What is Spain Up To?

Spain has already inflicted huge economic sanctions on its citizens: 25% unemployment [at least], reduced pensions and increased age of retirement, underfunded schools and hospitals, bankrupt local authorities, tens of thousands of incomplete and unsold dwellings, increased taxes ... and the catalogue could go on and on. While the banks have borrowed from EU institutions and from foreign banks even in recent days, the markets are betting against the Spanish state being able to submit formally to the conditions that would be applied to a formal 'bailout' by the European Union, the European Central Bank and the International Monetary Fund. Since it is generally understood that the conditions on any formal baliout would be very harsh, why should the Spanish government not have done what the Greeks did: take the bailout as soon as possible, and blame the Germans [and the rest of the EU]  for the harsh treayment meted out to the population?

Simplistically, Prime Minister Rajoy is asserted to be over-endowed with Spanish pride; which makes him exceedingly reluctant to submit to mere north Europeans. More realistically, he has hoped to be able to avoid a bailout altogether. Meanwhile, his government has demonstrated that the Spanish state is sufficiently robust to be able to enforce very hard economic policies. Most importantly he has emphasised and demonstrated the huge difference between the Spanish situation, and the popular response to it, and that of Greece. Spain has presented strong evidence against the domino theory.

Greece will some day fairly soon be forced to withdraw from the euro; but that need not precipitate a gaderene rush by specluators to force Portugal, Sapin or Italy also to fail to manage their economy withon the eurozone.

Whenever Spain now applies for a bailout, on conditions that it will partially be able to dictate, that will not be a signal for the progressive withdrawal of all the weaker southern states from the euro. Spain has not just bought time for itself to get agreed terms; it has ensured that the gulf between Greece and the rest has become consolidated. Yes, there are demonstrations verging on the riotous in Spain; dismay affects most of the population some of the time, and some of the population all of the time; but there is not yet the degree of hopelessness and despair that now characterises the vast majority of Greeks.

The whole situation is classically tragic, but redemption for Greece is vastly different - and much more painful to achieve - than is the possibility to turn the Spanish economy round within the eurozone.

The Euro: What's New?

The European Central Bank [ECB] has now put a modest amount of flesh on the bare bones of a contingency plan that is a long way from being implemented. If Spain or Italy [or France] asks for help from the EU - maybe something short of an appeal for a Greek-style bailout - and if the EU and the IMF agree terms with the government, the ECB may buy bonds issued by that government. These could either be bonds that are already in the market, or new issues of bonds that will have three years or less to run before they must be bought back by the issuing government. Some government spending in the target country [provided that the borrowing falls within the approved strategy] will be funded by new euros issued by the ECB, if any country qualifies for the scheme.

The ECB's balance sheet will be increased if this should happen; on the debit side by its liability for the new issue of euros and on the credit side by an equivalent notional 'value' of bonds. All the member-countries of the eurozone own the assets and liabilities of the ECB, and the bigger they allow its balance sheet to grow, the more deeply they will be committed to backing the whole dodgy structure. Many news media on 7 September 2012 copied the bizarre assertion [whose originator I have not yet been able to identify]  that this new policy would have the 'opposite effect' to that of the Reparations that were payable after the First World War. The sheer idiocy of this wild assertion makes it notable, and it may even prove memorable.

Reparations - money to pay for repairs - was demanded by the states that had participated in the war and had not collapsed at the end of it; as had the empires of Russia and Austria. Republican Germany was required to accept the Peace of Versailles, which included reparations; and Keynes made his name internationally by publishing The Economic Consequences of the Peace, a book that predicted the disaster that would inevitably follow. It is not clear how far, if at all, Keynes's analysis influenced members of the US Senate when they refused to ratify the Treaty; but history teaches that this decision - which seemed catastrophic at the time - was ultimately of no importance. The Treaty could be blamed for hyperinflation and economic catastrophe in Germany: and thus for the emergence of Hitler; and the Senate had no part in it.

The German electorate and the managers of the Bundesbank [the German central bank] are now united in regarding the ECB's new plan as being very adverse for Germany. By opening up the balance sheet of the common currency to weak regimes in southern Europe, the Germans and the Austrians and the Dutch [with others] find themselves forced into the situation where they will have to back the ECB, or withdraw from the eurozone: which would have catastrophic effects for the whole continent. The relatively feckless countries will have the power to undermine the strong: those who have worked hard and saved will be penalised to service the accumulated debts that were incurred by reckless welfare state awards [and by massive corruption] in another group of states. The European lie is well understood, now; but those who were conned cannot work out how the truth can triumph. The coming months will be extremely fraught for all who live in the eurozone: and for all whose economies rely on trade with the zone.

The USA and China, Russia and India, have a massive interest in this situation and have no influence over it. Britain, Sweden and Denmark have seats in all non-eurozone  EU gatherings: they could thus be in the unique position of power-brokers, but there is no sign that they have any useful advice or suggestions to offer to their beleaguered neighbours.

Keynes would have had an answer; but he was unique!

Concern at the IMF: About What?

The Managing Director of the IMF has expressed concern about the probability that their forecasts for economic growth throughout the world must be downgraded. Her foreboding is justified by the regular downward revision of estimates for growth that are being published in various countries, especially in the light of the ongoing crisis in the eurozone and its potential negative impact on its trading partners in other parts of the world. In the face of such a negative mood among Economists, politicians, journalists, bankers and some business managers it is unsurprising that there is a growing feeling of unease among the general public.

During the so-called credit crunch of 2007-8 many governments tried to secure the future of banks in their territories by guaranteeing the deposits that people and businesses had placed in those banks. When banks could not meet depositors' demands for cash from their own resources the government supplied the money. Governments that had control of their own currencies, such as the US dollar and the British pound, could authorise their central banks to create 'new' money and make it available to the banks: some went further and actually create the money with which to buy control of threatened banks. In the USA this process was extended to the one insurance company, AIG, that had ruined itself by creating contracts by which it guaranteed to fund banks in certain circumstances which had been thought highly improbable until they happened to several big banks all at once.

In countries that did not have control of their money supply, notably those in the eurozone, the means available to governments to stabilise the economic situation were seriously constrained. For seven years before the credit crunch occurred the member countries of the eurozone issued bonds and bills [certificates of government debt] denominated in euros; and bonds that had been issued before the creation of the euro had become redeemable in euros. Those governments could not follow the lead of the Americans and the British in creating the money that they had to pay out to buy the bonds that fell due to be cashed: they had to borrow the necessary euros from the European Central Bank or the International Monetary Fund, or tap new funds created by other eurozone governments. In considering any of those options a government was faced with strict conditions attaching to any loan, that usually included the imposition of restrictive economic policies. At an early stage in the banking crisis the Irish government decided to guarantee all banks' obligations, raised a large loan and imposed dramatically restrictive conditions on the economy. Southern European members of the eurozone faced up to the crisis more slowly and then took the very different stance of demanding bail-out loans and prevaricated about imposing the conditions that they had accepted, threatening the northern eurozone countries with progressive economic collapse and political chaos. The northern eurozone countries regard this as simple cheating and are resisting any further concessions to the south unless they are accompanied by enforceable sanctions. Meanwhile the population of the whole Union is getting used to commentators covering the arguments about the possible withdrawal of some countries from the euro or the collapse of the entire venture. The fact that the eurozone is not coterminous with the European Union is widely understood: the Union could survive either the defection of some members or  the total collapse of the single currency.

The possibility of chaos in much of the EU - the world's largest economic bloc - is the cause of worry throughout the world economy. The shabby history of the Union - the political fudges, the pervasive unaccountability of the Brussels bureaucracy and the notorious 'democratic deficit' by which the eurorats have evaded public concerns in aggregating power in their own hands - has created the circumstances in which there is little mass empathy with any proposal to give more power to the Union. Spaniards and Italians would like the Union to be able to grab Germany's wealth and hand it to them in return for promises to which nobody gives the slightest credibility: Germany would never assent to such a scheme. The extension of another loan to Spain, agreed overnight, is an allocation of the existing funds which the Finns and the Dutch and the Slovaks and the Germans have already written off. This time round the northern eurozone members seem to be so little concerned about this further handout that they have agreed to give the Spanish government longer to impose austerity.

 And so the sorry saga drags on. Greece will leave the euro. With that example in their sights it is just possible that the Spanish, the Portuguese and the Italians will accept enough 'discipline' to keep the euro staggering along for a year or two. There is no hope of Europe leading the world economy to a new era of prosperity; and not much sign of the emergent economies or the US providing a 'motor' to drag the global economy into an era of growth. New thinking is needed, urgently.

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.