Download - Third World Network

Keeping markets happy
It’s not public-sector deficits that are at fault for the euro crisis – it’s the policies that
have enabled the financial sector to wield so much power.
THE new fiscal pact agreed to by the
majority of European Union (EU)
countries (save Britain) on 9 December
in Brussels will do little to avoid
a pending catastrophe. It neither addresses
the main causes of the current
eurozone crisis nor calls for the
economic policies urgently needed
to restore stability and increase employment
and growth.
The dominant discourse of the
pact places the blame for the crisis
squarely on public-sector profligacy,
yet the crisis did not begin in the
public sector. It began in the private
finance sector, where it was triggered
by risky overleveraging by the
unregulated shadow banking system
of non-bank financial institutions,
many of which were exploiting a
dangerous housing bubble in the
United States and Europe that went
neglected by authorities. It quickly
became a public-sector deficit crisis,
however, as lavish bank bailouts
were put together and tax revenues
fell because of the economic recession.
Yet the initial problems of the
unregulated nature of the financial
sector and its reckless use of derivatives
and commodity market speculation,
not to mention the ‘too big to
fail’ moral dilemma, have not been resolved
at all, leaving the door open
for the possibility of more financial
crises in the future.
Another root cause of the
eurozone crisis lies in the unwillingness
of the European Central Bank
(ECB) to modify its current rules so
that it can act more like a proper central
bank. Although the ECB’s recent
moves to cut interest rates for the second
straight month and expand emergency
financing for cash-starved
banks are steps in the right direction,
its continued unwillingness to buy the
bonds of troubled eurozone countries
will only deepen the crisis. True, there
is a technical ECB rule prohibiting
unlimited bond purchases, yet one
E C O N O M I C S
Rick Rowden
cc ArcCan
The European Central Bank building in
Frankfurt, Germany. The ECB’s monetary
policy is narrowly focused on maintaining
low inflation over other goals such as
promoting higher employment and growth.
would think staring into the abyss of
a global depression might be a good
enough reason to break this rule.
This fundamental failure to act
with bond purchases reflects the
eurozone’s neoliberal architecture,
which overtly seeks to diminish the
role of the state and enhance the
power of the market. This thinking is
also reflected in the ECB’s monetary
policy, which is narrowly focused on
maintaining low inflation over other
goals such as promoting higher employment
and growth. Because
eurozone governments do not control
their own national currencies and thus
cannot devalue their way out of the
crisis, the only other option for increasing
their export competitiveness
is to drive wages down and further
weaken labour rights, a process referred
to as an ‘internal devaluation’
through the adoption of ‘labour flexibility’
reforms.
In fact, the new EU plan to restrict
deficit spending to 3% of GDP
and have EU countries cut and starve
their way out of this recession
smacks of the misguided fiscal and
monetary policy of 1937 and the
same anti-growth, anti-worker, and
anti-public-investment toxic cocktails
that have long characterised the
International Monetary Fund
(IMF)’s approach in developing
countries. These policies to drive
wages lower and adopt budget austerity
in the current context of a recession
will surely fail as consumer
demand falls further, unemployment
worsens, tax receipts continue to decline,
and public deficits rise anyway.
Also at fault in the crisis is Germany’s
longstanding beggar-thyneighbour
approach of using low inflation
and low wages to out-compete
its EU trading partners, which
eventually created destabilising imbalances
within the eurozone. The
approach worked so well over the
last decade that it earned Germany a
massive trade surplus while saddling
the country’s less competitive EU
partners with large trade deficits. In
so doing, however, it wiped out the
purchasing power in these markets,
which can no longer afford to buy
German goods, thus killing the goose
that laid the golden eggs.
So if these are the problems at the
heart of the debt crisis, what are the
solutions? European leaders could
avoid eurozone imbalances in the first
place by adopting sanctions against
both deficit and surplus countries.
Surplus countries could be required
to provide countercyclical long-term
financing to deficit countries during
crises through a system of regional
transfers, and adopt stimulus or even
mildly inflationary policies at home
to help boost the exports of deficit
countries. But such steps to avoid
THIRD WORLD RESURGENCE No 255/256
10