There was a report – Poverty in Australia – released over the weekend by the Australian Council of Social Service, which brought the reality of our lying federal government home – 1 in 6 Australian’s are living below the poverty line (which itself is a very low hurdle for an advanced nation to have to clear). I will dedicate a separate blog to that in the coming weeks. But the Federal government needs to face facts and stop adding to the despair of millions of Australia as part of its ideological and political obsession with budget surpluses. This brazen disregard for the most disadvantaged citizens probably qualifies the Government for a Nobel Peace prize, although I was thinking of nominating the IMF and the OECD to be joint recipients for 2013. They would join the current recipients, the EU and a host of other “deserving” winners over the last several years. I guess in awarding this year’s Peace Prize to the EU, the Nobel Prize Committee is trying to bring their main prizes into line with the rogue Economics Prize in terms of quality and deservedness of the winners.
When I first heard the news that the EU had one the 2012 Peace Prize, I wondered whether the tropical heat of my new location (Darwin) was getting to me already after just a week of being here. The weather is pretty torrid here for a “southerner”, a sort of affectionate (but, ultimately barbed) term that the locals use for blow-ins such as me from the South-Eastern states. So it is possible I was having a spasm or something when I read the news.
But it was confirmed to be my a spate of E-mails from disbelievers everywhere – most of whom live in more temperate climates and probably were not using any mind-altering substances, at least at the time they sent the E-mails.
As an aside – on the doping angle, I am doing an interview soon with a major cycling publication on the doping scandal in that sport. My involvement in that issue goes back to my days as a bike racer and the founder of the largest WWW cycling page – cyclingnews.com. More another day on that story, which has a long way to go yet, despite, the USADA’s recent success in breaking the big US conspiracy to cheat.
I thought this ABC News header caught what I was thinking about the announcement although the characterisation of the problem (“debt crisis”) is not how I would construct the travesty of giving the Prize to the EU.
Why not start with – “that plays down the fact that at least 50 per cent of youth and more than a quarter of all working age persons are being deliberately denied an opportunity to work” – or “that plays down the fact that there is a class war developing on the streets of Athens, Madrid and elsewhere in Europe as unemployment and increased poverty bites” or “that right-wing extremism is gathering ground as economies grind to a halt under the yoke of the ideological assault from the EC elites” or whatever else you think expresses this viewpoint.
In terms of the photo though – I did like the blue shades!
In his will, Alfred Nobel indicated that one-fifth of the annual interest on his invested “remaining realizable estate” shall be awarded annually:
… to the person who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses.
This New Statesman article (October 12, 2012) – Why the European Union does not deserve the Nobel Peace Prize – makes the obvious points.
The arguments presented in this Bloomberg Op Ed (October 12, 2012) – A Nobel Prize for Idiots, Signifying Only Bias – are contestable, but I agree with this observation:
Ask an Athenian shopkeeper, who during the past two years of civil unrest has had to board up his shop for weeks at a time, whether the EU has brought him peace. Ask the immigrants, who increasingly are threatened by Europe’s resurgent fascist parties, galvanized by the recessions that were caused in part by the EU’s effort to straitjacket every economy in Europe into a single currency, with a single interest rate and exchange rate. Ask the youth of Europe whether they’ve found peace, as the unemployment rates for their age groups rise above 50 percent in Spain, and only slightly less in Italy, Portugal and Greece.
Voters also rejected austerity in last week’s Lithuanian national election. The leading contender for government said that if his Labour Party took control it would ditch the SGP rules dictating a maximum 3 per cent budget deficit to GDP because (Source):
How otherwise can you generate [growth in] the economy if you only borrow to cover regular expenditure? You need to borrow for generating [growth].
Poverty rates in the EU are very high for an advanced block of countries and are getting worse. According to the – European Anti-Poverty Network (EAPN) – the poverty rate in the EU is currently around 16 per cent (1 in 6), similar to the shocking result just revealed for Australia.
Any way, we could go on about whether the recipient is deserving, which, in a way, would first of all have to be a discussion about whether the entire Nobel Prize apparatus has any credibility – given that even the close relatives of the original founder consider the Committee has been violating the original intentions of the will.
More important is the “Interim Report” released by the President of the European Council last Friday (October 12, 2012) – Towards a Genuine Economic and Monetary Union – which is meant to feed into this week’s summit of the EU elite.
As an aside, there are a lot of “interim” documents issued by the EU and the EC, which is, of-course, part of the problem. The decision-making machinery and processes are so elongated that it takes a long time to get anything done and when it is the compromises are so broad as to be (often) useless in relation to the problem being addressed.
This particular “Interim Report” was the result of an invitation from the June European Council “to develop, in close collaboration with the President of the Commission, the President of the Eurogroup and the President of the ECB, a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union”.
It is intended to “highlight points of convergence and to outline areas that would require further work for the final report due in December”.
It is applicable to the Eurozone only.
So what does this 8-page interim report tell us about the advances in understandings of the Eurozone bureaucracy and leadership about the issues that are driving the economies of the member nations into oblivion? Answer: Not very much.
Essentially, the document recommends that an integrated financial framework being introduced to put banking regulation at the EU level rather than at the member state level. This is sensible, given that the member states do not have central banks, which can provide genuine lender of last resort guarantees to ensure depositors are protected.
Further, given the extensive cross-border capital flows, it makes no sense for a host of regulative frameworks to exist side-by-side.
But given the recent German resistance to the Spanish government’s “bailout” funding (to save the Spanish banks, which are collapsing) being treated outside of the official budget, we will see how effective such a supra-national framework actually is. Count me among the skeptics on this.
In addition to the proposal to create an integrated financial framework, the document proposes an “Integrated budgetary framework”. As I have noted previously, there are only two ways for the Eurozone to proceed:
1. The preferred way, given the cultural and economic differences across member states, is for the Eurozone to be broken up in an orderly way and currency sovereignty restored at the member state level.
These currencies would float against each other and the democratically-elected governments would be able to pursue an independent monetary and fiscal policy aimed at advancing national interest, which at present would require large budget deficits in many cases targetting direct job creation.
2. But in lieu of that piece of common-sense, the Eurozone would have to create a true federation, where the member states become states of the Eurozone along the lines that California or New South Wales are states of the US and Australia, respectively.
The federal government should then be elected democratically and control the currency-issuing authority (the ECB) so that fiscal policy could be directed at advancing the common purpose across the Federation and extensive fiscal transfers be made possible, should the circumstance arise. At present that would require large fiscal injections into Greece, Spain, Ireland, Portugal, Estonia, probably Italy, soon France and the Netherlands and so on.
What I would have been looking for at this top-level, mission-statement sort of level was a clear vision that the “Integrated budgetary framework” would allow for fiscally responsible policies to be introduced by the federal government of the Eurozone, such that full employment was a prime objective.
In this context, the Federal government of the Eurozone (FGE) would have to recognise that budget deficits are endogenous outcomes, largely outside the discretion of the currency-issuing government, and reflect the state of non-government spending (and saving).
Above all, there would have to be an understanding that mass unemployment always means that overal federal budget deficits are too small because it arises when public spending is too low relative to the tax collected across the “federal space”.
While regional disparities occur across that space, the notion of the regions becomes usurped by the greater understanding that the federal level is where the solutions lie – even if they manifest at the regional level – for example, via direct job creation programs funded at the federal level.
We would be looking for an understanding that the role of the federal government is to ensure there is adequate aggregate spending at each regional level relative to the real capacity of that level to produce. This might involve reducing public spending where full employment was already being realised and increasing it in areas where obvious output gaps exist.
This capacity to redistribute aggregate demand as well as increase or reduce it overall is one of the reasons why fiscal policy is the preferred policy tool to manage overall spending in the federal space. Monetary policy is an inferior tool in this regard.
Monetary policy – largely working via interest rate management – is what we call a “blunt tool” – because it is difficult to target regions, specific demographic cohorts via interest rate changes and its impacts are lagged (working indirectly via changes to behaviour) and uncertain (impacts are net effects of creditors and debtors, which are in themselves difficult to estimate).
There would be no question that citizens in one state (for example, Germany) were working to pay for the bailout of another state (say, Spain) in this sophisticated federal structure. Australians consider themselves to be part of a nation, even though there are obvious state and territory loyalties. The reference above to “southerners” being part of that parochialism.
But of one state of Australia is in trouble (for example, during the massive floods last year in Queensland or the bush fires in Victoria the year before), there is no debate about the fact that the Federal government has to spend to restore infrastructure and make sure citizens in the troubled areas are aided.
We would never have the sort of debates that are common in Germany at present about lazy, fat Greeks and the rest of it. The fact those debates are frequent and occupy pages of the daily media is symptomatic of the problem this second option faces.
Will the Germans be willing to become part of a true fiscal federation where Germany becomes a “state” that is subjugated to the welfare needs of the union? Will health care, education, welfare entitlements, public housing be provided on equal terms across the federation?
I sense that that sort of cultural approach is totally absent in Europe at present. The Germans and Dutch hate the fact that they might have to pay out to assist the Greeks.
But never fear, none of this federal thinking is remotely in the minds of Mr Rompuy and his bureaucracy. They remain in denial and the Interim Report captures that in an exemplary fashion.
The “Integrated budgetary framework” proposal says:
Significant improvements to the rules-based framework for fiscal policies in the EMU have been enacted (‘Six-Pack’) or agreed (Treaty on Stability, Coordination and Governance) in the last couple of years, with greater focus on prevention of budgetary imbalances, more importance given to debt developments, better enforcement mechanisms and national ownership of EU rules. The other elements related to strengthening fiscal governance in the euro area (‘Two-Pack’), which are still in the legislative process, should be finalised urgently and be implemented thoroughly. This new governance framework will provide for ex ante coordination of annual budgets of euro area Member States and enhance the surveillance of those experiencing financial difficulties.
So – fiscal rules – tougher rules – tougher surveillance – tougher penalties for breaches of rules – tough, harsh – unworkable.
That is what this proposal is about.
I have considered the proposed “Six-Pack” solution in this blog – The left – entranced by the fiscal austerity mantra sold to them by the conservatives.
The “Six-Pack” refers to the new so-called “reinforced Stability and Growth Pact (SGP)”, which was agreed upon on December 13, 2011. In the Official Memorandum we read that the “Six-Pack” is “made of five regulations and one directive” and according to the EU elite spin:
… represents the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic Monetary Union almost 20 years ago … [and] … brings a concrete and decisive step towards ensuring fiscal discipline, helping to stabilise the EU economy and preventing a new crisis in the EU.
In fact, the Six-Pack annoucement further de-stabilised the EU economy when it was made public. The Six-Pack recognised that “23 out of the 27 Member States are in the so-called “excessive deficit procedure” (EDP), a mechanism established in the EU Treaties obliging countries to keep their budget deficits below 3% of GDP and government debt below (or sufficiently declining towards) 60% of GDP”.
These 23 have to undergo formal reviews and “must comply with the recommendations and deadlines decided by the EU Council to correct their excessive deficit”.
The components of the Six-Pack are that more rigourous imposition of financial sanctions will be followed if a nation fails to “comply with the specific recommendations” to get their deficits below 3 per cent of GDP. Further, if the “60% reference for the debt-to-GDP ratio is not respected” then the EDP will begin “even if its deficit is below 3%” and the nation will have to reduce “gap between its debt level and the 60% reference … by 1/20th annually (on average over 3 years).”
There will be “expenditure benchmarks” which will enforce “a cap on the annual growth of public expenditure according to a medium-term rate of growth”.
And a series of interventions under the so-called “Excessive Imbalances Procedure (EIP)” which aims to reduce macroeconomic imbalances (particularly unit costs etc) and will force nations to submit “a clear roadmap and deadlines for implementing corrective action”. The whole system will be subjected to a huge surveillance operation (EU monitoring) with “rigorous enforcement” (fines equal to 0.1 per cent of GDP) and central intervention in a nation’s budgetary process.
It all reeks of a nasty controlling, big brother sort of world where the worker in the village in Greece or the Netherlands will basically be casting a vote in futility if their respective governments stay in the Eurozone – because at any time an EU official will be able to intervene and coerce the elected government into following EU dictates rather than their elected mandate.
It seems from the recent political events in Europe that the people are getting wind of this abrogation of their democratic rights and are voting accordingly. But the choices now as so poor.
Fiscal discipline is not about meeting some arbitrary rules that were, as we have learned, just made up in an hour without any reference to any economic reality, to satisfy the political ambitions of Mr Mitterrand. Please read my blog – So who is going to answer for their culpability? – for more discussion on this point.
Fiscal discipline is ensuring there is enough aggregate demand, distributed across the federal space, that is consistent with full employment. Nothing more and nothing less. If the budget deficit that is required to satisfy this requirement is 10 per cent of GDP or 1 per cent then so be it.
It might be that a budget surplus is required. Then so be it. The actual budget outcome should never be the objective. The budget is a vehicle to a greater economic goal not an end in itself.
Once we get lost in rules that the currency-issuing entity can not really meet with any surety, much less whether these rules are relevant to the current situation that the policy makers confront, then fiscal responsibility is being abandoned in favour of a blind ideology.
That is where the European leadership is at present. Lost in its blind acceptance of an ideology that has already delivered manifest failure and can never be the basis of a policy-making framework that delivers sustained prosperity to its citizens.
Just to see what was in the Report I did some text searches – for full employment, welfare, youth unemployment or even unemployment – the response to these searches “No Results Found”.
This screen capture is for the “unemployment” string search.
So you see that the Interim Proposal has its priorities firmly in the “right place” (not!)
The Interim Report makes some noises about the functions of the “new fiscal capacity”:
… could be to facilitate adjustments to country-specific shocks by providing for some degree of absorption at the central level … [but] … Elements of fiscal risk sharing can and should be structured in such a way that they do not lead to permanent transfers across countries or undermine the incentive to address structural weaknesses.
Note the hedged terminology – “could” rather than “has to for the system to be workable”.
And then we read that the “establishment of such a new fiscal capacity should not water down the compliance with fiscal rules and fiscal discipline in individual Member States” and that although there would have to be the “establishment of a Treasury function with clearly defined fiscal responsibilities” there would have to be a:
… balanced budget rule enshrined in both the Stability and Growth Pact and the Treaty on Stability, Coordination and Governance would need to apply to this fiscal capacity.
The best comedy writer could not script this sort of stuff. If it wasn’t so tragic in the impact it is having on people at the street level it would be high farce.
What economic model tells us that a balanced budget rule is appropriate? Given the EU broadly runs an external balance overall with the rest of the world, how would the private domestic sector ever save overall? And what would happen if it tried to save overall?
Well that is what is happening now and the results are obvious. There would be a major recession every time the government tried to run pro-cyclical policy to maintain the balanced budget rule.
Later in the Interim Report we read about the need for “flexibility in prices” (read: wage cutting in poor nations) and the need for “structural reforms” (read: welfare state retrenchment).
But on Page 7, it turns to “Democratic legitimacy and accountability” and says that “ways to ensure a debate in the European Parliament and in national parliaments on the recommendations adopted in the context of the European Semester should be explored”.
But it fails to acknowledge that the only way a federal fiscal capacity can have legitimacy is if it is fully elected by the citizens of Europe on the basis of equal representation – one person, one vote and equal electorates – and is not subject to the fiat of non-elected and unaccountable bureaucracies – such as the EU, the ECB, the IMF or any other similar body.
The Interim Proposal is a long way from that ideal. It is about as crazy – given the problems at hand – as the IMF getting the Nobel Peace Prize next year!
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.