January 31, 2012
Giovanni Tiso, who runs the Bat Bean Beam weblog, has an interesting article in Overland entitled Europe’s perfect ruins. In it he addresses the neo-liberal narrative of the Euro sovereign debt crisis.
Tiso says that this narrative pits:
the profligate south versus the hard-working, virtuous, nose-to-the-grindstone north...the brutal austerity measures enacted in Portugal, Greece and Ireland (and, to a lesser extent so far, Spain and Italy) are a fitting punishment. The sin of profligacy, of living beyond one’s means, needs to be castigated: .. if [Greece] were relieved painlessly of its debt, then other economies in similar strife would have no incentive to cut expenditure and improve their fiscal position.
So Greece, and Italy, are forced adopt draconian measures that increased unemployment while benefits, services and public sector salaries were slashed in exchange for some relief for its creditors. If every country were as industrious and hard-working as Germany, then the entire euro- system could sustain itself indefinitely along a virtuous and prosperous path.
The flaw with this narrative says Tiso is the lack of automatic internal balancing mechanisms within the economic and monetary union.
As economist Michael Burke, and others, have noted, a region undergoing economic problems within a nation state, even a federated one, would automatically pay less tax on its reduced income and receive a larger slice of the overall state revenue in the form of increased social services and benefits. But the eurozone has no such facilities, leaving governments hit by the crisis powerless and their populations exposed to the repercussions.
Apparently the architects of the monetary union, aware that no governance provisions had been made to enable the centralised political control of fiscal policy necessary in a crisis, rested their hopes on an expectation that such provisions would be created in response to a crisis.
The response to the crisis is that the core economies possessing the money for a bailout (ie. France and Germany) are free to dictate its conditions without being subject to a union-wide democratic process. The real enforcers of the draconian measures that policy-makers advocate are the financial markets.
For Italy or Greece to service their large debt requires a sufficient pool of creditors who trust in your capacity to keep up with the repayments. If the pool shrinks, the interest rates go up and lo!, suddenly you find that you really can’t pay back the money. Loss of confidence. Another round of austerity measures is required. More sacrifice to prevent the interest rates from climbing to 7% levels on its bonds, which would put Italy and Greece on the brink of bankruptcy.
More sacrifice is required for those on mid to low incomes: doing without modern hospitals, having to work longer, abolishing the indexation of pensions; less protection from arbitrary dismissal; tax on home ownership; increase in value-added tax. If interest rates on the bonds climb, then that means the financial markets have judged the austerity measures are not harsh enough.
The problem with the austerity measures is that it leads in the short and medium terms to shrinking output, less government revenue and therefore debt burdens that become unsustainable. That increases the probability of governments defaulting, thus threatening the solvency of banks across Europe.