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Monday, 12 December 2011

Money, Democracy and Economy

Evidence is accumulating that the International Monetary Fund [IMF] is preparing to work closely with the European Central Bank [ECB] to prolong the survival of the euro for long enough to allow Greece to demonstrate whether or not an austerity regime can be imposed with sufficient rigour to allow the country to remain in the eurozone. Whether or not the Greek economy meets the challenge under the very difficult current circumstances, it is highly probable that Chinese resources will also be transmitted via the IMF and the ECB to prop up the rest of the eurozone. Chinese government deposits with the IMF are extremely secure, and China is happy to take a greater share of control of the IMF which is a corollary of increasing its deposits. The USA is watching this situation jealously: so the Americans will most probably also agree to support the ECB to prevent the Chinese becoming too influential.

This set of moves will help to offset the risk of an intensification of the recession that is already gripping the whole of the EU. The recession is already set to last through most of 2012, and could go on longer. Trade between Europe and North America is important on both sides of the Atlantic so it is a direct US interest that Europe will be a good customer for US commerce and industry in a presidential election year. Both China and the sovereign wealth funds that are held by oil-exporting states and by Singapore are looking for businesses in Europe that will be a good buy during the recession. China will gain both the turnover and the institutional experience of the European firms that they may come to own; and - more importantly - they will take control of the intellectual property that the companies have accumulated. They will own the speculative research and the design capabilities of their European subsidiaries, which they can carry forward in China or in Europe as they see fit. They will be able to put their European brand-names on products made in China, greatly increasing the value-added to Chinese industrial output. The Chinese owners will be free to decide whether or not to run-down their European factories, and they will have the option to make their brands in China and sell them at European prices.

Such takeovers, followed by technology transfer to China, will mean that European consumers will still have access to the same brands; but employment and production in Europe will decrease and profits will be exported, so European spending-power will permanently be diminished. The de-industrialisation that has been undermining Britain and the USA for the past half-century will spread rapidly in Europe, even in Germany, unless specific measures are taken to prevent the alienation of ownership.

The massive middle classes in India, China, Brazil and other leading emergent economies are the most avid buyers of quons - brands - [see PPE via the link from this site] and an increasing mass of the population aspire to follow them. Exporting leading brands will be a huge boost to the national balance of payments of the countries that will have bought the brands, and will give them increased profits to apply to new investment. This is the outcome of the operation of the Iron Law of Wages. The EU as a whole has broken the law for decades and the inescapable payback is now being taken by the rest of the world. Proper, provident Germany has not participated in the profligacy; but is straight in the firing line now that redress is being taken. Because of their loyalty to the European fantasy Germans are now at risk of losing some control of their own economy and of the technology in which they have led the world. They have deferred - perhaps permanently - the day on which they would have to open their currency reserves ad lib to bail-out the most profligate members of the euro. But because of their loyalty to the EU they have placed at risk their control of technology and of the brands that they have exported so successfully over recent decades.

Meanwhile there is a daft shouting-match developing in Britain, between those who think that David Cameron has in some degree 'saved' the City of London by declining to support the implementation by the EU Commission and the Court of the Merkel package of financial stringency that has been endorsed by the other 26 member states, and those who argue that Cameron has damaged the vital interests - and the prestige - of the United Kingdom. The Deputy Prime Minister expressed both views, in a perfect vignette of Liberal Democrat policymaking. It is not clear how the new eurozone agreement will be 'policed', and most probably some fudging mechanism will be cobbled together in the drafting of the Compact that is now to begin. It is expected that most of the 26 'inner European' states will agree to impose a Robin Hood Tax, or Tobin Tax, on financial transactions. Britain could veto a tax change, under the Lisbon Treaty; but the veto power would not be applicable to a regulatory change under which the EU might apply service charges or other 'penalties' to the financial services sectors of the UK economy.

The sound and fury of the debate will help nobody. It is, however, incontrovertible that the United Kingdom is again offering itself as a test-bed for seat-of-the-pants economic policy experimentation. Unlike the bowdlerised Keynesianism that was tried in the nineteen-sixties and the crude but clearly articulated monetarism of the nineteen-eighties, the present experiment in austerity management has no underpinning economic theory and no ideology. It stems from a naive pragmatism that was hastily cobbled together by professional politicians from the fundamentally incompatible Conservative and Liberal Democrat parties. It has nothing substantial to contribute to a global dialogue on responding systematically to a crisis which is has reached its high pitch of intensity because the world has allowed the postindustrial countries to breach the Iron Law for almost half a century. The resulting pain is being felt intensely in Greece, and is beginning to cause serious stress in most member countries of the European Union, not always in proportion to the extent to which individual countries breached the Iron Law. It is impossible to predict where this will lead in terms of socio-political tension, but it is inevitable in conventionally democratic societies that the complacency of the democracy itself will be challenged. Nothing can be taken for granted but it becoming common to question whether democratic principles have failed, or whether the disaster is the product of a perverse and irrelevant political class that has emerged in separation from the rest of society.

China has a huge political caste, who have been segregated for the entire length of their careers from the toil and economic stress of life as it is experienced by the vast migrant working class and by both the megarich and the tens of millions of middle-class consumers. There are great hazards in attempting to climb the greasy pole of party hierarchy, and even greater risks if party apparatchiks dabble corruptly with business; but the people who reach the top are generally of the highest quality. The near-miracle of economic and monetary management that has been accomplished over the past two decades is the best evidence of this. Western commentators have regularly predicted disaster, from hyperinflation through 'stagnation' in the property sector to mass unemployment, while standards of living have risen consistently. Democratic rights as defined in Magna Charta or the US Constitution and Bill of Rights have not been matched in China, and the lack of such rights is probably to the detriment of the Chinese people; but it seems generally to be accepted in the country that it is fair enough to concentrate first on economic development, and then to allow for the development of more open institutions. Dissent in China is very much a minuscule minority activity and is often ethnically based or specifically aroused by corrupt land seizures. The internet and mobile technology ensure that dissent and repression are more widely reported when it occurs; and the government is increasingly open to treating the dissentients more fairly. But the western model no longer looks like an inevitable endgame for Chinese youth to aspire to.

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