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Euro-report Euro-report
by Euro Reporter
2011-12-27 11:13:35
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In the grip of a financial coup

It is clear that the European Union cannot summon the political will to stand up to the markets and resolve the crisis. Until now the lamentable behaviour of European leaders has been blamed on their staggering incompetence. However, this (correct) assessment doesn’t go far enough, particularly after the recent ‘financial coups d’état’ that in Greece and Italy have dynamited a certain conception of democracy. What has been happening is less a matter of mediocrity and incompetence than active complicity with the markets. What do we mean by ‘markets’? A grouping of investment banks, insurance companies, pension funds, and hedge funds that essentially buy and sell four types of assets: currency, stock, sovereign bonds, and derivatives. To grasp their colossal power it is enough to cite two figures: each year the real economy (the production of goods and services) generates worldwide an estimated 45 trillion Euros -the gross domestic world product. At the same time, in the financial sphere, the ‘markets’ move 3,450 trillion dollars in capital —76 times the total production of the real economy. The result is that no national economy, however powerful (Italy, it should be remembered, is the eighth largest economy in the world) can resist an assault by the markets once they have decided to launch a coordinated attack, as they have been doing for over a year now against the countries insultingly referred to as PIGS (Portugal, Italy, Greece, and Spain).

Even worse, contrary to what might be expected, these ‘markets’ are not exotic forces that swooped down from distant heights to assault our local economies. Rather, the majority of them are our own European banks (the same that EU countries agreed to bail out with our money in 2008). To put it another way, the problem is not a massive attack on the euro zone by US, Chinese, Japanese, or Arab finance. What is happening is essentially a war from within led by Europe’s own banks, insurance companies, speculative funds, pension funds, and financial establishments. These are the entities that manage Europeans’ money and hold the bulk of European sovereign debt. And they are the ones that, in order to defend --in theory -- the interests of their clients are speculating and driving up the interest rates governments pay to borrow to the point that some -Ireland, Portugal, and Greece- have been driven to the verge of bankruptcy. As a result of this behaviour, citizens of these countries have been forced to bear austerity measures and brutal adjustments imposed by European governments to soothe the vultures of the ‘markets’ -meaning, their own banks.

The latter, moreover, were able to easily obtain funds from the European Central Bank at 1.00 percent interest rates, which they lent in turn to countries like Spain and Italy for 6.5 percent. Then there is the vast and scandalous power of the ratings agencies (Fitch, Moody's, and Standard & Poor's) whose measure of a country's creditworthiness determines the rate at which it can borrow at on the market. The lower the rating, the higher the cost. Not only are these agencies often wrong, most dramatically in their assessment of the subprime mortgage fiasco that led to the current crisis; they also play a perverse and repulsive role in situations like the present. It is clear that every austerity plan and programme of cuts and adjustment in the euro zone will lead to a drop in growth as a result of which the agencies will downgrade the countries' ratings, driving their debt service costs higher and higher, which forces even deeper budget cuts, further dampening economic activity and causing yet another ratings downgrade, and on and on.

In a framework of ‘limited democracy,’ these technocrats must impose, without regard for the social costs, whatever measures the markets require -more privatisation, more cuts, and more sacrifice- which certain political leaders didn't dare impose because popular opposition was so intense. The European Union is the last place in the world where savage capitalism is mediated by systems of social protections, known as the welfare state. The markets don't like it and want its destruction. This is the strategic mission of the technocrats who have come to power through this new avenue -the financial coup d’état- one presented, moreover, as compatible with democracy. It is unlikely that these ‘post political’ technocrats will manage to resolve the crisis. If a technical fix were enough, it would already be over. What will happen if the citizens of Europe recognise that their sacrifices have been for nothing and that the recession is continuing? How violent will the protests grow? How will economic order be maintained in the streets and in people's minds? Will European democracies become ‘authoritarian democracies’?


Financial crisis tops list of 2011 business stories

Europe took the financial world on a stomach-churning ride in 2011.
The rising threat of default by heavily indebted European countries spread fear across financial markets and weighed on economies worldwide. As the year came to a close, banks and investors nervously watched Europe’s political and financial leaders scramble to prevent the 17-nation eurozone from breaking apart. The European financial crisis was chosen as the top business story of the year by business editors at The Associated Press. The sluggish U.S. economy came in second, followed by the death of Apple founder Steve Jobs.

European financial crisis. The government-debt crunch rattled Europe’s financial system and weighed on the global economy. Portugal became the third European country, after Greece and Ireland the year before, to require a bailout as its borrowing costs soared. And investors grew worried that countries with much larger debts, such as Spain and Italy, would also need help.


Why the City of London is European

Next month's Franco-British collôque will provide much-needed group therapy for a relationship in crisis. The easy part will be where UK delegates reiterate their commitment to an open and competitive Europe, highlighting the vital national interest in the single market, destination for half of all British exports. This gathering of politicians, business leaders, civil servants and opinion formers will be able to agree that London's position as a top destination for inward investment owes much to EU membership, and that Britain would be taking a big risk if it signalled it was on a glide path out of the EU.

The much more difficult part will be to persuade the French, if not to love the City, at least to recognise how much it has changed since 2008. The scale of British-based banks (with balance sheets five times UK GDP) and the risk they posed to UK taxpayers left the British government no choice but to take early unilateral action. By adopting measures such as the bank levy and now the Vickers report – which demands higher levels of bank capital and ring-fencing of retail banks from their investment banks – Britain is already implementing more radical reforms than those demanded by European regulators.

Restoring confidence in UK regulation will be essential if Britain is to have an influential voice in the debate over how and where to regulate, (whether nationally; at the EU regional level; or globally, as with the Basel rules) and if it is to limit the damage a welter of ill-adapted EU regulations could soon do to the UK financial services industry. London feels frustrated by the way Paris continues to deride the City as a virulent breeding ground of systemic crises and, perhaps deliberately, ignores the fact that successive British governments have put an end to light-touch regulation.

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Emanuel Paparella2011-12-27 11:43:53
Indeed, the technocrats with no vision will try to put humpty dumpty back together so that things can go on normally. That is what they are good at and that is what they do. As the Prince of Salina says in Lampedusa’s novel The Leopard: “everything has to change so that nothing changes…” which in effect means that the technocrats will fail: they will change everything so that nothing will really have changed. That could deliver the opportunity for envisioning a new bold social paradigm based on more humane criteria, but that paradigm, as of now, remains in the realm of utopia. It is painful to say so but I am afraid that the situation has to get much worse before it begins to get better, for one cannot teach old dogs new tricks. On a purely natural level, it is enough to make one a pessimist and a cynic. But fortunately hope springs eternal and in the most unlikely of places. If Christmas teaches anything it is just that.

Christos Mouzeviris2011-12-27 13:41:41
Dear Emanuel, even Marx have said it in the past..What you say "everything has to change so nothing changes" is the mantra of the capitalism system..They will do anything they can, to keep this system alive, to keep the balance of power in place..and that is what they are doing..sacrifice democracy, the people and all the rights they gained over the centuries, to save capitalism...do we really need this political system still..?? no..! but "they" do...!!

Emanuel Paparella2011-12-27 16:32:51
Quite right Christos, Democracy is being sacrificed for greed and profits, perhaps proving the Chinese right: one does not need democracy to create wealth and material prosperity. What the Chinese have not figured out yet is what to do once the material needs of the people have been fulfilled, for there are needs that go beyond the material; what Socrates called the needs of the soul. They ought to consider carefully the ominous saying of Lincoln: “you can fool some of the people all the times, you can fool all the people some of the times, but you cannot fool all the people all the times.” The Chinese, as well as our politically myopic politicians will eventually find that out the hard and ugly way.

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