Working in the hub of international finance, the view that I am about to put forward may seem controversial and not a lot of sense to some, but in some respects, in my view its THE only way forward to this endless Eurozone crisis….
The causes of the financial crisis in many European countries is due to a variety of factors. Allegedly overspending in the Greek situation (although that is what we hear, who knows what the truth actually is), banking crises (Ireland), property crashes (Spain) and general economic malaise, low productivity… (Portugal). All these countries have received bailouts on a massive scale from the IMF, ECB and the EC, known as the Troika. The Troika, applying what they thought was the best remedy to a case of severe economic recession and budget deficits was to impose fiscal tightening on an awesome scale. If you are a Keynesian economist, this result was absolute economic madness – stimulus should be provided in times of economic downturn to replace the lack of private demand with public demand. The end result of this has been predictable and shameful: wide-spread economic contraction, mass unemployment (especially youth) and generations lost forever as they have been swept away by the ever need for illusory fiscal consolidation. The social costs of this crisis therefore have been HUGE… and let’s stop right there – the human cost of this crisis has been significant. People cannot get access to their medicines, highly intelligent youths armed with degrees from leading European universities cannot get jobs in their homeland so they come to the UK to serve coffee in Starbucks and other cafes or perform other redundant jobs relative to their capability. These Eurozone countries cannot deflate their way out of the crisis because of the common currency. The Eurozone then has become an economic war zone of death and destruction.
For what may we ask? For money that actually does not EXIST! In the aftermath of the financial crisis, private debt to large European investment banks was replaced by public debt to the IMF, ECB and other European bailout mechanisms. The ECB in particular prints money for fun as we have seen in their recent experiment with quantitative easing or open market operations buying large amounts of sovereign debt (further creating asset bubbles as stock markets feast on this fresh money being pumped into the system). The actual amount of “real” money actually circulating in the economy is minimal compared to the nominal amounts that exist as numbers in bank accounts. None of this money actually exists, that’s the truth!
So lets ask ourselves if we were to cancel all of the debt or provide debt relief to all of the Eurozone countries, what would happen? I mean, really, what would happen to the ECB? It cannot go insolvent as it is the lender of last resort, it would right off all its holdings of sovereign debt and then print some more money and buy some other sovereign debt to make up for its lost holdings of the sovereign debt it has written off. Perhaps I am missing something here fundamentally but to me, for institutions where money is “worthless”, every effort should be made for those institutions to absorb those losses that can afford to. Even the IMF has been pushing for debt relief in Greece..
The irony of all this is that the ECB and others are going to great lengths to kick-start the European economy, but are failing miserably because their austerity policies are choking the very economies they are trying to revive. Take Ireland for example, other cited as an austerity star – yes it is on track re its fiscal consolidation program but at what cost? As one commentator put it:
“For while it is true that Ireland has been achieving its fiscal retrenchment targets, and at a relatively low-cost to date in terms of social and political conflict, it is also the case that the Irish experience confirms what most economic theory has always taught, which is that contractionary budgets produce economic and employment contraction. The Irish economy has experienced a severe downturn since 2008 and is currently flat-lining; living standards have fallen, and both unemployment and emigration have risen. The political and social costs of managing austerity are rising rapidly.”
Niamh Hardiman Aidan Regan, ‘Austerity Measures in Crisis Countries – Results and Impact on Mid-term Development”, Intereconomics, Volume 48, January, February, 2013, No 1.
So the truth of the matter is that austerity has been a disaster for Europe and the only reason that they are persisting with it is because they hold on to his notional concept of fictional money, and whilst debt relief is the only way that a country can ever truly recover, the politicians respond by saying that if they give relief to one country, then the rest will be asking for it. Well go ahead and do it, because at the end of the day, it is the solution that everyone is looking for a the end of the day – ECONOMIC GROWTH and return to prosperity. Sure, go ahead and attach conditions to debt relief and all that, but just get the whole thing over and done with and lets start again.
Money is an illusionary concept that fixates the human mind. If only the politicians and technocrats could see the wood through the trees – it might end in the end bring some economic sunshine.