Mothering: Having a baby is not the same everywhere

We hear all the time how this the US is greatest country in the world and all that.  Of course, every ruling class says this in its efforts to create national pride and convince the masses that nowhere can equal the treatment their particular government affords.  Most American's mind you are well aware that here in the US if you have no money "you're on your own baby".  We're told waster like George W Bush or the hedge fund managers, bankers and other coupon clippers all pulled themselves up by their own bootstraps which of course is nonsense. The social services in the US, a 24 hour consumer society are extremely poor as the individual is supposed to fend for themselves. that's how it works.  But we are in the greatest society on earth.  The unelected rulers of the US wouldn't care at all if the US working class never traveled anywhere.  They'd prefer we know nothing other than what we see on their TV.  We thought our readers might find this piece of interest about how another society, Finland, deals with the question of pregnancy and childbirth. It is from the website, Mothering.

The Finnish Baby Box

By: Melanie Mayo, Mothering Blogger, and Cynthia Mosher

Posted 3/1/11 • Last updated 6/6/13 • 35966 views • 33 comments

by Christine Gross-Loh, author of the new book Parenting Without Borders: Surprising Lessons Parents Around the World Can Teach Us

      

I’ve long been fascinated by motherhood around the world. What is it like to birth in another country? What’s the lore on starting solids in another culture? How do children play in other countries? How do they sleep and who sleeps with them? How do cultural or societal supports ease the transition to new parenthood?

My friend Michele, an American new mother living in Finland, joins me here today to help satisfy my curiosity about motherhood abroad, in her guest post below.

The Finnish Baby Box

by Michele Simeon

In Finland, spotting babies with the same birth year isn’t just a matter of judging size. A famed national health care benefit of my adopted homeland is the maternity package, known as the ‘baby box’ in our household. Expecting mothers receive a large, cardboard box, itself designed to act as the baby’s first bed, full of gender neutral infant clothing and other essentials. Those who would prefer to purchase their own supplies instead receive a grant, and mothers carrying more than one child receive increased benefits on a graduated scale, so that e.g. families with twins can receive any combination of three grants or boxes.

The baby box is unique in the world and has been available in Finland to low-income mothers since 1937 and to all mothers since 1949. Each year, the designs and colors vary, creating allegiances of palettes and nostalgia for those special colors of infancy. You can view an inventory of the 2010 box here.

I pounced on my daughter Hilla’s baby box like it was the biggest, best Christmas present I’d ever received–that is, after hauling it uphill during a heat wave, eight months of pregnant belly weighing me down, much to the dismay of passersby. ‘It’s big and heavy,’ the kind postal worker had warned me. ‘That’s OK’ I beamed enthusiastically before realizing that my protruding middle prevented a conventional front carry.

But it was worth it. Hilla begins each day by kicking off her baby box bedding and exclaiming “boof!” At seven months, she’s outgrown the pajamas, still wears much of the box’s other clothing, and has yet to grow into a good deal more. There’s no sign of teeth in her gummy smile, so the toothbrush has gone unused. The teething ring and rhyme book, however, are part of an important morning ritual of toy and book mayhem. If we take the stroller out, Hilla will get bundled into the baby box snowsuit and sleeping bag–cleverly sized items that might just last until next winter if we’re lucky. Then there are the breast pads for mother, the bib for a messy little mouth experimenting with solids, and the towel that dries chubby baby bodies after the narrative of the day’s events has been washed away.  Hilla is tucked into her duvet until morning, when baby legs decide it’s time to start a new day.

While the box alone cannot create material equality for all babies born in this country, it is only one of many benefits designed to give children a good, fair start to life. There’s no shame in using public aid that everyone accesses and there’s no statement of consumerist individuality in the clothing that all babies are wearing. The box gives us lots of fun opportunities to play baby punch buggy and it spared us more than a few shopping trips and plenty of money, but its real value lies in its message of social justice for all children.

What public benefits are available to families in your communities? Which would you like to see?

Image credit top: Finnish Baby Box by Roxeteer

Image bottom: Two-month-old Hilla naps in her baby box outerwear. The bear & bee duvet plus cover were also a part of the package.

Michele Simeon is an American writer and editor living in Helsinki. Visit her blog A House Called Nut where she writes about living abroad in Finland and her experience of multicultural, bilingual family life.

Christine is a mother of four, crafter, journalist, and author. She wrote The Diaper-Free Baby (HarperCollins, 2007), a book about elimination communication, and a book and craft kit, Origami Suncatchers (Sterling, 2011). She’s now writing a book about global parenting practices to be published by Avery, a Penguin Books imprint, in 2013. Visit her at her blog.

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Greece still bust, Spain depressed, Italy paralysed

by Michael Roberts

As the summer rolls on, it is increasingly clear that the depression in the southern Eurozone economies is not going to go away any time soon.  Sure, the latest PMI data would suggest that the pace of decline in the Eurozone peripherals is slowing and, overall, the Eurozone may have stopped contracting in Q2 2013.

But the southern states are still deep in depression.  The most revealing news came from the latest IMF report on Greece (http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf).  According to the IMF, Greece is still bust and will not be able to get its huge public debt burden down sufficiently to sustain government finances or repay the loans it has received from the Euro leaders.  Despite the largest decline in living standards and real GDP of any European country since the Great Depression of the 1930s and all the austerity measures insisted by the Euro leaders and imposed by the right-wing coalition government, the government budget will still have a shortfall next year and need yet more funding if it is to close the gap.  Also, Greece won’t be able to meet the IMF’s target to reduce public sector debt from 176% of GDP this year to 124% by the end of the decade.  And remember 124% of GDP would put Greek state debt at a higher ratio than any other European country and way higher than can make debt servicing sustainable.

No developed country going through such a depression has experienced such an increase in taxes and other levies as a percentage of gross domestic product (GDP) in order to close the budget gap.  The economy shrank below €194 billion in market prices last year to a level last seen in 2005. This represents a drop of about 17% from the nominal GDP’s peak at €233 billion in 2008.  The economy is expected to shrink further to around €184 billion in 2013, representing a drop of 21% since the 2008 peak.  In 2005 Greek public debt stood at €212 billion, when the size of the economy was equal to last year’s, before skyrocketing to €355 billion in 2011 and the falling to €304 billion in 2012 thanks to the largest-ever sovereign debt restructuring (PSI).

But that ‘restructuring’ (debt default) has not been enough.  And the IMF report admits that more will be needed.  The IMF reckons the Euro leaders must provide €11bn more and Greece be relieved of debts already owed to Eurozone governments totalling 4% of GDP, or about €7.4bn, within the next two years.  The Euro leaders are avoiding grasping yet again this nettle until the German elections are over in September and have said they will not discuss further debt relief for Greece until April 2014 at the earliest, when Eurostat is due to rule on whether Athens has for the first time reached a balanced budget  when debt payments are not counted – a so-called “primary surplus”.  EU officials have indicated there may be ways to fill the immediate cash shortage – which the European Commission has estimated at €3.8bn for 2014, though the IMF puts it at €4.4bn – without forcing eurozone lenders to put additional cash into the €172bn joint EU-IMF programme. One EU official said there may be leftover funds intended to recapitalise Greece’s banking sector that may no longer be needed and can be reprogrammed, for example. However, the IMF report makes clear that the funding gap, which opens up in August 2014, goes beyond next year and into 2015, where it estimates Greece will need an additional €5.6bn.

In the meantime, the situation on the ground for Greek households is only getting worse.  The government published the names of more than 2122 primary and secondary school teachers who will be transferred to the new mobility scheme, including, (surprise!) the head of the Federation of Secondary School Teachers (OLME), Themis Kotsifakis.  A teacher in Larissa, central Greece, reportedly died of a heart attack earlier this week after learning she would be transferred.  Next to be published are some 3,000 municipal police officers, 1,500 administrative staff from universities and technical colleges, 1,500 public healthcare workers and 600 staff from various social security funds and the OAED manpower organization. The government has promised the dreaded troika of the IMF, ECB and the the EU that it will have 12,500 civil servants in the scheme by September and 25,000 by the end of the year. The public sector workers will receive 75% of their salary for eight months until another position is found for them. If no position is found for them, they will be dismissed at the end of eight months.

Spain’s depression is also worsening.  In another report (http://www.imf.org/external/pubs/ft/scr/2013/cr13244.pdf), the IMF forecasts that Spain’s unemployment rate will stay above 25% until 2018 at least.

Ignoring the 1.6% downturn that the IMF expects the country to suffer this year, average real growth for the Spanish economy between 2014 and 2018 will be just 0.6%.  GDP growth will remain below 1% until 2017 and thereafter only begin to expand beyond these levels. The IMF’s answer to all this is ‘more flexibility’ in the labour force – in other words, workers must take a reduction in pay and conditions in order to ‘price themselves’ into jobs at rates of profit acceptable to the owners of capital (see my post, http://thenextrecession.wordpress.com/2013/05/12/spain-the-return-of-the-inquisition/).  The IMF calls for wage cuts of up to 10% over the next two years, along with higher VAT for consumers and lower payroll taxes for employers!

In some ways, Italy is in the direst position.  Its rate of profit and real GDP growth continue to slide (see my post, http://thenextrecession.wordpress.com/2013/02/28/goodbye-monti-hello-the-three-bs/ for a fuller account of Italy’s economic state).

But the real pressure over the summer has been political.  After right-wing media mogul and former PM Silvio Berlusconi was finally convicted of tax fraud and faces imprisonment, fines and, above all, a ban from public office for five years, Berlusconi launched a tirade against the judges and threatened to withdraw from the fragile all-party coalition formed after the paralysing general election.  He even talked of the risk of “civil war” if the “injustice” of his sentence is not addressed!   So the government remains in power on the whim of a convicted tax fraudster.  At the same time, the Democrat party, supposedly on the left, is engaged in a leadership battle between those who lean towards the unions and an openly Blairite, neoliberal wing led by Enzo Renzi, the mayor of Florence, who wants to introduce privatisations and other ‘reforms’. The anti-political Five Star movement that did so well in the elections seems to have disintegrated into faction fighting.   So Italy will stumble on until the autumn and then we shall see.

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Greece, the IMF and debt default

by Michael Roberts

The Greek coalition has been pushed to breaking point over the decision of the largest party in government, the conservative New Democracy, to close down the state TV and radio broadcaster ERT without warning.  The two smaller ‘leftist’ parties in the coalition have demanded that this action be reversed and instead negotiations be started to ‘restructure’ the broadcaster without first closing it down.  There were massive protests against the government’s abrupt closure and a general strike was called by Greek unions.

According to two public opinion polls, around two-thirds of Greeks are opposed to the arbitrary closure of Greece’s state broadcaster, but a majority don’t want new elections to oust the coalition: they just want the government to resolve the economic crisis.  If there were elections, New Democracy would probably poll slightly more than the socialist opposition Syriza, as in the last election, while the fascist Golden Dawn would do even better, reducing the seats for the junior coalition partners.  That would mean that the coalition would lose its majority and the fascists would hold the balance of power.  So there is no way that coalition will be allowed to fall – a deal on the ERT closure will be worked out.   Most likely, ERT will be ‘restructured’, reducing its staff from 2600 to maybe as little as 1000.  Many Greeks see the ERT as being the former mouthpiece of the military in its coups or a tool of successive governments.  On the other hand, it is the only public broadcasting network putting on quality programming.  So Greeks are somewhat ambiguous about keeping ERT as it is.

More important, behind the unannounced move to close ERT was the pressure on the government to meet the fiscal targets of the dreaded Troika (ECB, EU, IMF) set for this summer in order to get the next tranche of EU bailout funds.  The government is committed to dismissing 4000 public servants by the end of the year and 15,000 by the end of next year.  After destroying ERT, it plans to lose another 800 jobs from various state organisations this summer by closing 17 down and merging others.

And things have not been going well for the government in meeting Troika demands.  The midnight closure of ERT came right after the government failed to privatise the natural gas firm DEPA and the Greek economy was cut to ‘emerging market status’ by equity index provider MSCI, pushing down sharply the value of Greek bonds.  A senior government official said Athens was “under pressure to show visiting EU and IMF inspectors that it had a plan to fire 2,000 state workers as required and the ERT shutdown was the only option available to meet the goal”.

The irony is that while austerity in Greece continues to be applied mercilessly, the IMF recently issued a report that concluded that the Troika’s approach was mistaken in imposing severe fiscal retrenchment back in May 2010 when Greece could no longer finance its spending through borrowing in bond markets (http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf).  Back then, the Troika had three options.

First, it could have provided a massive fiscal transfer to the Greek government to tide it over without demanding massive cuts in public spending that eventually led to a fall in Greek real GDP of nearly 20%, unemployment of over 25% and government debt to GDP of 170%, with economic depression likely to continue out to the end of the decade.  Or it could have allowed the Greek government to ‘default’ on its debts to the banks, pension funds and hedge funds and negotiate an ‘orderly haircut’ on those debts.  But the Troika did neither and opted instead for a third way.  It insisted that in return for bailout funds the Greek government meet its obligations in full to all its creditors by switching all its available revenues to paying its debts at the expense of jobs, health, education and other public services.

The Troika insisted on this because it reckoned 1) that austerity would be shortlived and economic growth would quickly return and 2) if the banks and others took a huge hit on their balance sheets from a Greek default it would put European banks in danger of going bust (Greek banks first).  There could be ‘contagion’ if other distressed Eurozone governments also opted not to pay their debts, using Greece as the precedent.  Of course, economic growth has not returned and despite huge efforts on the part of Greek governments to meet fiscal targets through unprecedented austerity, government debt has increased rather than fallen and the economy has nosedived.

Eventually, the Troika had to agree that the private sector took a ‘haircut’ after all, massaged as it was with cash sweeteners and new bonds with high yields.  Now the IMF in its report admits that austerity was too severe and debt ‘restructuring’ should have happened from the beginning.  The IMF, now in its semi-Keynesian mode, tries to put the blame for the failure to do this on the EU leaders and the ECB, which has not made the latter too happy, especially as the current IMF chief, Lagarde was strongly in favour of the austerity plan when she was French finance minister in 2010.

And after all, the EU leaders and the ECB had a point.  If Greeks had defaulted back in 2010, that could have led to other defaults and Europe’s banks were in no state to absorb such losses.  As a recent study shows http://www.voxeu.org/article/ez-banking-union-sovereign-virus), German banks were heavily overleveraged back in 2010 and they are not much better even now.  There was no way the German government was going to put German banks in jeopardy and allow the ‘profligate’ Greeks to get a huge handout of German taxpayers money to boot.  No, the Greeks had to pay their debts, just as the Germans had to pay their reparations to the French after 1918, even if it meant Germany was plunged into permanent depression.  Ironically, the Germans did not and have not paid promised billions in reparations to the Greeks after 1945 – something the Greeks are pursuing in negotiations!

Table 1 below shows the degree of ‘domestic leverage’ of the systemically important banks in major Eurozone countries that were subject to the EBA stress tests (and soon will be supervised by the ECB). It is apparent that in most countries the domestic banking system would not survive a Greek-style ‘haircut’ on public debt. (In the context of the PSI operation of March 2012, holders of Greek bonds had to accept a nominal haircut of over 50%, and on a mark-to-market basis the haircut was over 80%. It is apparent that no bank that has a sovereign exposure worth over 100% of its capital would survive such a loss.)

Table 1. Domestic sovereign debt leverage (sovereign exposure/capital)

	2010 Q4	2011 Q4	2012 Q2
DE	264%	241%	235%
ES	172%	131%	137%
FR	73%	53%	61%
IT	205%	155%	176%
PL	156%	141%	115%
PT	117%	102%	100%
UK	50%	52%	50%

Source: CEPS database.

What the IMF report really shows is that debt default is the only way to restore public finances without destroying services to the Greek people.  Why should the Greeks be forced to pay (bailout) the banks, the very institutions that triggered the crisis in the first place?  They have paid off the banks.  Now apparently, they must also pay off the European governments that insisted that they pay the banks.

But the Greek economy will not recover for many years ahead if austerity carries on.   Greek government debts are now 75% ‘owned’ by the other EU governments as the banks, pensions funds and hedge funds have been mostly paid off.  The Greeks have no chance of repaying these loans.  The Germans and the other EU governments have decided that they need to keep Greece in the Eurozone so that the euro does not break up.  So the EU leaders will relax the fiscal targets, extend the dates for repayment of their loans into the distant future and wait and hope the Greek capitalist economy gets back on its feet at the expense of the destruction of public services, small businessesand living standards in a ‘lost decade’.  The culling of Greece’s public broadcasting network is just another casualty on the way.

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The euro recovery: half full or half empty?

by Michael Roberts

The OECD has just issued its half-yearly forecast for economic growth.  It reckons that world real gross domestic product (GDP) will increase by just 3.1% this year and by 4% in 2014. Across the OECD countries, GDP is projected to rise by a meagre 1.2% this year and by 2.3% in 2014, while growth in non-OECD countries will rise by 5.5% this year and 6.2% in 2014.    In the US, activity is projected to rise by 1.9% this year and by a further 2.8% in 2014.  However, GDP in the euro area is expected to decline by 0.6% this year and then turn up just 1.1% in 2014, while in Japan GDP is expected to grow by 1.6% in 2013 and 1.4% in 2014.

These forecasts are more or less repeated by the IMF in its spring estimates. What stands out is that the mature capitalist economies are crawling along while the developing capitalist economies are growing at a reasonable lick.  But the Eurozone area of 18 nations shows no sign of recovery from the Great Recession, with southern Europe deep in depression.   The Euro leaders met last Monday and agreed that France, Spain, Greece etc could have more time to meet their fiscal targets on government budgets and debt because economic recovery was non-existent.  So the pace of austerity was eased by the Euro leaders.  But it’s still the message.  As ECB President Mario Draghi recently maintained: “There was no alternative to fiscal consolidation, even though, we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately”.   Clearly not!

Christian Noyer, governor of the Bank of France, also echoed Draghi in saying that austerity was necessary to encourage the ‘confidence fairy’ to make an appearance: “Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence.”  In other words, recovery is possible only if capitalists become confident that it will happen and that apparently depends on getting budget deficits and debt down.  Why? Well, because “the old model doesn’t work any more”, namely traditional Keynesian efforts to boost demand by encouraging spending.  Noyer added that France had to move away from public policies “overly concerned with preserving the jobs of the past” and allow for ‘liberalisation’ that could help future job creation.

And there we have it.  As I have argued many times in this blog, the aim of austerity is not just to reduce public debt and government spending as such, but to restore the profitability of the capitalist sector.  As Draghi puts it, “that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.”  And that’s why when the Euro leaders relaxed the pace of austerity for several governments, they did so on the condition that ‘supply-side reform’ was stepped up, namely cuts in job security,wage levels and ‘protected’ industries along with more privatisation.  That is the real aim of austerity: more neoliberal policies to restore the capitalist sector.

But is austerity working to achieve this?   Well recently, JP Morgan economists put together some measures of progress: the amount of deleveraging achieved in public and private sector debt; more competitive prices for trade by the distressed states; making it easier to hire and fire employees; opening up ‘markets’, more privatisations and interestingly, progress on reducing democratic and constitutional obstacles in various states to imposing neoliberal policies.

JPM concluded that the Eurozone was only halfway there in this neoliberal recovery programme (The Euro area adjustment: about halfway there, 28 May 2013).  For example, on the fiscal austerity targets, Italy was 75% on the way, Spain just 38%, Greece 97%, Ireland just 26% and Portugal 55%.  Longer term austerity targets (meeting the Fiscal Compact in 2030) were more or less along the same distance.

Wage cuts and reductions in labour costs had gone further, with Ireland and Portugal having done enough, Greece a little further to go (after a 30% cut in living standards!) and Spain still another 25% to go.

But when it came to ‘structural reform’ i.e. reducing the size of the public sector, selling off state assets, reducing labour and pension rights, lower corporate taxes etc, progress had been much slower.  Apparently, Italy, Greece, Spain and Portugal were still way less oriented to allowing the capitalist sector free rein than the likes of the Netherlands or Ireland.

JPM’s estimate of progress on the neoliberal programme is more realistic than the talk in financial markets that the likes of Greece or Ireland have ‘turned the corner’.  Take Greece.  The three parties in the coalition over the last year have stuck rigidly to the EU-IMF fiscal adjustment program. They have been awarded with an upgrade in the evaluation of Greek sovereign debt as a result by financial markets.  Greece’s upgrade to B- comes almost a year to the day from the downgrade Greek sovereign debt to CCC, i.e. junk.  So the ‘confidence fairy’ has shown itself from the undergrowth.  But it is nowhere near enough to talk about the Greek crisis being over.

All the Euro bailout funds to Greece have gone on paying off Greece’s creditors, namely other European banks, pension funds and speculative hedge funds, the latter have made a killing as Greek debt interest rates have fallen as a result.  But the real economy remains in a mess.  The economy has had 19 consecutive quarters of contractions.

About 1.3 million Greeks are out of work, some 400,000 families have nobody earning an income, about 300,000 workers have employers who have not paid them for months and thousands have left the country to seek work, while the forces of neo-Nazism grow stronger. About 800,000 or so long-term unemployed have lost any access to benefits and free healthcare.  Public services, such as health, have been ravaged, while the incessant rise in taxes has put terrible pressure on even the healthiest of businesses.

People in Greece worked 2,032 hours a year in 2011, considerably higher than the OECD average of 1,776 hours.  By contrast, the Germans, clocked in on average 1,413 hours a year.  Yet the average annual disposable household income in Greece is €15,800, way less than the OECD average of €17,820 a year.  On indicators used of the OECD’s better life index, Greece ranks 30^th out of 36 countries. In the EU, only crisis-ridden Slovenia ranks worse. Portugal came in at 28.
Small businesses in Greece are paying an interest rate of around 7% for credit assuming they can even get a loan from the country’s semi-comatose banking system.  In contrast, similar firms in Germany borrow at half that rate.  The current account deficit may have shrunk by about 7% pts of GDP but this been achieved largely on the back of a substantial fall in imports rather than a significant rise in exports.  Even the dreaded Troika  admitted in analysing the impact of its austerity programme that: “The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.”

Recovery in Greece depends on a return of investment in industry and key services.  But there is little sign of that.  In 2012 investment fell by 20% from the already ridiculously low levels of 2011. And the government is predicting a further fall in investment in 2013.

So if austerity is only half working at best to restore capitalism in the Eurozone, what is the alternative?  Well, there is another that is gaining prominence, especially within the distressed Euro states like Portugal, Greece and Italy.  It is the Keynesian alternative of leaving the euro and restoring a devalued national currency. For example, in Portugal, economist Joao Ferreira do Amaral has published a book urging Portugal to exit the euro.  This has become a best seller and is backed not just by the Communist Party but also endorsed by the Supreme Court President!  The book argues that austerity won’t work and the divergence between rich Germany and poor Portugal will only get wider if the current government’s policy is maintained.  The only answer is to exit the Eurozone and for Portugal to restore its escudo as in the 1990s.

The claim of these ‘exit’ supporters is that the cost of exiting the euro to the economy will be much less than the continuing cost of austerity imposed by the Euro leaders on the likes of Portugal or Greece.  These arguments are presented more theoretically by a new paper from Heiner Flassbeck and Costas Lapavitsas (Systemic_Crisis).  Flassbeck is  a former Vice Minister of Finance under left Social Democrat Oskar Lafontaine and seems to have formed an alliance with ostensible Marxist economist Lapavitsas to argue the case for exiting the euro as the only solution.  In doing so, they seem to have arguments very similar to those of many neoliberals like Dr Werner Sinn, now a leader of the new ‘exit party’ in Germany that calls for a return to the mark.  Lafontaine has also moved to this viewpoint.  So there is an alliance between some nationalist neoliberals and Keynesians for an exit policy.

The problem that I have with this exit policy is that it is a bit like the position of  the Irish Republican Army (IRA) on the issue of Irish unity.  The IRA argued that first we must end ‘the border’ that divided north and south Ireland and then we can adopt socialist policies.  Yet Ireland is still divided and still capitalist and the former leaders of the IRA now work within the existing two regimes for social change – a reversal of their old position.  The euro exit is also a ‘two-stage’  theory: first, we must exit the euro as the top priority and then we can talk about socialist policies to end the crisis.  I am sure that Lapavitsas and Amaral want to adopt policies for public ownership of the banks and major industrial sectors, public investment and a plan for Europe, but I think they obscure the battle against austerity by emphasising euro exit and devaluation as the major cure.  Surely, this is a diversion.

Why? Well,as I said in a  previous post
(http://thenextrecession.wordpress.com/2013/03/16/workers-punks-and-the-euro-crisis/), it is because the euro crisis is a crisis of capitalism and not a crisis of the euro. In other words, even if  the euro were to collapse and EMU states returned to running their own monetary and currency policies, the crisis would not go away and may even get worse.  That’s because the euro crisis is the product of the failure of the capitalist mode of production globally.  It has had the worst impact on the weaker capitalist economists like Greece, Portugal or Slovenia, but it has hit all economies.  The crisis is only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK.  If that is right, then alternative Keynesian policies of fiscal stimulus and/or devaluation where possible, will do little to end the slump and will still make households suffer income losses.  Austerity means a loss of jobs and services and thus income.  Keynesian policies also mean a loss of real income through higher prices, a falling currency and eventually rising interest rates.

Take Iceland, a country outside the EU, let alone the Eurozone.  Devaluation, or Keynesian-style ‘beggar-thy-neighbour policies, have still meant a 40% decline in average real incomes in dollar terms and nearly 20% in krona terms since 2007 (see my post, http://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/).  If not Iceland, then Argentina in 2001 is dug up as a successful ‘exit’ strategy.  Argentina ended the peso’s peg with the dollar and devalued, apparently escaping its depression.  But for Greece it is not just a question of breaking a peg with the euro.  It will have to introduce a new drachma.  Would this new currency issued by an effectively bankrupt state have any exchange value whatsoever? Will the Russians accept a Cypriot pound in exchange for oil, and the Americans drachma in exchange for medicines?  Greece, which, unlike Argentina, is not a net exporter of raw materials with rising prices and so has little to support any new currency. Greeks can print as much as they like of it, but will they be able to buy electrical appliances, cars or even foods produced abroad with it?

And anyway, Argentina did not escape its crisis by breaking the peg with dollar.  Guglielmo Carchedi and I are just about to publish a paper (The long roots of the present crisis: Keynesians, Austerians and Marx’s law) that will show that it was not competitive devaluation that restored Argentina’s growth after the 2001 crisis, but default on state debt caused by the previous destruction of productive capital.  Argentina’s recovery was fuelled neither by devaluation nor by redistribution policies, but by the re-creation of previously destroyed private capital in the private sector with a low organic composition; a rising rate of exploitation; and improved efficiency. This is the cause—rather than Keynesian policies—of Argentina’s economic revival.

The euro project was unique in one way.  It was designed to achieve integration and convergence among various European capitalist states but without establishing a full federal union of Europe, with one government, one budget, one set of tax laws and one banking system. For a while, it seemed to work until the crisis came, although even in the boom years, there was more divergence than convergence.

Can the euro’s halfway house now survive?  It is clearly not going towards some federal union of European states, whatever the claims of the nationalist sceptics of UKIP or Front National.  A united states of Europe under capitalism is not on the agenda.  But the halfway house could lumber on if economic growth returns.  But growth depends on investment.  And investment has collapsed and not just in the weaker capitalist economies of the Eurozone.

The figure above is from Greek Default Watch (http://www.greekdefaultwatch.com/2013/05/the-eurozone-since-2007-in-one-image.html).  The first column shows real GDP indexed at 100 in 2007.  The Eurozone as a whole by 2012 remained below the level of 2007.  And most Eurozone economies are still well below their 2007 levels – Greece is down 21%.  The next columns show the changes in GDP since 2007 by expenditure sectors.  The drop in GDP is really a factor of Germany growing (+€85 billion) but without a supporting cast to offset the declines in Italy (-€102 billion), Spain (-€40 billion) and Greece (€42 billion). On a net basis, Italy’s decline accounts for the bulk of the decline in the overall Eurozone, while Germany’s gain offsets the decline in Greece and Spain and the rest of the union is more or less even.

The Eurozone has a clear investment problem: investment rose in only one of the 17 countries (Luxembourg).  The issue of external competitiveness that the Keynesian exit economists emphasise, just like the neoclassical neoliberals is less important.  For the seven countries whose 2012 GDP was higher than in 2007, net exports made a big difference in only three cases; of the ten countries where GDP declined, net trade made a material contribution in seven, but this was not enough to offset the decline in investment. In other words, the problem for the weaker Euro capitalist states is not external competitiveness, but investment— it’s a very conventional capitalist crisis.

And as I have shown in previous posts, investment under capitalism depends on restoring profitability.  Yet, with the exception of Ireland, all the peripheral EMU economies still have much lower rates of profit than their peaks before the global crisis of capitalism hit. With the exception of Italy, profitability did recover in 2012, while in the case of Ireland, profitability turned round as early as 2010.

It’s a halfway house.  Austerity is working but very slowly.  Last Monday, ECB Board member Jörg Asmussen denied that there is a “Euro Crisis”, though he admitted Europe has ‘a decade of “adjustments” ahead.  Can the euro project survive another five or more years of austerity?  Is it half full of success or half empty?

There is a third way out of the Eurozone’s crisis: a socialist option.  That would involve Eurozone governments renegotiating and writing off public sector debt owed to the banks and other financial entities.  To pay for the losses that the banks incur, rich bank share and bond holders would be liquidated and Europe’s big 30 banks would be taken into public ownership.  They would become part of a Europe-wide New Deal to start public investment projects that could deliver jobs and housing and new technology. Governments would share Europe-wide revenues from each according to their abilities and to each according to their needs – as in a proper political and fiscal union based on common ownership and under a democratically endorsed plan for growth and welfare.

Of course, such a ‘Soviet Europe’ is not on the agenda and is thus utopian.  But then exit from the Eurozone by ‘oppressed states’ is also not on the agenda of any government in the Eurozone or even in the main opposition parties.  So it is equally ‘utopian’ with the added problem that it would not solve anything.

Leaders of Leftist parties like Syriza from Greece, IU from Spain, Front de Gauche in France etc have been meeting to discuss a joint programme for the Euro 2014 elections (http://www.publico.es/456053/la-izquierda-europea-se-pone-en-marcha-para-conquistar-bruselas).  Will that programme adopt the vision I expressed above or not?  If not, then we are faced with years (decade?) of more austerity.

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Ireland: Press Release from No 2CrokePark2

From Clare Daly TD

May 27, 2013 / Dáil Office /

Unions Must Oppose Draconian Legislation and Defend Trade Union Rights
ICTU Must Condemn The Finance Emergency Measures in the Public Interest Bill
Protest at Dail Eireann on Wed at 5pm.

In a statement today the NO2CrokePark2 Campaign called on all trade unionists to oppose The Finance Emergency Measures in the Public Interest Bill. The Bill, which is being rushed through the Dail and Seanad this week, is a fundamental attack on trade union rights and is being used to bully trade union members into accepting the Haddington Road Agreement.

The Campaign is calling on all those concerned about trade union and democratic rights to protest at the Dail next Wednesday at 5pm.

The Finance Emergency Measures in the Public Interest Bill is a serious threat to trade union and democratic rights. The bill, if passed, will cut wages and pensions. It also gives government power to unilaterally freeze increments and to change conditions of service including working hours in the public service.

It contains a coercive clause which threatens to freeze the increments due to workers in the public sector unless they sign up to the Haddington Road Agreement. It contains a provision “for a suspension of incremental progression for three years for all public servants unless they are covered by a collective agreement that modifies the terms of the incremental suspension and which has been registered with the Labour Relations Commission”. This means that unless a trade union signs up to the agreement, even if the pay of members is under €65,000, its members increments will be frozen for three years. This is a draconian measure far beyond anything contained in the original Croke Park2 proposals.

As stated by IFUT General Secretary this morning this is the first time that “the pay of a public servant is to be decided not by grade or position but by the particular union of which the person is a member.” In effect this Bill discriminates against those unions who decide to take a stand against cuts and austerity.

Campaign spokesperson Eddie Conlon said,

“The fundamental right of workers to vote on any proposal on the basis of its merit is being undermined completely. The right of a trade union to defend its members is being obliterated. A gun is being put to the head of public sector workers.

At present the government is attempting to intimidate workers into accepting the Haddington Road Agreement. This legislation changes the landscape in Ireland. It is remarkable that the leadership of the ICTU has been absolutely silent on the implications of the Bill. It is even more remarkable that the Bill is being introduced with the support of the Labour Party. We are calling on ICTU to immediately condemn the legislation and for Labour TDs to vote against it.

We believe it must be opposed by all trade unions and by everyone that cares for democratic principles. We are, therefore, issuing an open call to all trade union leaders and to TDs to immediately condemn the proposed legislation. To not do so is to stand against democracy and worker’s rights”.

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EU Economy: Europe deep in the mire

by Michael Roberts

European capitalism remains deep in the mire.  In the first quarter of this year, Eurozone GDP fell 0.2%, according to figures out today – and that was worse than expected. The Eurozone economy has contracted by 1% in the first quarter from the year before, marking the longest recession since the introduction of the single currency in 1999.  Italian GDP fell by 0.5%, the seventh straight quarter of decline. This makes the current Italian recession the longest on record. Portugal fell 0.3%, producing a decline of nearly 4% from last year, and making ten consecutive quarterly declines.
Most worrying, French GDP shrank by 0.2%.  Investment fell a further 0.9%, after 0.8% in the fourth quarter.  Exports fell and construction output fell.  Revisions to previous quarterly data meant the country avoided a ‘triple dip’ recession, but the economy has shrunk in three of the past four quarters.  Germany managed to grow, but only barely (graph below). First-quarter GDP grew 0.1%, up from a downwardly revised contraction of 0.7% in the fourth quarter of last year.  Investment continued to fall.  Dutch GDP shrank by 0.1% and Spain has already reported a 0.5% contraction.
T
Outside the Eurozone, the UK grew slightly in the first quarter.  And the Bank of England has now revised up its growth forecast for the current second quarter to 0.5% (graph below).  But this forecast assumes that there is zero to positive quarterly growth in the Eurozone in the current quarter.  Fat chance!

For some time, the UK government has been crowing that employment is much better then in the rest of Europe despite ‘austerity’.  Well, the latest UK jobs figures are starting to rain on that sunny idea.  The UK unemployment rate rose 0.1% pt to 7.8% in the first quarter from the quarter previous and the employment rate simultaneously dropped by 0.2% to 71.4% of the working age population compared with the last quarter of 2012.  And even worse, British households took another hit to real incomes as total pay growth was just 0.4%, while annual inflation is currently at 2.8%, so eating further into real wages.   Indeed, since 2005 Britain has fallen from 5th to 12th in the OECD’s ranking of countries by household disposable income. That’s bigger fall than anyone else in the top 10.

Europe’s depression is increasing the centrifugal forces that threaten to break the Eurozone up.  We all know that about the British scepticism towards the euro and the European Union, with talk of referendum to leave the EU.  But that disillusionment is now even worse in some Eurozone countries.  According to a Pew center survey, just 26% of Brits believe that economic integration has strengthened the economy, but only 22% of French, 11% of Italians, 11% of Greeks and 37% of Spanish voters do.  Of the large countries, only the Germans still think EU integration has been good for their economy – and even then, only just over half do (54%).   The findings also reveal disaffection with the EU among all groups, including the young.   That’s especially so in France, where there now less French support for the EU than among Brits!

The depression in Europe is destroying people’s livelihoods, reducing their confidence that governments can do anything about it and increasing their opposition to the existing institutions of ‘European’ capitalism built up over the last 6o years.   Europe’s political elite is in real trouble.

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Why sell back the viable banks?

by Michael Roberts

As the scandals in the banks globally mount up since the financial collapse of 2008-9 (see my post, http://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/), with the latest being the Cyprus disaster (see my post, http://thenextrecession.wordpress.com/2013/04/11/cyprus-aphrodite-into-hell/), you’d think that at least the more radical elements of the economics profession would see the merits of taking into and keeping key banks in an economy in public or common ownership.  Then they could provide a proper public service for households and small businesses and provide financial support to any national plan for investment in infrastructure, the environment and jobs.

And yet there is little sign that most radical policies for reform of the financial sector would include public ownership.  Instead we are offered more effective regulation, tighter capital adequacy minimums, or divorcing speculative activities from retail banking, or breaking the banks up into smaller units so they are not ‘too big to fail’.  Take the position of leftist economist Yanis Varoufakis (http://yanisvaroufakis.eu/).  In a recent post on his blog (27 March), he explained his position on what to do about the Cypriot banks.  “I have noticed that a number of commentators have misunderstood my position on the Cyprus debacle and, more generally, on the question of how failed banks ought to be dealt with. As I made clear yesterday, I am all for bailing in the creditors, even the uninsured depositors, of failed banks. In fact I have been arguing this case for three years (see for example our Modest Proposal) so as to avoid the zombification of Europe’s financial system. BUT, I have also insisted that this must be accomplished centrally, by an ESM which, in collaboration with the ECB, takes equity in the failed banks, shrinks them appropriately, recapitalises the viable parts and then sells off the latter to private investors at a profit (TARP and Sweden circa 1992-like – my emphasis).

I have highlighted in bold that part of Varoufakis’ explanation. Even he sees no reason to keep the banks in public ownership once they have been cleaned up.  His solution is the ‘Swedish’ one, where banks were nationalised, cleaned up at taxpayer expense and then sold back to the private sector to recoup the public money – in Sweden’s case that deal broke even for the taxpayer. But why reprivatise these viable banks and return them to a new set of people set to commit the same disasters and scandals as the previous owners? Indeed, that is what happened in the financial collapse of 2008, with many banks in different countries owned by the state originally but sold off.

I am reminded of what Lenin said about public ownership of the banks in contrast (Nationalisation of the Banks, Lenin Collected Works, Progress Publishers, 1977, Moscow, Volume 25, pages 323-369): “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.

It is absurd to control and regulate deliveries of grain, or the production and distribution of goods generally, without controlling and regulating bank operations. It is like trying to snatch at odd kopeks and closing one’s eyes to millions of rubles. Banks nowadays are so closely and intimately bound up with trade (in grain and everything else) and with industry that without “laying hands” on the banks nothing of any value, nothing “revolutionary-democratic”, can be accomplished.

What, then, is the significance of nationalisation of the banks?  It is that no effective control of any kind over the individual banks and their operations is possible (even if commercial secrecy, etc., were abolished) because it is impossible to keep track of the extremely complex, involved and wily tricks that are used in drawing up balance sheets. founding fictitious enterprises and subsidiaries, enlisting the services of figureheads, and so on, and so forth. Only by nationalising the banks can the state put itself in a position to know where and how, whence and when, millions and billions of rubles flow. And only control over the banks, over the centre, over the pivot and chief mechanism of capitalist circulation, would make it possible to organise real and not fictitious control over all economic life, over the production and distribution of staple goods, and organise that “regulation of economic life” which otherwise is inevitably doomed to remain a ministerial phrase designed to fool the common people. Only control over banking operations, provided they were concentrated in a single state bank, would make it possible, if certain other easily-practicable measures were adopted, to organise the effective collection of income tax in such a way as to prevent the concealment of property and incomes; for at present the income tax is very largely a fiction.

The advantages accruing to the whole people from nationalisation of the banks would be enormous. The availability of credit on easy terms for the small owners, for the peasants, would increase immensely. As to the state, it would for the first time be in a position first to review all the chief monetary operations, which would be unconcealed, then to control them, then to regulate economic life, and finally to obtain millions and billions for major state transactions, without paying the capitalist gentlemen sky-high “commissions” for their “services”.

This seems like an excellent summary of the benefits of public ownership of the banks, including stopping privately-owned banks from helping tax dodgers avoid tax and criminals launder money, apart from losing and stealing money themselves.

And would taking over the banks and keeping them in public ownership once they are viable and clean again be popular?  Well, a recent poll in the UK found that fewer than one in 10 voters would back a swift return of Royal Bank of Scotland to the private sector and more than three-quarters believe it should stay in public hands for the time being (according to a new YouGov poll).  This stands in direct opposition to the UK government’s plan to sell off its 82% stake in the bailed out RBS before the general election in May 2015, even though – on current prices – this would involve a loss of around £20bn.  Only 9% of respondents told YouGov they would favour “a sale in the near future” to recoup whatever money is available now. Some 44% favour holding on to the stake in the hope that the share price will eventually climb, while a large minority of 32% favour holding on to RBS “for the forseeable future” and running the Edinburgh-based institution “as a nationalised bank”. Together, that means 76% are against the option of early disposal – a crushing overall majority.
The views of the British public are eminently sensible.  In its latest Fiscal Monitor, the IMF calculated that around $1.7trn had been spent directly by taxpayers in the advanced economies to ‘bail out’ the banking sector in the financial crisis and so far only €914bn has been recovered through the sale of assets and other revenues collected from the bailed out banks. So 7% of 2012 global GDP has been used and only 3.7% of GDP has been recovered.  Indeed, only in the US is the taxpayer anywhere close to getting its money back (at 4.2% of GDP compared to a bailout of 4.8% of GDP spent).  In most other economies, the recovery rate is less than 25% after five years.


Most taxpayers are never likely to get their money back.  But governments are waiting for the first opportunity to sell the taxpayers stake in the banks, even if it is at a loss.  And, of course, the idea that the state should own and run these banks in the interests of the majority is an anathema.

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Profitability, the euro crisis and Icelandic myths

by Michael Roberts

As I have said in a previous post (see http://thenextrecession.wordpress.com/2013/03/16/workers-punks-and-the-euro-crisis/), Slovenia is likely to be the next Eurozone state that will require a bailout after Cyprus.  Slovenia’s banks need €1bn for recapitalisation after taking heavy losses on the commercial property development bust and on falling government debt prices (Italy?).  And the new centre-left coalition needs about €3bn to cover the budget deficit and debt repayments this year.  It does not look like it can find this money from the country’s own taxpayers and banks.  So watch this space.

As Cyprus enters a long period of austerity with the banking sector decimated and the economy diving (one forecast is for a 20% fall in real GDP through to 2017), the debate continues.  Is it better for small economies like Cyprus, Slovenia and even Greece to leave the Eurozone, institute their own currencies and devalue against the euro and the dollar, so they can grow through cheaper exports in world markets?  Or is better to continue with the grinding down of living standards under the ‘heel’ of the dreaded Troika?  Does leaving the euro mean that people can avoid a huge loss in jobs, public services and living standards?

My view is that either way, staying in or leaving the euro, will deliver more or less the same result for the majority.  That’s because this crisis is not a crisis of the euro as such but a crisis of the capitalist mode of production.  The way out for for the Eurozone is for austerity to lower the  cost of production in the weaker states to the point where profitability begins to rise and these smaller economies can start to restore economic growth.  The problem with this solution is that this could take a decade (it’s taken years already) and so it may never happen before capitalism enters another global slump – indeed, that may happen precisely because profitability cannot be restored.

There is some progress through austerity within the eurozone.   A key proxy for competitiveness is an economy’s current account, the broadest measure of trade with the rest of the world. It shows improvement across the periphery EMU nations.  The combined account of Greece, Ireland, Italy, Portugal and Spain narrowed to a deficit of 0.6 percent of gross domestic product at the end of last year from 7 percent in 2008 and will be in balance later this year.  While a slide in imports accounts for some of the correction, Greece boosted its exports outside the EU by about 30 percent in the fourth quarter of 2012 from the previous year, while Italy’s rose 13 percent in January from a year ago.    While austerity weakens consumer demand, it can begin to turn round profitability.  For example, Spain has slashed social-security payments from companies, raised the retirement age and made it easier to fire workers.  Portugal has weakened collective bargaining, cut redundancy payments and suspended four national holidays. Greece has pared public-sector wages, lowered the minimum wage, and eased redundancy rules;  and is selling state assets.

A November study by Berenberg, a Brussels-based research group, found unit labor costs fell 10.5 percent from 2009 to 2012 in Greece, 10.3 percent in Ireland, 6 percent in Spain and 6.1 percent in Portugal. Over the entire euro-area they gained 1.5 percent.  Relative labour costs in Spain and Portugal have now dropped below Germany’s for the first time since 2005. This has all helped to raise profitability in 2012 in most ‘austerity’ EMU economies (see graph).  But, with the exception of Ireland, all the peripheral EMU economies still have much lower rates of profit than their peaks before the global crisis of capitalism hit.   However, with the exception of Italy, profitability did recover in 2012.  In the case of Ireland, profitability turned round as early as 2010.

Why has Ireland done relatively better?  I think there are two reasons.  First reducing unit labour costs in production has a much bigger effect on growth and profits in an economy like Ireland with annual exports equivalent to 100% of GDP compared to 20-40% in the other countries.   Second, unit labour costs were cut so much more easily because of emigration.  Irish youth, especially skilled workers, just left the country for the UK and elsewhere.  Indeed, the turnaround from net immigration (or Irish returning home to a fast-growing ‘Celtic tiger’ before the crisis) to net emigration is truly dramatic.

Now many Keynesians like Paul Krugman or George Stiglitz argue that the euro crisis is a crisis of the failed project of the euro, not a crisis of capitalism.  So the answer is for the smaller EMU states to leave the euro.  For example, Krugman reckons the answer for the Cypriot people is to leave the euro. “Cyprus should leave the euro. Now.  The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding… What’s the path forward? Cyprus needs to have a tourist boom, plus a rapid growth of other exports — my guess would be agriculture as a driver, although I don’t know much about it. The obvious way to get there is through a large devaluation”  (http://krugman.blogs.nytimes.com/2013/03/26/cyprus-seriously/).  Keynesians bemoan the fact that this advice has not been heeded.

But there is a good reason for this.

Take the example of Iceland.  This tiny island, smaller in population that Cyprus, is not in the eurozone, or even the EU.  But it is used as the model by many Keynesians (see Krugman on Iceland: http://krugman.blogs.nytimes.com/2012/07/08/the-times-does-iceland/)  for Keynesian-style alternative policies, including devaluation.  Krugman argues for “the relevance of the Icelandic sort-of miracle… What it demonstrated was the usefulness of devaluation (and therefore of having your own currency), and the case for temporary capital controls in an emergency. Also the case for letting creditors of private banks gone wild eat the losses.  Iceland did not engage in fiscal stimulus; it didn’t have to, given the kick from a huge depreciation of the currency.  And more broadly, Iceland is a dramatic demonstration of the wrongness of conventional wisdom in these times. .. Iceland broke all the rules, and things are not too bad.“

But did Iceland ‘break all the rules’ and are ‘things now not too bad’?   This is another Icelandic myth according one Icelandic blogger: “people continue to spread the factually dubious statement that Iceland told creditors & IMF to go jump, nationalised banks, arrested the fraudsters, gave debt relief and is now growing very strongly, thanks.  No, Iceland did not tell the IMF to go away (https://www.imf.org/external/country/ISL/).    Iceland didn’t bail out the collapsed banks, but that wasn’t for the want of trying. If you read through the Report of the Special Investigation Commission you’d find out that the Icelandic government tried everything it could to save the banks, including asking for insane loans to pay off the banks’ debts (http://sic.althingi.is/).   The short version is that they tried to save the banks, save the creditors and screwed up completely.   Iceland arrested a few bank fraudsters, but just the pawns, small fry, and the lackeys.

Yes, Iceland did nationalise its banks but then privatised them again in record time. Two out of the three collapsed major banks in Iceland are now owned by their creditors, not the state. The third bank, Landsbanki, is still nationalised but that’s solely because of ongoing court cases involving Icesave.  Most of the creditors actually sold their stakes onto foreign hedge funds.  Some of the bankrupt banks only remained in government control for a few weeks.  SPRON, for example, was merged into Arion Bank which in turn was given to its creditors a few weeks later. essentially a free gift to Kaupthing’s foreign creditors.

Iceland’s lauded recovery model involving devaluation of its currency coupled with capital controls is now a drag on growth.   Iceland is growing at 2 percent, faster than much of Europe. But the IMF had originally forecast annual growth of around 4.5 percent from 2011-2013. It now is under half that.  Many Icelanders say they do not ‘feel’ this modest growth. Outside booming fishing and tourism, businesses complain of stagnation.  Some 80 percent of households are swamped in housing loan debts indexed to inflation. Investment is under 15 percent of GDP, a record low. State workers like nurses are raising worries about inflation amid increasing demands for better salaries.  An hour’s drive from the capital to the town of Keflavik, dozens of Icelanders line up for free food aid. People must present rent or mortgage slips and their salary slips. Real incomes have dropped sharply for Icelandic households and their debt is index-linked to inflation. Pre-tax gross income of the average Icelander has decreased by 18.3% since 2007. Measured in USD however, the fall is 42.7% since 2007.

So both austerity and Keynesian-style devaluation have resulted in a sharp fall in living standards, whether in Greece or Iceland.

Restoring profitability is key for economic recovery under the capitalist mode of production.  So which pro-capitalist policy has done best on this criterion?  Let’s compare Greece and Iceland.  Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008-9.  Devaluation of the currency started in 2008, but profitability in 2012 remains well under the peak level of 2004, although there has been a slow recovery in profitability from 2008 onwards.  Greece’s profitability stayed up until the global crisis took hold and then it plummeted and only stopped falling last year.  Profitability in ‘austerity’ Greece and ‘devaluing’ Iceland is now about the same relative to 2005 levels.  So you could say that either policy has been equally useless.

Perhaps the biggest lesson of this crisis of capitalism is the lasting damage that the Great Recession and the subsequent Long Depression has had on the ability of the capitalist mode of production to deliver on profitability and economic growth.  A recent study found that there has been a significant deterioration in long-term real GDP growth (http://www.voxeu.org/article/eurozone-looking-growth).   Trend growth for the four main Eurozone countries is forecast to be a little less than 1% and slightly less than 2% after 2014, with trend growth highest in Spain and France; and the lowest for Italy and Germany.
Weak trend growth in a central scenario

Source: BofAML Global Research.
It could be even worse, if investment fails to recover quickly. Trend growth might well remain negative in Spain and Italy and may fail to increase for Germany or France.   As the authors conclude, “this exercise shows the damage will indeed be long lasting, permanently impairing growth in a context of an ageing population that needs higher growth capacity than ever before.”

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European Union: Cyprus: sold!

by Michael Roberts

The pressure on Cypriot leaders finally worked.  Cyprus’ parliament had thrown out the plan to levy the bank deposits of ordinary Cypriot citizens  – a plan drummed up by Cyprus right-wing president Nicos Anastasiades and the EU leaders.  The Cypriot leaders then appealed to its Russian ‘benefactors’ (the main foreign bank deposit holders) to give them a new loan to bail them out.  But Anastasiades’ Russian pals refused to help – they did not want to make a new loan as it would eventually have to be written off. Good money after bad. So Cyprus has been forced to return to the idea of a hit to deposits to find enough money to trigger the EU-IMF bailout funds of €10bn.  The final deal is a ‘restructuring’ of the second biggest bank, Laiki, with deposits over €100,000 (so-called uninsured) being frozen for use in restructuring and the largest Bank of Cyprus may also be hit with a levy on uninsured deposits and will take on the debt that Laiki has with the ECB.  All other bank deposits will be untouched. 

This measure means big losses for Russian depositors and the end of banking as we know it in Cyprus. Apparently, the plan to restructure Laiki angered Anastasiades so much that he threatened to resign rather than see his beloved ‘casino banking’ centre wiped out- yet another example of his great leadership of the Cypriot people.

Along with a package of further austerity measures and significant sales of public assets, this will raise enough funding to meet the demand of the Troika for about €6-7bn to add to the €10bn Troika bailout.  Cyprus faced a Monday deadline to clinch a bailout deal with the EU or the European Central Bank says it would cut off emergency cash to the island’s banks, spelling certain collapse.
The aim of making Cyprus pay part of the bailout is two-fold.  First, the German and other Euro leaders did not want to bail out in full all those Russian oligarchs and ‘mafia’ who used Cypriot banks as tax havens and money launderers.  It would look bad in German parliament just months before a general election to have to explain why Russian crooks should get German money because Cyprus banks acted like money prostitutes for Russians and then went on a speculative spending spree across Europe.  Second, the IMF was concerned that if the bailout came completely from EU-IMF loans it would take Cyprus public sector debt to above 150% of GDP and there would little prospect of getting that debt down over the foreseeable future (as the graph below shows).  So Cyprus’ public sector could end up defaulting or being bailed out again.   So a ‘bail-in’ of bank assets was necessary.

The levy on deposits is unprecedented in the Eurozone, as is the proposal to introduce capital controls so that Cypriots, Russians and other foreigners cannot take all their money out of Cyprus when the banks open on Tuesday.  For the first time in the Eurozone, a member state is taking people’s savings and blocking the movement of euros within the Single Currency area in order to pay its bills.    This is breaching EU Treaty rules.  It is a big sign that the Eurozone area is in deep crisis.  The impact on deposits in banks in other EMU states like Greece, Spain or Portugal could be damaging.  Depositors will look to get outside the risk of capital controls being applied again within the Eurozone.

Small depositors have been spared a ‘haircut’ in their savings, but remember there are still ordinary citizens with over €100,000, as for many this constitutes their life savings in their old age.  It is not all Russian oligarchs or tax-hiding wealthy foreigners – many of these had already got their money out or move it to Swiss bank accounts.  And then there is the hit to bank workers.  It is not their fault that their boards and the politicians built up a ludicrous financial albatross round the necks of Cyprus and then tried to defend this huge ‘rentier’ financial centre at the expense of depositors and bank staff.  Cyprus has a skilled workforce; with possibilities to to develop manufacturing and services industries; and it has gas reserves soon to come on line.  It did not need such a distorted economy.  Bank workers and public sector workers (photo below) are now to lose their jobs and pensions as Laiki is ‘restructured’ and the whole banking system is shrunk by half over the next few years.

As Paul Krugman put it in his blog: “The Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began.A few Cypriot banks bet big on Greek bonds, very big, and their losses are about one-third of Cypriot G.D.P. Why would anyone want bank executives and traders to be in a position to do this much damage to a country?  But step back for a minute and consider the incredible fact that tax havens like Cyprus, the Cayman Islands, and many more are still operating pretty much the same way that they did before the global financial crisis. Everyone has seen the damage that runaway bankers can inflict, yet much of the world’s financial business is still routed through jurisdictions that let bankers sidestep even the mild regulations we’ve put in place. Everyone is crying about budget deficits, yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like the little people.”

Cypriot politicians and bankers were so swept up in the short term benefits of the Mediterranean island’s adoption of the euro that they ignored warnings over the resulting lending boom.  Banks’ loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits.  That supposedly protected them from the credit crunch and global financial collapse in 2008-9, where banks that relied on inter-bank borrowing like Northern Rock, Dexia etc, went down.  But then the Cypriot banks stimulated a property bubble in the island and funded it by ‘hot money’ from abroad, namely Russia.  And the bank boards, like those in Iceland and Ireland, got hubris.  They could do no wrong and the politicians were happy to agree for a slice of the action.

The rapid expansion of bank assets left Cyprus with a banking system eight times the size of its national output, as its accommodative regime of not taxing foreigners’ dividends and capital gains lured investors from countries like Russia.  A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five years in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 euros interest it would have earned in Germany, according to figures from UniCredit.

Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island’s two biggest lenders, Cyprus Popular (Laiki) Bank and Bank of Cyprus.  About 30 percent (11 billion euros) of Bank of Cyprus’ total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Popular.  More striking was the bank’s exposure to Greek debt.  The Bank of Cyprus’s 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank’s total capital, while Laiki’s 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.  Bank staff, who mostly got small bonuses and annual pay rises of around three or four percent, were unhappy about the mounting exposure to Greece but powerless to stop it.  The banks could survive a maximum 25 percent loss on their Greek bonds.  The “haircut” on Greek debt imposed on private creditors ultimately agreed by the EU leaders, including Cyprus’ then president Demetris Christofias, was more than 70 percent, heaping losses of 4.5 billion euros on the banks.  The ricochet of the crisis across the Eurozone finally brought Cypriot banks to their knees.

So is this deal the only way out?  No, no, no.  Cyprus could pay for the recapitalisation of its bust banks itself without having to take a Troika bailout.  There are at least €30bn in deposits held by tax-dodging foreign-based individuals and companies.  A bank bailout would cost €10bn maximum but if the four largest banks were restructured into one state-owned bank with any worthless assets siphoned off and sold, that would reduce the ultimate cost.  Bank staff could be guaranteed a job in the state-owned banking system or retraining on full pay for a new job.  Also there is €2.5bn in bank bond debt held by foreign banks (including Greek) that could be written off.

A 50% levy on foreign-based deposits plus the writing off of bank debt and the restructuring of the banks would raise €20bn, more than enough to sort out the banks and provide support for bank workers and others that may have a case of need.  Then a properly run banking system can be established owned by the Cypriot people, garnering deposits from citizens and lending it back to residents and small businesses on the island.  Instead, this deal protects senior bank bond holders (other banks), threatens thousands of bank jobs, imposes severe fiscal austerity and a permanent depression in the Cypriot economy for the rest of this decade, at least.

The leader of the Church of Cyprus, the island’s largest property owner, said after the Sunday mass in Nicosia that on Thursday he is going to host a dinner with the chiefs of Russian companies that are active in Cyprus to convince them against taking their money away from the island so that the situation does not deteriorate further.  He blamed the previous Communist-led government for the mess and said that “Cypriot people must learn to live on tighter budgets”.  The church leader is worried that his Russian friends will flee.  Maybe if church property was sold off, it could help bank staff keep their jobs and pensions.

And my alternative would enrage not only the Russian oligarchs and their government, it would also be against the interests of the financial and church elite in Cyprus who are in league with rich Russians and other Eurozone banks.  And it would mean losses for the ECB which has lent credit (€9bn to Laiki).  Banks holding Cypriot bank debt would go to international courts to get their money back.  And a Cypriot government that did not impose austerity and privatisations would be breaking the fiscal compact targets of the Eurozone.  But breaking Euro law is already being envisaged with the measure of capital controls in this ‘emergency’.

This is an emergency too for the Cypriot people. A fearless Cypriot government could ‘bank’ on its people (and those in other Eurozone countries like Greece) to support them in arguing its case with the Euro leaders.  The Euro leaders could provide solidarity support with funding, but they won’t.  The terms of EU-IMF funding deal means selling Cypriot jobs, savings and resources to pay for it.

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EuroZone: Cypriot bank heist

by Michael Roberts

In the early hours of Saturday morning, the Euro leaders, led by the Germans, the other northern European states and Christine Lagarde from the IMF, held a gun to the head of the newly-elected president of Cyprus Nicos Anastasiades  and gave him an offer he could not refuse.  Either he accepted that the cash and savings deposits of ordinary Cypriots would be raided to the tune of 6.7-10% or there would be no funding for Cyprus’ banks that were bust.  Anastasiades has a reputation as a political ‘bruiser’ who campaigned under the slogan “the crisis needs a leader”.  Well, he fell at the first hurdle.

The deal will be voted on Monday in the Cyprus parliament while the banks remain closed through to at least Tuesday.  If it fails to back the deal, Anastasiades has warned that Cyprus’s two largest banks will collapse.  Cyprus Popular Bank could have its emergency liquidity assistance (ELA) funding from the European Central Bank withdrawn immediately.  As Anastasiades stated, it was put to him by the EU leaders that “we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis”.   Neoclassical economist and Nobel prize winner Christoforos Pissarides, who heads the newly-formed National Council for the Economy, echoed these words, when he said there is no other option than taking these measures, otherwise the country’s credit system would crumble leading the country to chaos.  “This may be a painful solution but it is the only hope we have to save the economy of Cyprus.”

Cyprus needs €17bn in funds to cover the losses its wildly over-extended banks have made on all the loans they made to property developers on the island – and most important, to Russian oligarchs and Greek shipping magnates that have now turned sour.  The Cypriot government had been bailing them out up to now but has now exhausted that capability.  But the EU-IMF Troika was worried that a straightforward bailout to the Cypriot government would mean a total support to Russian mafia depositors that have been using Cypriot banks as money launderers  and it would also double the public sector debt ratio for Cyprus to 145% of GDP by end-2013, with every likelihood that it could never be paid back.

So the EU leaders took the unprecedented step in taking the ‘insured deposits’ of Cypriots as part payment for the funding.  The one-off levy will raise about €6bn of the €17bn needed.  In return the depositors will get shares in the banks!  Even Ireland, whose banking sector was about as large relative to its economy as Cyprus’ (bank assets are eight times annual GDP) when Irish banks were forced into a bailout in 2010, never agreed to taking people’s savings.

Not surprisingly, Cypriots reacted angrily. Hundreds of account-holders gathered outside branches of Cyprus co-operative banks, which normally open on Saturdays, after emptying ATM machines of cash at the start of a three-day holiday weekend.  “They’ve cheated us, they said they’d never allow a haircut on deposits,” said Andreas Efthymiou, a taxi driver, referring to a government pledge to seek alternative ways of rescuing the island’s banks.  Christos Pappas, a financial services worker, said: “I tried to transfer cash online as soon as I heard the news, but the account had already been blocked.”
EC official Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.   Cypriot finance minister Sarris was shame-faced: “I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” he said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”

So here we have Cypriot banks who have been laundering money for Russian oligarchs, lending to all and sundry in speculative ventures, Icelandic style.  Now they are bust and who is to pay?  Not the Russian oligarchs.  If it had been them, all their deposits could have been forfeited or the bank levy could just have been applied to those with over €100,000 on deposit.  And it’s not the owners of Cypriot sovereign bonds who bet on the government continuing to allow the banking spree.  No, the Greek and Russian banks that own Cypriot debt, or the hedge funds that bet on a bailout,will be laughing all the way to the banks.  No the main payers are the poorer Cypriot deposit holders and Cypriot taxpayers.  If you have €30,000 in the bank as your only savings, you will be losing €2000 forever. And that €2000 is much more important to the small saver than the rich Russian oligarch.
And the taxpayers still get hit with a large increase in debt payments to make down the road and increased taxes now.  Also the government now plans to privatise the utilities to meet part of the bailout bill.  Cyprus also the potential for offshore gas supplies.  No doubt revenues from those will end up in the hands of creditors rather than as better incomes for average Cypriots.   Already, as a sweetener, Anastasiades has hinted that he would offer depositors equity returns, guaranteed by future natural gas revenues. “Half of the value of the haircut will be guaranteed by natural gas proceeds”.So Russian oligarchs will get some energy revenues.

The immediate issue  is whether this heist will spark runs on banks in other countries.  If your cash in the bank is no longer safe from the Euro thieves, people may prefer to keep it in the UK or the US or under their beds.   EC official Asmussen, the leader of the heist, said the Cypriot government and the ECB were closely monitoring deposit flows, including on an intraday basis, for signs of a bank run and insisted those with accounts in other bailout countries need not fear for their holdings since the rescue programmes are already fully funded and would not need to dip into deposits for more cash.  But the idea of guaranteed deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks.  If the Eurogroup can impose this on Cyprus, it can do so elsewhere too.

The cruel irony is that even with this heist on depositors to pay for recapping banks that remain in private hands, and even with EU-IMF loans to repay government creditors, such will be the depression that ensues in Cyprus that the Troika’s target to getting the public debt ratio down to 120% (still double the target of the EU’s fiscal compact) will not be achieved.  So Germany and the rest will probably have to revisit Cyprus either for another heist  or for a further transfer of funds.

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