that may not be enough… June 22, 2011

I’ve been reading Larry Elliott in the Guardian in recent times, and what’s striking to me is how much my view of him has shifted. I used to see him, and sometimes dismiss him, until relatively recently as euro-sceptic, but these day’s he seems to be in a sense euro-realist. Because the unpleasant sense has been growing for me that he has been correct and my own attachment to the European project blinded me to the realities of the situation, at least as it has developed in the early 21st century.

In referendum after referendum I voted for the deepening of the EC and EU. Not unthinkingly, but certainly with an attachment that now seems at odds with the actuality of that institution.

But if this was a blind attachment I’ve been far from alone. It would seem that the political ‘elites’ of the continent for the most part felt much the same. How else to explain the adherence to it by those of varying political persuasions of centre left through to the right?

For myself my europhilia I suspect came from a sense that the European project was a short hand for modernity, and even in some ways a short hand for a style of European social democracy that was fairly alien to this polity. Allied to that was a belief that Ireland as a peripheral economy would do better within the European Union and a sense that the issue of the North could be better addressed within that context.

Well, I’m not recanting on all of that, though some of it would be now strongly open to question. What has taken the gloss off – from my perspective – I think was the running of referendums on the same issue far too frequently in the last decade, the sense that there was only one ‘right’ answer – even if this was one I agreed with – and that all would be done to ensure that it was arrived at. Having argued the opposite I understand entirely that there are different perspectives on this, but it seems to me that there is a democratic deficit – an inevitable outworking of a situation where the requirements of national sovereignty must compete with a supranational, but not federal, political structure. To be honest I’d sooner go to a genuinely federal structure but that’s not an option and short of that I think making haste slowly might be a better way. Ironically enough that’s precisely what has happened to the EU project. We are now stuck, caught between national sovereignty and federalism and arguably mired in the worst of both worlds. Despite the overheated rhetoric of its proponents (and opponents too), Lisbon has not delivered the streamlined outcomes that were meant to follow on from it. Indeed there’s a strong case to be made that what the crises of the past 36 months or so have demonstrated is that the EU is a structure made for stable times and unable to respond effectively under pressure.

Now, that doesn’t mean that the EU is destined for inevitable break up, or any such. But it does perhaps mark the limits of the project in one area.

But the European Union is one thing and the Euro is quite another. Ireland managed for over a quarter of a century to muddle along within the EEC/EC/EU before the euro was introduced. And even if I also have to admit to an affection for the currency, mostly it must be said for its utility when abroad, well there it is. Nor is the situation in Northern Ireland demonstrably worse because there are different currencies in use on the island – as there were in any case before the euro (though the number of places that seem not just willing but eager to use the euro in the North always surprises me on trips there).

But Elliott doesn’t make it easy to have much faith that the Euro project is going anywhere – and if that analysis is correct it has significant ramifications as regards the European project more widely.

The Maastricht criteria were really economic window dressing for a politically motivated concept, and politics decreed that there should be as many members of the euro area as possible. Perhaps five or six countries were in a fit state to cope with the rigours of the euro; 11 – including Greece, Portugal, Italy, Ireland and Spain – were founder members.

Who could possibly argue that it was otherwise?

Monetary union did not lead to convergence; rather it exacerbated existing differences. A heavy price is being paid for failing to try out the idea of a single currency in a hard core of countries where economic performance was broadly similar. The failure to make the single currency work with a wider group of countries means that the attempt to muddle through has reached the end of its natural life.

And in light of that Elliott makes a crucial point:

No country is prepared to have a pan-European taxman take all their dough, so full political union is not on the agenda. That means there are really only two logical ways forward. Either there needs to be a plan B in which the euro area is pared back to a group that includes Germany, France, Austria, the Netherlands and perhaps a couple of other countries, or there will be an uncontrolled break-up with dire consequences.
Europe’s leaders have no plan B. They see no need for it because they are still committed to plan A – the European dream of fraternity and solidarity. This must be defended at all costs, even if it means permanent austerity for Greece, Ireland, Spain, Portugal and any other country that can’t cut the mustard.

And he notes that since neither devaluation nor default are ‘allowable’ for Eurozone members – and perhaps not for EU members either at that, then the only option left is deflation and all this to ‘fix’ the Greek economy and ‘ensure the single currency remains intact’.

As he further notes:

This is a crackpot idea for two reasons. First, it runs counter to the basic principles of democracy; the Greek people are clearly not in the mood to bear the spending cuts, the reductions in wages and the sweeping privatisation being demanded of them by the European Union and the IMF as the price of a fresh bailout.
Second, deflation has already made Greece’s debt problem worse and more deflation will make it worse still. It is worth spelling out exactly why this is so. The public finances of a country are made up of two components – the annual current budget and the stock of national debt. The national debt is simply the total of all the previous budget deficits or surpluses and is measured as a percentage of overall output. As an example, the UK ran a budget deficit of about £140bn last year, pushing up national debt to just over £900bn. The output of the economy was just short of £1.5tn so the national debt is about 60% of GDP.

And…

Running a primary budget surplus requires revenues from taxes to be higher than government spending. What then are the chances of Greece running a primary budget surplus of 7-10% of GDP if subjected to further austerity measures? None whatsoever, which is why either default or devaluation – and perhaps both – seem increasingly likely.

I don’t think the first point he makes about democratic mandate should be dismissed. A lamentable aspect of this entire process has been the one which has seen democratic control and opinion sidelined. Our most recent election demonstrated that the opinion of the Irish citizens in this state was for an alternative to the terms we currently labour under. That vote, though, appears to have been interpreted by the ECB and others as a legitimation of their calls for ‘political stability’.

The left [and in fairness important parts of the right and center] both here and elsewhere, has incorporated a spectrum of opinion from those arguing that the debts piled upon peoples are wrong to those who will accept part or all of those debts but demand that the timelines for repayment and the structures of repayment should be ameliorated to ease the burden on citizens. But those arguments have been brushed aside by the ‘hurry, hurry’ school.

But this is where his second point comes into play. That ‘hurry, hurry’ school cannot even by its own lights work – and here hardly more than in Greece. Indeed one could enquire as to whether all this has been in some respects a rather cynical ploy in order to squeeze as much from national governments in the PIGS before the financial and economic realities of policies that depress and kill growth are put aside. And this speaks of a poisonous inversion of the proper ranking that these polities should make as regards who pays what and why.

But in all this it now seems to me difficult to disagree with Elliott’s contention that …

…monetary union is fundamentally flawed, with zero chance that the weaker members can become as competitive as those at the core.

And it seems to me also that it is near impossible given the nature of the sovereign states which make up the EU that for any but a very few states a monetary union can operate as it does in the US, where there is the necessary rebalancing from the centre to smooth out certain negative economic effects. But then that merely points to the reality that the US isn’t simply a monetary union, but also a genuine political union.

For the EU to achieve that would appear to be an almost utopian goal. Our own experience underlines that. Our leaders have sallied forth to protect corporation tax in the last two months, but in a genuine political/economic union there would be no question of such a measure being protected.

And here is where Elliot may be wrong. I think that the attempt to muddle through, which has been the primary characteristic of the EU in the past three years when faced with what is rapidly assuming the look of an existential crisis to the project, will continue. I suspect that given the intrinsic paradoxes and contradictions between an EU and Eurozone project and the reality of nation states there is no other way. One could even posit that the appalling mess that was the Cowen/Lenihan government in its last two years is indicative of how the EU and ECB will continue to act, all half-truths and evasions and bluster as the fundamentals go south. Which will lead precisely nowhere good.

And in that last respect I fear that Elliot will most likely be proven all too correct.

Random thoughts on an economic crisis… June 21, 2011

An unusually interesting piece by Madeleine Bunting in the Guardian last month where she engaged with the issue of the lack of response by the public over the banking/financial/economic crisis. She noted that:

… the biggest puzzle is the public. The enormous advertising campaigns of the banks must play a role; some say the total spend last year was around £30m. The cutesy animation and friendly “real” bank staff must work at some level to delude the public, to calm and reassure that all is as normal. It’s trading on some folk memory of banks as sober and reliable. Add to that the massive patronage – of the arts, sport and good works – in the last few decades designed to inspire shock and awe.

This public deference is also evident in how effectively the banks have used complexity and expertise to dodge accountability. “You wouldn’t understand” was the mantra provided to regulators, politicians and the public, just as priests in a cult might tell devotees. The complexity required a superior intelligence and skill, insisted the “masters of the universe”, as they recruited the sharpest minds. This is a version of the meritocracy against which Michael Young warned so presciently in 1958, using a phrase that has been stubbornly misunderstood ever since. He recognised that meritocracy was a form of elitism; it could be as ruthlessly exploitative as aristocracy and, in both, deference and patronage play integral roles. It’s worth remembering that Young predicted revolution by the disfranchised against the meritocracy – but not until 2033.

I think that the answers to this are to be found in the same area as those discussed recently in relation to the John Lanchester book. Simply put the orthodoxy is the overwhelming discourse, there is a sense that this orthodoxy is correct and crucially that it is pointless to explore alternatives. In a curious way it reminds me of the old trope about ‘there being no life outside the party’ for ex-CPers with perhaps the same sort of manichaean basis to it.

There are other issues at work in relation to banks in particular. Not that long ago the hierarchical relationship with banks was one of customers being near supplicants when making applications for loans. And that top down relationship I think goes beyond the idea of banks as ‘sober and reliable’. I think it feeds into an approach where the bank was not quite entirely, but to some degree almost unquestionable. After all the bank had something approaching the power of life and death.

And allied with that then there’s the reality that for many the bank was the repository – quite literally – of much of what they had, whether in terms of mortgages or savings. It’s very difficult to turn that around conceptually to being a relationship where the customer is giving something to the bank rather than that the bank is holding something over the customer. It’s almost as if the bank has an hostage – and perhaps explains why some of the talk of mortgage boycotts and such like has run into the ground.

All this is impressionistic and it would be useful to see something more empirical brought to bear on the topic. But widening this out it explains perhaps why public anger is so diffuse about the crisis.

What’s most curious about this is that up until even two decades ago the idea that states across the globe would adopt such essentially passive measures in the face of recession would have seemed wildly at odds with previous economic practice in the post-war period. The idea that ‘austerity’ was the sensible course of action in recessionary times would have been regarded as hugely counter-intuitive for the obvious reasons, that such austerity stifles the very growth which is needed to pull away from recession.

But again as touched on by Lanchester, the capture of social democratic parties intellectually by the neo-liberal right, or rather the retreat or surrender by such parties to nostrums of the impossibility or inadequacy of interventionism is perhaps the key issue. One can view this as a loss of heart or perhaps a poorly worked out economic foundation to their philosophies (in that they didn’t offer strong counter critiques) or whatever. One might also attribute it to a dynamic where winning back state power – even if once won they resiled from engaging with the potential of that state power was more important in the short term than demonstrating through work on political economy that state power [and by the way I'm not an out and out statist and have always believed that intervention should be across a spectrum rather than narrowly focused just on the state] had an efficacy in such contexts.

I’ve been listening to a lot of US politics podcasts, most notably, Left Right & Centre from KCRW, which take the view that the ECB and eurozone as a whole are replicating the worst mistakes of the US banking crisis by attempting to support the banking sector over the economy.

Their incomprehension at the policies being pursued here in particular is deeply disturbing and perhaps all the more so because it is generally positioned within a more rather than less orthodox approach. As Matt Miller said on the latest edition of LR&C:

“It’s also true that Greece took on tons of debt that was beyond their ability to pay… and that they’ve huge issues in their tax collection and public employment that are legitimate issues to be revisited…

But the real scandal, it seems to me, and this happened in Ireland… is that the entire effort of European politicians is to avoid having the private sector bank bondholders that are holding Greek debt from taking any reduction from 100% on the dollar of the debt that they’ve taken on and the pressure, and the idea that we’ll insulate banks because they don’t have enough capital to withstand losses, is really what got us into this mess in the first place, banks banks operating with very thin levels of capital whose losses end up becoming nationalized in this situation.”

And they point to the intrinsic problem of the eurozone itself preventing an orderly devaluation. This doesn’t sound good. And that’s beyond the capacity of the Greek – or this – polity to absorb what is being asked of it.

That thought in mind Constantin Gurdgiev makes an interesting point in the latest Village magazine in the front page piece on the economy. He notes:

…the periphery label attached to Portugal, Ireland, Italy, Greece and Spain. In 2010, its ‘periphery’ accounted for 35% of Euro-area GDP, 40.5% of its population and 40% of the total gross government debt. I doubt any US administration would ever be arrogant enough to call, say, the States west of the Rockies, the ‘periphery’…

Perhaps Gurdgiev is reaching a little in incorporating Italy into the PIGS acronym, perhaps not. But this surely feels like a crisis that the EU is remarkably unprepared to face up to. And even if we calibrate an intrinsic bias against the EU into the statements of those noted above that still leaves little room for comfort.

And that led to another thought. Last week I watched two films about the resistance to the Nazi’s, the interesting Flame and Citron, set in Copenhagen and following the fortunes of two nationalist resistance fighters and the equally interesting, but perhaps more harrowing, Army of Crime which followed a Paris based Resistance group which was largely but not exclusively made up of non-French nationals and Communists. I’d recommend both, but something very curious struck me during the latter. Throughout the film the narrative is interspersed by Vichy and occupied France radio announcements about the activities of the Resistance.

Listening to the radio announcers detailing the ‘crimes’ against the Nazi’s and the infrastructure there was an almost overwhelming urge to shout at the screen ‘but it’s an occupied country and they’re resisting and you’re pretending nothing has changed’.

Oddly familiar.

Another thought. I’m not a believer in conspiracy theories, though I find them fascinating. And I don’t believe this crisis was deliberately generated on behalf of anyone in order to suppress populations. That said I do think that it is proving to be an educative moment for some of the great and good as to how passive populations are and how much can be removed from them before there is serious unrest. I have little doubt that the lack of response is being filed away for future use – in much the same way as the response to the security measures taken during the visit of the Queen provided a not dissimilar educative moment for the Irish state.