[P2P-F] Fwd: Article : Debt Defaults, Austerity, and Death of the “Social Europe” Model

Thu Feb 10 10:51:45 CET 2011

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http://michael-hudson.com/2011/01/the-spectre-haunting-europe/

The Spectre Haunting Europe
January 22, 2011
By Admin <http://michael-hudson.com/author/karl/>

Debt Defaults, Austerity, and Death of the “Social Europe” Model
Jeffrey Sommers and Michael Hudson

A spectre is haunting Europe: the illusion that Latvia’s financial and
fiscal austerity is a model for other countries to emulate. Bankers and the
financial press are asking governments from Greece to Ireland and now Spain
as well: “Why can’t you be like Latvia and sacrifice your economy to pay the
debts that you ran up during the financial bubble?” The answer is, they
can’t – without an economic, demographic and political collapse that will
only make matters worse.

Only a year ago it was recognized that decades of neoliberalism had crashed
the U.S. and several European economies. Years of deregulation, speculation
and lack of investment in the real economy had left them with rising
inequality and little consumer demand, except for what was financed by
running up debt. But the financial press and neoliberal policymakers
counterattacked, using the “Baltic Tigers” as an exemplary battering ram to
counter Keynesian spending policies and the Social Europe model envisioned
by Jacques Delors.

Analysts have viewed Latvia’s October election results as vindication of the
efficacy of austerity for solving the economic crisis. The standard
narrative is that Latvia’s Prime Minister won re-election even after
imposing the harshest tax and austerity policies ever imposed during
peacetime, because voters realized that this was necessary. On politics, the
standard narrative (as recently rolled out in The Economist) is that
Latvia’s taciturn and honest prime minister, Valdis Dombrovskis, won
re-election in October even after imposing the harshest tax and austerity
policies ever adopted during peacetime, because the “mature” electorate
realized this was necessary, “defying conventional wisdom” by voting in an
austerity government.

The Wall Street Journal has published several articles promoting this view.
Most recently, Charles Doxbury advocated Latvia’s internal devaluation and
austerity strategy as the model for Europe’s crisis nations to follow. The
view commonly argued is that Latvia’s economic freefall (the deepest of any
nation from the 2008 crisis) has finally stopped and that recovery (albeit
very fragile and modest) is under way.

This view appeals to bankers looking to prevent defaults on private and
public debt, hoping that austerity can lead to economic recovery.
But Latvia’s model is not replicable. Latvia has no labor movement to speak
of, and little tradition of activism based on anything other than ethnicity.
Contrary to most press coverage, its austerity policies are not popular. The
election turned on ethnic issues, not a referendum on economic policy.
Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly
neoliberal), while the sizeable 30% minority of Russian speakers voted with
similar discipline for their party (loosely Keynesian).

Twenty years from independence, the consequences of Russian emigration to
Latvia under Soviet occupation still shape voting patterns. Unless other
economies can draw upon similar ethnic division as a distractive cover,
political leaders pursuing Latvian-style austerity policies are doomed to
electoral defeat.

While the economic crisis was deep enough to drive even Latvia’s
depoliticized population into the streets in the winter of 2009, most
Latvians soon after found the path of least resistance to be simply to
emigrate. Neoliberal austerity has created demographic losses exceeding
Stalin’s deportations back in the 1940s (although without the latter’s loss
of life). As government cutbacks in education, health care and other basic
social infrastructure threaten to undercut long-term development, young
people are emigrating to better their life rather than to suffer in an
economy without jobs. Over 12% of the overall population (and a much larger
percentage of its labor force) now works abroad.

Moreover, children (what few of them there are as marriage and birth rates
drop) have been left orphaned behind, prompting demographers to wonder how
this small country can survive. So unless other debt-strapped European
economies with populations far exceeding Latvia’s 2.3 million people can
find foreign labor markets to accept their workers unemployed under the new
financial austerity, this exit option will not be available.
 Latvia’s
projected 3.3% growth rate for 2011 is cited as further evidence of success
that its austerity model has stabilized its bad-debt crisis and chronic
trade deficit that was financed by foreign-currency mortgage loans. Given a
25% fall in GDP over during the crisis, this growth rate would take a decade
to just restore the size of Latvia’s 2007 economy. Is this “dead cat” bounce
sufficiently compelling for other EU states to follow it over the fiscal
cliff?

Despite its disastrous economic and social results, Latvia’s neoliberal
trauma regardless is idealized by the financial press and neoliberal
politicians seeking to impose austerity on their own economies. Before the
global crisis of 2008, the “Baltic Tigers” were celebrated as the vanguard
of New Europe’s free market economies. Critics of this economic “miracle,”
built on foreign currency loans financing property speculation and
privatization buyouts, were dismissed as naysayers. Without missing a beat,
these commentators have branded the present Latvian option of austerity as
policies for other nations to adopt.

The Latvian option serves several masters. The financial press pines for the
fairytale that markets self-correct and austerity brings prosperity.
Latvia’s Central Bank (about which even the IMF has expressed concern over
its neoliberal stridency) wishes to run a victory lap, absolving itself for
policies that imposed massive suffering on Latvia’s people. And Washington
and EU neoliberals want other countries to adopt Latvia’s version of China’s
colonial “Open Door” matched with a Dickensian welfare system. Openness to
economic penetration is the standard on measure, and the Balts have this in
spades, ergo, they are “successes,” regardless of how well or bad their
economy serves its people’s needs.

Given the geographic proximity of Latvia and Belarus, it is illuminating to
compare how neoliberals have assessed their respective economies. Latvia
suffered Europe’s largest economic collapse in 2008 and 2009, with
continuing double-digit unemployment. Its economy will show no growth until
this year (2011), and its modest growth likely will remain accompanied by
double-digit unemployment. Much of its population has evacuated the country,
leaving many children with relatives or to fend for themselves. Neighboring
Belarus, with few of Latvia’s geographic advantages (ports and beaches) or
high-tech background, has a per capital GDP not too far behind Latvia’s.
Belarus had a boom with double-digit growth before the crisis, and kept its
economy at full employment during the crisis rather than collapsing by the
25 percent rate that plagued Latvia. Belarus also has a GINI coefficient
(inequality) roughly on par with Sweden, while Latvia’s is closer to the
widening inequality levels that now characterize the United States.

Yet neoliberal Latvia is declared an economic success model and Belarus a
failure. The CIA’s World Factbook reminds its readers that Belarus’s
performance occurred “despite the roadblocks of a tough, centrally directed
economy.” This is the standard characterization of Belarus. But one needs to
ask to what degree its success may reflect its central planning. Latvia has
produced greater political freedom for dissidents, but Belarus has less
economic inequality and foreign debt.

Every economy in history has been a mixed economy. We are not defending
Comrade Lukashenko’s media and political repression in Belarus. We simply
are not going to the opposite extreme of applauding Latvia’s neoliberal
model. One can reject Belarus’ political system without endorsing the
electoral oligarchy that characterizes much of Latvia’s political life. Yet
win or lose on economic outcomes, Latvia and the Starving Baltic Tigers will
be declared the winners, while Belarus always will be declared the loser on
economic performance, regardless of achievement. You will not see a measured
look at both nations’ economies to examine objectively where they are
succeeding and failing (including by sector) with an eye for what lessons
might be derived from such an investigation. Economic comparisons are
entirely political.

Our intention is not to blame the Latvian nation for the cruel neoliberal
policy experiment to which it has been subjected, to question the global
community of policymakers, intellectuals and some of Latvia’s own elites
that persist in pursuing this failed policy and even recommend it to other
countries as a path of growth rather than economic and demographic suicide.
Latvia’s people have suffered from the ravages of two World Wars and two
occupations, capped by neoliberalism dismantling its industry and driving it
deeper and deeper into debt – indeed, foreign-currency debt – since it
achieved independence in 1991. Neoliberalism has delivered poverty so deep
as to cause in an exodus of Biblical proportions out of the country. To call
this a forward economic step and a victory of economic reason reminds one of
Tacitus’ characterization of Rome’s imperial military victories, put in the
mouth of the Celtic chieftain Calgacus before the battle of Mons Graupius:
“They make a desert and they call it peace.”

In the several years that we both have been visiting Latvia we have seen an
industrious and talented people, with many displaying integrity despite
being immersed in a corrupt environment. Our aim here is to explain why the
failed “Latvian model” should be seen as a warning for what other countries
should avoid, not a policy to be imposed on hapless Ireland, Greece and
other European debtor countries. In fact, we both have worked to encourage a
policy reversal in Latvia itself. What now is at stake, after all, is the
future of European social democracy and the continuation of peace in a
region plagued by war for a millennium prior to the 1950s.

The problem is that Europe’s economic difficulties are rooted not merely in
profligacy, as the press and many politicians typically claim. Debt is a
consequence of structural financial, economic and fiscal faults built into
the design of post-Soviet Europe. In a nutshell, the European Union never
developed sustainable mechanisms to transfer capital from its richest
economies to poorer countries, especially on the periphery.

The Bretton Woods order after World War II was part of a more workable
system for reconstruction lending and capital transfers between war-torn
Europe and the United States. Marshall Plan aid, accompanied by capital
controls and government investment to encourage economic development and
monetary independence, enabled Western Europe’s national economies to buy
imports from the United States while building up their own export capacity
and raising their living standards. The system was not without fault, but
the desire to avoid the previous half-century cycle of economic depression
and war (and mounting Cold War concerns) led Western Europe’s economies to
develop and pave the way for subsequent continental integration.

The post-Cold War period since 1991 reflects similar patterns of
underdevelopment in the relationship between rich Western Europe and its
poorer East and Southern European counterparts. In contrast what was done
after World War II, sustainable structures were not put in place to make the
latter economies self-sustaining. Just the opposite outcome was structured
in: foreign currency debt, especially for domestic mortgage loans, without
putting in place the means to pay it off.

Today, the wealthiest EU states are high-value added manufacturers. EU
expansion twenty years ago was marked by rising exports and bank loans from
these nations to what have become today’s crisis economies – and by rising
debt levels in the context of privatization sell-offs without progressive
income taxation and with little property tax (a major factor in promoting
local real estate bubbles).

The Baltics and East European countries have financed their trade deficits
over the past decade mainly by Swedish, Austrian and other banks lending
against real estate and infrastructure being sold and resold with increasing
debt leverage. This has not put in place the means to pay off these debts,
except by a continued inflation of a real estate bubble to sustain enough
foreign-currency borrowing to cover chronic trade deficits and capital
flight.

The Baltic States have since brought their current account into line, not by
producing more goods and services, but by impoverishing their people. Their
neoliberal planners have slashed consumption – not to create capital for
investment, but to pay down debts to bankers. This is how they are adjusting
to the cessation of capital inflows from foreign banks now that real estate
Bubble Lending has dried up (the Bubble Lending that was applauded for
making their property markets “Baltic Tigers” to the banks getting rich off
the process). Bankers and the financial press depict this austerity program
to pay back banks as the way forward, not as sinking into the mire of debts
owed to creditors that have not cared much about how the Baltic economies
are to pay – except by shrinking, emigrating and squeezing labor yet more
tightly.

The fiscal burden falls much more heavily on employment than it did in
Western Europe sixty years ago during its period of reconstruction. Insider
dealing and financial fraud was widespread. To cap matters, euro-denominated
debt for associate members was secured by income in their own local
currencies. Worst of all, banks simply lent against real estate and public
infrastructure already in place instead of to increase production and
tangible capital formation. In contrast to the Marshall Plan’s
government-to-government grants, the ECB’s focus on commercial bank lending
simply produced a real estate bubble. Bank lending inflated their real
estate bubbles and financed a transfer of property, but not much new
tangible capital formation to enable debtor economies to pay for their
imports. Just the opposite: Their debts rose without increasing
foreign-exchange earning power. So it was inevitable that this house of
cards would collapse.

In setting up the EU’s economic relations, free-market trade theory assumed
that direct investment and bank lending would provide the capital needed to
help Europe’s poorer regions catch up. This assumption turned out to be
unwarranted. Banks lent against real estate and other assets already in
place, inflating their prices on credit. It is the debt overhang and related
aftermath of this narrow-minded economic philosophy that now needs to be
cleaned up.

These arrangements served the major EU exporters but did not develop
European-wide stability based on more extensive economic growth. Without the
looming threat of war or political threat from Russia, Europe’s richest
nations pushed for trade liberalization and privatizations that accelerated
de-industrialization in the former Soviet bloc. Southern European members
were brought into the Eurozone with its strong currency and strict limits on
government spending that failed to enable these countries to develop their
manufactures in the way that Western Europe (and the United States) had
done.

This state of affairs could only be temporary, because the East was
reconstructed in a way that made it import-dependent and financially
subordinate to the West, treated more as a colony than as a partner. And as
in colonial regions, the West became a destiny for capital flight as
property was sold on credit and the proceeds moved out of the post-Soviet
and southern European kleptocracies and oligarchies.

The foreign currency to pay banks on the loans that were bidding up real
estate prices was obtained by borrowing yet more to inflate property prices
yet more – the classic definition of a Ponzi scheme. In this case, European
banks played the role of new entrants into the scheme, organizing the
post-Soviet economies like a vast chain letter, providing the money to keep
the upward-spiraling flow moving.

The problem was that credit only was extended to fuel real estate and to
finance the exportation of goods from the industrial export dependent
Western Europe (with its Common Agricultural Policy crop surpluses) a
de-industrialized and agriculturally unmodernized East. The expanding debt
pyramid had to collapse, as no means of paying it off were put in place.

There was a vague hope that levels of economic development eventually would
equalize across the EU, as if bank lending and foreign buy-outs would lead
to greater homogeneity rather than financial polarization. The problem was
that the EU viewed its new members as markets for existing banks and
exporters (including as dumping ground for its agricultural surpluses), not
to help these new members become economically self-sustaining or set up
viable national financial systems of their own.

Given the restrictions the euro places on its member countries, the path of
least resistance EU’s creditor nations and banks understandably would like
to resolve this crisis is “internal devaluation”: lower wages, public
spending and living standards to make the debtors pay. This is the old IMF
austerity doctrine that failed in the Third World. It looks like it is about
to be reprised. The EU policy seems to be for wage earners and pension
savers to bail out banks for their legacy of bad mortgages and other loans
that cannot be paid – except by going into poverty.

So do Greece and Ireland, and now perhaps Spain and Portugal as well,
understand just what they are being asked to emulate? The EU policy seems to
be for wage earners and pension savers to bail out banks for their legacy of
bad mortgages and other loans that cannot be paid – except by plunging their
economies into poverty. How much “Latvian medicine” can these countries
take? If their economies shrink and employment plunges, where will their
labor emigrate?

Without public investment, how can they become competitive? The traditional
path is for mixed economies to provide public infrastructure at cost or at
subsidized prices. But if governments “work their way out of debt” by
selling off this infrastructure to buyers (on credit whose interest charges
are tax-deductible) who erect rent-extracting tollbooths, these economies
will fall further behind and be even less able to pay their debts. Arrears
will mount up in an exponential compound interest curve.

The EU’s creditor nations and banks are seeking to resolve the crisis in way
that will not cost them much money. The best hope, it is argued, given the
inability of the crisis countries to depreciate their currencies, is
“internal devaluation” (wage austerity) on the Latvian model. Bankers and
bondholders are to be paid out of EU/IMF bailout loans.

The problem is the austerity imposed by existing debt levels. If wages (and
hence, prices) decline, the debt burden (already high by historical
standards) will become even heavier. This is what the United States suffered
in the late 19th century, when the price level was driven down to “restore”
gold to its pre-Civil War (and hence, pre-greenback) price. Presidential
candidate William Jennings Bryan decried crucifying labor on a cross of gold
in 1896. It was the problem that England earlier experienced after the
Treaty of Ghent ended the Napoleonic Wars in 1815. Aside from the misery and
human tragedies that will multiply in its wake, fiscal and wage austerity is
economically self-destructive. It will create a downward demand spiral
pulling the EU as a whole into recession.

The basic problem is whether it is desirable for economies to sacrifice
their growth and impose depression – and lower living standards – to benefit
creditors. Rarely in history has this been the case – except in a context of
intensifying class warfare. So what will Latvians, Greeks, Irish, Spaniards
and other Europeans do as their labor is crucified by “internal devaluation”
to shift purchasing power to pay foreign creditors?

What is needed is a reset button on the EU’s economic and fiscal philosophy.
How Europe handles this crisis may determine whether its history follows the
peaceful path of mutual gain and prosperity that economics textbooks
envision, or the downward spiral of austerity that has made IMF planners so
unpopular in debtor economies.

Is this the path that Europe will embark on? Is it the fate of the Jacques
Delors’ project of a Social Europe? Was it what Europe’s citizens expected
when they adopted the euro?

There is an alternative, of course. It is for creditors at the top of the
economic pyramid to take a loss. That would restore the intensifying GINI
income and wealth coefficients back to their lower levels of a decade or two
ago. Failure to do this would lock in a new kind of international financial
class extracting tribute much like Europe’s Viking invaders did a thousand
years ago in seizing its land and imposing tribute in the form of land.
Today, they impose financial charges as a post-modern neoserfdom that
threatens to return Europe to its pre-modern state.

As published in Counterpunch<http://www.counterpunch.org/hudson01182011.html>

*Prof. Hudson at UMKC and Prof. Sommers at the University of
Wisconsin-Milwaukee are advisors to the Renew Latvia Task Force.

---------- Forwarded message ----------
From: Dante-Gabryell Monson <dante.monson at gmail.com>
Date: Thu, Feb 10, 2011 at 12:28 AM
Subject: Article : Debt Defaults, Austerity, and Death of the “Social
Europe” Model
To: econowmix at googlegroups.com, sustainable_solidarity at yahoogroups.com,
hc_ecology at yahoogroups.com

excerpt from article below : *"Economic comparisons are entirely political."
*
*
*
*"*Washington and EU neoliberals want other countries to adopt Latvia’s
version of China’s colonial “Open Door” matched with a Dickensian welfare
system. Openness to economic penetration is the standard on measure, and the
Balts have this in spades, ergo, they are “successes,” regardless of how
well or bad their economy serves its people’s needs.

Given the geographic proximity of Latvia and Belarus, it is illuminating to
compare how neoliberals have assessed their respective economies. Latvia
suffered Europe’s largest economic collapse in 2008 and 2009, with
continuing double-digit unemployment. Its economy will show no growth until
this year (2011), and its modest growth likely will remain accompanied by
double-digit unemployment. Much of its population has evacuated the country,
leaving many children with relatives or to fend for themselves. "
 ---- http://michael-hudson.com/
http://en.wikipedia.org/wiki/Michael_Hudson_(economist)
http://www.youtube.com/watch?v=sjV5FEKVs8A&feature=related
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