Greek Chorus

I've thought about calling this blog 'thinking the unthinkable' but I decided to use such a cliched strapline was probably itself unthinkable. Perhaps 'explaining the inexplicable' would be more appropriate. But what I am not prepared to do is repeating the unrepeatable and so, in response to a request from a friend and colleague for some guidance on the Greek situation, I am offering a tidying up and pulling together of various previous posts.

We need to begin with an understanding of the misguided euro project, which was driven by corporate interests and political ambitions and was unpopular with economists from the start. The sort of strait-jacket it imposed on countries' interest rates assumed a uniformity of economic development and social values that simply did not exist. The strictures that were entered into and are now being enforced are similar to those imposed by the gold standard in the 1930s, and so brilliantly explained by Karl Polanyi in his Great Transformation. For a more radical view of the purpose of the Euro project you might enjoy a paper by Ramón Fernández Durán called 'Mars Vs Venus, or Dollar vs Euro?'

This helps us to answer the question of whose fault it is - the financiers and corporate power-brokers who sought to increase their power and ease their extraction of surplus value. It was the poor design and inadequate debate that resulted in the tragedies now playing themselves out in Greece, for which the Greek people cannot be held accountable and should not be made to suffer. Similar arguments were made by Mary Mellor, and were posted to the blog in May 2010.

This brings us to what is to be done. Here I point to the lessons from Argentina, where a country's leaders refused to see their society destroyed and forced their creditors to the negotiating table. Politically this is the only acceptable option: a democratic decision about who gains and who loses value. In the free-for-all that is now threatened in Greece the financiers will flex their muscle while pensioners and the soon-to-be unemployed will be the losers. The tragedy not just for Greece but for the world is that similar negotiations at the global level have not been taking place and are desperately overdue if we are to preserve our democratic right to decide how our economies function.
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Unified Continent not Single Currency

The first time that I was in the uncomfortable position of agreeing with Conservatives was some ten years ago when, on behalf of the Green Party, I joined the national campaign against Britain joining the Euro. The pro-finance and little Englander Tories felt the need for a bit of breadth and so invited Euro-sceptic former foreign minister David Owen, a couple of anti-European Labour MPs and a representative from the Green Party to join them.

Around the same time I published a chapter in a book called Implications of the Euro: A Critical Perspective from the Left. In my chapter I discussed the ways that a single currency would force the pace of political change in a way that the institutions could not follow and would alienate the peoples of the countries involved. This, and the growing tensions between nations that would be created, could threaten the future of the European project as a whole. The self-interest of finance could overwhelm the common interest of peace.

This morning I believe we have seen these predictions come to pass. This is why I believe that David Cameron was right not to join the treaty although, just like the Tories on the anti-Euro committee a decade ago, we could not be further apart in terms of the economic route Britain should follow. Cameron's interest is almost entirely to protect the City and to avoid its spivs and speculators from being forced to consider the social consequences of their actions. However, some in his party are articulating concerns about democracy that I still believe have merit.

It is tempting to believe that the European institutions might impose acceptable standards on the City, just as they have forced us to improve our environmental standards and reduced exploitation at work. But the problem every time has been that we have not had the power to make these decisions democratically. We do not elect people with sufficient power to make decisions at the European level and so these decisions have no more political authority than the current unelected prime ministers of Italy and Greece.

The democratic deficit is more threatening to the aims of the EU than the collapse of the euro. For many years the single market and then the single currency were ambitions driven by business to serve its interests. They have utterly distorted the institutions of Europe and have alienated many of the people of Europe from this organisation that was designed to protect their peace and prosperity. How else can we interpret the huge votes in many of Europe's most loyal members for parties of the nationalist right?

Although the details of the new treaty are as yet unclear we do know that it will involve allowing unelected European officials to set levels of spending and rates of taxation in countries over which they have no democratic mandate. The Euro always constrained monetary policy and therefore reduced the room for manoeuvre in terms of fiscal policy. But as the fiscal straitjacket is imposed, and austerity follows, it is Europe and the other nations that make up the continent that will be blamed by the citizens of the countries who suffer.
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Just Say 'No'

The Irish State faces a historical moment. In keeping with its tradition of courageous struggle for freedom and justice and the unique role that Irish people and culture have played on the world stage, Ireland can now be the country that stands up against the bullying forces of the financial markets. The morally unacceptable terms it is being offered mean that any other response is unthinkable.

The bond traders responded to Merkel's attempt to constrain their profiteering by downgrading Irish debt - thus raising the income they gain from it - increasing the costs imposed on the Irish state, and crucifying the Irish people. It is time for a proud nation to say no: default is better than humiliation.

Such a strategy will also turn the tide. Since the break-up of the euro nwo appears inevitable Ireland could be a player in the end-game, rather than a victim. The plan of the financial interests is to pick off one Euro country after another. This is similar to the financial contagion that began in South-East Asia in the 1990s, but with the added appeal that, as each country falls, Germany will pay off the traders. Ireland's default would signal the end of this process and force a political solution on the Eurozone. If Ireland does nothing Germany will come under increasing pressure itself to abandon the euro and create a new currency, leaving the smaller nations of Europe in turmoil.

And here is one I prepared earlier. All EU states should simultaneously suspend trading in their national debt. They should then agree interest rates that they are prepared to pay on their national bonds over a 10-year period. These rates would vary to reflect the nature of the economies involved, but only within narrow bands, and at much lower rates than are being paid today. New dated bonds with fixed returns would be issued up to a percentage of current holdings.

States would thus retake the power over their national economies. Traders could accept the terms or lose everything. Their game of extorting the value of national economies through pressurising their politicians would be finished.

This radical political move would clearly have serious implications for the other global currencies, and especially the dollar. But it would bring the interests of citizens back into play and increase the pressure for urgent negotiations to establish a new global financial architecture which serves people rather than financial interests.
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Merkel Confronts the Market Wolves

Throughout the years of financial crisis it has been notable that financial and business interests have been writing the story. Media analysts have been colluding: those who understand what is going on are in the pockets of the business lobbyists; those who do not are scared to reveal their ignorance. The result is that we are being sold a lie.

The official version of what is happening in the finance markets goes like this. Countries are in debt so they look like a bad risk. The debt of risky countries is harder to sell and so the price falls and traders need to be offered a better rate of interest to accept it. Traders will not buy it at all unless they are convinced about the soundness of the national economy selling it, so that markets demand that countries introduce austerity measures. If they are not satistifed the austerity must be made more austere.

The truth is different. As they pick on each country in turn the bond traders create a self-fulfilling prophecy. They (through the credit-rating agencies) downgrade the surety of the country's debt. Its price falls and the return they gain from holding it rises. Thus their creation of this story is a simple means of increasing their profits. They feel they can still squeeze more out of Irish debt, hence the story that the 'markets don't believe' the Irish government is secure. Once they have destroyed Ireland they will move on to Portugal, Spain and even Belgium, according to today's story. Governments in those countries tremble and beat up on their own people.

Understanding the behaviour of market traders is not difficult; devising policy to counteract it is. The process of globalisation meant the signing away of political power over economics, so even when the free operation of finance markets is clearly disastrous for the world's people politicians feel powerless. If one country acted alone they would face the massive movement of speculative money and, as Black Wednesday proved, no country or currency can withstand that.

German Chancellor Angela Merkel has been clearest about the need for political action, perhaps because she represents the strongest economy, perhaps because of the folk memory of the 1930s and the destructive consequences unrestrained finance wreaked then, perhaps because she grew up in a debt-averse Protestant home. First she called for political controls over credit-rating and now she is suggesting that the bond-holders should contribute to paying for the costs of the crises they are causing, shifting the balance of their incentives away from destroying domestic economies. These represent the first feeble attempts to reassert political authority over the globalised economy. "Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" she asked on Wednesday.

Gordon Brown is short of a job these days. Perhaps the son and daughter of the church could combine their efforts in devising a plan for European governments to take charge. If he really wants to save the world, now could be just the right time.
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Currency to Serve People and Planet

We need to see the Irish tragedy as part of a wider picture: the ongoing currency wars and the struggle for domination of the global capitalist economy. Since 1945, the US has enjoyed extraordinary power as a consequence of the Bretton Woods Agreement that the dollar should be acceptable in the place of gold as a global numeraire. Since the US reneged on its promise to support its currency with gold in 1971, its government has been able to print dollars at will, and claim goods in return. This, more than anything else, explains the decadent US lifestyle - and its planetary consequences.

Europe's response, after years of decline and unfair competition, was to establish the Euro. This was a fatally flawed strategy since, unlike the USA, Europe is not a natural currency area, and there is no single democratic body that matches the currency area. Hence it has always operated like a strait-jacket, with some currencies having interest rates too low for their needs (hence the Celtic boom and bust) and others having interest rates too high. It was Germany's currency, the Mark, which gave the Euro its credibility, and the German economy that provides the ballast for the currency. Hence what worked for Germany has been forced onto the other members of the Eurozone, with disastrous results for their national economies.

Yet the problem of dollar dominance persists. Hence Skidelsky's call for a 'bancor', or bank gold, a proposal for a neutral currency to facilitate world trade and form the basis for national currency holdings. This should be the call of the Irish people: global justice and a balanced system of international trade. This has been the call of the Chinese for some time. It is only because we live in the Anglo-American media bubble that our perceptions of the dollar demise are so distorted.

I have been calling for some time to consider the possibility of linking the new global currency to carbon emissions, thus putting an automatic brake on economic activity on a global basis, and rationing CO2 emissions by country. Another possibility is that the exchange rates between countries might be fixed in an inverse relationship with wages, so that no country can undercut another by restricting rates of pay. In this way, a neutral global currency could not only stabilise the financial system but also end the 'race to the bottom' that globalisation has brought in its wake.
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Time to Create the Renten-Euro?

Why do currencies fail? If you did not know any better you would assume it was because the people in the countries supporting them became lazy and demanded free plastic surgery at a moment's notice while spending all their days reclining in the sun enjoying a view over the Agean. Or some other scenario we can enviously imagine while stuck at our computers in the summer rain - us and the Germans we share our northern Atlantic climate with.

It was not so long ago that we were looking at this same scenario from the other end of the telescope. The narrow focus on the Second World War in UK history teaching means that many of us have a strong mental image of the collapse of a European currency, with the useful visual mnemonic of hungry shoppers trundling a wheelbarrow full of notes to the local bakery. The whispered suggestion that the Euro may have lost credibility to the extent that it be replaced by a new currency (as the Mark was replaced by the Rentenmark in 1923) makes clear the parallel with that period of German's history.

The most unhelpful talk of punishment should bring this image to mind, because nobody suggests that the German hyper-inflation between the wars was the result of the burghers setting up their deck-chairs along the Rhine in the hope of catching a bit of sun. We all learned, and we should remember now, that the German economy was destroyed by the demand for an unrealistic level of reparations. Punishing Germany for its economic woes, as many are suggesting we should punich Greece now, destroyed its currency and allowed space for fascism to flourish.

The CIA have helpfully compiled a list of the countries of the world ranked according to the size of their debts as a proportion of the GDP. I have no idea how reliable this data is, but surely the more important point is that so many countries have these debts. This suggests that there is something structurally wrong with the system of national and global financing, rather than the demand of people the world over for a decent life, or their willingness to work a reasonable amount of hours to achieve that.

The system of creating money as debt should be our target: for creating instability, and for permitting the extraction of the value of work by those who do none. If we are seeking targets in deck-chairs, those who live from rental earnings of their financial investments would be a good place to start. Tweet

Theatre of the Absurd

What are we to make of the late-night performance that took place in Brussels yesterday. The sums of money now being dramatically thrown around are different by an order of magnitude from the national budgets of just a couple of years ago. The €750bn euros this deal represents is a grotesquely large sum for governments to promise on our behalf.

The money is not real. It never existed and the bulk of it is 'guarantees'. What is a financial guarantee? It is an empty performance, a simulacrum to cover the absence of any real value being created by many of the European economies, a sideshow to divert public attention from the reality that our national wealth has been ransacked by the financial market and that nothing of any real value remains.

The ministers also apparently offered to buy bad debts from the market in the first round of 'quantitative easing' by the European Central Bank. The UK has injected as much money as it could possibly borrow to keep markets afloat last year; now only the wealthier economies of Europe can produce money to feed the rapacious wolves of the finance markets. As they do this, that money will be sucked into the stock market, causing the same artificial rally we have seen in UK markets over the past year. Their claim that balancing securities will be sold - to waylay German fears of inflation - will be tested in the coming months.

The curious question that must be asked is how can we be in a situation where everybody is in debt all at the same time. If you accept the standard view of money and accounting that would be impossible since a debt must create a parallel credit. The existence of debt in every economy simultaneously is evidence that money itself is created as debt and that, under such a system, debts accumulate until they feed on the very economies that gave rise to them.

This particular drama has distracted attention from our domestic problems. Now that the wounded prey in the Eurozone have attracted a strong monetary defender the wolves will turn their attention back to Britain, as a more likely source of profit. We are likely to have a greyer, more resigned version of the Greek tragedy in which to play a minor role over the coming months. Tweet

Dollar, Euro, or Ebcu?

The unaccountable power of credit-rating agencies has now come under attack from the EU's most powerful politician, Jose Manuel Barroso, the president of the European Commission. Clearly the speculation against national economies is dangerously destabilising for all the European economies, but behind this attack we may also see a glimpse of the struggle for currency hegemony between the dollar and the euro.

The political purpose behind the establishment of a European currency was to provide an alternative to the dollar, whose role as global trading currency enabled the US to fund its superpower military strength and its unsustainable lifestyle at the cost of the rest of the world's people. The credit-rating agencies, all based in the US, can turn market sentiment against the weaker European economies, thus undermining the currency they share. Hence Angela Merkel's suggestion that Europe needs to establish its own credit-rating agencies.

The European financial crisis is rapidly cycling out of control. We are moving beyond the dealings of young men sitting at computer screens and onto the streets. The anger between some Greek citizens and their government is matched by an anger between different European nations. The EU currency straitjacket is, as was predicted, leading to tension between the vastly different economies it forced together. In currency wars, as in military wars, it is the elites who make the decisions and divide up the spoils, while the poor pay the price.

Green economists have long argued for a political response to this crisis that opens up the question of how money is created. At the global level we suggest a neutral currency, which enables trade between countries without allowing this to accrue benefit to the country that controls the trading currency. If such a currency were linked to carbon dioxide emissions as an environment-backed currency unit (Ebcu) it could also ensure that the global economy stayed within planetary limits. Tweet

Told Euro So

Smugness is never an appealing characteristic, but I think we Greens are sometimes a little too reticient in taking the credit for being right. On our political wing discussions about the imminent collapse in the financial system were everywhere for a good five years before it happened. And recent events across Europe have shown that we were right about the euro as well.

The central case for the UK not entering the euro was that we would lose political control over our economy, if we gave up the ability to control our national currency. Entering a single-currency area would require us to accept the interest rate of the most powerful economy in that area, in the case of the euro that would mean Germany.

The disasters that have befallen especially Ireland and Greece have arisen from them having to take the euro interest rate, which was much to low for their economies during the last decade, leading to housing-market bubbles and speculative inflation in their economies. Now that the bubble has burst they are having to accept an interest rate that is too high, whereas in the UK our central bank has been able to reduce the cost of borrowing money to a mere administrative charge, giving the economy the best possible chance of recovery.

The lesson is not that we are prudent and the marginal Greeks and Irish are feckless. Rather it is that in global capitalism size matters, and that controlling your own currency matters most of all. Greece's deficit is 12.7% of its GDP, way beyond the euro limit of 3%. But the UK's is already 7% and that takes no account of the potential banking liabilities we have taken on, nor the off-balance-sheet debts represented by PPP contracts.

And beyond these special cases, the wilder baying of the market hounds is, as the Spanish government has claimed, an irresponsible attempt to change investor sentiment. While they are untrammelled by political controls, speculators will seek to gain market advantage by artificially increasing or decreasing the value of currencies and national bonds. Whatever we think of the situation of Greece, the Spanish economy is not demonstrating any inability to make good on its debts: its debt-to-GDP ratio is below the EU average, less than that of the UK and well below the 60% allowed by the European Central Bank.

The conclusion should surely be that what counts is not the view of the bond traders or the power of the markets, but our courage to stand up for ourselves. Greece will come out of this crisis better than Ireland - with fewer cuts to services and wages - because the Greeks have the courage to exercise their democratic freedoms and go onto the streets. The Irish, by contrast, seem to have believed the myth about the battle between capital and labour over economic value as being something historical. In fact, the power games between Europe's politicians, the central bankers, and the speculators is being played out daily in our news bulletins. Tweet

Markets Beware Greeks Bearing Gilts

As Greece stumbles its way towards the humiliation of an IMF loan it is the way this latest economic tragedy is being reported that causes most concern. The hegemony of market domination is complete as journalists report on the need for the country to rapidly cut public spending with no voice given to those in the country who need public spending to continue.

The flight from Greek national debt is a demonstration of the growing power of the market makers, as they attempt to sideline and denigrate the more vulnerable of the European economies. Far from reducing their power, the financial crisis has emboldened the finance traders, since it proved that no government had the courage to make politics and public interest count for more than market profit. With a few exceptions, commentators who might defend the interests of the citizen against those of the speculators are excluded from the media so that the public debate is framed entirely in terms of what Greek politicians must do to please the markets. There is no sense of irony that, even in the home of democracy, the wishes of the people have become an irrelevance.

The speculative attacks on Greece and the lining up of the countries that are to follow - Portugal and Spain are in the firing line first, since Ireland kowtowed and put its credit-rating before the needs of its people - is reminiscent of the 1997 Asian financial crisis. The movements in value of national economies and their debt enables the gaining of arbitrage profit for the speculators, whose room for manoeuvre always expands during a crisis. Hence the credit-rating agencies and the media are working together to create opportunities for profit.

The case for a new international financial system, negotiated on a democratic basis, grows ever stronger. The original role of the IMF was to intervene in just this sort of situation, and in its early days its facilities were used mostly by the European economies who were taking the rocky road to reconstruction following the Second World War. The Greek crisis is a clear demonstration of the need for a democratic and accountable lender of last resort for the world economy to replace the disaster of a financial system dominated by private speculative interests. Tweet

When is an economist not an economist?

I had a rather unpleasant experience last week at the Welsh Economics Colloquium, a gathering of research-active economists in Wales. I was only able to attend for the final day but had quite forgotten how detached from the real world many economic researchers are.

In fact, economists in Wales are fairly empirical (for which read that they do take the workings of the world itself into account), but the keynote address was by a Manchester-based economist who spent an hour of our time outlining a mathematical theory about optimal currency areas without mentioning the present financial crisis at all and with barely any relationship to the euro.

Having spent several years on the national steering group of the anti-euro campaign there were a wealth of questions I could have asked but the paper was so enclosed in its own theoretical bubble that there was simply no way in. This economist publishes in the highest-level journals, which only confirms my suspicion that they deliberately exclude any work that has any thing to do with reality because that reality proves the inapplicability of the theories of conventional economics.

As Mark Blaug put it: 'Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing.'

The level of response to my own presentation - about the excellent potential of Wales as a green economy - was much lower than I would encounter in a political setting, or from those involved in the Transition Town movement. It barely rose above the level of guilt-tripping - 'Why do you live in Stroud and work in Cardiff?' being an example question. The arch-theoretician asked a question so abstract that my mind failed to comprehend it. I do remember that it began 'If you had been alive a million years ago, when the temperature was 10 degrees hotter than it is now . . .'

Over the years I have moved from claiming venehmently that I am not an economist, to feeling comfortable using the title 'green economist' to actually thinking that maybe I might be an economist. After this experience I feel sympathy with Hazel Henderson's revulsion from the economics profession. Too many economists are happy to draw large salaries, paid for by people shovelling chips in McDonalds, for creating work that has no value and no relevance. Tweet