Though Cowards Flinch joins forces with Jurgen Habermas on radical EU reform in light of Greek debt crisis
Dr Paul Cockshott, Though Cowards Flinch 28 April 2010:
At the same time they [national governments] set their face against any transformation of the EU that would have strengthened the tax raising and spending powers of the European Parliament. The crisis in Greece, and shortly in Portugal, stems ultimately from this.
The Eurozone is a monetary federation without the federal government tax and spend powers that have been essential to the functioning of earlier monetary federations like Germany or the USA. If the EU parliament had the power to levy income and property taxes across the Union, the current crisis in Greece would not be happening. A large part of the expenditure now met by the Greek Government would be being met by the Union out of general Union taxation: defence, pensions, perhaps medical costs.
…[T]he key issue, how to get politics in the EU context from a national to a class basis. Ideally one needs a Europe wide Social Democrat party contesting the EU elections and the national elections. Key issues then are which major ticket items of government expenditure should move to the center. With the free movement of labour within the EU, the obvious targets would be a) social insurance covering unemployment benefits, health and pensions, and b) defence.
Jurgen Habermas, Financial Times, 01 May 2010
Greece’s debt crisis has had a welcome political side-effect. At one of its weakest moments, the European Union has been plunged into a discussion concerning the central problem of its future development. The crisis shifts the focus of public discussion – and not only in the business sections of our national papers – of an issue that many regard as the birth defect of an incomplete political union stuck in midstream.
…European unification remains to this day an elite project. We have yet to experience a European election in which the outcome turned on anything other than national topics and tickets. Until the Maastricht treaty, the unification process was also, if not primarily, driven by economic interests.
The financial crisis has reinforced national egoisms even further but, strangely enough, it has not shaken the underlying neo-liberal convictions of the key players. Today, for the first time, the European project has reached an impasse. Imagine the improbable scenario of a co-ordination of the economic policies of the eurozone countries which would also lead to an integration of policies in other sectors.
Here what has until now tended to be an administratively driven project would also take root in the hearts and minds of the national populations. The symbolic power of a common foreign policy would certainly promote a cross-border awareness of a shared political fate and bolster a further democratisation of the EU.
Meanwhile, EU bureacrats do not listen to Cockshott/Habermas and seek to make situation worse for European people (Financial Times, 01 May 2010):
More rigorous surveillance of national budgets, the power to withhold European Union aid funds and a crisis resolution mechanism are among proposals that EU policymakers will present next month in an effort to prevent future Greek-style debt debacles.
The ideas are contained in a European Commission paper, obtained by the Financial Times, which has been prepared for review by EU governments and the European parliament.
They will form the basis of an initiative that Olli Rehn, the EU’s monetary affairs commissioner, will unveil on May 12……
This is a potentially powerful weapon. The EU’s structural funds budget for 2007-13 amounts to €277bn ($369bn, £241bn) – although much of it is destined for countries outside the zone.
In Mr Rehn’s view, a EU crisis resolution mechanism would have to be based on a willingness to support a country in trouble, on condition that the terms were so harsh that no government would voluntarily apply for financial aid.
Well, they did predict a riot.
An interesting comment in this context is the open letter being circulated on the Heterodox Economics Network. A relevant passage says:
“Greece’s fiscal catastrophe has four causes. First, there is the past fiscal weakness of the Greek state, in particular the inability to generate tax revenues, as a share of GDP, in line with its European neighbours, but also inexcusable statistical manipulation. Second, Greece’s relative competitiveness has steadily worsened, especially within the euro area, as reflected in a sustained current account deficit as a result of above-average increases in unit labour costs and prices and a stronger economic growth dynamic. Third the economic crisis – which, given the country’s conservative banking sector was a classic external shock – has ravaged public finances, just as in other countries. And last but not least, fourth, the interest cost burden has dramatically increased, as genuine concerns about fiscal sustainability combined with speculation and misinformation to dramatically raise the rate of interest on new Greek government bonds.
Only the first of these reasons calls unambiguously for Greeks to accept the pain of fiscal austerity. All the others have a strong European dimension and call for European solutions. In particular, the loss of competitiveness by Greece (and a number of other countries, including Spain and Ireland) is the mirror image of an increase in relative competitiveness by others, notably Germany, Austria and the Netherlands. The latter countries could not have increased their net exports without the faster demand expansion in the former group, which, it is often forgotten, were also responsible for much of Europe’s economic and jobs growth in recent years, while demand and output growth in the surplus countries has been sluggish. The problem is symmetrical and the solution must be as well.
For Greece has not – as is often claimed or implied – lagged behind Germany in raising productivity: on the contrary hourly labour productivity increased more than twice as fast in Greece than Germany during the ten years of the euro since 1999. Nor do frequent claims in the media of Greek ‘laziness’ stand up to scrutiny: average annual working hours are the longest in Europe (and hundreds of hours per year longer than in Germany!). The problem has been with nominal wage and price setting.
Due to strong differences in wage setting, Greek nominal unit labour costs increased by more than 30% since the start of EMU – and the increases in Italy, Spain, Portugal and Ireland were even higher – whereas in Germany they rose by just 8%. Monopolistic price setting is also critical, enabling firms to pass on higher wage costs or imported prices onto domestic prices. Such wage and price divergences are not sustainable within a monetary union where exchange-rate adjustments are no longer possible. But this requires an adjustment from both ends. Wages and prices in Greece and other countries need to fall in relative terms, but they must increase faster in Germany, whose aggressive wage moderation policies are deflationary, export unemployment and threaten to explode the monetary union. This is the only way to rebalance the euro area while avoiding the huge risk of a deflationary spiral.”
“Only the first of these reasons calls unambiguously for Greeks to accept the pain of fiscal austerity.”
Not even the first. “The inability to generate tax revenues” is due primarily to the outrageous tax loopholes in the Greek income tax law. For example, I read a link somewhere that there’s a tax deduction, exemption, or credit related to swimming pools. There were like 16,000 swimming pools in a Greek area, but only 100 or so reported for tax purposes.
Make that 600 pools reported, per the New York Times, but there were 16,000 swimming pools in an affluent Greek area. That’s tax evasion for you.