Friday, 21 June 2013

Misreading the Toxic Legacy of the Greek Crisis   
Henry C.K. Liu 
In his June 18, 2013 Financial Times column: The Toxic Legacy of the Greek Crisis, Martin Wolf cites a bog post by Simon Wren-Lewis of Oxford university that draws on a critical evaluation by the International Monetary Fund of the program for Greece agreed in May 2010, pointing out a summary of the failings: “Market confidence was not restored, the banking system lost 30 per cent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment. Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.” 
Wolf highlights that while the IMF program forecast a 5½% decline in real gross domestic product between 2009 and 2012, the outcome was a fall of 17%. According to the OECD, the association of high-income countries, real private demand fell by 33% between the first quarters of 2008 and 2013, while unemployment rose to 27% of the labor force. The only justification for such a depression is that a huge fall in output and a parallel rise in unemployment is necessary to force needed reductions in relative costs on to a country that is part of a currency union. Since the Greeks want to remain inside the Eurozone, they have to bear the resultant pain, Wolf explains. 
Wolf asserts that even this cannot justify one aspect of the IMF program. The IMF is supposed to lend to a country only if its debt has been made sustainable. But it was not, in the least, as a host of commentators pointed out at the time. Instead of making debt sustainable, the program merely let many private creditors escape unscathed. In the end, a reduction in debt to private creditors was imposed. Yet Greek public debt remains, arguably, too high: the IMF forecasts it at close to 120% of GDP in 2020. This debt overhang will make it hard for Greece to return to the markets and to economic health. Deeper debt reduction is still needed, Wolf warns. 
In brief, Wolf concludes that the Greek crisis proved a triple calamity: a calamity for the Greeks themselves; a calamity for the popular view of the crisis inside the Eurozone; and a calamity for fiscal policy everywhere. The result has been stagnation, or worse, particularly in Europe. "Today, we have to recognise that the huge falls in output relative to pre-crisis trends may well never be recouped. Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new, lower level. It is a sad story," Wolf writes. 
Wolf's column on the austerity cure being worse that the disease is on target, albeit much too late to be useful, as by now the revealing data are available for all to see. Still, cautious academic economists need to wait for collectable data to verify even the most obvious causal dynamics. 
A bigger flaw in Wolf's observation is that it did not contain any mention about the European sovereign debt crisis being misnamed: Eurozone government debts denominated in euros are not sovereign debts because the euro is a common single currency controlled by the European Central Bank for all enrozone economies, not by national central banks of separate Eurozone countries. 
Greece faced a crisis in government debt denominated in what is essentially a foreign currency, not a sovereign debt crisis denominated it its national currency. The Euro preempts monetary sovereignty of Eurozone member states. That is the real reason behind the eurozone debt crisis and the main obstacle blocking recovering. 
In a series on the European Sovereign Debt Crisis, I wrote on the conflict between supranational globalization and national sovereignty: 
Part V: EU Treaty Reform
Part IV: Need for an Orderly Withdrawal Mechanism from the Euro and the Eurozone
Part III: Supranational Globalization vs Nation State Sovereignty
Part II: The Role of the IMF/ECB/EC Troika
Part I: A Currency Union Not Backed by Political Union 
In another series on the global post crisis economic outlook, I wrote on the Greek Tragedy: 
Part XII: Financial Globalization and Recurring Financial Crises
Part XI: Comparing Eurozone Membership to Dollarization of Argentina
Part X: The Trillion Dollar Failure
Part IX: Effect of the Greek Crisis on German Domestic Politics
Part VIII: Greek Tragedy
Part VII: Global Sovereign Debt Crisis
Part VI: Public Debt and Other Issues
Part V: Public Debt, Fiscal Deficit and Sovereign Insolvency
Part IV: Fed’s Extraordinary Section 13(3) Programs
Part III: The Fed’s No-Exit Strategy
Part II: Two Different Banking Crises - 1929 and 2007
Part I: Crisis of Wealth Destrution  
In Part VIII: Greek Tragedy (printed in AToL on May 20, 2010), I wrote: 
Following misguided neoliberal market fundamentalist advice, Greece abandoned its national currency, the drachma, in favor of the euro in 2002. This critically consequential move enabled the Greek government to benefit from the strength of the euro, albeit not derived exclusively from the strength of the Greek economy, but from the strength of the economies of the stronger Eurozone member states, to borrow at lower interest rates collateralized by Greek assets denominated in euros. With newly available credit, Greece then went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics that left the Greek nation with high sovereign debts not denominated in its national currency. Further, this borrowing by government in boom times amounted to a brazen distortion of Keynesian economics of deficit financing to deal with cyclical recessions backed by surpluses accumulated in boom cycles. Instead, Greece accumulated massive debt during its debt-driven economic bubble. 
The Euro Trap 
I wrote that by adopting the euro, a currency managed by the monetary policy of the supranational European Central Bank (ECB), Greece voluntarily surrendered its sovereign powers over national monetary policy, and rested in the false comfort that a supranational monetary policy designed for the stronger economies of the Eurozone would also work for a debt-infested Greece. As a eurozone member state, Greece can earn and borrow euros without exchange rate implications, but it cannot print euros even at the risk of inflation. The inability to print euros exposes Greece to the risk of sovereign debt default in the event of a protracted fiscal deficit and leaves Greece without the option of an independent national monetary solution, such as devaluation of its national currency.  
Notwithstanding a lot of expansive talk of the euro emerging as an alternative reserve currency to the dollar, the euro is in reality just another derivative currency of the dollar. Despite the larger GDP of European Union (EU) as compared to that of the US, the dollar continues to dominate financial markets around the world as a bench mark currency due to dollar hegemony which requires all basic commodities to be denominated in dollars. Oil can be bought by paying euros, but at prices subject to the exchange value of the euro to the dollar. The EU simply does not command the global geopolitical power that the US has possessed since the end of WWII. 
A Panic Wave of Demand for Fiscal Austerity 
The sovereign debt crisis in Greece has sparked a panic wave of radical policy demands for fiscal discipline throughout the European Union from a perverse coalition of neoliberal public finance ideologues and anti-government conservatives. Proponents of fiscal discipline argue that the EMU and its common currency, the euro, would not be sustainable without the drastic restructuring of public finance in all eurozone member states through a combination of tax increases and deficit reduction through fiscal austerity. But creditors, mostly transnational bank, will be protected from having to accept “haircuts” on their holdings of eurozone sovereign debt. 
Yet such harsh approaches of tight fiscal austerity at a time when the global recession of 2008 is still waiting in vain for a recovery will risk increasing the danger of a double dip recession in 2011 in a secular bear market. The alarmist voices of these fiscal deficit hawks clamor for fiscal austerity programs that are essentially punitive for eurozone workers while continuing to tolerate abusive financial market manipulation that will benefit only the financial elite as the economic pain is passed on to the general public.  
Bank Creditors against Wage Earners 
Fiscal deficits across the eurozone are to be reduced by cutting public sector wages and social benefit and subsidy expenditures so that transnational bank creditors will be paid in full while turning a blind eye to blatant tax evasion and avoidance by the rich with non-wage income that contribute to loss of government revenue and fiscal deficits. The dysfunctional disparity of income and polarization of wealth between the waged-earning masses and the financial elite with income from profit and capital gain, are the main causes of overcapacity in the economy. In past decades, the neoliberal response to overcapacity was to shy away from the obvious solution of raising wages, turning instead to flooding the economy with huge mountains of consumer and corporate debt that eventually resulted in a tsunami of borrower defaults that turned into a global credit crisis. Yet repeating the same response to the current crisis will lead only to another global crisis down the road.   
While the culprits of the global credit meltdown of 2008 have been bailed out with the public’s future tax money, the sovereign debt crisis across the globe is blamed on innocent wage earners for receiving supposedly unsustainably high wages and excessive social benefits that allegedly threaten the competitiveness of economies in a globalized trade regime designed to push wages down everywhere. 
Sovereign Debt Crisis not caused by the Welfare State 
The rush by the rich and powerful to punish the trouble causing working poor goes against strong evidence that the current sovereign debt crisis is not caused by high social welfare expenditure, but by a sudden drop in government revenue due to economic recession caused by credit market failure under fraudulent accounting allowed in structured finance for which the financial elite are directly and exclusively responsible. 
Through devious “special purpose vehicles”, the sole special purpose of which is to treat proceeds from debt issuance as revenue from sales to remove financial liability from government balance sheets to present a deceptively robust picture of public finance, phantom profits are siphoned off from the general economy into the pockets of greed-infested financiers while pushing the real economy out of balance, resulting in high real public debts that inadequate aggregate worker income cannot possibly sustain. As a portion of GDP, wages and benefits have been falling in past decades while the public debt has been rising. Transnational financial institutions routinely generate profits larger than government revenue of small economies. 
Despite propagandist distortion, the sovereign debt problem has not been caused by the high cost of a welfare state; it has been caused by deregulated financial markets that allowed governments to borrow huge sums against future revenue from public sector enterprises without showing the liabilities on government balance sheets.  Structure finance was providing participating governments with up-front cash while hiding the sovereign debts that had to be paid back in the future. But the bulk of the borrowed money went to the pockets of dealmakers of public sector privatization while the debts were left with society at large. Large amount of the national wealth is transferred from the local economy to international speculators through legalized manipulation made possible by deregulated financial market globalization. It is a new form of synthetic financial imperialism against weak economies through a scheme of naked shorts against the currencies and equities of vulnerable nations. 
Fiscal Austerity will endanger the EU 
Further, such punitive fiscal austerity solutions will render the EU unsustainable as a political superstructure due to violent popular opposition in the constituent nations. Third Way centrist synthesis of free market capitalism with the social democratic welfare state has provided the enabling conditions for the current sovereign debt crisis. Market fundamentalism has been exposed by unhappy but predictable events it helped create as an exorbitant and spectacular failure. And the exhorbitant cost of this spectacular failure of market fundamentalism will be put on the back of the innocent working poor. 
There are strong signs that voters in countries with multiparty democratic political systems have been brainwashed into beleiving that free market capitalism with minimum government intervention is the only road to prosperity. Voters have been conditioned unwittingly to buy into an anti-government ideology that diametrically contradicts the public’s other demand for generous safety nets of socioeconomic security that only government can provide. 
When the gullable weak is convinced by the devious strong in society that government is the problem, not the solution, the weak are inadverdently trapped into a political climate that permits the destruction of their only institutional protector, since the existential function of government, regardless of political and economic color, is to protect the weak from the strong. 
Government non-interference through deregulation and privatization of the public sector leads to the law of the jungle in free markets under which the economic function of the financially weak is to serve as the food supply for the financially strong. Historically, government evolves in civilization so that the weak masses can collectively resist the oppression of the strong elite. This is the reason why the strong in society always bash popular government. 
Price of Saving the Euro may be EU Disolution 
Thus the attemp to save the euro from collapsing in exchange value under the weight of aggregate eurozone member state sovereign debts through coordinated fiscal austerity in all member states of differing scocio-economic legacy and conditions will incure the price of political divergence of the member states from the European Union. Member state governments are pulled apart from the union by centrifigal nationalist forces generated by separate and divergent domestic politics. Popular sentiment against local fiscal austerity for the sake of preserving the European Union is spreading like wild fire in this sovereign debt crisis of the European Union. 
But a weakening of convergence toward full integration of European nation states will prolong the euro’s structural vulnerability as a common currency without a unified political structure and condemn it to remain a multi-state currency with high political risk. This internal contradiction is the Achilles’ heel of the euro, which is the legal tender of a monetary union without a political union. 
Stormy Political Weather for Incumbents 
Stormy political weather have recently battered incumbent centrist political leaders in several countries by holding each of them separately responsible for the austerity measures they are now forced to implement to get their different economies out of unsustainable sovereign debt. 
In order to meet a 2013 deadline for compliance with EMU’s euro convergence criteria as spelled out in its Stability and Growth Pact (SGP), at the end of the preceding fiscal year, the ratio of the annual government fiscal deficit to GDP must not exceed 3% and the ratio of gross government debt to GDP must not exceed 60%. This means the eurozone governments need slash their individual budget deficits to add up to a total of €400 billion. This huge sum will be taken primarily from pockets of public service employees, pensioners, the unemployed and the indigent in the EU for decades to come.
Greece was forced to adopt on May 11, 2010 an austerity plan to reduce its budget deficit by €30 billion over the next three years through wage, benefit, subsidy and pension cuts, slashing social programs and an increase in VAT (value added tax). 
Spain on May 26 announced cuts of €80 billion from its fiscal budget, shedding 13,000 public service jobs, reducing salaries of state employees by 5% and freezing pensions. The allowance of €2,500 for parents of a new birth to reverse declining population trends will be suspended.   
Portugal has imposed a hiring and salary freeze in the public sectors and passed an increase in VAT in order to cut €20 billion from its budget deficit. 
The Italian government launched measures that will result in cuts of €24 billion by 2012. They include a reduction in civil service jobs, salary cuts, raising the retirement age and cuts in the health care system.
France plans to reduce its budget deficit from 8% to 3% of GDP by 2013. This will be achieved by delaying the retirement age of public employees; cuts in housing benefits, employment compensation and museums funding; as well as a 10% cut in administrative costs.
The German government will decide on concrete austerity measures on June 6 and 7. The so-called “debt brake”, anchored in the German federal constitution, imposes a reduction in new debt of €60 billion by 2016. Among the many measures under discussion are cuts in social programs, such as family, child, welfare and disability benefits, annuities and pensions. The German government plans to save around €80 billion between 2011 and 2014 with measures that include a €30 billion reduction in welfare spending and a cut of 15,000 in public sector payrolls.  It hopes to realise  €5.5 billion euros through subsidy cuts, and may reduce  the armed forces by 40,000.
Delaying Retirement Age Counterproductive
The EU Commission suggests that the retirement age in Europe should continue to rise steadily. This is to ensure that in future, no more than a third of a person’s adult life could be spent in retirement. In the long term, this would mean raising the pension age to age 70. This will add pressure on young new entrants to the job market for the next two decades as fewer positions will be vacated by retirement of the currently employed. 
The new center-right British conservative government announced immediate budget cuts of £7.2 billion, including a hiring freeze in the civil service. The new Prime Minister, David Cameron, said Britain's budget deficit will be cut over the next four years by more than £100 billion. This will include slashing 300,000 posts in public service and a freeze on public sector pay.
For millions of workers and young graduates, the newly adopted measures mean rising unemployment and poverty levels. In particular, old-age poverty will again become a mass phenomenon in Europe. Nothing will remain of the post-war welfare state. A study by the Carnegie Endowment for International Peace think tank in the US concludes that “the welfare states set up across Europe from the 1940s onwards with the aim of suppressing popular unrest and paying off tensions that could lead to another continental war” are “unaffordable”. What was left unsaid in the study was that it would be unaffordable only if the disparity of income and polarization of wealth were to be allowed to continue. In an overcapacity economy, the people can afford what they produce if the system does not deprive the majority of their right to the wealth they create and hands it to a controlling minority.  Revolution would have to come by policy or it will come by violence. 
Crisis of Mal-Distribution of Income and Wealth
In a fiat money regime, it is the central bank’s responsibility to ensure an adequate supply of money. The fiscal budget shortfalls that are being used to justify the dismantling of the welfare state are the result of the systematic mal-distribution of income and wealth from those at the bottom of society who do the work to those at the top who do the manipulation. 
For a quarter of a century since the late 1970s, both right-wing and center-left governments have reduced taxes on income and property for the rich, depressed wages through structural unemployment as a tool to fight inflation and have abdicated government responsibility in maintaining economic justice. 
The concept of a living wage is regarded by new coalition as utopian. Wages are set by their marginal utility to the return on capital in unregulated markets rather than by the economic law of demand management in a modern overcapacity economy of business cycles, the recessionary phase of which has become nearly continuous. Popular discontent is muted with unsustainable increases of the public debt. These are the main causes of the sovereign debt crisis, not over-consumption by the working poor.
Public Debt Crisis caused by Bank Bailouts
The public debt had been pushed up sharply in the last two years by the trillions that governments run by free market policymakers pumped into distressed banks to prevent their collapse from proprietary speculation in deregulated markets. Recent figures from the German Bundesbank showed that in 2008 and 2009, some 53% of Germany’s new public debt was used to rescue distressed financial institutions. The total new public debt rose by €183 billion in those two years; the costs involved in supporting distressed financial institutions amounted to €98 billion. 
Trade Union Leaders s as Hatchet Men of Neoliberalism
To push through the austerity measures against the working poor, the ruling financial elite drafted the social democrats and the trade unions as their hatchet men. In the PIIGS (Portugal, Italy, Ireland Greece and Spain) countries, social-democrat-run governments impose the austerity measures, or, as in Britain, France and Germany, the social democrats have so discredited themselves by their previous cost-cutting measures that now the right-wing parties have reaped the political benefit. In all cases, the social democrats leave no doubt that they support the cuts, telling working people that there is "no alternative".
Trade union leaders have been willingly subscribing to the discredited “TINA” (There Is No Alternative) voodoo economics of Reagan and Thatcher, in cooperation with corporate-controlled governments to wage financial war on labor. The labor-organized demonstrations and strikes against austerity measures have all been suppressed by armed police, with the violence and deaths exploited as reasons why labor protects must cease. 
Yet labor has a moral and functional obligation to force structural changes in this dysfunctional economic system, instead of continuing to remain a passive victim in the new age of wholesale anti-labor selfdom. Meanwhile, a conservative populist movement that calls itself TEA (Tax Enough Already) Party is gaining popular support and can easily be transformed into a fascist political force. Left unsaid in TEA Party rhetoric, beside protest on rising taxes, is protest on the prospect that the tax money should be spent on the poor, rather than bailing out the errant financial elite. Until labor takes the rein of reform, the EU’s trillion-dollar stabilization package will end in failure. (posted on June 7, 2010) 
Responsibility of Germany and France for the Debt Crisis 
The conditional agreement reached by Germany and France on Monday, December 5, 2011 on reform of the Lisbon Treaty of late 2009 that governs the constitutional basis of the European Union (EU) was hailed as good news in the press which had been desperately waiting for positive news. The agreement proposes changing the inter-government structure of the Lisbon Treaty toward supranationalism that diminishes the national sovereign authority of member states in the union on the issue of fiscal policy. 
If the German-Franco proposal of treaty reform is accepted without changes by all the other 25 sovereign governments of the 27-member European Union (EU), whose support is needed to modify the Lisbon Treaty that had entered into force on December 1, 2009, the supranational European Commission (Ecom) would be given new powers to impose fiscal austerity measures on 17 eurozone member states and also all those non-euro in the EU that deviate from the fiscal criteria set by the Stability and Growth Pact (SGP). 
The SGP had been introduced in 1997 as a Protocol of the Maastricht Treaty of 1992 to preempt subsequent need of fiscally undisciplined eurozone sovereign states for bailouts by supranational EU facilities in the framework ofintergovernment agreement. Giving the supranational Ecom power to impose fiscal regimes on eurozone member states in financial difficulty will dilute the target countries’ national sovereignty over fiscal policy. 
Germany and France Were First to Breach SGP Criteria to Stimulate Growth 
The irony is that by 2003, three years after the euro became common currency for the 17 countries in the eurozone,Germany and France, the two largest economies, had been the first countries in the eurozone to violate SGP criteria.Germany had been insisting on reforming SGP criteria to ease limits on national fiscal policy in the eurozone and the EU. 
The reason many eurozone governments readily supported the German request for less strict fiscal limits was understandable: SGP criteria depressed growth; and fiscal prudence would cause European economies to fall behind those in the US, UK and Japan, not to mention the BRIC (Brazil, Russia, India, China) economies which had been growing at 10% annually. Such growth could only come from government deficit spending to stimulate the economy by accumulating more sovereign debt. And expansion of sovereign debt from deficit spending would be benign because the GDP would grow to keep the ratio of sovereign debt to GDP constant. 
Germany and France Lobbied for SGP Reform in 2005 
With several eurozone national economies failing to keep to SGP criteria in the initial years after the limits came into force in 1997, Germany and France lobbied for SGP reform in 2005 to allow eurozone member states more flexibility needed for counter-cyclical fiscal policy. Given the relatively poor record in economic performance of the eurozone’s centralized monetary policy, the failure of the original rigid SGP criteria to simulate growth attracted broad criticism. There was much sympathy to the German-Franco view of the need to reform the SGP. 
The Maastricht Treaty of 1992 set mandatory centralized monetary and fiscal rules for member states of the Economic and Monetary Union (EMU): low inflation, low interest rates and controlled public debt and government spending, notwithstanding that many elements of these criteria contradict one another, such as low interest rates and low inflation, as a matter of economic logic. 
The SGP, agreed to in 1997, required uniform fiscal rules be applied along with the launching of the euro as a common currency for eurozone economies on January 1, 1999. All EU member governments have since been required to keep within SGP criteria: fiscal deficit not over 3% of GDP, public debt not over 60% of GDP and inflation rate of not more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. 
For non-euro EU member states such as Britain, SGP criteria also applied but their governments were not subject to SGP penalties. Since 1999, the only SGP criteria that eurozone governments managed to meet was keeping inflation rate low and this achievement was made possible by recession rather than government policy. 
How SGP Works 
The original SGP required all countries in the eurozone to aim at keeping their annual budget deficit below 3% of GDP, total public debt below 60% of GDP and inflation rate of not more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. If a member state broke the rules, it had to take measures to restore good standing by reducing its fiscal deficit, paying down it sovereign debt and reducing domestic inflation, albeit that the problem of how to fight inflation without monetary authority to raise interest rates was left unspecified. If a member government broke SGP rules in three consecutive years, the Ecom could impose a fine of up to 0.5% of GDP. 
The SGP was not effective in preventing eurozone government deficits from exceeding the 3% of GDP threshold.  By 2003 France, Germany, Italy, Portugal, and Greece had all violated SGP criteria, and the Netherlands joined the list by 2004. 
European Council Modified SGP Criteria 
In March 2005, at the urging of Germany and France, the European Council agreed to reform SGP criteria. On the surface, the reform kept unchanged the key quantitative criteria on fiscal deficits, sovereign debt and low inflation, but the small print of the reform contained a list of exemptions for types of spending that would not be counted as part of the fiscal deficit or public debt. This list included government spending on education, research, defense, aid and spending associated with ‘the unification of Europe’. However, the reforms of 2005 have been criticized and at the height of the global financial crisis in 2008 and during the ensuing recession, there were calls for the EU to do more to penalize states with fiscal deficits that could not be sustained by government revenue in the long run. 
All Eurozone Governments violated SGP Criteria by 2006 
In 2006, at the height of world-wide credit bubble, a year before the global financial crisis began in New York in mid July 2007, Germany’s sovereign debt reached 66.8% of GDP and Greece’s was over 100%. In 2010, Germany’s sovereign debt reached over 78%; Greece’s reached over 120%, and  France’s sovereign debt reached over 80.3% of GDP, its highest ever level since the beginning of the euro regime in 1999. Sovereign debt of eurozone governments continued to rise until the crisis hit in 2008. 
Arguments For SGP and Reform 
The arguments for keeping the SGP and reforming it are many. SGP helps eurozone countries commit to the common currency and to keep the euro as a strong currency. The exemptions proposed in 2005 by Germany and France would make SGP criteria more flexible and allow member governments to adopt counter-cyclical deficit spending as stimulant for continuing economic growth. SGP relieves cyclical political pressure on politicians and  can be a technical shield against domestic political attacks to allow them to adopt long-term policies of stability and sustainable growth with less short-term political cost.
Augments Against SGP 
While the initial SGP criteria were too rigid, the reformed version has so many exemptions that it is in fact difficult for member governments to breach the new criteria.  By failing to impose penalties on Germany and France for violating SGP criteria since 2005, the European Commission has shown that there are no unbreakable SGP rules on government fiscal deficits or sovereign debt in the eurozone. The reformed criteria do not provide real solutions on counter-cyclical fiscal needs, and they encourage creative accounting through the use of special purpose vehicles to hide true levels of sovereign debt. The new criteria also fail to allow for deficit capital spending with a balanced current account. 
When government budget promises disbursements that regularly exceed its tax receipts even in the boom phase of a business cycle fuel by debt, then the government, even under normal circumstances, will incur a budget deficit that will accumulate more sovereign debt that will implode in the next down phase in the cycle. 
Europe’s Fiscal Deficit Bias 
A fiscal deficit bias has structural in European government finance since the mid-1970s when fiscal deficit levels for most European countries began to grow. The fiscal deficit bias was due to ineffective and insufficient revenue collection in balance with high government obligation that has become a permanent feature of European democratic politics. 
Most European tax regimes have a narrow tax base constructed on a historical principle of using taxation as a means of equalizing income and wealth. There are relatively few people who pay taxes because taxable income threshold is set too high, and tax exemptions are too liberal. The middle class whose members pay taxes demand their tax money be spent on social services on and subsidies for them. The average tax payer gets more social services and benefits than their tax payments could buy. 
Most European tax regimes have very high graduated marginal tax rates (the tax rate increases with increased income or profit), leaving high tax bills for those with high income or profit. This tends to lower total tax collection because of a marginal disincentive to maximize income from work, and to encourage pervasive tax avoidance and even evasion. In order to avoid paying high taxes, many taxpayers devote enormous time and energy to hiding their taxable  income from tax collectors, raising the tax burden of those who actually pay. High income taxpayers routinely seek cross-border tax arbitrage to relocate income and assets to lower tax locations. 
Europe’s Long History of Moving Toward Equality Reversed 
Also, Europe has a long history of government spending on welfare state obligations and equalitarian wealth redistribution. In contrast to the US, many European nations over the course of their history of moving from feudalism to capitalism have been moving from extreme disparity of income and wealth toward equality until recent recent decades during which disparity of income and wealth was allowed to increased in the name of competitiveness in global markets. 
US Founding Principle of Equality Reversed 
In contrast, equality of income and wealth had been a founding democratic principle of the US, yet over history, disparity of income and wealth had gradually been allowed to increase after special interest groups captured government through the peculiar politics of representative democracy in a costly electoral process that favors the rich despite repeated populist upsurges against excessive disparity of income and wealth after every recurring financial crisis, the burden for which invariably was placed predominantly on the backs of the poor and the middle class. (Please see my articles in the March 2008 series: US Populism: Part I: The Legacy of Free Market Capitalism and Part II: Long-term Effect of the Civil War) 
Domestic Social Programs Challenged by the Need for National Competitiveness 
Most European countries provide free public health care services to their citizens covering basic medical needs while the US, the richest nation in the world, continue to debate about the validity of universal health care insurance and to celebrate the merits of private education under the hypercritical banner of individual freedom of choice. 
Most European governments own and operate large companies in key sectors that have been nationalized to save them from bankruptcy and to keep them afloat with heavy government subsidies. In many European economies, the government heavily subsidizes key industries, specifically agriculture, and provide very liberal unemployment assistance and social security benefits for their citizens. And because of global cross-border wage arbitrage having pushed down wages in most economies engaged in world trade, many workers in Europe have been pushed into government welfare trap to compensate for the disappearance of living wages, similar to other parts of the worlds except that in Europe, welfare programs ae generally more liberal that adds to government fiscal imbalance. 
SGP Intended for Preventing Moral Hazard from Infesting Governments 
Legislation that limits the size government fiscal deficits to 3% of GDP in countries in the European Monetary Union (EMU) was put in place by the Maastricht Treaty of 1992 to prevent fiscal moral hazard from infecting member governments in the monetary union, as well as to enforce monetary stability and to reduce the deficit bias. If a eurozone member government violates the deficit to GDP ratio put in place by the SGP, it could face a series of fines from the supranational European Commission (Ecom) based on inter-government agreement. Under intense pressure from the offending member states, led by Germany and France, SGP penalties were suspended in 2003 and no fines were issued since for excessive deficits. SGP then became a watchdog with no teeth. 
In 2005 a reformed SGP was adopted with new criteria that allowed fiscal deficits to be temporarily larger than the 3% of GDP deficit threshold calculated on an annual basis as long as medium term average stays within the 3% limit. The focus of SGP then turned toward medium-term budgetary objectives. 
Fiscal Deficit Made Structurally Necessary by Loss of Sovereignty Over Monetary Policy 
Fiscal deficit has been identified as one of the main causes of and its elimination as one of the main solutions to the European sovereign debt crisis denominate in a common currency the monetary policy of which has been voluntarily surrendered by eurozone sovereign states to the supranational European Central Bank (ECB). This means the fiscal discipline of eurozone governments on which the soundness of the common currency depends, must also be imposed by a supranational authority. This is the logic of the German push for supranational authority over eurozone and even EU member states.
Germany and Britain Battle Over Free Financial Markets in the EU 
The fiscal problem created by the centralized monetary policy of a common currency has led Germany to demand supranational authority over not only fiscal discipline for eurozone member states but also over the non-euro member states of the EU to replace the inter-government structure of the SGP with a supranational authority, in order to eliminate structural  competitive disadvantage in the same single market between economies with fiscal flexibility disparity. This is the main conflict between Germany and the UK, in that German economic and financial competitiveness would face a structural disadvantage if German fiscal flexibility is more rigid than that of the UK. It is the main reason behind the UK veto on the German proposal on treaty reform. 
The treaty reform proposal by Germany is by design a serious challenge to national sovereignty of EU member states in that it seeks to deprive governments of sovereign countries of their fiscal policy independence and prerogative.  And forBritain, the loss of full sovereignty over fiscal policy and over associated liberal regulatory regime in the UK financial sector would threaten the supremacy of the City in London as a world financial center. If traders in the City are forbidden by supranational EU treaty laws to speculate on European sovereign debt to assert market discipline on the global sovereign debt sector, including that of the eurozone, the investment banking firms in the City would have to down size drastically, and the loss of tax revenue from it would cause fiscal problem for the British government. 
Contagion Hitting Strong Core Economies in Eurozone 
The countries that would have been affected immediately by treaty reform are in the periphery of the eurozone, suchGreece, Ireland and Portugal, the so-called Club Med economies that are facing fiscal regimes of extreme austerity imposed by the governments of the stronger economies in the EU, the ECB and the IMF. Yet several core economies, such as those of Italy, Spain and France, and in a worst case scenario, even Germany could be in theory exposed to the same risk of impaired sovereignty, as will the 10 non-euro countries in the EU. 
Different National Reasons Behind SGP Violations 
After the launch of the euro in 1999, different countries in the eurozone for different national reasons had difficulty meeting the SGP criteria. For the weak economies, for whose economy the euro was an overvalued currency, government fiscal deficit beyond the SGP limit of 3% of GDP was needed to augment their stagnant economies suffering from a dysfunctional overvalued common currency. 
At the same time, in the current world economic order of neoliberal globalized trade, growth could be stimulated only with sharp increases in the level of sovereign debt beyond the SGP limit of 60% of GDP. The current globalized neoliberal trade system requires trade competitiveness to be at the expense of domestic economic development through rising wage income. For the weak economies with below par domestic development, the excessive reliance on international trade as the sole venue of growth, denominated in an overvalued currency over which their governments cannot control, is particularly damaging.  Much of the socioeconomic problems faced by emerging economies, including China, can be traced a low wages in the export sector to keep it “competitive”. (Please see my September 2004 article: Liberating Sovereign Credit for Domestic Development) 
SGP Criteria Hamper Trade Competitiveness 
Before the global financial crisis hit Europe, even with SGP criteria violations, sovereign debt of even the weak economies in the eurozone found ready buyers in global credit markets due to high investor confidence in the euro as a eurozone common currency, which compensated for weakness in the national economies of several eurozone sovereign borrowers. Investors assumed that eurozone sovereign debt denominated in euro would ultimately be backed by the full faith and credit of the eurozone and all eurozone governments to protect the soundness of the euro as a common currency. Credit rating for the weak eurozone economies was lifted by the high credit ratings of the strong eurozone economies through the market's faith in the common currency.  For many years, the weak economies were getting a free ride on the credit ratings of the strong economies through their common currency. 
SGP Criteria Hamper Domestic Growth 
For the strong economies, such as Germany and France, SGP criteria handicapped their competitiveness in global financial markets against countries such as Britain, the US and Japan, and even the BRIC economies, all with more flexible fiscal policies than those set by the SGP. The petition to the European Council to relax the way SGP criteria are measured focused on compliance within a long wave rather than annually to allow eurozone governments the important and necessary option of using fiscal measures to optimized long-term growth.  
Supranational Institutions of the EU 
The European Council (ECoun) is the the EU institution where the member states government representatives sit, i.e. the ministers of each member state with responsibility for a given area. When the Lisbon Treaty came in to force onDecember 1, 2009, the ECoun became  an institution of the European Union although its existence predates that of the EU. ECoun comprises the heads of state or government of EU member states, along with the President of the European Commission (Ecom), and the President of the European Council (ECoun). 
Germany and France Ignored SGP Criteria by Policy 
In 2003, the two largest economies in the eurozone, France and Germany, purposely exceeded SGP criteria as a matter of policy to compensate for monetary restriction associated with a centralized monetary regime of a common currency. It is a rational hydraulics of economic policy that given a rigid monetary policy, fiscal policy must compensate to protect the economy from stagnation. 
European Commission Tolerance of German and French Violation of SGP 
However, since the two countries with the largest economies in the eurozone could be expected to be able to maintain SGP fiscal targets on average over the long term beyond cyclical fluctuations, the European Commission (Ecom) allowed them counter-cyclical fiscal flexibility to enhance their competitiveness in global financial markets. And in so doing, all other eurozone countries also must  be allowed similar flexibility as required by treaty. 
But no danger was perceived as the two largest economies were expected to keep the eurozone economy healthy enough to absorb the fiscal problems of the small economies to allow them to correct them at a pace that would not create political or social instability. 
Strategy of Fiscal Flexibility Made Inoperative by US Subprime Mortgage Crisis 
Tolerance for the the strong eurozone economies to adopt flexible fiscal standards was a reasonable strategy and was in fact the key advantage of a common currency. What eurozone policy-makers did not foresee, was the financial tsunami from across the Atlantic epicenter in New York that rendered the eurozone strategy of growth through debt inoperative. 
Supranational Organization of the EU 
The European Commission (Ecom) includes the institution itself and the College of Commissioners, which is composed of one commissioner from each of the 27 EU countries. The Ecom is the “guardian of the treaties” that created the European Union and the defender of the general interest of Europe, with the right of initiative in the lawmaking process to propose legislative acts for the European Parliament and the Council of the European Union to adopt. 
The Council of the European Union (sometimes simply called the Council and sometimes still referred to as theCouncil of Ministers) is the institution in the legislature of the European Union (EU) representing the executives of member states, the other legislative body being the European Parliament. The Council is composed of 27 national ministers (one per nation state). The exact membership depends upon the topic; for example, when discussing agricultural policy the Council is formed by the 27 national ministers whose portfolio includes this policy area (with the related European Commissioner contributing but not voting). 
The Presidency of the Council rotates every six months between the governments of EU member states, with the relevant minister of the respective country holding the Presidency at any given time ensuring the smooth running of the meetings and setting the daily agenda. The continuity between presidencies is provided by an arrangement under which three successive presidencies, known as Presidency trios, share common political programs. 
SGP regulators underestimated the problem in a centralized fiscal regime for a eurozone comprising different national economies: that what is good for the goose is not necessarily good for the gender. The SGP’s one-size-fits-all criteria designed for the benefit of strong economies are not operational for the weak economies. 
Effect of SGP Criteria Modification on Weak Economies in Eurozone Periphery 
The result of the German-Franco SGP criteria modification in 2003 was that weak economies such as Greece andPortugal were able to take on high levels of sovereign debt denominated in a stable euro as a common currency in excess of the ability of their economies to assume even in the boom phases of business cycles. 
Eurozone economies were made to appear robust from the benefits of a stable common currency while in reality these economies were only turbo-charged temporarily by unsustainable levels of sovereign debt denominated in a common currency the strength of which was derived not from the strength of the individual national economies of the sovereign borrowers but from the strength of eurozone economy as a whole. 
And the euro is a currency over which these countries with weak economies have no monetary authority. Under the common currency regime, the free spending profligate governments were getting a free ride on the backs of the fiscally prudent governments to sustain the soundness of the common currency, albeit the ability to get the free ride had been handed to the weak economies by none other than Germany and France, the two strongest economies in the eurozone, for their own geo-economic reasons of increasing their own competitiveness in global financial markets. 
Further, the emergence of globalized structured finance (securitization of debt which is hedged with derivatives) since the late 1990s, coupled with faulty financial advice from the likes of Goldman Sachs on creative ways to exploit globalized finance deregulation regimes, enabled governments of weak economies to take on high levels of sovereign debt in Special Purpose Vehicles (SPV) designed to hide liability from the balance sheets of their central banks and treasuries in order to float more sovereign debt in global credit markets and to draw loans from the European Central Bank (ECB). 
The lax in supervision and enforcement of modified SGP criteria greatly weakened the effectiveness of the SGP as a supervisory-disciplinary body on national fiscal integrity in the Eurozone. 
In March 2005, the European Council (ECoun) agreed on a reformed SGP that legalized fiscal violations by introducing new flexible rules and liberal definition of terms. Even these reforms were further challenged as too strict in August 2007 by France when President Nicholas Sarkozy wanted to introduce new fiscal policies of deficit financing outside the SGP regime to ward off the effects of contagion on the French economy from the global consequences of the credit crisis that began in New York in Mid July. 
US Urged Europe to Adopt Emergency Proactive Fiscal Deficit Policies in 2008 
By 2008, urged by US political leaders and finance officials fearful of worldwide depression from the market meltdown that began in New York, EU member states had all adopted proactive fiscal deficit stimulant measures that violated SGP criteria in a frantic effort to deal with the global financial crisis caused by the bursting of the US debt bubble of runaway subprime home mortgages, and to following the US approach of emergency monetary and fiscal rescue measures to reverse a sudden and near fatal meltdown of global financial markets. 
European Commission Warning on Eurozone Public Debt 
In 2010, the European Commission (Ecom) warned that average public debt in the eurozone was approaching 84% of GDP and rising further by the month, breaching the 60% limit set by the SGP. The public debt growth trend was exacerbated by GDP shrinkage in the eurozone, pushing up the debt to GDP ratio sharply. The Ecom was particularly worried about levels of public debt in Portugal, Ireland, Italy, Greece, and Spain, the so-called PIIGS, and even France. 
The Crisis in Greece 
But Greece’s spiraling public debt presented the gravest immediate concern as short-term maturity dates of Greek government bonds were coming due at a time when the Greek government was having serious difficulties rolling them over or selling new bonds to retire maturing ones. And the Greek government has no euros in reserve to avoid defaulting the maturing bonds. 
The Greek sovereign debt difficulties quickly affected market confidence in the euro, leading to market speculation on the ability of the common currency to survive without massive intervention from EU governments. The strategy of carrying high levels of sovereign debt with high growth suddenly became utopian, as the market could not see any prospect of a short recession. The eurozone was faced with a financial fire in Greece that could jeopardize the stability of the euro and even the eurozone without an effective firewall or fire trucks to extinguish the financial fire with fresh euros. 
Marcus Walker of the Wall Street Journal reported from Heraklio, Greece that two years into the European sovereign debt crisis, suicides among the Greek people increased by 40% in the first five months of 2011 over same period in 2010, doubling to 6 per 100,000 persons, according to the Health Ministry of Greece. 
While the bailout funds Greece had received to date have gone to enabling the government to pay the foreign creditor banks, the Greek people had to pay for it with severe and open-ended austerity. Greek GDP in Q2 2011 was down 7% form a year before, amid government spending cuts and tax increases that equaled 20% of GDP. Unemployment reaches 16%, crime, homelessness, emigration and personal bankruptcy are on the rise. 
The decline in GDP increased the debt to GDP ration, making Greek sovereign debt credit rating fall further.  The Greek people are paying for the failure of the grand plan to unite Europe through a common currency called the euro. 
The downward spiral of the economies in the Eurozone, particularly that of Greece, is not expected to reverse anytime soon. The Greek people simply cannot and will not silently suffer the rising financial pain for a decade or more that is generally expected before the Greek economy can complete the process of de-leveraging from debt capitalism before life can return to normal to the way it was before the crisis. Both Greece and Italy are now run by technocrats appointed for their technical skill to appease foreign creditor banks rather than elected by the people who have confidence in their ability to protect the people's interest. These technocrats while applauded by foreign creditor banks, command no loyalty from those they have been appointed to govern.  
The euro will be saved from disintegration by Germany, but at a discounted exchange rate that will serve German national interest of having a cheap currency to boost German export outside of the eurozone, mostly to China. Germany will be soaking up the wealth created by a common currency in the eurozone through the portion of its trade outside of the euro zone denominated in a cheap euro. 
It is a direct transfer of wealth to Germany from those eurozone countries which have been forced to adopt austerity programs to stay with the euro and in the eurozone. The world is waiting for Europeans to realize its time for a political response to the sovereign debt crisis by driving neoliberal monetarists into the sea to drown, instead of dumping surplus grain to keep food prices up. 
Making the clueless working poor pay for the sophisticated sins of the financial elite is not only unjust, it is also bad economics. 
June 18, 2013