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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The other Mario and the other Marx

ECB's Mario Draghi

Mario Monti may have been defeated in Italy’s general election and will not be prime minister by the time this March is over, but the other Italian super Mario is still in place.  Mario Draghi is head of the European Central Bank and responsible for ensuring that Italian capitalism does not go bust.  He stands ready to pump cash into Italian government bonds if financial markets should desert Italy over the next few months and force a new Euro crisis.

So how does Mario see his role as the lender of last resort and, as Atlas-like, the supporter of European capitalism? Well, Mario gave a speech on Tuesday in Bayern, Munich, the home of BMW and the heart of conservative Catholic Germany.  He told his audience at the Catholic Academy, at the time of the resignation Pope Benedict (“a great son of Bavaria”) that the Pope had been very concerned about the ‘ethical’ nature of modern capitalism, and so was he, Mario.  Mario was particularly concerned about the ethical role of the ECB during “the economic and financial crisis that now extends into its fifth year.”

Mario noted that “the crisis has dented people’s confidence in the capacity of markets to generate prosperity for all. It has strained Europe’s social model. Alongside the accumulation of staggering wealth by some, there is widespread economic hardship. Entire countries have been suffering from the consequences of misguided past actions – but also from market forces that are sometimes beyond their control.”   So Mario asked the question of himself and the audience: “what is the right framework for reconciling free enterprise and individual profit motives with concerns for the common good and solidarity with the weak?” 

The answer, Mario, tells us is not to rely on the ‘invisible hand of the market’ to solve all; we need an ethical approach, something that Adam Smith, the father of political economy, was also concerned about.  As a Jesuit, Mario follows that Catholic order’s “fundamental guiding principle: our striving for excellence had to be paired with integrity and a moral message – an ultimate sense of purpose in the service of social justice and fairness….Ultimately, we must be guided by a higher moral standard and a profound belief in creating an economic order that serves every person.”

So who does Mario turn to in the current crisis for a guiding hand towards a ‘moral capitalism’?  “Here I find myself in the company of Marx. Not Karl, but Reinhard. Cardinal Reinhard Marx has rightly insisted that “the economy is not an end in itself, but is in the service of all mankind.”  
At this point, let me tell you who Cardinal Reinhart Marx is.  He is the Archbishop of Munich who wrote a book at the depth of the Great Recession entitled “Das Kapital: A Plea for Man”, named after Karl’s work but designed to reject Karl’s ideas.  Reinhart Marx wants a market economy that is “kinder to the weak and downtrodden” instead of “heaping even more rewards on those who behave immorally.”   As we review the results of the global slump, the grotesque greed of the rich and cruel realities of austerity in Greece, Italy, Spain, Portugal and elsewhere on the ‘weak and downtrodden’ , we would hope that Reinhart can tell us how to reconcile the ‘free market’ and capitalism with “the welfare of the world”.  Unfortunately, I have to tell you that Reinhart in his book provides no answers, except vague platitudes.  At least, he does not repeat the line of the head of Goldman Sachs, Lloyd Blankfein, who when asked whether it was right for his investment bank to make huge amounts of money and deliberately sell financial products to customers knowing they were toxic, Blankfein, as the chief vampire squid of capitalism (but a very devout man), replied that he was “doing God’s work”.

Anyway, Mario went on to explain to his Catholic audience how he applied Reinhart’s ethical principles to his job at the ECB.  You see, Mario told them, the main job of the ECB is establish ‘price stability’ and achieving that was “the basis for a just and fair society. It is a common good for all Europeans.”  And of course, it is true that if there is no inflation, households obtain full purchasing power on what they earn and do not see their savings eroded.  That’s important for those that live on the interest of past savings.  However, the ECB can hardly claim that the current low level of inflation (and even deflation) in Europe is down to the work of Mario and his colleagues.  It is the result of the total collapse of ‘effective demand’ as the Keynesians would put it, or down to a strike by capitalist investment (as we followers of Karl, not Reinhart, might put it).  Balanced against the ‘moral good’ of low inflation lies the ‘moral bad’ of extreme unemployment, collapsing public services and falling real incomes. How do we reconcile these apparent contradictions in a ‘moral way’?

Mario recognises that the ECB was failing.  It was failing to get all the liquidity (money) that it had pumped into the hands of bankers onwards to the wider economy: “our low interest rates have simply not been getting through to people in some parts of the euro area.”  Something  had to be done.  So we come to the great ethical policy of Mario Draghi:  Outright Monetary Transactions (OMT).  OMT is the proposed tool of the ECB to buy the bonds of governments that have been deserted by the ‘free market’.  The ECB will buy as much as is necessary to shore up these governments so they can meet their obligations at reasonable rates of interest and keep economies going.

So far this ‘ethical’ measure has not had to be used because financial markets are still expecting Eurozone governments to enforce austerity.  But moral Mario is ‘concerned’.  After all, “economic adjustment is coming at a heavy social cost.”  Euro area GDP is currently lower than it was in 2008. Almost 19 million people are unemployed – more than the population of the Netherlands.  “Unemployment is a tragedy. It squanders the vitality of our workers. It prevents people from playing a full and meaningful part in society. It induces a sense of hopelessness, which drains the inspiration from our young.”

So what is the moral path out of this slough of despond?  For Mario, it is ‘reform’.  By this, Mario does not mean replacing the ‘free market’ with an organisation of society that benefits the majority who create the wealth, as Karl Marx would have it.  He means a bigger role for the ‘free market’, namely “reforms that make doing business easier. That guarantee that those who owe taxes actually pay taxes. That ensure that public services actually serve the public.”  In practice, these are ‘reforms’ that reduce labour’s rights to work; lower pensions; reduce public services and privatise the rest.
Mario says “it is wrong to claim that countries are undertaking reforms only to please the markets or to satisfy the demands of technocrats in Brussels, Frankfurt or Washington. They are doing it for their own benefit.”  Really?  Who are the ‘reforms’ that attack the incomes of workers and pensioners and the ‘social wage’ beneficial to?  To the majority or to rich tiny minority?  Are the economic policies of the ECB and Eurozone governments that Mario supports really “in the service of humanity” ?
Are they what the good Cardinal Marx would recognise as ‘moral’?   “Capitalism without humanity, solidarity and justice has no morals and no future,” the Cardinal wrote.   Unfortunately for Cardinal Marx and Mario, the history of capitalism cannot be divorced from inhumanity, class division, injustice and immorality – as even the last five years has confirmed. 

So it has no future.

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Italy: Goodbye Monti; hello the three Bs!

by Michael Roberts

So it’s goodbye to Mario Monti, the bankers man who took over as Italy’s ‘technocrat’ PM in a coup engineered by the Euro leaders to oust the Murdoch-type right wing leader Silvio Berlusconi back in 2011, when the euro crisis reached a new level and Berlusconi threatened to oppose further fiscal measures (see my post, http://thenextrecession.wordpress.com/2011/11/10/italy-and-greece-rule-by-the-bankers/).  He had to go and Monti came in to introduce fierce fiscal austerity and attacks on labour rights.  Then when Berlusconi forced an early election, Monti, believing in all the praise heaped on him by the Euro leaders would be reciprocated by the Italian electorate decided to run for parliament.  It’s been a disaster for him.  The bankers’ man has taken a fall, mainly due to the efforts of the two clowns in Italian politics;  Silvio (the unfunny one) and Beppi Grilli (the very funny one).  This just expresses the growing opposition to austerity and the policies of the Euro leaders.

The centre-left party, the Democrats (PD) led by Pier Luigi Bersani (picture), will get the largest vote in the lower house of parliament at about 31%.  But Berlusconi’s right wing People of Freedom (PdL) party has got about 28%, much better than was expected when the campaign began.  And the euro sceptic anti-politician movement of Beppe Grillo’s Five Star party has got an amazingly high 24%, while Monti has polled just 9%.   So the vote against the existing order and policies; against austerity and the Euro leaders; was at least 51%.  Italy’s electorate may still be in favour of staying in the euro but they are very much against austerity and the Euro leaders.  And much of the centre-left voters would also agree.  Italy’s voters have decisively rejected the current pro-capitalist policies.

And scepticism about austerity, corruption and general incompetence on the part of Italy’s political elite has also been expressed in the lowest election turnout since the war.  And it will be the lowest since compulsory voting was abolished in 1994, coming in at 75%.

The low turnout has been the story of other recent elections in the US and Japan (http://thenextrecession.wordpress.com/2012/11/07/us-election-no-gold-at-the-end-of-the-rainbow/ and http://thenextrecession.wordpress.com/2012/12/16/japan-election-lowest-turnout-since-records-began/).  Everywhere, there is disillusionment with the elite and the existing political order.

Financial markets at first reacted positively to the results, because they thought that a ‘stable government’ would be formed that would continue to back fiscal austerity and try to introduce yet more measures to cut real wages, ‘deregulate’ the economy and meet Euro leaders’ fiscal targets.  But that optimism drained away as the results filtered through that the centre-left would not have a majority in the Senate Upper House  and that Monti centrist group may not be able to help out.  The prospect of Berlusconi and Grilli dominating and blocking anything that moves now suggested that Italians could go back to the voting booths again before the summer is out.

Anyway, the tasks of any new government to meet its obligations to the Euro leaders and to get the economy going are immense.  The reality is that Italian capitalism (like other parts of the Eurozone) is in deep trouble.  Italy is entering a second year of real GDP contraction since the ‘recovery’ from the Great Recession.

Italian capital was in the doldrums even before the Great Recession.  Profitability has been falling since 2000 and the rate of profit had fallen back to the level of 1963.

And since the trough of the Great Recession in mid-2009, Italy’s rate of profit has fallen further and is now down nearly 30% since 2005 compared 15% for the Eurozone as a whole.

As night follows day, with profitability falling, net investment by Italy’s capitalists has dried up entirely.

And since the end of the Great Recession, there has been no recovery in investment at all.  Real investment levels are now down 25% from the peak in early 2007.

The policies of austerity at first introduced by Berlusconi back in 2010 and then more vigorously by the bankers’ man Mario Monti have failed, even on their own terms.  The public debt to GDP ratio continues to rise and unit labour costs, which have been cut back sharply by austerity in other countries, continue to rise in Italy, despite falling wages, because productivity is falling.

What will Bersani do?  Well, one good thing is that Monti has been fatally weakened.  So an outright pro-market deregulating, privatising government is now ruled out.  The left within the Democrats are stronger and may well ensure that austerity does not get worse.  But then even the IMF is opposed to any more austerity measures right now.  But the PD has no different policies from Monti really.  Bersani has not even gone as far as Hollande did in the French elections in talking about reducing inequalities or protecting jobs.  But he will do as Hollande has done; backtrack on all his promises to the labour movement in order to meet obligations to the Euro leaders.  Italy will stay where it is, in a depression, with real incomes falling yet further – real average earnings are now 2% below where they were in 2004!

Already there is talk of holding another election in order to force the voters to elect a stable pro-capitalist government, as happened in Greece last summer.  So the three Bs could be pitched against each other again within months.

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