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Brexit and the City
26 December 2011

ポールNゴールドシュミット:「冬の憂鬱」欧州の連帯強化への請願


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Goldschmidt writes that it is of paramount importance to link formally any realistic growth policies with the political and economical integration of the EMU/EU.


As year-end “festivities” deploy their veneer of gaiety, citizens, whether worker, unemployed, consumer, capitalist, commuter, or retired, are increasingly confronted by the selfish behaviour of individuals or groups whose impact will only aggravate an already highly compromised situation. Their impact can have serious political consequences challenging the social and economic conquests considered as “rights”, as well as compromising fundamental values such as democracy, freedom of speech and of movement that one should never consider as being irreversible.

It is, indeed, the wave of social unrest spreading all over the European Union, that raises my fear that the indispensable and too long postponed return to sound public finances will be compromised by the egoism of segments of the population that insist on exonerating themselves from any participation in the collective efforts required.

Since I started the chronicle of the crisis, I have regularly been extremely critical of the financial sector, blaming it for its significant share of responsibility, be it because of totally unacceptable practices (obscene levels of remunerations, indiscriminate marketing of toxic products, etc.) or a culpable lack of competences (superficial evaluation of risks, excessive leverage, passivity of board members, etc.) as well as deploring the absence of any sanctions – financial or judicial – in the many instances where demonstrable mistakes or outright transgressions had been committed.

I also pointed out that this responsibility should be shared by public authorities (Governments, Legislators and Regulators) and with consumers who, often subject to intense pressure, adopted high risk strategies aggravating the chronic over-indebtedness of the financial system. These wayward trends reflected a long-term phenomenon originating over two decades ago, whose cumulative effects, exacerbated by excessive leverage, contributed to the amplitude of the collapse.

Apparently, I omitted to include the working class – as a category – among the beneficiaries of the post-war prosperity of the industrialised world and their corresponding responsibility in sharing the burden of resolving the crisis. Even if it is undeniable that ordinary workers were among the first to suffer from the fragilities of the system when, in the 1990’s, the divergence between high and low wages as well as between the remuneration of labour and capital started to accelerate, it remains true – and fully justified – that their standard of living improved over the period.

At present, Trade Unions are “demanding” that those who have “no part” in the responsibility for the crisis be spared and that all the “social conquests” so hardly fought for  be fully protected. At first glance, this line of argumentation, with its populist bias embellished with easy brain-catching slogans such as “socialisation of losses and privatisation of profits”, seems well founded, especially when confronted with the most blatant injustices that the crisis has exposed. It does not, however, resist entirely to a deeper analysis. Indeed, there is no doubt that part of the economic and social progress benefiting the working classes has been financed through (mainly sovereign) indebtedness, far beyond their share that would have resulted from a “fair” distribution of the wealth created and the productivity improvements. Subject to intense trade union pressure, managements and governments often chose the path of least resistance, the former to buy a good conscience (easily assuaged by the profits derived from globalisation that exceeded the loss of competitivity at home), and the latter to buy social peace and avoid angering the voter. As a result, over the years, a level of social protection was instituted (covering pensions, unemployment benefits, health care, indexation of wages, etc.) whose cost was, at least partially, dictated by structural developments (ageing, globalisation) and cyclical elements (growth) whose causes largely escaped the control of the authorities.

During the first years of the 21st century, economic growth, in particular in emerging countries, bolstered the profits of large multinational corporations and underpinned financial markets, providing governments with easy access to finance blinding them to the early warning signs of the brewing crisis. Not only did the speed of “financial innovation” accelerate, but it occurred in the vacuum of a suitable regulatory framework and adequate supervision, as exemplified by the explosion of the derivatives market. Where rules did exist, their implementation was impaired by the application of national legislations to a globalised market, exonerating in advance the supervisors from any responsibility as they were prevented from getting a suitable overview of the institutions under their jurisdiction.

Within the eurozone, the introduction of the single currency brought additional financial flexibility to governments as they benefited from the alignment of their borrowing costs on the lower German rates, perpetuating lax fiscal policies and supported by the firmness of the € versus the dollar. Simultaneously, in the United States, an economic model based on consumer spending, totally reliant on debt financing, induced highly dubious financial practices leading to the bursting of a real estate bubble, triggered by the “subprime” crisis.

In such a “leveraged” context, it is hardly surprising that at the first serious shock, the whole pack of cards would collapse. Thus, the financial crisis, initiated in the summer of 2007, spread from the financial sector (requiring the massive intervention of governments) to the real economy, inducing a first deep recession in 2008/09 and the implementation of expensive “stimulus programmes” which aggravated further public sector deficits. The European Union appears all the more vulnerable as both the real economy and governments are far more dependent on the banking sector, when compared to the USA, for their financing. The “structural” interdependence of the banking and public sectors has become self defeating and impairs the capacity of both parties to perform.

One should add that the danger of contagion of the crisis within the eurozone is reinforced by the existence of a largely integrated banking sector alongside a “sovereign debt” market that remains largely dependent on national factors. This situation has led to the quasi drying up of the “interbank market” where the fear that Governments will not be able to support their domestic banks (due the latter’s excessive exposure to the Sovereign), induces a paralysing mutual mistrust. A direct consequence is the increasing reliance of banks on the ECB, as was clearly demonstrated by the take up of €500 billion at the recent three-year refinancing auction.

If the analysis here above is largely shared by experts and authorities charged with managing the crisis, the consensus is far from extending to the remedies. Indeed, most of them are riddled with explicit or implicit contradictions which render their implementation problematical. Let us take an example.

A commonly recommended remedy is to “stimulate growth”. If it were possible to ensure a rapid return to past “trend growth rates”, the correction of past excesses would be far less painful and could be implemented in a fairly orderly manner. However, stimulating the economy either through consumer spending, investment or exports presents considerable difficulties: an increase in consumer spending implies an increase in income (or in indebtedness) difficult to envisage and a stimulus through tax cuts would only worsen budgetary deficits. Corporate balance sheets are strong but if consumer demand is absent, private investment decisions are likely to be postponed and those that depend of Government spending are limited by budgetary constraints. Finally betting on exports omits to take into account the lack of competitivity of the weakest countries and implies the depreciation of the €. No doubt that an exchange rate of 1€ = 1.0 to 1.15 USD would be most welcome in a non-inflationary environment, but it would not affect “internal market”(which  represents 85 per cent of trade) and would, in all probability, be opposed by Europe’s trading partners whose own “export based models” are vital to their development, in particular in emerging nations. One must conclude that the appeals for “growth” are more akin to incantation than to a catalogue of serious proposals.

The idea, often put forward, that one should implement over the short term a combination of measures stimulating growth with savings that do not penalise economic activity, only holds water to the extent that it is accompanied by a credible perspective of fundamental reform over the medium and long term. It is totally illusory to believe that markets will grant the necessary time for an orderly restoration of public finances if they are not convinced that a programme of profound structural change has been agreed upon which will permit the eurozone/EU to deploy the full array of its many advantages and strengths.

Such a process has, indeed, been initiated during the recent European Council, but one is still far from a sufficiently structured framework to offer the necessary credibility. On the contrary, the ever-increasing populist sirens with their nationalistic undertones, in the face of continuing disagreements among EU and EMU Member States (on the intergovernmental or supranational character of the reform - on the role of the ECB – on the attitude towards inflation, etc.) undermines the likelihood of a robust agreement in spite of the fact that EMU/EU has considerable means at its disposal whose use in common would provide for the desired responses.

It follows that it is of paramount importance to link formally any realistic growth policies with the political and economical integration of the EMU/EU. This necessity is also apparent in further addressing more specific questions such as the “mutualisation” of sovereign indebtedness (Stability/Eurobonds) and the amendment of the mandate of the ECB to allow it to perform its full role as lender of last resort. Of course, the necessary precondition for making such “transfers of sovereignty” acceptable is – quite rightly – the adoption of an integrated budgetary framework subject to common rules, to centralised supervision and to credible means to enforce discipline in case of transgression.

The purpose of this digression is to demonstrate that responsibility for the crisis is more broadly shared than commonly admitted and that the absolute priority must be given to the deep transformation of the EMU/EU without which the survival of the euro and the EU itself cannot be guaranteed. Indeed, the cataclysmic consequences following an implosion of the euro would exceed by far – for the vast majority of European citizens – any immediate social or economic advantage that a given pressure group believes it is able to preserve (or impose) by insisting on exonerating itself from - or limiting its participation in - the necessary efforts ahead.

It is essential that actors at all levels show unfailing solidarity and postpone until better times ahead the satisfaction of claims, however legitimate they may be. This holds true for States, local Authorities, employer federations, trade unions, associations as well as for individuals. It behoves the political authorities to ensure that the reforms appear equitable, in the knowledge that failure would be even more penalising. In face of the impossibility to take into account all relevant factors and claims, it is unavoidable that some individuals or groups will feel unfairly treated.

Therefore, to return to the initial subject of social discontent, trade unions should be invited to show appropriate restraint and offer – on the contrary – their support to governments whose policies are aimed at a stronger and more integrated Europe. They should participate in the efforts of communication to their affiliates on the importance of these priorities rather than exacerbate partisan claims whose short term satisfaction can only be precursor to an ensuing field of ruins.

Authorities must strive to implement measures that deal with some of the most shocking practices and injustices tolerated in the past: the reform of the financial sector must be carried out in depth by accelerating the separation of commercial and investment banking. Deposits being guaranteed by the State, this protection should not become a liability for the taxpayer. If need be, one should consider the “nationalisation” of deposit banks, which would be an elegant way of resolving the incestuous relationship existing between governments and banks. Investment banking activities, indispensable for the smooth functioning of capital markets, should remain in the private sector but would no longer benefit of an explicit or implicit public sector guarantee or from the possibility of cross subsidising activities. For deposit banks, the distribution of dividends and bonuses should be subordinated to meeting the norms of solvency, liquidity, risk diversification and other requirements imposed by Regulators; failure of an investment bank would be entirely at the expense of shareholders and creditors without any recourse to state support.

Rather than exacerbating conflict, the media also has a prime responsibility in educating the citizen by helping him to realise the need to support the actions of their respective governments during this vital period of restructuring of the Union. It is the sine qua non condition to avoid the implosion of the economy, intense social unrest and, who knows, the decadence of Europe’s civilisation.

Paul N Goldschmidt, Director, European Commission (ret.); Member 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


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