There is now a growing volume of literature on the Euro crisis – which simply won´t go away – and the austerity recipe which was supposed to cure it, but to no avail. One of the latest is: „The Euro: How a Common Currency Threatens the Future of Europe“, by a Nobel price winner in economics, Joseph Stiglitz. Listen to what he has to say:
„The euro started 17 years ago in the name of forging a greater sense of union among the disparate nations of Europe; to erode borders and foster a spirit of collective interest among former wartime combatants. What it has achieved is the exact opposite. It has reinvigorated conflicts, fresh grievances and a spirit of distrust, yielding new crisis. It is a tragic mistake. It is making economic inequality worse, while deviding Europe into two adversarial camps: debtors and creditors“. Stiglitz´final verdict is this:
„The financial sector has enriched itself on the back of government credibility, without performing the societal functions that banks are supposed to perform. In doing so, the financial sector has become one of the major sources of the increased inequality in Europe and around the world“ (p.281).
The central argument is this: Economies have mainly three adjustment mechanisms to adapt to externals shocks or internal imbalances: The rate of interest, the exchange rate and fiscal adjustment, cutting or raising taxes or spending to stimulate or restrain the economy. The euro-zone has none of those crucial shock-absorbers. Worse than that: The ECB is not even a fully empowered central bank as a lender of last resort to member states. This means that the deficit countries are locked in an economic straitjacket which keeps them in a vicious circle of longterm recession or depression. They are simply deprived of the tools to pursue policies of growth and full employment. It is an unhappy marriage indeed.
Instead of fixing the euro-zone´s structural deficiences, Europe´s leaders have made matters worse by imposing austerityupon weak economies, already in deep recession, making matters worse. All of this, according to Stiglitz, in the name of a „totally discredited economic dogma, that if you concentrate solely on preventing budget deficits and inflation, the markets can be counted on to deliver growth“. – They don´t. The historical record is there to prove it.
Wether we agree with Stiglitz´ analysis or not, the facts speak for themselves: Eight years after the financial crisis, Europe is still in a recession. It has by now become a lost decade. The economic performance is simply abysmal. Contrary to the prescriptions, debt as a percentage of GDP is much higher than before the crisis and in many cases utterly unsustainable. GDP of the crisis countries has not reached the precrisis levels, with the loss of output estimated at 200 trillion euros and the loss of jobs approaching 60 millions. The longterm damage is inestimatable. Unemployment, specially youth unemployment, is persistently high, a terrible waste of human capital.
At the same time we observe an indecent and growing level of inequality. The rich are getting richer and the poor are getting poorer. The middle class is being squeezed at both ends. The center doesn´t hold any more. The basic tenets of the unwritten social contract of a democratic market society have been discarded: The profits are privatized but the debts are nationalized. Politically there is a deep undercurrent of disappointment and distrust, with a political leadership which seems impotent to deal with social and economic problems of the this scale. Brexit is a blunt warning. But in the continued absense of radical reform we can expect increasing support for the exits in the near future. The future of the European project is being seriously questioned.
Underlying the demise of neo-liberalism is a financial system out of control. In the years 1980-2014 the financial system has grown six times faster than the real economy. The fundamentalist belief behind it is that the sole duty of corporate CEOs is to maximize short term profits, share-prices and dividends. Those perverse incentives are used to justify executive salaries more that 300 times higher than those of average workers; and obscene bonusus in the tens of millions.
This is many times more than in any other sector of society, although managing money creates no comparable value. As such, this financial system has turned out to be the main conduit for moving streams of income and wealth from the productive sectors of society to the financial elite: from the 99% to the 1%. The share of labor in the global GDP has fallen by hundreds of billions annually, while the share of financial income enriching the 1% has increased dramatically.
This financial system does not serve the longterm interests of our communities, nor the requirements of productive business. Small and medium-sized companies (SMEs) account for 67% of job-creation in our societies, but receive only a friction of total bank-lending. In its single-minded pursuit of short term profit the banks concentrate their lending on stock exchange-speculation and real-estate, increasing the nominal value of existing assets – creating bubbles and busts – further enriching the rich.
This is why inequality has reached exorbitant levels in our societies. The rich are getting richer and the poor are getting poorer by the day. This is why long-term unemployment is built into the system. This is why poverty is increasing amidst plenty. This is why social cohesion is dwindling and polarization growing. Since our leaders seem to be offering no convincing solutions, feelings of dissappointmet, resentment, anger and distrust are rising. Our democracy is under siege by the plutocratic elite.
This financial system is utterly unsustainable. It is also out of democratic control. It is footloose and fickle and prone to panic at the slightest sign of trouble, leaving behind scorched earth: collapsed currencies, bankrupted banks, sovereign defaults and mountains of debt to be paid by others. There is a complete disconnect between freedom and responsibility. After the crash 2008 the system has been rebuilt on the same model. That means that we are stuck in a prolonged recession, even awaiting a new crisis. The people out there, who are suffering the consequences, are waiting for trustworthy solutions – radical reform.
In case you think that this analysis is based on dangerously radical ideas or utopian dreams, you should listen to what Merwin King, the fomer director of the Bank of England, has to say on the subject. In hearings before a parliamentary committee he said the following: „Of all the potential ways of organizing an effetive financial system to serve our society, the one we have is the worst imaginable“. – He should know.
I hope I have said enough to convince you of the need for radical reform. Muddling through with halfbaked measures – too little and too late – wan´t do any longer. And fortunately there is a growing volume of serious literature, presenting the case for reform. The aim is to reestablish a 21st C. banking system which serves the general interests of our communities rather than merely the special interests of the financial elite. (See annex on bank reform).
Without comprehensive reform of this kind Europe will be unfit to play its role in the international system, increasingly marked by climate change, the rise of China, Russia´s aggression, Middle-East turbulence, the Arabworld´s scelerosis, the threat of terrorism and a rational humanitarian management of the migration issue. From the list of speakers I think I can safely conclude that they will enlighten you on how to deal with those issues.
In conclusion may I remind you of the wise words of his holiness, Pope Francis, based on his rewarding experience serving the people in the slums of Buenos Aires:
„The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of financial markets, which are faceless and lacking any humane goal. Money has to serve, not to rule“.