Recovering from the Crisis: INSIDE OR OUTSIDE THE EMU?
April 9th The Institute for International Relations and Political Science, Vilnius University, held a seminar on the international financial crisis, comparing the fates of countries inside and outside the euro-zone. Main speakers were Jón Baldvin Hannibalsson, former Minister of Finance and Foreign Affairs of Iceland, Dr. Ingrida Simonité, former Minister of Finance of Lithuania and Dr. Baldur Thórhallsson, Head of the Center for Small States´ Studies at the University of Iceland. Dr. Ramunas Vilpisauskas, Head of the institute introduced the speakers, but Mr. Bo Tillberg from the Nordic Council of Ministers´ Office was moderator.
Following are the speaking-notes of Mr. Hannibalsson:
1. The Neo-Liberal Experiment.
- Before comparing notes on wether our countries have turned out better off in coping with the crisis, - outside or inside the EMU
- Before doing that, let us try to gain some overview by asking ourselves some basic questions on the nature of the current financial crisis and how it is affecting us.
- Why is it that major financial crisis are getting more and more frequent?
- Is it a coincidence that this is the era of neo-liberal policies being prevalent around the globe?
- Does it have something to do with the fundamental tenet of neo-liberal economics, i.e. that state intervention is always bad, that markets can be trusted to be self-correcting, justifying that laws, regulation and supervision of financial markets have been systematically abolished or relaxed?
- Does it have something to do with the fact that the financial sector (banking - but primarily shadow-banking) has vastly outgrown the real-economy, so that fickle and footloose capital is roaming the globe in search of short term profit (rather than longterm investment) - thus causing booms and busts.
- Can it be that financial markets have simply run amok - out of all control - beyond the power of individual states or multinational institutions to control?
- The third richest individual on earth, Warren Buffett, certainly thinks so, since he has designated the sophisticated, high-tech financial products - that turned out to be intrinsically fraudulent - as "financial weapons of mass destruction".
- Is it possible that the scale of inequality - the concentration of wealth and income in the hands of a tiny international elite - the so called 1% - has reached such levels, that the democratic state has become impotent to deal with it? - Or that the representatives of the people - the guardians of the public interest - have become captive to the owners of capital?
2. Crisis of Democracy
Is this why people have lost trust
in the democratic process and their democratic institutions? According to the polls in the worst afflicted countries, trust in politicians
, political parties, and parliaments has plummeted as never before.
- Does this explain the pervasive feeling of powerlessness, political paralysis, anger and frustration being so prevalent all around us?
- Is this why the middle class - traditionally the enlightened pillar of democracy - is feeling so squeezed? Is this why wages have remained stagnant and purchasing-power of wage earners is declining? Why investment in the real economy is declining? And is this again why unemployment - especially among the young - has already reached alarming levels in many countries?
- Questions like these should really be at the back of our minds, when we are contemplating the causes and consequences of the current crisis. If the answers to most of those questions are in the affirmative, then there is little hope, that individual countries can find lasting solutions on their own; little hope that we can fix such gigantic problems by tinkering with the system here and there. We should be looking for more radical solutions, structural refoms - even systemic change.
- One example: It is estimated that the financial elite - the 1% - have amassed accumulated wealth to the tune of the combined GDP of the United States and Japan - tens of trillions of dollars - and hid it, away from the short arm of the law, in so-called tax paradises around the globe. This is done for the purpose of tax-evasion and money laundering. It is incompatible with the rule of law. Why is nothing being done about it? Why should tax-payers accept being enforced by their political leaders to pick up the bill for bankrupt banks, while the super-rich play it safe, beyond the reach of the law?
3. The Main Thing: Domestic Economic Management.
If we look across Europe, trying to take stock on how individual countries have weathered the storm of the crisis - inside or outside the EMU - the conclusions are far from straight forward. A few examples:
- Finland is in and has been doing quite well - but Sweden is out, and doing no worse - even a little better.
- Luxembourg has been in from the start and is still flourishing as a tax-haven at the heart of Europe. But Cyprus (and Greece) were also in, but have been going through hell nonetheless.
- Iceland was out on its own and was the first to go down; The entire financial system collapsing along with its currency. By hindsight we now know, that the "best thing" that happened to Iceland was, that it had no means to bail out the banks - they simply went bankrupt. That has since been called: The Icelandic Way.
- But Ireland was in and faired hardly better. The Irish government senselessly guaranteed the debt of the banks, so for years to come Irish tax-payers will be paying the bills for the banksters who ruined the country. And by the way: Who are the creditors, who made the wrong decisions to finance the Irish real-estate boom? And why should they be saved?
- Who is the worse off: The dispossessed young Icelandic family, the unemployed Irish emigrant or the young Spaniard "without a job, without a home, without hope"? These are not merely academic questions. They are urgent questions to which millions of families across Europe are desperately seeking answers - but receiving few.
- What´s the conclusion: Some countries are doing well inside the EU - others are not. Some countries did very badly outside - but others are doing even worse inside. The Scandinavians have been doing pretty well - outside. In short. EMU-membership is not a patent solution for all our troubles. The countries that have been doing well are those that have managed their economy well - inside or outside. The most vulnerable ones are those who suffered from incompetent and undisciplined economic management to begin with. That was certainly the case in my country, in Greece, in Ireland, in Spain, in Portugal, in Italy and a few more.
4. What is Wrong with the Euro-zone (EMU)
Mr. Baldur Ţórhallsson, Professor of Political Science, University of Iceland, Mr. Jón Baldvin Hannibalsson, Ms. Ingrida Simonyte, former Minister of Finance of Lithuania and Mr. Bo Tillberg from the Nordic Information Office of the Nordic Council of Minister, who was the moderator at the conference
- Why is it that membership of the EMU has not turned out to be a decisive advantage for many member countries in coping with the crisis? Is it simply the bitter truth that the EMU is not an optimal currency area? That it is suffering from a fatal flaw in design, that has to be corrected, if it is to survive?
- Let us take an example: The state of California is fiscally bankrupt and has been so for years (just like Greece). Constitutionally California has renounced her sovereign power of raising taxes, although state expenditures are proliferating. The result is a fiscal black hole amidst political gridlock. Questions: Why haven´t the "markets" besieged California? Why haven´t they exploded California' s borrowing costs and sunk the state into unsustainable debt? Has anyone in Washington D.C. or Chicago or Seattle proposed to throw California out of the Union? No. Why not? Because the US federal government and the federal reserve stand by California and support it to the hilt.
- Noone is complaining that they won´t pay the debt of proliferate Californians basking in the sun. The mutualization of debt is a sine qua non of a successful monetary union. Either we are in it one for all and all for one, or we should never have started this union in the first place.
- If some US-member state is in trouble, it is not in danger of being ambushed by financial predators, because then they have to face the overwhelming power of the federal government and the federal reserve, who have enough resources to stop any ambush in its track. That is what a federal government and a central bank are for. Of course they can legitimately set conditions for support, e.g. that certain structural reforms should be implemented. This shows that we can learn a lot from the Americans - on how not to do things but also on how to do things successfully.
- The California example shows that the European Monetary Union (EMU) had from the beginning fatal flaws in design. For a monetary union to succeed, it has, at the minimum, to fulfill three basic conditions. The central bank must have full powers to act as a lender of last resort to member states. It must have full powers to control the money supply, including issuing and buying bonds from member states. And a central authority must have the power to enforce at least a minimum of fiscal co-ordination to supplement and support monetary policy in maintaining the stability of the economic system.
- This is necessary for several reasons. On occasion the central bank must have the power to shield weaker member states from the volatility of the market. It must be able to prevent borrowing costs of those states from getting out of control. It must be able to stop market ambushes in their tracks.
- We all know the European Central Bank has none of those powers. Why not? Didn´t Delors and his people know at the time, that those could become fatal flaws in the future? Yes, they did. But Germany simply would not budge from her historical inflationary hang-over. It was a classical case of the irresistable force (of European integration) meeting the immovable object (the ghosts of Europe´s past). Apart from this, the pioneers of the EMU-project simply hoped for the best; namely that with time the strong and the weak would converge so that those in-built discrepancies would gradually disappear.
- This was a mistake, for which we are paying dearly. The EMU is therefore like a halfway-house, incomplete and on shaky foundations. It is highly vulnerable, when the disruptive powers of the elements are blowing at full force. For years now, we have had before our eyes the sorry sight of European leaders reacting to events with half-measures and short-term fixes - too little and too late rather than following a plan with well designed long-term solutions. If they og on like this they are doomed to fail. That is the key-lesson to be drawn from our experience of coping with this crisis - in order to be better prepared for the future. In this way economic integration will contribute to the gradual "convergence" of our economic and social models.
(The author is a former Minister of Finance, Foreign Affairs and External Trade of Iceland)
Jón Baldvin Hannibalsson
Deila á Facebook