Thursday, May 27, 2010


Patrick Barkham reports from "the most indebted country in the EU"; not Greece - Ireland.
For a decade, the "celtic tiger" economy was the poster child of free-market globalisation. Now, this bedraggled alley cat of an economy is neo-liberalism's favourite example of how to cut your way to recovery. Ireland's government has slashed public sector spending by 7.5% of gross domestic product with a series of drastic cuts this year: public sector pay by 15%, child benefit by 10%, unemployment benefit by 4.1%. Another €3bn will be removed next year, a total of 10% of GDP over three years: these measures are equivalent to the British government slashing its budget not by the £6.25bn planned by George Osborne in 2010, but by an incomprehensibly gigantic £150bn.

Yet despite the cuts, dubbed "masochistic" by the Financial Times, Ireland's debt is still growing, thanks to the desperate bailing out of its banks. Irish critics fear this economic death-spiral could lead to a decade of grinding austerity, a generation lost to unemployment and, worse, the return of a spectre that has haunted Ireland for two centuries: mass emigration.

Meanwhile, one of the better bloggers from Greece looks at life in Thessaloniki.

Sometimes it's the little thing that show you how grim things are getting here in Thessaloniki, the long lines of taxis waiting at ranks for customers to turn up even in the middle of the day when up till recently getting a cab was next to impossible. Or perhaps its the accents of wandering street vendors who are now more likely to be people from the city than some recently arrived immigrant from West Africa or a member of Greece's Rom community. The city centre has become a near ghost town on week nights, a mere shadow of its former, vibrant self with cafes uncharacteristically quiet and empty streets, this in a place that prided itself on 4am traffic jams.
He also links to this post about Latvia and its "internal devaluation" (a process bluntly described by Paul Krugman here)
Anyway, the essential thrust of the concept is that a country in a fixed exchange rate regime can still manage its relative competitiveness by reducing its labour costs through fiscal measures. For example, a country could finance a decrease in payroll taxes through increased income taxes. Such a shift reduces real labour costs and therefore increases the competitiveness of exports - while also being budget neutral and reducing consumer demand in that country. In theory, it therefore achieves a similar outcome as a currency devaluation...

In Latvia's circumstances, it seems that the term has departed somewhat from its original meaning. The IMF sponsored plan calls for 20% cuts in public sector wages, 20% cuts in pensions, an increase in VAT from 21% to 23%, rises in the average effective rate of personal income tax etc... There isn't much focus on labour productivity or unit costs. It's simply reduce the budget deficit at all costs.
And now there's Italy ... and so on and so on. And this is just the beginning of what promises to be a major European deflation in response to the public deficits that have rocketed and not just through 'profligacy'. As Edward Hugh notes, "another significant part of rising state indebtedness comes from having recently bailed out a significant chunk of the private sector".

I don't have the expertise to comment on the economics of this policy, other than to express a sense of unease and anger at the social cost. I certainly wonder if this is the wisest way to tackle the crisis. Treating this as a budgetary problem rather than a human one, other than by the routine expression of a sense of regret at the resultant 'pain' from people who will not feel it themselves, means that there is a danger of seeing the policy as somehow socially neutral, not having profound, and mainly unintended, political consequences. The historical precedents are certainly not encouraging, though economies and democratic societies are stronger than they were in the 1930s. Yet what is coming from the mainstream left? Nothing; no challenge to orthodoxy can be heard, no heretical voices. And this intellectual vacuum is the most worrying aspect of all about an economic crisis that is far from over.

1 comment:

Roger said...

Depressing to read about Thessaloniki - spent a few days there tasting Byzantine churches and hanging around the cafe at the White Tower where I was deeply smitten with the Swedish-Greek waitress and her iced coffees - and found it much more pleasant than Athens (although in the late 90s it was difficult to find anywhere less pleasant than Athens).

There is in fact an excellent book by economist Richard Koo with the silly title the Holy Grail of Macro-economics - Lessons from Japan's Great Recession which will confirm your deepest fears:

'Koo believes that Japan's "great recession" of 1991-2005 contains useful lessons for interpreting and dealing with the subprime mortgage crisis in the United States and with the burst financial bubbles in China and Europe.

His book reviews the key characteristics and policy developments of Japan during this troubled period, arguing that Japan suffered from a balance-sheet recession, during which firms struggle to repair their impaired balance sheets and are therefore reluctant to take on new business, even promising business, if that will delay improvement.

Under these circumstances, economies respond very differently to new shocks, new opportunities, and new policies from how they would in normal recessions. In particular, monetary policy is much less effective, since demand for new loans is weak. Fiscal action, even including the injection of new capital into banks, is necessary to avoid prolonged Japanese-style stagnation'

(Review from Foreign Affairs Sept/Oct 2008)

The concept of a balance sheet recession is in fact Koo's Holy Grail as it finally supplies a explanation as to why the 1930s global recession was so prolonged and damaging.

Japan is a test case as its long recession from the early nineties onwards actually defied all the standard classical and Keynesian solutions - several massive deficit financed public spending programmes that concreted over much of the country failed to rescue it as did neo-liberal shock treatment.

So for Koo all governments can do is try and keep demand as stable as possible through deficit-spending until eventually companies have eliminated THEIR massive accumulated debts and are ready to expand again.

And having quickly abandoned their neo-liberal experiments this is by and large what Japanese governments did for most of the nineties and were finally being rewarded with a return to growth when the bankers fucked everything up.

And thanks to Nick Clegg and the Orange Book cabal we are now doing the exact opposite of what is needed and are evidently doomed to relive the 1930s once again...