What should protesters protest for? They rightly oppose the many faults of the current economic system, but what is the alternative? What ground should occupiers occupy? What can politicians who reject corporatist politics-as-usual, and economists who reject wrong economic thinking do in response to justified protest? How can the economy be transformed to serve the 99%, instead of the 1%?
Capitalism can work if reformed, and history can teach us much. In the period 1940-80, the Keynesian, mixed-economic models of north-west Europe, North America and many developing regions delivered to the poor and weak, while not frightening the strong. The financial sector was fairly small, well-regulated and simple; it financed the real economy, as it is supposed to. Growth, employment and security were high, poverty was reduced and liberty preserved, partly because social democracy helped both to moderate capitalism and to oppose communism.
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The increasing global economic uncertainty and the prospects of a flight-to-quality, with money flowing out of developing towards developed countries, raise the question of how prepared developing countries are to protect their economies from external shocks in the coming year. But volatility of financial flows also means that, most probably, following capital flight driven by the eurozone crisis emerging markets will again experience a surge in speculative financial inflows. The threat of continued ‘boom and bust’ cycles and lack of responses from international forums like the G20 and the IMF to address global monetary chaos makes the need for central banks to take action even more urgent.
There is a welcome shift in Latin America as countries continue their slow process of acceptance and de-stigmatisation of capital account regulations. In September this year Costa Rica joined the group of countries using these regulations, when it established that short-term foreign loans received by banks and other financial entities will be subject to a holding deposit of 15% of the value of the investment.
The European Leaders agreed in principle at their meeting in Brussels on the 8th/9th of December 2011 to adopt tougher sanctions on the euro area countries that break the ‘new’ rules of what used to be the Stability and Growth Pact (SGP), what is now called the ‘fiscal compact’ (FC). The FC requires that tax and spending plans be checked by European officials before national governments intervene. There will be automatic actions against those countries that are deemed to have budget deficits that are too large. In effect the new agreement tightens the rules of the old SGP, but with no apparent improvement, as the FC retains the principles of the previous SGP but with the one addition that breaking the deficit rules may actually be punished in some way.
The limits of the fiscal compact (as in the SGP) are in effect to balance overall budget over the cycle and limit the national budget deficit in any year to a maximum of 3 per cent of GDP. Under the fiscal compact the 3 per cent limit is retained, and the balanced overall budget is formulated as ‘structural budget’ to not exceed 0.5 per cent of GDP, and this is to be written into national constitutions or equivalent. In place of the previous threat of a 0.2 per cent of GDP ‘fine’ for exceeding the 3 per cent limit (though never implemented even though there were 40 cases where the 3 per cent limit was breached), there will be automatic consequences, including possible sanctions, unless a qualified majority of euro area countries is opposed.
It is readily apparent that the ’fiscal compact’ does nothing to address the perceived problems of national governments with large budget deficits, which cannot be funded through capital markets, except insofar as it somehow changes the European Central Bank’s attitudes to directly or indirectly funding those deficits. More seriously it does nothing to address the major problem of the Economic and Monetary Union, namely the large current account imbalances – ranging from a surplus of 7 per cent in the case of Germany to deficit of 10 per cent in the case of Greece (figures for 2010).
Earlier this fall, I crossed the Pacific Ocean from the island nation of Kiribati, which I am privileged to serve as President, to visit the United States.
In the days just before the tenth anniversary of the terrorist attacks of September 11, I saw and heard many references to the “resilience” of the American people. President Obama spoke of it, the covers of magazines displayed it. There is no doubt that Americans have found within them the capacity to absorb tremendous shocks, to adapt and heal from unimaginable disaster.
I listened as my American hosts spoke about your economic challenges. I understand that the hardship in your country is great. I heard of many people who are jobless, “underwater” on their home loans, and struggling to make ends meet. I know the deep insecurity that many of you feel.
These same ten years have brought another sort of disaster to my country, a constellation of low-lying, reef-fringed islands scattered across 1.3 million square miles of the South Pacific. On average, our islands are just two meters above sea level. Scientists anticipate sea level rise of one meter or more as a result of climate change within this century. You begin to see the catastrophe that Kiribati faces.
What are the ethical responsibilities of sovereign nations? How can we expect nations to behave, in regards to climate change? We often hear that nations will inevitably try to shape policy in ways that serve their own interests, where “interests” are largely defined in terms of short-run economic growth. Yet, if every nation sets this as a goal, we are—to use a particularly apt colloquialism—cooked.
I’m afraid that economists are particularly to blame for this perverse framing of the issue. In the economics mainstream, people are thought of as autonomous individuals who are driven by a desire to maximize their own levels of personal satisfaction. Sociality, care, ethical responsibilities, and environmental impacts are not part of the story. The insistent teaching of this approach over the last century or so has led many people to believe that selfish and even opportunistic behavior is simply “natural” or “standard” in commercial life—and therefore both excusable and unavoidable. A number of scholars of economics, law, and politics have extended this approach to thinking about governments, considering states as simply “economic man” writ large.
Back in September I was sitting in the salubrious office of an official from one of International Financial Institutions – when he slouched back in his chair, sighed and said ‘I can’t even bear to read those G20 communiqués – they are so vacuous.’ That evening, I found myself at a dinner hosted by DC law firm Jones Day where former Mexican President Zedillo branded the G20 ‘a disappointment.’
But last week Christian Aid welcomed the G20′s bold pronouncements on tax havens, financial transparency and development. President Sarkozy went as far as to say that havens that didn’t comply would be excluded from the international community. A whole programme of work on tax and development was agreed.
This was a major coup for organisations like Christian Aid and the Tax Justice Network that just three years ago were struggling to garner political support for these issues.
While markets expect eurozone leaders to exercise effective leadership and take action to resolve the eurozone’s sovereign debt crisis, citizens in peripheral European countries are trying to make ends meet under drastic cuts in wages and pensions, rising taxes and massive layoffs.
While the public debate and the media focus their attention either on European banks and their recapitalization needs or on the planned rescheduling of private bond holdings and the future capital needs and powers of the European Financial Stability Facility– the euro zone’s rescue fund– the anxious voices of impoverished families in Greece, Ireland, Portugal , Italy or Spain are not even recorded.
While the future of the euro hinges on the collective capacity of member countries to safeguard financial stability and avoid further contagion, the future of decent jobs for young Europeans is under threat, fueling massive protests by angry youth in most European countries.
While talks in academic circles focus on the exigency of further deepening European integration via a fiscal union, European solidarity and the legitimacy of the European social model are questioned in the streets and squares of several European capitals.
Yet again, the G20 Summit, held in Cannes last week, yielded insipid communiqués that merely rehashed past commitments, outlined policies the G20 countries are already doing, and reiterated the EU’s party line to assuage markets on the eurozone debt crisis. The FT reports that the G20 has once again proved meager results despite lofty promises, casting its own irrelevance against the gloomy realities of the world economy.
Drawing a parallel between the ineffectual coordination in the G20 forum with that of the EU’s internal faultlines and lack of democratic policymaking, analysts have remarked that the G20 is a microcosm of the multitude of global malaise: persistent imbalances, the failure of democratic and collective action, and the lack of structural reforms.
At the core of the G20’s macro-policy agenda is an elite consensus that there is too much sovereign debt in the world and so governments have to reign in public budgets through fiscal austerity. As both Paul Krugman and Gerry Epstein have pointed out, this was the case in last year’s Seoul summit, which called for ‘fiscal consolidation programmes’ in developed countries despite massive levels of unemployment.