Thursday, 7 June 2012

Fiddling while Europe burns

Paul Sweeney: Today’s Financial Times tells us that in an effort to persuade Spain to accept a bailout, “unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans.”

It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.

Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?

The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.

Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.

It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!

But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.

What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.

The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.

Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.

The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.

They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?

The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”

In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?


Paul Hunt said...

It appears that the penny hasn't dropped in Ireland (or in the other PIGS) that Germany and the other creditor nations are simply applying whatever pressure they can exert to encourage the less well-governed to pursue the necessary political and structural reforms to become, resp., better-governed and more competitive.

Better governance is required to assure voters in the creditor nations that they can contribute to sharing the burdens of bank resolution without being taken for a ride by the PIIGS - again. Competitiveness is required in the face of the significant, but very welcome, economic advance of the BRICS, the CIVETS and other emerging economies.

But Official Ireland, similar to its counterparts in the other PIGS, is resolutely opposed to the necessary politcial and structural reforms. Indeed it is going in precisely the opposite direction with this Constitutional Convention and the 'Our Sustianable Future' document issued yesterday.

We had the big car crash in Sep. 2008 but the government-machine srang in to damage limitation mode. It'll need a few more car crashs in a variety of sectors before the penny will finally drop for Official Ireland.

But they're inevitable.

David Jacobson said...

Paul Hunt as usual misses the point. The problem is not specifically Ireland’s. And it is not the PIGS’ nor even the PIIGS’. It is Europe- and maybe even world-wide.

Sweeney’s argument is that the message from the Left should be that “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”

Esping-Andersen, a great analyst of capitalism, argued that developments in the late 1990s contradicted the view that EMU would lead to increasingly competitive labour markets but also to “social policy deregulation”. The massive increase in unemployment, and the withdrawal of state support for a whole range of social support programmes since 2008, may lead him to a different conclusion now. James Wickham already warned, a decade ago, that over-reliance on market criteria would lead to “destruction of the European social model and of everything that makes Europe different from the other parts of the world.” According to Patrick Kinsella the “treaty upsets the historic balance that lies at the heart of the European project – the balance between labour and capital”. The treaty, he continues, has no social chapter; it aims at solving macroeconomic problems “whatever the social cost”.

Ireland voted in favour of this treaty – and maybe we had no choice – but it may just be a further step in the strange neo-liberal ascendance in the face of the worst crisis of capitalism since the Great Depression. If so, then we need some alternative to the vague hope that growth within the current system will – if it returns – bring with it an enhancement of the European social model.

Paul Hunt said...

Before the usual nay-sayers or nitpickers swoop on me, I should add that political and structural reforms are vitally necessary in Ireland (and in the other PIGS) on their own merits, but are equally, if not more, important at this juncture, in the context of increased Euro Area co-ordination of governance, reduction of internal imbalances and burden-sharing.

It's a bit difficult pleading for assistance from the creditor nations in the EU when the Irish cost of living is 15% above the Euro Area average (mainly due to the impact of dysfunctional and inefficient national policy and regulation fully within Ireland's control) and wages and benefit levels are correspendingly above the Euro Area average to compensate for this self-inflicted policy and regulatory lunacy.

paul sweeney said...

I would disagree with Mr Hunt that structural reform is required in Ireland, tho we may mean different things. Our productivity is one of the highest in the world, and rose significantly in recent years. Perhaps I might agree on some areas.

For example, our infrastructure is well behind European levels especially on public transport, still quite a few school and other public buildings are poor and importantly, there are sections of the private sector which need radical reform to eliminate cosiness.

For it was “Cosy Irish capitalism” (FT) or the system of incestuous corporate governance and lack of regulation which collapsed the economy. As yet reform of corporate governance and company law (real reform of the shareholder value model) is not even on the agenda. We are reforming the banking system and the public sector, but not the indigenous private sector.

Prof Jacobson hits it on the head. There is a concerted effort to undermine and indeed even eliminate the European Social Model. He is correct to point out that Patrick Kinsella and James Wickham have already drawn attention to the dangers of the potential success of this effort by the EU elite. The really sad aspect is that many former progressives seem to be acquiescing to this attack.

Paul Hunt said...

In very simple terms there are three broad overlapping areas of conflict in advanced economies - producers/providers v consumers/users, owners/employers v workers and those who perceive they get less value and benefits from thier tax payments that they should v those who rely on tax payments for wages or benefits (net tax-payers v net tax recipients). Many people are on different sides of these conflicts at the same time.

Over the last 30 years public policy and regulation has tended to favour the former over the latter in many countries with a clear imbalance in the exercise of power. The extent of the power imbalances in these conflcits varies from country to country. The US and the UK exhibit quite extreme imbalances with the EU creditor nations exhibiting more moderate imbalances - and with the PIIGS exhibiting a range of imbalances between these.

These imbalances will have to be addressed and each country will have to begin to address its own unique and idiosyncratic imbalances before they can co-operate effectively to address broader Euro Area imbalances.

However, most people conveniently only see the conflict in which they perceive they're on the losing side and the so-called 'technocratic mainstream' (in the Irish context I prefer Official Ireland) has been adept at suppressing and smothering these conflicts.

It is possible to project optical illusions and to suspend disbelief for quite a while, but eventually reality will come crashing in - usually in the form of 'events'. 30 Sep. 2008 was a big 'event, but Official Ireland was able to manage it at a considerable and ongoing cost to a majority of citizens. Some more 'events, though almost certainly not of the same magnitude, are inevitable. But they don't need to be of the same magnitude. Having survived a major traumatic episode the resilience of Official Ireland is far weaker than they might think.

paul sweeney said...

It is good to see that Rob Kitch challenges my call over on IrelandafterNama
and indeed he is quite correct in doing so. My call is for the minimum. It is, I agree, quite unambitious. But it is a great deal more than most serious progressive Parties are seeking in Europe today. My point is that if they had the ambition to retain and enhance the Europe Social Model, it would be a great start. They might even get elected into power. Then as Robs says, they must address inequality in a systemic way.
I am not saying you’ve been “scunnered by Capitalism” and “the answer is for more capitalism.” There are varieties of Capitalism and most progressives would prefer to live in Europe than the US and many favour Scandinavian countries’ economic systems. Even by the criteria of capitalists, in the WEF Competitiveness league table, the Scandinavians lead all the time.
And there are varieties of “Socialism”. There is North Korea, not even a favourite of some of the utopian comrades! There is China. There is/was Cuba. And what other economic and social systems do we have?
Capitalism is a very flawed economic system. It is the dominant and dominating system we have today, but it is highly differentiated. People make political choices. These choices, over time, are reflected in the economic and social systems of their countries.
My point is that the Left is so down that even a weak ambition that is easily achievable within a short time is a bloody good start. And to build the Social Model, flawed and all, throughout the whole of the EU 27 states over the next decade would be a great success.
That I am focused on Europe is correct. Ireland is consumed in a deep, deep European crisis and our EU leaders have been fiddling while the 27 nation states burn for four long years now. It is crazy! This is of almost obsessive interest to us. Does that mean that I am Eurocentric and the attitude is “screw the rest of ya” is utterly wrong.
Unions can have a grand global vision, but if we cant attempt to fix what is within our own reach, then such idealism is of little consequence.
Meantime Merkel today calls for a two speed Europe. And she is excluding Cameron’s Eurosceptical UK. And Ireland. Should we care?

P.S I have to correct Mr Hunt on his recital of the old shibboleth that Irish wages are out of line with Europe. Happily they grew in the 20 years of the boom and for most of those years the growth was based on real productivity growth. Today Irish earnings are at about EU15 average and the total labour costs for employers are far lower in Ireland (thanks to a very low social contribution by them to the welfare system). Check it out for yourself at NERI
or the NCC, OECD’s Taxing Wages or US Bureau of Labor Stats. Even more shocking – considering the excoriation of public servants for two long years in Ireland – look at the cost of a clerical office in the civil service in Ireland compared to the OECD (which average includes Estonia and Hungary etc) on Page 35 of the linked paper.

Paul Hunt said...

@Paul Sweeney,

I take your point about labour costs, but my primary focus is on the cost of living and the extent to which this squeezes disposable incomes for the vast majority of citizens and feeds through in to stagnating consumer demand with the inevitable knock on effects on private sector investment. And so, whatever about the MNC export enclave, with government in a fiscal strait-jacket, we have GNP flat-lining and unemployment increasing - despite the impact of the time-honoured safety-valve of emigration.

The critique of your position on 'irelandafternama' is a perfect example of why the progressive-left will find it impossible to secure the democratic plurality to determine public policy in a constructive and progressive fashion. The vast majority of citizens both in Ireland and throughout the EU recognise that the capitalist system will continue to dominate in some shape or form. But those who shout most loudly on the left want to supplant, suppress or supercede it. The issue, as you rightly put it, is what sort of capitalist system. But the Left is also hamstrung by a perceived requirement to defend those who have done well under recent arrangements and who have established effective 'property rights' to jobs - and who will resist change and reform and defend these 'property rights' as aggressively as any dyed-in-the-wool capitalist would defend his or hers.

Paul Haran makes a valid case for change in the public sector in today's IT:

This addresses the third conflict in my earlier comment, but I expect it would encounter strong resistance.

In addition, and in the context of the second conflict I identify, the 'liberalisation model' for infrastructure and utility services, comprising an incoherent mix of private sector participation, competition and regulation, orginally developed in the Britain but being applied throughout the EU - and in particular for the electricity and gas sectors - is no longer fit for purpose. The UK government is abandoning key features, but the sticking plasters being applied to cover the gaps are making a bad situation much worse. The penny is also beginning to drop in continental Europe that refrom is required, but there is no recognition whatsoever in Ireland of how damaging to the interests of consumers and the economy the current model is. Indeed, the Government is determined to expand and extend the application of this failed model. Again the so-called progressive-left would oppose reform.

I can only come to the conclusion that the progressive-left is so riven internally by ideological conflict and the requirement to protest particular influential sectional interests that it is rapidly becoming a waste of space - in particular in Ireland. Liberal, centrist progressives are repelled by its antics (with Labour clinging to government facing annihilation at the next election and nationalistic, socialistic elements gaining some increse in popular support). But these liberal, centrist progressives have also been deceived by the Neo-con subversion of the discipline of economics. The narrow canon of neo-classical microeconomics eschews effective analysis of power and institutions and is unable to bear the burden being imposed on it. And this suits the Neo-cons perfectly.

Oh for a Keynes who would knife through the power and profit-crazed antics of the right and the disingenuousness and dishonesty of the left - as he did in the '30s.

Anonymous said...

Could this Paul Haran, who is lecturing us on public sector reform, be the same man who was a director of the Bank of Ireland when it was lending recklessly, imploded and almost took down the Irish state? Was he not the head of Mary Harney’s department when it de-regulated labour standards and enforcement? It would be better for Paul Hunt to quote someone who has a proven track record of improvement to make his point.

Paul Hunt said...

Oh, it's so easy to shoot the messenger when the message isn't palatable. But I do agree that it is interesting that those who did so little when they exercised some power and authority become enthusiatic evangelists for reform once they have relinquished these particular powers and authority.

It's just that those in Official Ireland who exercise sufficient power and influence to puruse beneficial reforms are all, to some extent or other, captured, constrained, conflicted or compromised.

It's little wonder we're in the mess we're in - and find it so hard to get out of it. But something will give eventually. One just has to be patient.

Paul Hunt said...

@Paul Sweeney,

This thread appears to be fizzling out. The 'progressive-left' laments its failure to secure sufficient political traction to influence public policy in a constructive and progressive manner, but refuses to address the reasons why and what needs to be done.

I'll leave you with a simple example that sums up the problem. If you, and your comrades on the 'progressive-left', refuse to recognise or have no problem with the fact (or both) that the ESB, with full policy and regulatory sanction, is fleecing Irish electricity consumers both to part-finance investment and job creation in Britain and elsewhere and to pay dividends that should be re-invested at a time when disposable incomes are being squeezed, then there is really nothing left to say.

This situation cannot, and will not, continue indefinitely. And this is probably the most egregious of many examples where the disposable incomes of the vast majority of citizens are being expropriated as a result of glaring inefficienies, rent-seeking and monopoly profit-gouging.