31 August 2012

Paul N Goldschmidt: A stone in the field of the "politically correct"!

Readers of Goldschmidt's prose should be aware that he has little indulgence for the abusive behaviour at the root of the financial crisis, the devastating effects of which are spreading progressively from national to European and global levels.

Those who are kind enough to read my prose are aware that I have little indulgence for the abusive behaviour at the root of the financial crisis and whose devastating effects are spreading progressively from national to European and global levels.

Be it the obscene remuneration of some economic actors (not limited to bankers), the unfettered quest for profit, the absence of ethics, the cowardice of political authorities or the incompetence of some regulators and supervisors, all these factors have contributed to the chronic excessive indebtedness of the public and/or private sectors which is the prime cause of the crisis. The responsibility is, no doubt, to be broadly distributed but its diffuse character means that those concerned escape, more often than not, any sanction, at the polls, in the courts or even financially.

In a globalised economy, for better or for worse, the interdependence of economic actors has become an inescapable fact. At every level, each passing day puts into ever sharper focus the choice between solidarity capable of fostering hope and selfish retrenchment leading to economic, social and even, in fine, military conflict.

It certainly behoves those in power to assume leadership and to show the example in the efforts towards recovery, but the posturing of those who exonerate the great majority of citizens of any responsibility in the crisis is as superficial as it is erroneous.

We have often drawn attention to the fact that this crisis of excessive indebtedness surfaced from the bursting of a bubble that had been in the making over an extended period of time. If the distribution of wealth between the privileged minority and the remainder of the population has exploded to reach levels difficult to justify on “moral” grounds, and particularly unacceptable in a crisis, one should, nevertheless, recognise that the “neo-liberal” environment, which fostered this situation, deployed a considerable amount of resources to the benefit of the less well off.

Indeed, social benefits (unemployment, pensions, healthcare, etc.), of which Europe is so proud, have been considerably reinforced while, at the same time, being financed to an ever greater extent by borrowing. This allowed politicians to satisfy comfortably their electorate: the wealthy by reducing taxes in a variety of ways and the population in general by granting “rights” that are now considered as both justified and irreversible social benefits.

As long as economic growth prevailed, “prosperity” was feeding an apparently virtuous circle but it papered over a number of embedded structural flaws: increasing tax revenues led to lower budget deficits, even if the cost of servicing ballooning debts was kept in check by lower interest rates. In addition, the cost of unemployment was limited by the high level of economic activity.

The financial crisis, triggered by the subprime debacle, delivered a fatal blow to growth revealing progressively the underlying weaknesses of the system. If at the outset, the excessive indebtedness was unequally spread between the public and private sectors, according to the country being considered, the massive government interventions to save the banking system in 2008, followed by significant economic stimulus programmes, shifted brutally the excessive indebtedness on to the shoulders of the public sector. This created the premises for the “sovereign debt crisis”, without, however, reducing significantly the global level of indebtedness. EMU members, unable to resort to devaluation, had to make the necessary adjustments through budgetary measures (austerity) or, failing that, to increase public debt even further realising, often too late, that limits had been reached if not exceeded.

Exiting the crisis will necessitate profound structural changes. This process will not be possible without considering reforms of the social benefit programmes, the cost of which has become unsustainable. In a spirit of fairness and in order to protect the weakest, a significant measure of “means testing” should be introduced.

In conclusion, even if it is only right to call on the privileged classes, which have benefited, sometimes outrageously, from economic and fiscal measures in their favour, to contribute significantly to correcting the structural imbalances, one should also discard the myth that only the wealthy have benefited from the overall prosperity, built in part on shifting sands. Trade Unions, also, have very cleverly promoted their demands as a justified quid pro quo for the excessive concessions granted to the privileged. Having reached the limits of indebtedness, which bought their support, it is only appropriate that they share in the required efforts including the consideration of reducing manifestly over expensive social benefits.

Whatever the euro sceptics or the nationalist-populist brigades may proffer, a sharing of the efforts spread over the European Union as a whole can render these necessary sacrifices more bearable than the enormous damage that “national” retrenchment would inflict on each and every Member State. It will also allow for a better defence of European interests on the world economic stage. Mobilising public opinion around a common European project, in which solidarity primes over national egoisms, remains the best hope of surmounting the deep crisis which threatens to destroy everything in its path.

Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015

Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web:www.paulngoldschmidt.eu

© Paul Goldschmidt