On Monday (July 8, 2013), the IMF released its “preliminary findings” of the – Article IV Consultation with the Euro Area. The nomenclature and turn of phrase alone are symptomatic of the organisation’s incapacity to come to terms of the problem it is addressing and its own role in creating and perpetuating the problem. On the one hand, they clearly acknowledge that “the economic recovery remains elusive, unemployment is rising, and uncertainty is high”. But on the other hand, they urge more of the same and claim the policies that have created this mess represent “progress”. The Euro area can do two things to improve the situation of citizens who live within it. First, abandon the voluntary fiscal rules which have not theoretical justification and allow nations to expand deficits to address the massive output gaps. If need be, fund the deficits via the ECB. Second, once the crisis is over, create a process whereby the monetary union voluntarily dissolves itself in an orderly manner. That is the only sure way of minimising the on-going damage. Oh, and third, withdraw all funding from the IMF and enter multilateral negotiations to create a new agency that helps poor nations defend themselves against speculative attacks on their currencies. And, while I am at it, fourth, reach an international accord to outlaw any speculative transaction that does not advance the real economy. That will keep them all busy and get the millions of people that the IMF and the Euro elites have deliberately made jobless busy again too.
Madame Lagarde has been trying to wash her hands endlessly over the last few years as growth has crumbled. But the blood sticks – thick and immovable.
Remember this interview October 10, 2010 when she was the French Finance Minister where she claimed that fiscal austerity is necessary for growth because the private sector will not spend until deficits are tamed. Only watch it if you want to be ill.
Among her statements, this one is classic Ricardian Equivalence:
In terms of growth versus austerity its the policy that we have adopted in pretty much all European countries that we need to address both issues. If we do not reduce the public deficit, it is not going to be conducive to growth. Why is that? Because people worry about the public deficit. If they worry about it, they begin to save. If they save too much, they don’t consume. If they don’t consume, unemployment goes up and production goes down.
That interview was one of many she gave urging the Euro elites and the IMF to go hard on Greece to ensure the government pursues a massive austerity program.
This is the classic belief that a fiscal contraction expansion is possible because consumers and investors will realise that tax rates will not rise to pay for the higher deficits and so they will stop saving for the future expected tax rises and start to spend. All of this is going to happen, so the story goes, even though unemployment skyrockets, pensions and wages are cut and sales collapse.
Firms are going to happily invest in new capacity, so the story goes, even though the existing capacity is more than enough to meet current demand and sales are falling fast, because they hate high deficits.
Such impacts have never been witnessed. The empirical veracity of these Ricardian notions is zero. Over and over again, mainstream economists have wheeled this idea out as a so-called “theoretical justification” for cutting government net spending and the relevant economies have gone further backwards.
The blood is thick and won’t wash away.
Since becoming the IMF boss, Madame Lagarde has toned down some of the austerity narrative and has more recently been talking about a need to emphasise growth and jobs.
In presenting the “2013 Article IV Consultation with the Euro Area Concluding Statement of IMF Mission”, the Madame said:
Over the past year, substantial actions at both the national and euro-wide levels have been taken to combat the crisis … But despite this progress, the economic recovery remains elusive, unemployment is rising, and uncertainty is high. Additional policy measures are required to fully restore confidence, revive growth, and create jobs.
Note the nomenclature that is entering the public debate – the use of the word “despite” and “progress”. Remember that Guardian article the other day, which I covered in this blog – Ireland still located in the Irish Sea despite multibillion-euro austerity drive.
So – Austerity is progress and despite it the Eurozone is still collapsing! What a mystery the Madame is posing for the world to consider.
That is the sort of line that we are now getting.
But – a leopard cannot change its spots. The IMF recruited Lagarde because she is one of them – a neo-liberal. She also has very little understanding of economics despite her luxuriously paid positions in the past and present.
They know full well that austerity is killing growth. Their revised modelling – that is the modelling that you do when you admit that the first modelling that was used to justify the austerity (as part of the Troika imposed death sentence on Greece) was wrong – tells them that.
So how do they massage that and still command centre stage?
Simple, ignore the reality.
The Article IV Statement claims the problem is the “financial fragmentation across national borders” (banks won’t lend) and there are even “deeper structural reforms throughout the euro area remain instrumental to raise growth and create jobs”.
They also claim that “continued demand support in the near term” is required but when you read what they mean by that you get:
… more monetary easing will likely be necessary to support demand … [and] … The recent extension for some countries to meet deficit targets will moderate the downdraft from fiscal consolidation on growth but more flexibility may be needed. Current targets could still prove ambitious if growth disappoints.
And “fiscal adjustment in euro area countries should be carefully paced to avoid an excessive drag on growth”.
If there weren’t millions of people unemployed, suicide rates rising and a whole generation of youth being disadvantaged for the rest of the lives, we would think this was some sardonic comedy and laugh our heads off at the sheer audacity. It must be a send-up would be the first response.
But we have seen the blood on her hands and the rest of them. Its thick and won’t wash away. Its real. This is no laughing matter.
The IMF propose “four priority areas” that should be the basis of renewed policy action.
1. “Restoring the health of banks’ balance sheets” – they claim that credit growth is being constrained by banks unable to determine the quality of their held assets.
There is no doubt that many zombie banks are present in Europe and a major process of restructuring (nationalisation included) will be required. But even if the banks were sound, there would be a low rate of credit growth in the Eurozone.
Why will firms invest when nations are going backwards at rates of 5 or 6 per cent a year? When the overall monetary union has contracted for the last three quarters? When millions of people are unemployed and not spending much?
Bank lending in Europe is not up against a binding capital constraint at present. Rather there is a dearth of credit-worthy customers who are willing to entrench themselves further in debt while their economies continue to go backwards as a result of their governments deliberately undermining any prospect for growth.
2. “Completing the banking union” – there is no doubt a “centralized authority with power to trigger resolution and make decisions on burden sharing” is required in the monetary union. But that will not generate growth or jobs.
What is required to do that is a centralised fiscal authority capable of addressing asymmetric aggregate demand shocks with appropriate deficit responses. The IMF say nothing about that. What is actually needed for growth is not going to be possible given the politics of the zone. At present the ECB could play this role but that would be undesirable given it is not an elected and accountable authority.
3. “Taking further steps to support demand in the near term” – As above.
Two major points. First, the continued faith in monetary policy to stimulate a massive shortfall in aggregate demand flies in the face of the evident and theory. The low interest rates are not sufficient to induce people to borrow and spend when unemployment is rising and growth collapsing.
All the other balance sheet tricks that the ECB has pulled have not been growth supporting. They have just staved off a financial collapse, which is a different thing.
Second, we keep reading about “growth friendly fiscal consolidation”. There is no such thing. This is back to the Ricardian point made at the outset. They still believe (or want us to believe) this nonsense.
Spending equals income which generates employment growth. If one sector cuts spending and the other sector doesn’t fill the gap then growth falls and income and employment is lost.
In Europe at present, the private sector will not fill the spending gap created by austerity. But, moreover, even if it did, it would still leave a massive shortfall in overall spending. Some nations need to double their deficits (at least) as a percent of GDP right now.
Slowing the pace of fiscal austerity just slows the death that the spending cuts inflicts. Until that reality enters the debate, the zone will wallow in its recessionary-state.
4. “Pushing ahead on structural reforms” – the old faithful. Privatise, cut welfare, cut employment protections, cut wages, increase work intensity, etc.
The IMF claim they want to “remove barriers to protected professions, promote cross-border competition, and, ultimately, raise productivity and incomes”.
Even if this was achieved, we are talking about a second-order of smallness in gains when compared to the massive gains that would be forthcoming if the spending gaps were closed with fiscal stimulus.
All the credible literature tells us that the so-called microeconomic inefficiencies (and there is strong debate about their delineation and existence) costs that are dwarfed (many times over) by the macroeconomic inefficiencies of mass unemployment and persistent output gaps.
The two losses cannot be compared. And further, microeconomic reform is more effective when resources can transfer more easily across borders and across sectors/occupations etc. That doesn’t happen during a major recession. Recessions slow down resource transfers except those which move from employment to unemployment and/or out of the labour force altogether.
The literature also indicates that privatisation results in massive job losses typically. And, it is obvious that cutting into wages and protections such as the health system etc undermine current spending and future productivity. There is a strong evidence base for those conclusions.
We read in the Guardian overnight – Eurozone throws Greece a €3bn lifeline – that the Troika has demanded further cuts in Greece which will include:
… a painful programme of public sector job losses mainly affecting education.
Some 6,500 teachers or education ministry staff are either to be fired or put on a “reserve” and sacked at the end of next year if no alternative work has been found. This makes up more than half of the 12,500 public sector jobs on the line, which also include 3,500 police posts. Police officers anxious for their jobs staged protests in Athens at the weekend.
Then their Article IV Statement raves on about stimulating productivity. Decimating a public education system and creating demand conditions where more than 60 per cent of 15-24 year olds who want to work are forced into joblessness is not the path to future productivity growth. Exactly the opposite.
The leopard (IMF) might massage its message a bit more these days but the intent and action is basically the same as it has been for years. They are the front-line neo-liberal commanders who believe in reducing the public sector and refuse to conduct cost-benefit analysis to demonstrate how massive the income losses are that follow from their policies.
And their documents are so full of techno-babble that the personal dimension of their crimes is brushed out of existence.
And don’t for one minute think that deliberately putting millions of people out of work and destroying peoples’ life savings and denying the youth a future is anything but a crime against humanity.
For a sad article from the New York Times (July 8, 2013) on the damage done to Spanish workers from the austerity you might read – Spaniards Fight to Get Savings Back. Shameful … and … criminal.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.