Sunday, November 23, 2014

Europe’s Pain without Gain

VITORIA-GASTEIZ – In a recent interview, French President François Hollande made the crucial, but often forgotten, point that there are limits to the level of sacrifice that can be demanded of the citizens of southern Europe’s financially distressed countries. To avoid turning Greece, Portugal, and Spain into collective “correctional houses,” Hollande reasoned, people need hope beyond the ever-receding horizon of spending cuts and austerity measures.

Even the most rudimentary understanding of psychology supports Hollande’s assessment. Negative reinforcement and delayed gratification are unlikely to achieve their goals unless there is a perceived light at the end of the tunnel – a future reward for today’s sacrifices.

Public pessimism in southern Europe is largely attributable to the absence of such a reward. As declining consumer confidence and household purchasing power deepen the recession, projections of when the crisis will end are repeatedly pushed back, and those bearing the brunt of austerity are losing hope.

Throughout history, the concept of sacrifice has merged theology and economics. In the ancient world, people made often-bloody offeringsto divinities, whom they believed would reward them with, say, good harvests or protection from evil. Christianity, with its belief that God (or the Son of God) sacrificed Himself to expiate humanity’s sins, inverted the traditional economy of sacrifice. In this case, divine suffering serves as an exemplar of the selflesshumility with which earthly misfortunes should be endured.

Despite secularization, the belief that rewards, or achievements, require sacrifice has become an integral part of European cultural consciousness. The idea of a “social contract” – which arose during the Enlightenment in orderto address, without resort to divine right, the legitimacy of the state’s authority over its citizens – rests on the premise that individuals surrender a certain degree of personal liberty in order to secure peace and prosperity for all.

As a result, political leaders have often asked citizens to sacrifice personal freedoms and comforts in the name of secularized spiritual entities, such as the nation or the state – and citizens have eagerly obliged. In his first speech to the House of Commons as Prime Minister of the United Kingdom, Winston Churchill inspired hope in a beleaguered nation when he famously declared that he – and thus Britain – had “nothing to offer but blood, toil, tears, and sweat.”

Given such countless precedents, it may be surprising that the rhetoric of sacrifice under the banner of austerity has proven so ineffective in Europe’s current crisis. Some observers blame declining levels of commitment to anything that transcends the individual, including the political system.

But resistance to austerity in southern Europe is not rooted in general hostility toward sacrifice. Rather, Europeans have come to believe that their leaders are demanding sacrifices that do not advance their interests. Churchill gave Britons something to look forward to: victory. Without a clear end that justifies it, sacrifice becomes meaningless.

Prosperity was supposed to legitimize the European Union. After the period of rapid economic growth ended, Europe’s leaders came to rely, instead, on the threat of an evil that is greater than austerity: further destabilization of debtor countries, leading to default, expulsion from the eurozone, and economic, social, and political collapse.

But the rhetoric of fear is losing sway, because the “new deal” taking shape across southern Europe offers morerepression and less protection, thus violating the social contract’s fundamental tenets. Indeed, while European citizens are being asked to sacrifice their standard of living – and even their livelihoods – for the sake of the “national economy,” transnational corporations are thriving.

The conditions imposed by the “troika” – the European Commission, the European Central Bank, and the International Monetary Fund – amount to an indefinite delay in addressing the needs of those asked to sacrifice and in repairing tattered social safety nets. Yet national governments continue to implement policies that exacerbate injustice. For example, Portugal’s 2013 budget reduces the number of tax brackets from eight to five – a move that will devastate the middle class.

Sacrifice used to involve ransoming the body – its pleasures, basic needs, and even vitality – for the sake of the spirit. While the discourse of sacrifice persists, the logic that has shored it up for millennia has been abandoned. Europe’s leaders must imbue their citizens with renewed hope. The legitimacy of “post-national” Europe – based on the EU’s obligation, enshrined in the Lisbon Treaty, to promote “the well-being of its people” – is at stake.

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    1. CommentedCarol Maczinsky

      @Daniel Gomes: Bond markets don't lie. Market prices are more honest than politicians. The foremost task is that you get the tighter "order" in place rather than the blame game. It may well be that the Us financial tide caused the Spanish banking crisis and the debt issues. That means we have to get a new order in place and schotts to curb risks. However, you see the strength of resistance to that. The People in these nations have to suffer under a lack of past order, now demagogues use their suffering to fight an installation of a future order.

        CommentedDaniel Gomes

        what are bond markets?
        What are markets as a matter of fact?
        Have you ever stopped for a moment to ask yourself?

        The price finding in a particular market is only defined by supply and demand when there is clear information and choices and no emotions or herd effect.

        The moment panic or euphoria is triggered (e.g. by ratings agencies) takes over the herd sentiment, then what you see is irrational panicky behavior from investors and aggressive speculation from banksters.

        If you still don't understand this after the 2008 crisis, then there's nothing I can do for you and I wish you a nice holiday in lala land

        CommentedDaniel Gomes

        Carol, please think twice before writing.

        If bond markets don't lie why was Lehman Brothers bonds rated as top quality assets until the eve of its bankruptcy?

        Furthermore, if bond markets do not lie, why is that Greece was paying such low interest on its bonds until end of 2008 until it suffered a quick series of downgrades (self-fulfilling prophecies) from the wise ratings agencies leading the interest rate to suddenly skyrocket? Did Greek pile debt overnight?

        And why is that bonds dont lie when Japan has almost 200% debt over GDP, a stagnant economy for 2 decades, price deflation further inflation the debt, a crumbling economy in which its giant companies like Panasonic, Sharp or Sony are all heading to collapse.

        And you want to talk about Spain?

        Spain's debt over GDP was one of the lowest in the euro zone for the past decade, it is still lower than Germany's in fact despite being subject to the German driven depression spiral.

        You want to talk about banking? Go and check how extremely over-leveraged on toxic assets German banks were in 2008 until the ECB and Fed bailed them out for free.

        Germany's attitude towards countries like Spain is purely driven by supremacist bias, (blatantly exposed in the fuehrer's lies claiming Germans work more than all southern Europeans) no serious economic analysis would ever explain the current German demagogue, hypocritical behavior of happily instructing the ECB to socialise their financial secotr toxic debt and provide cheap loans while now denying any basic help other high interest loans (profiteering) in exchange for impoverishment of the population.

        And to further emphasize that this is pure ethnic politics not economy, how do you explain that this austerity recipe which has clearly proven to be extremely counter-productive leading to much faster piling of debt in every country where it was applied, and still keeps being pursued by the fuehrer at any cost? It only goes to show that this is intellectual masturbation for German electorate and zero economics.

    2. CommentedDaniel Gomes


      It's rather exhausting to discuss with individual who write based on their believes rather than facts.

      I know I'm not too smart in arguing as everyone knows you cannot convince someone not to believe in God because he believes in God aware of no scientific evidence of its existence.

      So I'll just leave some hints, and I hope for the sake of knowledge you will do your own research and draw your own conclusions with an open mind.

      - Portuguese exports for example, have been growing at double digits since mid 2000s with the exception of 2009 due to the crisis.
      If this is not regaining competitiveness what is it then?
      Merkel's supremacist stubbornness in insisting in the wrong diagnosis is completely counter productive, it is destroying the internal market and prolonging the credit crunch to Portuguese companies effectively drying their liquidity hindering production and in some cases causing bankruptcy of otherwise viable companies.

      - Furthermore a lot of the current gov debt was piled because of the austerity induced recession leading to lower tax revenue and higher social spending with unemployment.

      - The funny thing is , Portugal Italy and Greece's primary budgets are still some of the most sustainable in Europe. The problem is the debt itself, namely the interest, not the economy or competitiveness.
      All this can be easily confirmed.

      - But if we look at the big picture, what we see is that all western countries have piled a lot of debt specially in the past 15 years, some more some less.
      And what is really interesting is that if you check the current account of countries like Portugal or Spain and even Germany, you see a very noticeable relation between the Euro exchange rate to the Chinese currency and euro zones trade current account balance.

      The Chinese renminbi is still more overvalued today against the euro than what it was 10 years ago.. this despite all the doubts on the euro survival.. it's insane!

      Obviously Asian countries are not only flooding western market with their subsidized products rendering European companies uncompetitive (solar panel companies Germany) but they are also accumulating unimaginable amounts of western foreign reserves in the process.

      By the way, western countries should promote the rising of the commodity prices.
      Reason being, that, Asia shutting down the western productive sector with its ultra-low cost approach.
      If commodity prices go up, the most affected will be ultra cheap, long haul exports as the cost of producing and transporting will be significantly higher this reducing the relative advantage of Asian manufacturing.

      In fact i believe that inflation in Asia in the past few years is already undermining their competitiveness and forcing them to let the currencies appreciate.

    3. CommentedFriedrich Böllhoff

      Daniel, in your drive to accuse the messenger you fail to notice the message. If commodity prices remain where they are, the level of consumption of before the crisis cannot be regained. And banks will not finance it as they did before. Either southern Europeans get more competetive or they have to accept less consumption. Others will not pay their bills in the long run.

      The nationality of those who tell you that is not important. The question is: "What can be done?", and not „What has happened?“ and „Who is to blame for it?“.

      In earlier posts I have been quite critical of German behaviour, albeit for different reasons than you. It is nonsense to save like mad, have to few children and expect a rosy retirement. The right mix is important. The savings have been used to finance others debt, in other countries as well as in Germany itself. Entitlements here have been ever-increasing. Government debt via welfare payments is financing private consumption.

      I believe that we will get serious problems in Germany by 2020 (2025 at the latest), when our demographic problems become very hard to manage. So wait, the right time to blame Germans for their behaviour will come.

    4. CommentedCarol Maczinsky

      Oh: And what about you? Do you want to take their debt? Fine, go and buy bonds. But don't ask for unconditioned money from others. If someone breaks a deal it is upon him to restore his trust and confidence, not blame others.

        CommentedDaniel Gomes

        Can you tell me in which way Portugal or Spain overspend more than France?
        Have you ever seen any primary balance or deficit numbers for the past 5 years or are you just talking out of your rear behind like most Germans posting here?

        Also can you tell me if BNP Paribas or Societe General speculated heavily on US subprime collecting handsome profits for the french tax payer (like Deutsche and Commerzabank)?

        Can you tell me how many hundred billions did the ECB and Fed gave to French irresponsible greedy banks thus socializing French and German debt amongst european taxpayers and asking them to foot the bill for French, dutch, German financial systems greediness without being entitled to any of the speculative profits from previous years?

        So in sum citizens of Portugal, Spain, Greece, Italy, Finland, Austria etc, whose banks had no role whatsoever in sub-prime, had to foot hundreds of billions for Dutch, French and German banks.

        Once and for all to all arrogant German French or dutch, shove into your arrogant information deprived heads, that you have been heavily subsidized the past 4 years!

        And all of that money came with no strings attached!

        Had the ECB and FED let the corrupt, irresponsible greedy banks fail and now we would be in the exact opposite position with southern European having a healthy banking system hand Germany, France and Netherlands under harsh austerity due to the bankruptcy of their irresponsible banking system and subsequent collapse of their economy.

    5. CommentedCarol Maczinsky

      What about the people of the nations that have been screwed up by the misconduct and overspending? What about the broken EU Treaty principles and the trust in the Euro? Hollande is free to spent French money without terms to payroll the bankrupter nations.

    6. CommentedFriedrich Böllhoff

      Maybe there is no prospect of betterment offered because it is not a realistic outcome.

      The questions which should be answered are: What happened and what went wrong in the past? How is the situation now? What can be realistically expected in the future?

      Artificially low interest rates (due to improper risk assessments, partially induced by the lack of ownership capital requirements for public debt) led to too much debt in southern European countries (public debt in Greece, private debt in Spain - as well as in the USA for that matter). These debts financed overconsumption there.

      The crisis then in 2008 was triggered by huge price increases for oil and other raw materials, when it became clear that the level of consumption could not be matched with those high oil prices. Financial markets were not ready to finance the level of consumption and credit became more expensive via higher interest rates. Households reacted by a decrease in consumption, voilà la récession.

      The oil price on average stood at 25 $ per barrel in 2002, now it stands at around 100 $. Many other raw materials now have a price three times the level of 2003. For me, this leads to the conclusion that we are in some kind of resource crisis. We don’t have a physical scarcity of resources, though. We rather have a price increase, which is to be expected when goods become less abundant relative to demand.

      These price increases (if they remain where they are) lead to a permanent transfer of income from European importers of raw materials to exporting countries. I expect higher prices to be permanent, given the increased purchasing power of developing countries. I guess, it might be something like 200 to 250 billion Euros a year for oil alone, about 8 to 10% of Germany's GDP. At these prices, the former level of consumption in southern Europe was not sustainable and cannot realistically be expected in the future.

      People in Greece and elsewhere should therefore not be made false hopes of a happy end. If I had an unsustainable level of consumption for some time, which I cannot keep anymore, I could not expect my neighbours to pay my bills. I would either have to be more competitive to generate more income or I’d have to consume less.

      On the other hand it is obvious, that Greece needs some kind of debt restructuring again. The problem is to explain it to voters in creditor countries.

        CommentedDaniel Gomes

        Here we go again, the German innocence theory.
        Germany was the most overleveraged banking system in Europe at the time of the subprime crisis as they happily engaged in subprime speculation.
        Deutsche Bank received the biggest bailout from the Fed of any banks

        German financial system was bailed out by the Fed and ECB in hundreds of billions of Euros.
        Had not this happened Germany would have folded.

        Germany has absolutely zero moral high ground specially when compared to the case of Spain.

        Like you, many people ignore that spanish population increased 20% in 10 years thus of course causing property to get more expensive and a sustained (not irresponsible speculation like Germany) property boom

    7. CommentedJ. C.

      "Indeed, while European citizens are being asked to sacrifice their standard of living – and even their livelihoods – for the sake of the “national economy,” transnational corporations are thriving...."

      The same transnational corporations that pay taxes and that are creating jobs in places where people do the same job for a lower price...

      This is a pointless discussion since earnings from transnational companies are being generated mostly in developing countries (I´m thinking in companies as Santander, Fiat, etc)... so your point is: lets take more from EM countries so europeans can keep up with their life standars??

      Latin America lived a crisis similar to Europe since 1998 to 2002... ask them about sacrifices...

    8. CommentedMark Ibor

      It's great to have a perspective which seeks to find broader consequences for today's policies escaping from the pure economic explanations.

      if you're lucky to work in these countries, it's not easy to do it with enthusiasm and optimism.

    9. CommentedKir Komrik

      Thanks for the great article,

      The situation in the EU pure insanity. The key problem here is the lack of any legal framework to back the currency, and that has been the 800 lb. gorilla in the living room since the Maastricht Treaty.

      A General Federalist system would serve them well and this "confederacy" of European states won't work. And quite a bit of international experience should have told everyone that.

      I don't like half-measures. Europe needs a framework for real governance. But in the meantime Europe has little choice but to hand over the reins to Germany and let them have more decision-making power in matters of fiscal policy; namely, to weigh the votings of the ECB so that Germany has controlling interest. Mr. George Soros also has some really good ideas on this problem that don't go as far as my suggestions.

      Once the crisis is controlled the longer term fixes such as General Federalism or some other legal framework capable of backing the Euro can be discussed, imo. But the clock is ticking and time is running out.

      - kk

      General Federalism:…ral-federalism/

    10. CommentedFrank O'Callaghan

      Well done! One of the unmentionables is said out loud! Portugal's reduction in the number of tax bands suggests that there are fewer income bands. This is the same con trick played by right wing looters all over the world for more than thirty years.

      It is a way of enlisting those on moderate incomes to the service of cutting the taxes of those on obscenely high incomes. Where this has been tried it has always been followed by social, financial and fiscal disaster.

    11. Commentedjames durante

      But surely there is still a God or, at least a Godhead--private ownership, profit, and their exemplars, ceo's, banksters, hedge fund charlatans--to whom all of the rest of us must sacrifice. We pay tribute through usury and labor and tax dollar bailouts and with our bodies as soldiers for wars they finance.

      L'etat se mois says the Godhead; submit to me.

      The real hypocrisy comes when one of the politician puppets says "we all must sacrifice." At least the Godhead has a sick sense of humor.