"We should manage our fortunes as we do our health -- enjoy it when good, be patient when it is bad, and never apply violent remedies except in an extreme necessity."
—François de La Rochefoucauld (1613-1680)
(Swans - January 16, 2012) ASSAILING THE EURO: The European Central Bank recently loaned €489 billion to European banks for three years at a 1% interest rate. Just last week, Italy and Spain issued new short- and long-term bonds with a much lower yield. France announced that its budget deficit, which was equivalent to 7.1% of GDP in 2010, was down to about 5.5% in 2011. French public spending has remained remarkably stable in the past 20 years -- from 52.8% of GDP in the 1990s to 52.9% today. Yet, the US rating agency Standard & Poor's chooses that moment to strip France from its AAA credit rating and downgrade it one notch, this at the beginning of a presidential election season that will pitch a nominally-socialist neoliberal, François Hollande, against the conservative neoliberal Nicolas Sarkozy (talk about political interference!). S&P also downgraded eight other members of the eurozone: Cyprus, Italy, Portugal, and Spain (by two notches), and Austria, Malta, Slovakia, and Slovenia (by one notch). Meanwhile Fitch, another rating agency, is threatening to downgrade Italy and Spain further, and Moody's, the third rating agency, is not far behind. Those moves, of course, will lead to a rising borrowing cost for the European Financial Stability Facility to raise money to rescue Euro countries that are facing financial difficulties. In short, the attacks on the eurozone continue full speed.
IF YOU DO NOT BELIEVE that this is a concerted attack on the eurozone, simply read the S&P press release justifying their decision to downgrade the ratings of so many countries. In less than 1,200 words the verb "believe" is used 11 times and the term "eurozone" 20 times. However, they append the following paragraph to their report:
This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used.
IN SHORT, they "believe" the sources of their information are reliable according to their "standards," but they cannot guarantee the reliability. So, don't sue them! Much more legal disclaimer is appended at the very bottom of the release. It reads in part:
S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis.
TYPICAL AMERICAN legalistic mumbo jumbo that says that no matter how shitty the product may be, the producer is not responsible...
WHAT'S INFURIATING is that the S&P crew in charge of rating so many sovereign nations is composed of five, at most seven so-called analysts. The lead analyst is a 35-year-old guy named Marko Mrsnik who joined S&P in 2007. Two years later, he downgraded the credit rating of Greece, quickly followed by the actions of Moody's and Fitch, which started the mayhem. (Currently, the lead analyst for eurozone sovereign debts at Moody's is Alexander Kockerbeck, and at Fitch Maria Malas-Mroueh.) Faceless, unknown people (they do not even have an entry on Wikipedia), yet able to unleash so much turmoil...
INITIALLY, they began downgrading the ratings of sovereign countries because of the high level of public debt, telling these countries to cut spending in order to supposedly restore confidence in the financial markets. Evidently, downgrading these ratings did little to restore confidence. On the contrary, it created the opposite. The yield on sovereign-issued bonds jumped up immediately. So the countries began to cut spending by putting together a series of austerity measures. The result was what anyone with a minimum of empirical knowledge predicted. Growth, which was already anemic due to the economic and financial crises, faltered and the national economies contracted, leading to less tax revenues and therefore more difficulties to face the debt burden. In other words, as the financial and economic environment is becoming more "adverse" (see S&P report), the ratings are therefore further downgraded -- an absurd vicious circle.
BUT ABSURDITY is not what is at play here, except in a Kafkaesque sense. Look at Italy: It was said that Silvio Berlusconi had to go in order to restore the confidence of the markets. Mario Monti, an unelected technocrat, was put in charge of the country. He immediately worked on a plan to privatize state assets and put in place austerity measures. As I said above, Italy was able to issue new short- and long-term bonds at a much lower rate last week. So the famed financial markets got what they wanted. Berlusconi resigned, Monti took charge and slowly started dismantling the Italian social contract, the yields fell by almost one-half, etc. And what does S&P do? It downgrades Italy's credit ratings by two notches! This is nothing else but a frontal political attack on the euro, using the financial markets (and speculators) to asphyxiate the eurozone.
PUBLIC DEBTS, as I have contended time and again, are not the issue. Measuring these debts in terms of GDP does not even make sense. Debts should be measured in terms of revenues. Take France again: The budget deficit for 2011 should be around €91 billion (the final figure will be known next month). However, the French government has provided tax cuts to corporations and private individuals worth, according to official figures, €100 billion a year on average since 2000, and financed these cuts through borrowing. According to the French national statistics institute (INSEE) the total public debt was €1.69 trillion, 85.3% of GDP, in December 2011. Just do the math.
IF THE SITUATION were not so severe I'd use humor and propose that Marko Mrsnik -- the S&P analyst -- become the French president, thus saving France from the expenditures associated with the presidential election and the moronic, and boring, debates that are going to take place in the coming months. Then, I'd pick Alexander Kockerbeck and Maria Malas-Mroueh to govern two other countries (your pick would be as good as mine -- Germany, Spain?). It would save much public money and certainly these three individuals, who apparently know best, would correct the governance of the eurozone and solve the economic and financial crises, unemployment, industrial delocalization, and the growing poverty within the EU. Ah, yes, poverty... It is measured within the EU as a yearly income of €7,178 for one individual and €15,073 for a family of four. On average, 16.4% live under these thresholds. In Greece, 27.7% of the population is poor. It gets worse in other EU countries: Bulgaria (41.6 %), Romania (41.4 %), Latvia (38.1 %), Lithuania (33.4 %), Hungary (29.9 %), Poland (27.8 %), Spain (25.5 %, just behind Greece)... The rate of suicide in Greece increased 40% in the first six months of 2011 compared to the same period in 2010... No doubt, with all their expertise, Marko, Alexander, and Maria would turn the situation around in a hurry.
MORE SERIOUSLY, faced with a political confrontation under the guise of financial imperatives, the response should be political as well as financial. Until the 1970s national central banks fixed the interest rates for sovereign debt. The financial markets and rating agencies had no say in the matter. It was a simple policy: Take it or leave it. Investors were taking it. Nowadays, the investors are playing the fiddle and the central banks listen to the tune, fully aware that enormous political and economic forces are in play. Nowadays, too, central banks within the eurozone cannot set policies. The European Central Bank is at the head of the matrix. It is up to governments to direct the ECB to take control of interest rates for the entire eurozone and tell the rating agencies and unwilling investors to take a hike. Set an interest rate at, say, 3% and the investors, whoever they are, will keep coming.
A SECOND STEP would be for European governments to stop borrowing from non-EU banking and investing entities and only borrow within the EU, excluding Britain. I'm not sure what would be the regulatory process to achieve this goal. Possibly, a tax on financial transactions (aka, Tobin tax, or Robin Hood tax), which would be very modest within the EU but would be increased 10-fold on non-EU banks and foreign investors, including British banks and investors. If a non-EU financial entity has a subsidiary within the EU, any financial transaction would be taxed at the higher rate. Call it financial protectionism. The European project is such an extraordinary human development that it should not be thwarted by outside forces and ambitions.
A THIRD STEP would be to go after tax evasion. Block all financial transactions between tax havens and the EU, and do the same with Switzerland as long as that country's financial institutions keep holding the money of European tax evaders. No exception.
ANOTHER STEP (and there are many more that could be instituted, like to seize and break the too-big-to-fail banks) is to ask wealthy people and corporations to pay their fair share of taxes. Sure, they may demur and threaten to leave the EU. Fine, take over all their assets. Intelligent human resources are aplenty all over the EU. These robber barons can be replaced in a hurry, at a lower rate of exploitation.
OF COURSE, these steps would require to put the neoliberal ideology aside, which presently is a pipe dream, but the debt issue would be solved within two or three years and even poor little Greece would be saved, and poverty greatly diminished. One can always dream, I suppose.
. . . . .
C'est la vie...
And so it goes...
La vie, friends, is a cheap commodity, but worth maintaining when one can.
Supporting the life line won't hurt you much, but it'll make a heck of a
difference for Swans.
Legalese
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Gilles d'Aymery on Swans -- with bio. He is Swans publisher and co-editor. (back)