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Pt.2 Fareed Zakaria’s defence of neo-liberalism runs into trouble when Italian PM says “fiscal discipline” destroying domestic demand

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

In part one of our interview with John Weeks (and you’ll find it right below here in our episode), we discuss Fareed Zakaria’s show of Sunday, where he talked about Germany making reasonable demands on Greece, requiring reforms and fiscal consolidation and such. And that’s the path to growth, Zakaria said. But it was kind of ironic. In the very next segment of Zakaria’s show, he interviews Prime Minister Mario Monti, and Monti more or less says, well, we’re doing everything we’re being asked and there’s no growth. Here’s a segment of that part of the show.


FAREED ZAKARIA, CNN HOST: When you talk about the need for a growth agenda in Europe, are you saying that the austerity programs really haven’t worked? If you look at a country like Ireland, which has done everything it was asked to do, or many of the things, in terms of fiscal consolidation, cutting spending, raising taxes, it has not produced growth. It has not even produced much investor confidence. Italy’s budget deficit is up, its debt-to-GDP ratio is up, largely because growth has collapsed. Should these austerity measures end?

MARIO MONTI, PRIME MINISTER OF ITALY: First of all, I don’t like to speak about austerity. I prefer to speak of fiscal discipline. Fiscal discipline, in the end, amounts to austerity if it is not accompanied by other policies. Fiscal discipline, in my view, is there to stay. Italy has done huge efforts towards fiscal discipline, and it is now the country in the European Union which will achieve a structural balanced budget before all the others next year—actually, a slight structural surplus. And yet growth is not coming.

ZAKARIA: How does that happen? So you in Italy, as you say, you have done more fiscal consolidation than any country. You’ve done structural reforms as well. Now, how do you get that demand going?

MONTI: Exactly.

ZAKARIA: You need somebody to buy your products. Are you saying you want Germany to buy things from you?

MONTI: Well, we are gaining a better position in terms of competitiveness because of the structural reforms. We’re actually destroying domestic demand through fiscal consolidation. Hence, there has to be a demand operation through Europe, a demand expansion.

As you pointed out most clearly, we, for example, in Italy are having problems because we have achieved very good fiscal results—but will they really be sustainable in the longer term unless the dominator, GDP, increases through growth?


JAY: Now joining us again to discuss all of this is John Weeks. John is a professor emeritus at the University of London School of Oriental and African Studies. He’s the author of the book Capital, Exploitation and Economic Crisis. He’s also the founder of And he joins us again from London. Thanks, John.

JOHN WEEKS, PROFESSOR EMERITUS, UNIV. OF LONDON: Well, thank you for having me again.

JAY: So Zakaria and Monti now seem a bit in a quandry. They—what they both had advocated, and certainly what the financial elite of Europe advocates, Italy says it’s doing, and there’s no growth. What do you make of that?

WEEKS: Well, as I said in the other interview, this is all a complete misrepresentation of what’s going on and using terms that obfuscate and mislead people. And so, for example, fiscal consolidation, fiscal discipline, these words cover—what they mean is cuts, cutting things that affect people’s day-to-date life. So what Monti is saying is, we’ve achieved fiscal discipline. Sounds good, doesn’t it? It sounds like now we’re—we were undisciplined before; now we’re disciplined. Rubbish. Italy was not undisciplined in fiscal terms. If you look at the numbers, Italy ran an expenditure surplus throughout the 2000s, up until the great crisis of 2008. Yes, a surplus.

Where their deficit came from was interest being paid on the national debt. And the reason the national debt was so large was because in the 1990s, the Italian government borrowed to maintain the lira par with the German currency in order to enter the euro. I mean, if ever there was a case of being careful of what you want because you might get it, this is it. So the larger debt that everybody attacks Italy about, where did it come from? It came from borrowing to maintain the currency into the euro. Alright.

There was no need for fiscal consolidation, because actually interest rates for Italy are much lower now than they were in the 1990s. This is a—in the case of Greece, there was a genuine fiscal problem which could have been easily solved. But in Italy’s case, there is no fiscal problem. You know, Berlusconi in his final days as prime minister was interviewed, and in that interview he said, crisis? There is no fiscal crisis in Italy. Berlusconi, a congenital liar, for once in his life told the truth. There was no fiscal problem in Italy. This is a pure speculative phenomenon. And the Italian government, the Italian elite, is taking advantage of it through Monti to remove those protections of workers and small businesses in order to facilitate the development of big business in Italy, particularly in the retail area.

JAY: And then Monti in a sense acknowledges the effect of this, because he says to Zakaria, well, we did all this, and now we destroy domestic demand. I mean, so what do they think? How is there going to be growth after you destroy domestic demand? So, you know, they’re not offering solutions on either side.

WEEKS: It’s true. I want to say one more comment about—I read the text of Monti’s response. At one point, Zakaria—doesn’t attack—says, you know, democracies don’t seem to be very good at solving these problems; that’s why they had to put you into a government in Italy, a nonelected government. I mean, it is remarkable if you think about it. We have two nonelected governments in Europe, in Italy and in Greece, imposed from external pressure. I mean, that is extraordinary, isn’t it, in the 21st century.

JAY: Yeah, it’s also kind of ironic. Zakaria’s worried about German voter taxpayers in a democracy bailing out Greece, but he’s not very worried about any democracy in Italy or Greece.

WEEKS: [incompr.] and so Monti says, democracies aren’t very good at doing this, because voters have a short-term viewpoint and can’t see the long term. Democracies are not very good at doing it, because it is a policy of the 99 percent. It is very hard to get a majority of people to come out in favor of the policies that help the 1 percent and harm the 99 percent. So, yes, democracies don’t do very well at imposing austerity, for the most part.

So how do you get out of this? We’ve known for a long time how to got out of it: indeed, a fiscal expansion. Now, let me say it will not be quite that simple in Europe, because the German government has been quite successful—German governments, I should say, plural—been quite successful in creating a cost gap between German products and the products of the other European countries. This was primarily by methods that I discussed in a previous interview. Okay. Somehow you have to close that gap and get back to a situation in which trade is more balanced among those countries. So first you stimulate demand so that there is more demand within each country.

But then you need to do something such that you have a demand stimulus in Italy and the result of it isn’t, say, for half the demand stimulus to go on the importation of products from Germany. And I think what needs to happen there is there need to be—for the countries with trade deficits with Germany there need to be temporary export subsidies, just as Germany had export subsidies. So if you combine a fiscal stimulus [incompr.] general increase in demand and something to narrow the cost differentials, you would have recovery. But it’s not going to happen. That is not going to happen.

JAY: But the other part of this, too, does there not also have to be something because part of this destruction of domestic demand is, you know, the lowering of pensions, and most importantly the lowering and undermining of wages, that if this is going to be sustainable, there has to be some kind of policies that lead towards higher wages? Is that not part of this?

WEEKS: A number of people, German economists too, have said we need a policy in which growth is tied to increases in money wages. And the increases in real wages are tied to increase in productivity. This was in fact the practice in the 1950s and the 1960s. I mean, that’s what European governments sought to achieve through various mechanisms, pacts between—tripartite pacts with government, labor, and business, in which you—the rising—the incomes of workers and a majority of the population moved in step with productivity and with growth. We need to return to something like that. I don’t see it happening, but that is the only way there will be sustained growth at at least a moderate pace in the major economies, and, by implication, at the global level.

JAY: Now, twice you’ve said, I don’t see that happening. So what do you see happening?

WEEKS: Well, when you interviewed me (I don’t know if you recall it) in October of last year, I said there was going to—very likely to be another major financial crisis, and it would probably be the coming year, that is, in 2012, and that it would be around the euro. You didn’t have to be Nostradamus to make that prediction, let me say.

[incompr.] what will happen? People argue, well, you know, should Greece drop out? Should Greece default? What will—you know, with the—wouldn’t it be mad to default? Things are out of control. Greece is going to default. This is—if I can take a phrase from Gabriel García Márquez, this is a chronicle of an exit foretold. Sometime next month, Greece will default. There will be an election. If the left is elected, then you’ll have a controlled default. To a certain extent it will be controlled. At least there will be an attempt to manage it. If the leaders of the other European countries are successful in frightening Greek population into reelecting the same clowns and thieves that got Greece into this austerity mess, then also there will be default and exit, but it will be chaotic, because what’s happening—as you’ve said, what’s happening in Greece is the result of the austerity. Austerity prevents the government from having the revenue to service the debt. Without growth, there is no conceivable outcome other than default.

JAY: And then what?

WEEKS: Well, I think that’s [incompr.] ability to predict, but I would say that it’s conceivable Greece could default and stay in the euro. And that would involve more of the same misery, only even worse. More likely, I think, is that they’ll default and be abandoned. I think that in Germany and in the European Commission, leaders are already planning for Greece to exit. I think they take the position that, you know, the Greeks have been a problem for too long, they can’t solve the problem on Germany’s terms, so if they default, then just push them out.

Then what happens to the euro? Many people say it will break up. I would say that depends on what the other weak countries do, ’cause, see, Germany is one of the strongest economies in the world, so it’s inconceivable that you can have a collapse of a currency which is being used by one of the strongest countries in the world and a country which is growing—not very fast, and on the basis of beggar-thy-neighbor policies, but still it’s growing. So I don’t think they will enter a period of very extreme financial instability. Banks will go bust, particularly in Spain. Perhaps some of the viewers have been reading or seeing reports about the banks in Spain. It’s almost certain that they’ll need to be bailed out again. Then what will happen? Will the Germans say, well, Spain has become too much of a problem too? It will be a very chaotic situation. How chaotic and how it will be resolved I don’t know. We’ll really be in, you know, uncharted territory, if I can use a cliche.

JAY: Thanks for joining us, John.

WEEKS: Well, thank you for having me.

JAY: And thank you for joining us on The Real News Network.


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John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.