What is the world coming to? I would never have thought that I would agree completely with the British Economist. In its April 21 issue, under the headline “Beyond battlefield medicine”, it says: “The eurozone needs more growth, new banking rules and a path to joint Eurobonds”. These are exactly my words in a number of postings in this blog.
Like all other international institutions, with the notable exception of the EU kCommission, the Economist sees the effects of the large liquidity infusion (1 trillion €) fading, and the time this infusion bought not having been used to correct some of the birth defects (“original sins”) of the Eurozone. It calls for a better macroeconomic mix, meaning slower budget consolidation plus a growth strategy, for partial Eurobonds (partial in order to maintain pressure on national governments to accept responsibility), lower Eurozone interest rates and/or more quantitative easing, and joint European responsibility for cross/border banks. All this is also copyright Kurt Bayer.
However, I am quite sure that this is where the similarities end, before readers suspect a big love-fest between myself and the economist. While I see Eurobonds (in their full version or only up to/beyond 60% of government debt ratio) as an important improvement, I would go a lot further and take government financing completely away from private investors and turn it over to the ECB or EFSF/ESM, the new financing mechanism. I am aware that this would violate the prohibition of monetary financing in the ECB statute, but think that this is a necessary step, in order to extract the socially important task of planning government expenditures and taxes from the whims of rating agencies, private banks and private investors, who in their investment decisions look at governments just like business enterprises. It is uncanny that banks and investors did not mind at all when during the recent crisis governments underwent huge debts in order to bail out banks, but do not want to apply the principle of social responsibility when other, e.g. social expenditures are planned. Then they cry for “savings” which alone can re-establish “confidence” in the safety of their investments.
Another point where I am sure to differ from the Economist is my assessment of the benefits of free trade and capital movements. Both these need reassessment. Economists have known for a long time that free trade is good as a principle – when all partners have a similar level of economic development. But when free trade is imposed on small and weak countries, their chances for being able to compete with large neighboring giants are very limited. At best, they can become part of the value chain which is directed from the large and strong country. At worst, they are reduced to suppliers of cheap labor and resources. This has become very clear after the fall of the Berlin Wall, and even more so, in many developing countries. The result of this insight should be that “infant-industry”-like protection must become part of the international trade regime, of course with the caveat that it must not be abused by vested interests trying to protect their rents.
And in a similar vein, we should reassess our fascination with free capital flows. Again, the principle is good, but its application has been damaging. Free capital flows have led to the contagion of the most recent crisis which spread from the USA throughout the industrialized world, and from there to all the rest. The inter-connectedness of banks, the free movement of capital to the highest return, its sheltered, tax-avoiding location in “tax havens” – all this has caused huge damage to the world economy and to the poor, while immensely and grotesquely enriching its movers and shakers. To redress some of the deleterious effects of globalization is difficult, but needs to be undertaken. With out a global economic policy governance regime reigning in such excesses, it is up to the EU and other institutions to break to ideological stranglehold of the “free everything” paradigm.
The third, and certainly not last, point where I am sure to differ from the Economist is the need to regulate all financial transactions, to subject them to a global tax, and to request licensing of new products with the possibility to prohibit instruments whose social value has not been proven. The aim must be to re-position finance once more to its subservient role of bridging saving-investment decisions, of dealing with time-inconsistency problems and to reduce the financing risks, all with the purpose to restart value-creating activities in the real economy.
The global crisis is not yet over; the Eurocrisis cannot be over, since the instruments used to combat it, are insufficient and inadequate. Every day more people are thrown out of work, more young people remain without hope and a feeling of belonging to this society. This is a very dangerous political situation. Once citizens lose all confidence in the “system” and its protagonists, they easily turn to anarchy or fall prey to irresponsible demagogues. We have been there, and we need to say: “Never again!”.