Sunday, May 16, 2010

Reading Between the Lines: Europeans Will Be Europeans No More

Last week, Greece became the byword for the European “fiscal crisis”. The mainstream press and media pulled out all the stops in hyping an impending doom if the severest austerity measure were not put in place – and soon. The Financial Times had little else in its opinion pages except warnings by its regular and guest columnists about the eurozone’s “race to the bottom”, Europe’s “lack of preparedness for austerity”, Britain’s “lack of preparedness for austerity” and the view in “Germany” – based on interviews with a few Germans – that the trillion dollar aid package was doomed because it did not address the fundamentals, which could only be corrected with more austerity.

The New York Times got into the act, too. It dispatched Tom Friedman to Greece for an interview with Papandreou. Friedman is an idiot, though of the useful kind. Because he never understands what the “shot” is, to show his importance, he reveals whatever he picks up in conversations. He paraphrased the prime minister that in return for the aid package “Greece’s entire economic and political system will have to change for Greeks to deliver their side of this bargain.”

Exactly. I could not have said it better myself. (Do you hear, Prof. Becker?)

FT’s Gideon Rachman is a fool of a different kind. He has business contacts and knows more of what is happening, but only as conveyed to him by business interests. But as the mouthpiece of capital, he uncomprehendingly – and inevitably – reveals more than he intended. Here is some of what he wrote last week, followed by my comments.
Most of the European Union is living beyond its means. Government deficits are out of control and public sector debt is rising. If European governments do not use their new breathing space to control spending, financial markets will get dangerously restless again.
Note the European Union. In Those Overspending Americans, we saw that American consumers were being scorned for spending more than they earn and thus, impeding the economic recovery. That cannot be said of the European consumers. They do not have personal debt the way Americans do precisely because the wages in Europe have kept up with productivity and inflation and the European governments have more generous social programs. Hence, Rachman’s attack on the European Union, by which he means the individual European governments.

Now, look at the threat: What would happen if European governments do not control spending? Will there be the bubonic plague? Will locusts come? Will the world end? No, only “financial markets will get dangerously restless again”.

What are financial markets? They are the province, the realm, of private capital. So, we see who – or rather, what – is pushing for the austerity. Governments, columnists, commentators, politicians are mere proxies. Rachman continues:
Unfortunately, European voters and politicians are simply unprepared for the age of austerity that lies ahead... Many have come to regard early retirement, free public healthcare and generious unemployment benefits, as fundamental rights. They stopped asking, a long time ago, how these things were paid for. It is this sense of entitlement that makes reform so very difficult.
One question, then, Mr. Rachman. If the citizens of the European Union must work till they die, cannot have free healthcare and will have to go hungry when unemployed, what does it mean to be a European? Were not these “entitlements” precisely the core lifestyles issues that the Union promised its citizens and on which the idea of the Union was sold to a skeptical public? Without these entitlements, how would you dangle the prospect of a “European life style” as the role model for the citizens of say, Afghanistan?

The man, though, asks one important question. How are these things paid for, he asks? He implies that these things cannot be paid for, because Europeans cannot afford them, so they have to cut the expenses. But he is being dishonest. There was a time – an extended time, really – when European governments did pay for all those entitlements, which is what made Europe, well, Europe. Come to think of it, even the U.S. companies apparently could afford to pay for such entitlement. In the 1950s, you got a job at GM, supported your family for 30 years, bought a car and a house and then retired with a pension to enjoy the rest of your life.

What happened? The answer, as I pointed out elsewhere, is that the rate of return of capital in the West declined. That is one thing you will not see mentioned in the coverage of the crisis. Necessarily then, the barrage, intended to soften up the rabble for the austerity, focuses on the diversions: overspending, immigrants and playing one group against the other. Rachman:
The growth in the size and power of the EU has fed a dangerous sense of complacency. For the countries of southern and central Europe – who joined later than the inner core – “Brussels” was sold as the ultimate insurance policy. Once they were inside the EU, it was felt that war, dictatorship and poverty were safely consigned to the past. Everybody could aspire to the relatively comfortable, stable lives of the French and Germans... There is already much bitter talk in Greece about the loss of national sovereignty, matched only by bitter talk in Germany about the cost of bailing out the feckless southern Europeans.
The ouzo drinking, grape-leaves eating Greeks thought that EU membership meant class; they were all going to be French and Germans! That is not the attitude of thuggish Rachman. Liberal Paul Krugman concurs:
So, is Greece the next Lehman? No. It isn’t either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008.
(Parenthetically, note at the man’s mentality. I wrote about Paul Samuelson comparing the U.S. navy to an apple. Here is his disciple, the Nobel Prize winning columnist of the New York Times comparing a country with a sham operation and concluding that the sham operation – now defunct – was somehow “superior”. Like the under-aged prostitutes who remain in awe of their pimps no matter how much they criticize them, Krugman remains in awe of a place like Lehman – and Goldman and Citi – as the magical places of power run by tough guys such as these.)

Still, some might not have gotten the point. Rachman, a Larry Summers like fellow, spells it out for them:
The idea was that a Union that spanned 27 nations was large enough to protect a unique European social model from the uncertainties of globalisation. At the most fundamental level, the EU does indeed protect. But while Europeans no longer fear foreign armies, they are starting to fear foreign bondholders. Europe’s existence as a “lifestyle superpower” has depended on an ample supply of credit ... [They] are discovering that the “European project” provides no protection against the harshness of the outside world.
Uncertainties of globalisation. The harshness of the “outside world”. Curious admissions these, if you can read between the lines. The pieces are beginning to fall into place.

One question remains: why did Greece – and Spain and Portugal and even Italy – join the eurozone? What was in it for them, if their entire social and political system had to undergo a radical change without any protection against the harshness of the “outside world”?

The answer is that they did not join. They were dragged in against the will of their population. The idea was to bring in the cheap labor of poorer countries in southern Europe to boost the “productivity”. Then the newcomers began to entertain the fantasy that they had joined a country club as members. They were in fact brought in as workers and janitors. The financial crisis provided the opportunity to drive this point home, to disabuse them of their fantasies. What Clinton did to the poor in the “welfare reform”, the eurozone membership is doing to its southern members: their lives, as we know, will change. The target in the two cases is different but the underlying double whammy is the same: to stop paying the poor – there is no free lunch – and force them into the labor market to push down the labor costs to boost productivity. From today’s Financial Times, under the heading “Spain puts labour reform on agenda”:
In Frankfurt, Jean-Claude Trichet, president of the European Central Bank, said controls on public finance were essential to boosting eurozone countries’ economic prospects. “It is a complete fallacy to say that fiscal soundness dampens growth. It is exactly the contrary. It is the absence of fiscal credibility which dampens growth.”
There is no relation whatsoever between growth and spending. How much money you are earning or will earn in the future does not depend on what you spend. Yet, the president of the ECB links the two. Why? Because “fiscal soundness” he mentions is the code word for reducing labor costs by cutting their pay and pensions. That is what the fight is all about: to bring down the labor costs to at least temporarily boost the growth, i.e., increase the rate of return of capital, whose consistent decline in the past decade remains a matter of serious concern to the planners of the European Union.