Back to the illusion of globalization
Well, it's Bash-a-Country month, but how about bashing an entire continent (or at least most of it)? I know you want to. OK, let's look at what's going on in Europe. Cos Europe is so funny and fucked up, right? But seriously. In its attempts to save the Euro, the EU is logically advocating ever more strongly the idea for a tighter and closer macroeconomic coordination. That's expected. Of course this would've been an absolutely brilliant idea, had the European history not already experienced similar attempts at globalization (or regionalization), and failed completely.
Today we see the consequences from the adoption of a common European currency in countries that were never any close to fulfilling the conditions for doing so, and this, coupled with a lack of the relevant fiscal institutions to really do it. On one side, the Euro zone remains too inefficient in terms of functionality. On the other, despite its flaws, its member states feel an urgent need to do everything in their abilities to keep the Union intact, at any cost. This way European politics is entirely focused on preserving the paying ability of the "ill states". As we know, until 2013 this task will rest upon the European rescue package which was created for fighting the crisis. After 2013 this package is expected to be substituted by the Stability Pact, which includes a European Stability Mechanism. It's supposed to prevent the "ill states" from taking credits that they couldn't pay back, or if they eventually take credits, those would be granted in exchange for heavy strings attached. Because, of course, no lunch should ever come for free (for too long). Except the American lunch maybe, but that's another story.
But would that be enough? Would it do the job? Probably not. Because here we're not talking of indebtedness alone. The main problem is in the macroeconomic flaws that were built into the Euro since its very inception as a currency, and continue to unravel to this very day. This could be seen very clearly when we look at the figures on the current fiscal balances of the EU members. Greece, Ireland, Portugal, Italy and Spain (PIGS-I?) have all imported more than they exported, for 10 years uninterrupted since 2001. In comparison, Germany has always had budget surpluses for the same period. And what's the consequence from this situation? One of the main reasons for all the troubles is the disparity in the income per labor unit in the various European countries. For example between 2000 and 2008 these expenses have risen by 25% in Italy, 29% in Spain, and... 0% in Germany, where this figure remained a constant.
In order to keep their ability to cover the losses generated by the increasing import of goods (and export of labor force), the public and private players in the "ill countries" had to take additional international credits. Eventually, a point was reached where these credits were being solely supplied by banks and capital investors from the countries with surpluses, because those had enormous amounts of fresh money ready for use. But few investors ever asked whether the economic power of the credit receivers would hold for too long, neither whether they could keep serving the ever increasing debt burden. The realization that this was economically impossible in the long run, somehow came "suddenly and unexpectedly" in 2010, although the very fact that everybody was so surprised, is a huge surprise in itself.
The market solution of this problem that's being proposed by the current austerity fans, would've easily been just doing nothing, right? Letting the losers to fail, and the market would fix this on its own. Under this logic, those who give the credits should take the blow and meet the consequences from the irresponsible credit lending to inherently insolvent receivers (the receivers would also drown in the process, of course). And this should be like a lesson for them, and next time they'd be more careful, and think twice before doing something stupid. Makes sense, at a first sight. Because this way the risky credit lending to "ill countries" (and entities) would be limited drastically in the future, and probably never reach those crazy levels. But on the other hand this would limit their ability to import goods, and stagnation ensues.
In this line of thought, apart from the drastic shrinking of the deficits, the "ill countries" ought to address the issue with the enormous expenses for adapting to the new situation. Right now, even if you poured a trillion euros into Greece, they'd still sink in, or rather leak out like from a broken bucket. Because Greece lacks the structure that would prevent this. The paradox is that as a consequence from the austerity, we're seeing not only the logically expected negative growth (shrinking) of the economies of the affected, but also a slowing down of the recovery process, and a number of major economy-drivers falling into insolvency in sectors that had previously been unaffected. And worse, even some of the credit lenders getting in trouble eventually (France's credit rating was downgraded for a reason). So, such an austerity solution tends to create illnesses for the "healthy countries" as well, spreading the disease onto those who could've made a real difference if the wheel of their economy had been allowed to accelerate through pouring more water on it (i.e. stimulus). Because a considerable decrease in their exportation capabilities is bound to occur as a result of the diminishing markets (you can see what's happening on the European stocks right now), and thus the disease overwhelms the entire zone, instead of being confined to just the "ill countries".
Granted, juggling with debt and adding more debt on top of the existing one, is a dangerous exercise. You need brains to do it properly, otherwise things would only get worse. And you'd give more fuel to the critics of stimulus, who'd argue (and for a good reason) that austerity should've done a much better job.
We see some even more imbalanced political solutions being proposed instead of the above market solutions. The various statements from politicians from various countries are showing how little understanding they have about the core reason of the problem, and how confused they are. So they're busy, planning a "macroeconomic coordination" model, which includes a myriad of indicators to help navigate through these muddy waters - such as the current fiscal balance of a country, which is supposed to reflect the economic state of development of the EU members. If one of the indexes of a given country exceeds certain thresholds, then the country is supposed to make a thorough reassessment of the problem, while simultaneously developing strategies and mechanisms for instantaneous normalization of the affected sector.
The plan would also include the budget surpluses as an index. If this happens, then countries like Germany will be forced to decrease their export and increase the import, in order to curb their budget surplus, because otherwise the internal imbalances within EU would again bring us to square one (presumably). As with all other breaches of the new rules, breaching this one would also result in sanctions, but the proposition is to tie this to the ability of the member states to reject certain correctional mechanisms. Which, in simpler words, means that if they don't play by the rules, they won't be able to reject the adoption of said rules, which however is a paradox. Another paradox in the longer run is that this creates a potential situation where offenders would be judging other offenders, and clearly you can see the conflict of interests here. It's like a bunch of burglars being expected to make a verdict about a fellow burglar.
The planned European Stability Mechanism poises a very similar risk. It would allow governments to receive EU money during crisis situations. So far so good. But if they're certain that they'd receive the money, it's very probable that they'd just maneuver between the problems and thus forget about the vital but painful reforms they'd have to introduce, because such a step would bring a huge public outcry, even violence, and it would surely send a lot of political heads rolling. And no politician wants that. In this line of thought, I'd say that the bigger the probability for ESM taking effect, the easier it would become for countries to receive credits, and simultaneously the number of member states who'd be prone to taking drastic reforms would plummet.
But, back to the illusion of globalization (or regionalization). Such a macroeconomic coordination has actually been tested 44 years ago in Germany. I'm talking about Karl Schiller's "Globalization Policy". It failed, and not so much because of the war. Nowadays, people know very well why such macroeconomic indicators as growth, employment rates and fiscal balance (they used to be called "non-economical balances" back then) are dynamic variables that change *within* the market process, not outside of it. And they cannot be entirely planned and controlled through political means.
In a very simplistic summation, the fiscal balance of a country is (primarily) formed by the expenses per labor unit, which in turn is a result from the salaries and the work productivity. That's why it's extremely important for politicians to know exactly where, which salaries, when and by how much they should be changed, in order to achieve the desired positive effects on the price per labor unit, and hence the fiscal balance.
This is exactly where the illusion of control on the highly volatile economic system is hidden. It's a system where every minor nudge on tariffs anywhere across the given economic zone (EU in this case) could itself trigger changes in the rules of parallel and seemingly unrelated policies, and eventually change them noticeably. This includes a scheme of collective labor bargaining on these tariffs, that would prevent the politicians from getting involved. A possible interference into this autonomy of the market could easily grow into a major legal conflict. What's more, there are many ways of tariff negotiation without government involvement, which could result in a serious hike in the price of labor. And the ability to politically plan and control the productivity of labor is even slimmer than that. Especially in fields where innovation (or the drive for innovation) and the ability of each entrepreneur to introduce and use innovations, is crucial (technologies, for example).
In conclusion, I'm sure that since the full macroeconomic political control of the Nazi-Germany type turned out practically impossible back then, this must bring us to the conclusion that a similar type of control between 17 sovereign, democratic states with 17 different (similar, but not the same) types of legislative systems and political traditions) now looks even less likely.
All of this makes me ask if in the long-run there aren't really just two possible options for the Euro zone. Either the "healthy" and "ill countries", despite all their efforts and stated common values, taking two different roads after all; or the imposition of a really heavy and invasive, even *forceful* financial uniformity between the member states, where the "ill countries" would have to receive enormous financial compensations from the "healthy" ones, just for being weaker than them. Which sounds more like socialism than we would've liked, and what's worse, kills any incentive to excel as a fiscally responsible country, and potentially creates many situations like Greece.
One could only try to guess which of the two scenarios is more likely to play out in the years to come. Personally, I'm betting on the former. Particularly since there've already been such indications.
But if we create two "leagues" - the fast-lane and the slow-lane one, what happens to the idea of a Union? Well, some people in Brussels and in most of the capitals along the European periphery might not like the answer to that question.
Today we see the consequences from the adoption of a common European currency in countries that were never any close to fulfilling the conditions for doing so, and this, coupled with a lack of the relevant fiscal institutions to really do it. On one side, the Euro zone remains too inefficient in terms of functionality. On the other, despite its flaws, its member states feel an urgent need to do everything in their abilities to keep the Union intact, at any cost. This way European politics is entirely focused on preserving the paying ability of the "ill states". As we know, until 2013 this task will rest upon the European rescue package which was created for fighting the crisis. After 2013 this package is expected to be substituted by the Stability Pact, which includes a European Stability Mechanism. It's supposed to prevent the "ill states" from taking credits that they couldn't pay back, or if they eventually take credits, those would be granted in exchange for heavy strings attached. Because, of course, no lunch should ever come for free (for too long). Except the American lunch maybe, but that's another story.
But would that be enough? Would it do the job? Probably not. Because here we're not talking of indebtedness alone. The main problem is in the macroeconomic flaws that were built into the Euro since its very inception as a currency, and continue to unravel to this very day. This could be seen very clearly when we look at the figures on the current fiscal balances of the EU members. Greece, Ireland, Portugal, Italy and Spain (PIGS-I?) have all imported more than they exported, for 10 years uninterrupted since 2001. In comparison, Germany has always had budget surpluses for the same period. And what's the consequence from this situation? One of the main reasons for all the troubles is the disparity in the income per labor unit in the various European countries. For example between 2000 and 2008 these expenses have risen by 25% in Italy, 29% in Spain, and... 0% in Germany, where this figure remained a constant.
In order to keep their ability to cover the losses generated by the increasing import of goods (and export of labor force), the public and private players in the "ill countries" had to take additional international credits. Eventually, a point was reached where these credits were being solely supplied by banks and capital investors from the countries with surpluses, because those had enormous amounts of fresh money ready for use. But few investors ever asked whether the economic power of the credit receivers would hold for too long, neither whether they could keep serving the ever increasing debt burden. The realization that this was economically impossible in the long run, somehow came "suddenly and unexpectedly" in 2010, although the very fact that everybody was so surprised, is a huge surprise in itself.
The market solution of this problem that's being proposed by the current austerity fans, would've easily been just doing nothing, right? Letting the losers to fail, and the market would fix this on its own. Under this logic, those who give the credits should take the blow and meet the consequences from the irresponsible credit lending to inherently insolvent receivers (the receivers would also drown in the process, of course). And this should be like a lesson for them, and next time they'd be more careful, and think twice before doing something stupid. Makes sense, at a first sight. Because this way the risky credit lending to "ill countries" (and entities) would be limited drastically in the future, and probably never reach those crazy levels. But on the other hand this would limit their ability to import goods, and stagnation ensues.
In this line of thought, apart from the drastic shrinking of the deficits, the "ill countries" ought to address the issue with the enormous expenses for adapting to the new situation. Right now, even if you poured a trillion euros into Greece, they'd still sink in, or rather leak out like from a broken bucket. Because Greece lacks the structure that would prevent this. The paradox is that as a consequence from the austerity, we're seeing not only the logically expected negative growth (shrinking) of the economies of the affected, but also a slowing down of the recovery process, and a number of major economy-drivers falling into insolvency in sectors that had previously been unaffected. And worse, even some of the credit lenders getting in trouble eventually (France's credit rating was downgraded for a reason). So, such an austerity solution tends to create illnesses for the "healthy countries" as well, spreading the disease onto those who could've made a real difference if the wheel of their economy had been allowed to accelerate through pouring more water on it (i.e. stimulus). Because a considerable decrease in their exportation capabilities is bound to occur as a result of the diminishing markets (you can see what's happening on the European stocks right now), and thus the disease overwhelms the entire zone, instead of being confined to just the "ill countries".
Granted, juggling with debt and adding more debt on top of the existing one, is a dangerous exercise. You need brains to do it properly, otherwise things would only get worse. And you'd give more fuel to the critics of stimulus, who'd argue (and for a good reason) that austerity should've done a much better job.
We see some even more imbalanced political solutions being proposed instead of the above market solutions. The various statements from politicians from various countries are showing how little understanding they have about the core reason of the problem, and how confused they are. So they're busy, planning a "macroeconomic coordination" model, which includes a myriad of indicators to help navigate through these muddy waters - such as the current fiscal balance of a country, which is supposed to reflect the economic state of development of the EU members. If one of the indexes of a given country exceeds certain thresholds, then the country is supposed to make a thorough reassessment of the problem, while simultaneously developing strategies and mechanisms for instantaneous normalization of the affected sector.
The plan would also include the budget surpluses as an index. If this happens, then countries like Germany will be forced to decrease their export and increase the import, in order to curb their budget surplus, because otherwise the internal imbalances within EU would again bring us to square one (presumably). As with all other breaches of the new rules, breaching this one would also result in sanctions, but the proposition is to tie this to the ability of the member states to reject certain correctional mechanisms. Which, in simpler words, means that if they don't play by the rules, they won't be able to reject the adoption of said rules, which however is a paradox. Another paradox in the longer run is that this creates a potential situation where offenders would be judging other offenders, and clearly you can see the conflict of interests here. It's like a bunch of burglars being expected to make a verdict about a fellow burglar.
The planned European Stability Mechanism poises a very similar risk. It would allow governments to receive EU money during crisis situations. So far so good. But if they're certain that they'd receive the money, it's very probable that they'd just maneuver between the problems and thus forget about the vital but painful reforms they'd have to introduce, because such a step would bring a huge public outcry, even violence, and it would surely send a lot of political heads rolling. And no politician wants that. In this line of thought, I'd say that the bigger the probability for ESM taking effect, the easier it would become for countries to receive credits, and simultaneously the number of member states who'd be prone to taking drastic reforms would plummet.
But, back to the illusion of globalization (or regionalization). Such a macroeconomic coordination has actually been tested 44 years ago in Germany. I'm talking about Karl Schiller's "Globalization Policy". It failed, and not so much because of the war. Nowadays, people know very well why such macroeconomic indicators as growth, employment rates and fiscal balance (they used to be called "non-economical balances" back then) are dynamic variables that change *within* the market process, not outside of it. And they cannot be entirely planned and controlled through political means.
In a very simplistic summation, the fiscal balance of a country is (primarily) formed by the expenses per labor unit, which in turn is a result from the salaries and the work productivity. That's why it's extremely important for politicians to know exactly where, which salaries, when and by how much they should be changed, in order to achieve the desired positive effects on the price per labor unit, and hence the fiscal balance.
This is exactly where the illusion of control on the highly volatile economic system is hidden. It's a system where every minor nudge on tariffs anywhere across the given economic zone (EU in this case) could itself trigger changes in the rules of parallel and seemingly unrelated policies, and eventually change them noticeably. This includes a scheme of collective labor bargaining on these tariffs, that would prevent the politicians from getting involved. A possible interference into this autonomy of the market could easily grow into a major legal conflict. What's more, there are many ways of tariff negotiation without government involvement, which could result in a serious hike in the price of labor. And the ability to politically plan and control the productivity of labor is even slimmer than that. Especially in fields where innovation (or the drive for innovation) and the ability of each entrepreneur to introduce and use innovations, is crucial (technologies, for example).
In conclusion, I'm sure that since the full macroeconomic political control of the Nazi-Germany type turned out practically impossible back then, this must bring us to the conclusion that a similar type of control between 17 sovereign, democratic states with 17 different (similar, but not the same) types of legislative systems and political traditions) now looks even less likely.
All of this makes me ask if in the long-run there aren't really just two possible options for the Euro zone. Either the "healthy" and "ill countries", despite all their efforts and stated common values, taking two different roads after all; or the imposition of a really heavy and invasive, even *forceful* financial uniformity between the member states, where the "ill countries" would have to receive enormous financial compensations from the "healthy" ones, just for being weaker than them. Which sounds more like socialism than we would've liked, and what's worse, kills any incentive to excel as a fiscally responsible country, and potentially creates many situations like Greece.
One could only try to guess which of the two scenarios is more likely to play out in the years to come. Personally, I'm betting on the former. Particularly since there've already been such indications.
But if we create two "leagues" - the fast-lane and the slow-lane one, what happens to the idea of a Union? Well, some people in Brussels and in most of the capitals along the European periphery might not like the answer to that question.