The tragedy of the interwar years in Germany was that the Social Democrats - then the world’s foremost socialist party - became fatally tainted by acquiescing in Bruning’s deflation torture from 1930 to 1932. They did so, of course, because they dared not confront the orthodoxies of the Gold Standard. By then the fixed-exchange mechanism had gone horribly wrong - in much the same way that EMU has gone horribly wrong - because the surplus countries were not recycling demand to maintain equilibrium. It had become a job-destruction machine. The result in Germany was the Reichstag election of July 1932 when the Communists and Nazis won over the half the seats. As historian Simon Schama wrote over the weekend in the Financial Times - "The world teeters on the brink of a new age of rage: we face a tinderbox moment" - there is typically a lag-time between economic shocks and social fury. Luckily there is no Fascist threat this time. It is the (more benign) Marxist Left that stands to gain. Perma-slump has already chipped at the left flank of the ruling Socialists in Portugal. The Communist Party (PCP) and the Maoists and Trotskyists of the Left Bloc together won 18pc of the vote in September 2009, leaving premier Jose Socrates with the lonely task of enforcing yet more austerity by minority government. Communist leader Jerónimo de Sousa said last week that the country was being reduced to a "protectorate of Brussels", cowed into submission by financial blackmail. He invoked the civil war in 1383 when the country rallied heroically to expel the foreign opressor - with English help, the "ultimato inglês" as he calls it - from Portuguese soil. "It is not just the Communists who are worrying about this. There are a great numbers of Portuguese who are concerned that this country built over the centuries, for better or worse, on a foundation of sovereignty and independence is endangered by accepting everything that comes from Brussels without a trace of patriotism. The EU’s claim of economic and social cohesion is just propaganda," he told Publico. "Monetary union is not in the interests of Portugal or the Portugese people. The economy has ended up the way it is for fundamental reasons, not because of some curse, or some Plague of Egypt descending on Portugal. If we don’t go to the root of the matter we will face yet harsher measures, in a spiral towards the abyss," he said (my loose translation). What this comes down to is "ownership" of austerity policies. It is hard enough for the elected parliament of an ancient and sovereign nation to impose cuts - as Britain discovered in September 1931 when Royal Navy ratings at Invergordon refused to set sail after the Admirality docked pay by a shilling - but what is the charisma and ordaining legitimacy of an EU council of ministers meeting behind closed doors in Brussels? Portugual is not unique. I spent Saturday delving into the subcultures of Italy’s Rifondazione Comunista, Spain’s Izquierda Unida, Olivier Besancenot’s Parti Anti-Capitaliste in France, and Germany’s Linke (Left). While it is too early to talk of a pan-European revolt against EMU-deflation, the Left is starting to offer the only coherent critique of what has gone wrong with monetary union and why there can be no durable solution until the EU creates full fiscal union (which creates its own problems of permanent subsidies, as from Ostrogoth Padania to Berber Sicily under the lira) or until this latter day Gold Standard is broken into viable halves. It was refreshing to read "The Euro Burns" by Michael Schlecht, Die Linke’s economic guru, arguing that the primary cause of Euroland’s crisis is "German wage-dumping". He shows from Eurostat data that German labour costs rose 7pc between 2000 and 2008, compared to 34pc in Ireland, 30pc in Spain, Portugal, and Italy, 28pc in Greece and Holland, and 20pc in France. Again, my loose translation. Germany ran an accumulated trade surplus of €1,261bn over the period, while Spain ran a deficit of €598bn, and Portugal €273bn. This shell game was kept afloat by recycling German capital to Club Med debt markets beyond sustainable levels until it all blew up over Greece. The Club Med victims are now trapped. "Had Britain not been able to create breathing space by devaluing the pound, the situation for England would perhaps be even graver than for Greece. No wonder nobody in Britain is even thinking about joining the euro," he said. Quite so. Berlin prides itself on German wage discipline, insisting that others should do the same. Chancellor Merkel implicitly blames the euro debacle on (allegedly) feckless Greeks and Latins, but the logic of EMU is that cultural Germans must meet cultural Latins half way. Her quid pro quo for the €750bn EMU "shield" is ultra-austerity in the South. This belt-tightening is intellectually absurd, comes too late to rebalance EMU, and has now run amok. Spain is cutting public sector wages by up to 7pc this year. Greece has swallowed a de facto cut of 16pc. Italy is preparing a wage freeze as part of a €25bn austerity plan over two years. France has joined with plans for a three-year freeze and a hair-shirt clause in the constitution. Pre-EMU Romania is cutting wages by 25pc, so that take that you wimps. Romania’s police union has vowed to bring down the government, threatening to "do what we did in 1989, when we overthrew the dictatorship". The IMF’s Dominique Strauss-Kahn is having second thoughts about a synchronized fiscal squeeze across half Europe. "Growth in Europe is by far too low. Germany and the other countries must urgently do more to accelerate growth. The whole world is watching this and is losing confidence in Europe," he said. The Left always warned that EMU was a "Bankers’ Ramp", an instrument of creditor control that would lock in reactionary policies. Little did they know how extreme this would prove to be. Greece is having to go through the harshest fiscal cuts ever attempted in a developed economy under its EU-IMF plan, without offsetting exchange and monetary stimulus. The agony is pointless. The IMF admits that Greece’s public debt will rise from 120pc to 150pc of GDP by 2014. The country is already past the point of no return. Such a policy is not in the interests of Greek society. Greece should leave the euro and carry out a controlled default, sharing the pain with foolhardy creditors. The EU is preventing this cure: either to protect bond-holders - ie, French and German banks - giving them time to shuffle off their bad debts onto EU taxpayers; or because Brussels refuses as a matter of ideological principle to countenance any step back, ever, in the sacrosanct Project. It is undeniable that Europe needs to master its debts but not by tipping a clutch of countries into debt-deflation, a policy that will cause each to feed off the crisis of its neighbours in a self-feeding downward spiral. The only way out is for the European Central Bank to lift Club Med off the deflation reefs by monetary stimulus, and allow these economies to work off their debt in an orderly fashion without shrinking nominal GDP. That means quantitative easing a l’outrance - not "sterilising" bond purchases it has done so far - and that in turn means that Germany must accept 5pc inflation. Will Germans tolerate such an outcome? The civil peace of Europe demands that they do, but I am not hopeful. The Bundestag vote to authorise Germany’s €147bn share of the EMU "shield" has already caused apoplexy. "One of the gravest errors of decision in the history of the Federal Republic of Germany," said Hans Werner Sinn, head of the IFO Institute. Bavarian politician Peter Gauweiler is launching a legal challenge at Germany’s constitutional court to block the rescue, arguing that the "contractual foundations of monetary policy" as fixed by the Maastricht Treaty have been breached. The legal cases are piling up. It is remarkable that so much time has been spent by City analysts combing through Greek data to gauge the risk of default, yet so little time has been spent thinking about these cases at Karlsruhe. How many have read the court’s rulings on Maastricht and Lisbon? Yet the "tail-risk" is nuclear. The North-South divide within EMU has been allowed to go so far that any solution must now be offensive to either side, and therefore will be resisted. The euro is becoming an engine of intra-European tribal hatred. Brilliant work, Monsieur Delors.Europe's deflation torture is a
gift to the Far Left
If Europe’s ultra-Left has so far reaped little dividend
from the great "Crisis of Capitalism", this will surely
change as the eurozone’s 1930s policies of wage
deflation sap the credibility of the governing centre
and the EU itself.
Monday, 24 May 2010
Posts
