Is the Euro Crisis Over?
William K. Black, Paolo Manasse, and John Weeks discuss the Euro and the danger of global recession
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. As 2011 comes to a close, the central story, of course, is still the global economic crisis. The European Central Bank has just announced that it’s starting a loan program that will allow private banks in Europe to borrow money at about 1 percent interest. And apparently almost half a trillion dollars now has been borrowed. This is supposed to create some impetus in the private banks to buy government bonds, which in theory helps alleviate the euro crisis. The question is: does this get to the roots of the crisis? And if it doesn’t, what will? And what might we be expecting in 2012? Now joining us is an eminent panel to discuss this issue, and first of all Bill Black. Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist, a former financial regulator. He’s the author of the book The Best Way to Rob a Bank Is to Own One. And he joins us from Kansas City. Also joining us 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 been an adviser at the United Nations Development Programme and the World Bank. And he joins us from London, England. And also joining us, from Bologna, Italy, is Paulo Manasse. He’s an economics professor at the University of Bologna. He teaches macro and international economic policy. He’s been a consultant for the OECD, the World Bank, the Inter-American Development Bank. He’s been an adviser at the IMF. Thanks for joining us, all of you. Paulo, let me start with you. This loans and what they’re saying introducing this big whack of liquidity into the European financial system, is it going to work? Does it actually address the roots of the problem?
PAULO MANASSE: Okay. I don’t think it will address the roots of the problem, but it will address the last incarnation of the crisis. The last incarnation of the crisis that, you know, we imported from the U.S., and then, you know, it became a sovereign debt crisis, the last incarnation [incompr.] banking crisis and a liquidity crisis, which is very serious. What is going on in Europe in terms of banks is that banks are unable to, basically, borrow from the international market and [incompr.] their bonds, their obligations. So in fact, you know, there were a number of options that, you know, were quite unsuccessful in Europe. And next year, it’s about–you know, banks will have to borrow something like EUR 700 billion, so a large amount that, you know, nobody knows how these banks will be able to get. So now we’re in a situation in which there is a lot of, you know, uncertainty about the balance sheets of banks, because most of them, for example Italian banks, are full of sovereign bonds, which are shaky. And so banks are very reluctant to lend to each other. So we would have a almost frozen banking situation, you know, very similar to what happened in the U.S. with the subprime crisis. And this explain the very large intervention of the ECB with this opportunity to borrow from the ECB at very low interest rate, 1 percent, in very large amounts for three years. So these new measures are addressing the last incarnation of the crisis that is a banking crisis up to this point.
JAY: John, what’s your take on this? Because in the United States, where the IMF did–I mean, sorry, the Fed gave all these low-interest loans to banks and big corporations, to a large extent, they’re kind of sitting on the cash. It may have made their books look stronger, but it hasn’t done much for the real economy.
JOHN WEEKS: I think that the central bank’s action is ridiculous, because think about what they’re suggesting–not what they’re suggesting; what they have done. They have lent money to private banks to buy government bonds to bail out Europe. Why don’t they just buy the bonds themselves if they want bonds at all? The reason they don’t is purely ideological. Merkel and others in the–leaders in the European Union will not allow the Central Bank of Europe to be a central bank and be the lender of last resort. That is the problem. The second problem is that even if these bonds were bought directly by the Central Bank of Europe or those banks were to feel generous and they were to do it, that would not solve the problem, because you would get the debt generated afresh, because the problem is essentially imbalance in trade. Germany has a huge trade surplus. That trade surplus is balanced by the deficits of the other major countries and minor countries in the eurozone. And until that problem is solved, it will be difficult or impossible for the countries that are in trouble to get out of trouble.
JAY: Bill, you can talk a little bit about the American experience with this kind of Fed introducing liquidity into the U.S. system and any–what–. And, also, what do you think of what’s happening in Europe?
WILLIAM BLACK: Well, I agree with John, and, indeed, he has described this as the new mercantilism. And that, of course, is exactly what Adam Smith was writing principally about, the insanity of everyone trying to out-export everyone else, which is a policy that can work for a few nations but is catastrophically bad for the world, and therefore ultimately bad for all of the nations. What you’re seeing in both America and Europe is a complete willingness to bail out banks but not human beings. And that is what has pushed the eurozone, according to the OECD, back into recession already. And as we’re having this discussion, Republicans are threatening to put the United States back in recession by ending the payroll tax reduction.
JAY: So, Paulo, what do you make of the argument?
MANASSE: Well, let’s say I agree on the substance, a little bit less on the–how can I say?–on the ideology, in the sense that I don’t believe that it’s anything to do with mercantilism, frankly. But it has to do with trade, though. So what happened is that productivity growth in Germany, you know, growth, you know, was very high during the last 15 years in many countries, for example Italy and others, other European countries who had almost no productivity growth. This is true, for example, for Greece, this is true for Italy, this is true for Portugal, for example. So what happened is that this divergence has made [incompr.] change in such a way that, you know, the goods that were produced in Germany became much cheaper relative to the other goods, and so this, you know, growth with that and a trade surplus in Germany and a trade deficit in many of these countries, less so in Italy. So it was something that had to do with the real economy, not with the politics, in a sense, or kind of, you know, not with a trade policy, tariffs and that sort of things. The problem was that having a single currency, you manage to kind of increase this problem, because it would be–the exchange, the nominal exchange rate could not adjust. So–and typically what happens is that countries running surpluses have their exchange rate appreciate, and that, you know, offsets the change in relative prices. This could not happen with a single currency. So we have the persistence of these trade deficits. So I agree on the substance [incompr.] divergence of productivity growth and leading to trade imbalances. I think that was not an explicit thing made by the evil guys in Germany; that was just a result of very sane productivity growth and very insane productivity stagnation in other countries. But the result was surely a trade imbalance.
JAY: Well, John, there seems to be–there’s two parts to this argument. One is the role of Germany. And is this like–to what extent is this sort of a structural but also deliberate policy on the part of Germany or not? And then the other part is the piece that Bill raises, that this seems to be about bailing out banks while there’s austerity for the real economy.
WEEKS: This is a complicated question, which I’m going to try to make simple. And the way I’m going to do it is by–let’s look back at 2000, you know, 11 years ago. Eleven years ago, Germany had a slight trade deficit of about EUR 50 billion. And all the other major countries of the eurozone had about the same, just slight surpluses, like [incompr.] In the subsequent ten years, Germany has generated a surplus of over EUR 300 billion, and those other countries have generated a deficit almost the same size. Now, I don’t see that that is the result of any inherent structural relationship between Germany and those other countries, except for economic and political power held by Germany. That’s one issue. Also, another very related issue: nineteen–2007. In 2007, you had the smallest budget deficit. Well, actually, Spain, it was running a surplus. It was number two. Portugal was running a deficit of about 1.5 percent of GNP. It was third. Germany almost exactly at the Maastricht criteria of 3 percent. So just four years ago, Germany was not the most prudent- and solvent-looking country in Europe. It was at best number three. But now Spain and Portugal are in a terrible situation and Germany’s lording it over them. Why is that? That relates to the restrictive fiscal and monetary policies followed by the German government in the last decade when they should have been following expansionary policies. They should have followed expansionary policies, which would have increased their rate of growth, which was relatively modest, which would increase the exports of the deficit countries, and we wouldn’t be in the situation that we’re in now.
JAY: Paulo, I’ll let you respond. I mean, essentially, I think John is saying this is a beggar-thy-neighbor policy coming from Germany.
MANASSE: I think there are two sides of the questions. One is the trade surplus and deficit of countries, and here, I think nobody knows where it comes from. I mean, what we observe is that the crisis grew much more rapidly in Southern European countries, and productivity growth, you know, much less rapidly, while in Germany it was the other way around, so productivity growth was very buoyant and prices were kind of stable. So that was a clear competitive advantage, and any economist would have predicted that that should have resulted in–into a trade surplus. So this is part of one argument. Then we have another issue, which is the kind of what is the role of the budgetary policy in the crisis. And on that, I do agree that budgetary policies, which Germany’s–kind of focuses on and which, you know, it’s totally obsessed by, is not the real cause of the problem, because, as John correctly said, Spain, Spain was a kind of–you know, one of the most virtuous countries, with running surpluses. And even Italy, despite the big debt, was kind of running more the surpluses. But Germany and France, they actually reformed the Growth and Stability Pact to make it more relaxed, because they were running surpluses, and they should have adjusted. That happened about three, four years ago. So the real issue was not–the real cause of the problem was not the budgetary situation. What happened, at least in Spain, Portugal, and Ireland, in Italy and Greece things were different because of deficit increase and because of debt in Italy. And that–you know, for those two countries, the budget played a much larger role. But what is sure is that with the crisis that we imported from the U.S., the big recession, that, you know, boosted the budget deficits all over the place. And now the German obsession with cutting and cutting and cutting is becoming very risky, because I agree with what John said, the point is really about having different policies for different countries. Now, there are countries which are either already bankrupt, like Greece, or, you know, close to becoming so, like Italy. And these country have little choice. I mean, they have to do some consolidation, possibly not too tough, but with such high interest rates they have little option. But, however, there are other countries, like Germany, which are running trade account surpluses and have, you know, relatively sound budgetary positions. And I agree that they should really expand. And that would take care of a lot of problems, the problems of low growth in the South, problem of current account deficits in the south. So what is sure is that now we should have different policies for different countries in Europe and not what Germany’s imposing on everybody, having everybody tighten up at the same time, you know, risking aggravating the global recession for everybody. So on that I do agree.
JAY: Bill, President Obama last week, when he was addressing the crisis in Europe, he said there’s plenty of money there; if they wanted to deal with it, they could. It’s kind of ironic, ’cause one could certainly say the same thing about the United States. But go back to your point about it’s about bailing out banks and not people, meaning, I guess, in terms of growth in the real economy.
BLACK: The new credit facility provides exceptionally low-cost funds to banks, well below supposed market rates. And it’s a way of transferring wealth to the banking sector. And I agree with both of my colleagues, there’s absolutely no reason to do it this way except ideology about the role of the ECB. Obama is correct that Europe has more than ample funds to deal with the crisis, but it has allowed it to twist slowly in the wind, and it has exposed the fact that the leading proponents of ever closer union, France and Germany, didn’t really mean it. In other words, once Greece got in trouble, well, it was the damn Greeks that got in trouble; it wasn’t my fellow countrymen analog in the United States, say, when New Orleans has a hurricane. You know, you bail out Louisiana, whether or not you particularly like Louisiana. But Europe is not a united nation. It’s not close to a united nation. And Germany is imposing policies that are exceptionally destructive to the rest of Europe. And so, ultimately, it is completely ideologically driven. You have insanity, after all, going on, where if you go to Ireland, the official policy mandated by the rest of Europe is to cut your wages so that you can out-export the Portuguese. But if you go to Portugal, the strategy is to slash working class wages so you can out-export the Irish. And this is the road to Bangladesh strategy. And it is quite clear that France, Germany, Netherlands are quite willing to saw off the periphery of Europe. They just can’t figure out a way to do it without hurting their own banks.
WEEKS: Yeah, I agree with Bill, and let me say Paulo and I are quite close on this, too. There are just–there are a few, I think, interpretations that are–that we may have time to come back to. But I want to deal with what Bill said. I think, first, on bailing out banks and not people, I mean, the obvious one is mortgages. I mean, there’s such an easy way to stop these predatory foreclosures, such an easy legal way. All you would have to do is for Congress to pass a law that said before any bank could foreclose on a household, they would have to prove that the household could not pay. And that–and you could have strict guidelines about, you know, if you’re unemployed, you qualify, if you couldn’t repay, and so on. It would not be difficult to do that. We’ve done that and other things. But instead of that, we have, you know, a Rube Goldberg bill to try to help people in their mortgages that doesn’t work and doesn’t have enough money. And so that’s a clear example of how they’re willing to bend over backward for the banks, but you put something that’s, you know, really second-rate and doesn’t work for mortgage holders. And also what I–very briefly just say something [about] what Bill said about cutting wages. It’s true. A couple of–about a month ago, I wrote a article called "The Italian workers caused the Italian crisis", I mean, where the argument is, you know, wages are too high, benefits are too great. I mean, it’s really annoying about human beings, isn’t it? You know, they expect to–they grow–they continue to live after they quit working. If just people died when they’re 65, we wouldn’t have this pensions problem. And, I mean, this ideological assault on everything progressive and everything to do with the welfare state, I mean, the message being pushed by the right in the United States and in Europe is it’s the welfare state that caused this crisis. That’s the problem. We just get rid of it, we’ll be okay.
JAY: Paulo, what do you make of this argument that this is all about saving the banks, whether it’s putting liquidity into the financial system or its imposing austerity policies on people of Europe, that this was really about strengthening the banks’ bottom line without too much regard to what happens to the people of Europe?
MANASSE: Well, I agree that, you know, you know, even in Europe, all this money given to the banks are kind of raising a lot of doubts, and, you know, nobody likes banks anywhere in the world. And, you know, in Europe, the, you know, banks are not loved, as they are not in the U.S. Let me say something, however, and that may explain, despite that, the fact that banks are being bailed out. And this, unfortunately, I mean, for the way in which our system is built, has to do with the key role that banks play between intermediation, so just transferring money from savers and households to firms. You know, this is intermediation. And like in the U.S., in Europe the role of banks is much larger in financing firms than in the U.S. In the US, you know, firms go to the, you know, stock exchange market, they get the quotes, and then they raise funds from the stock market. In Europe, this happens to a much smaller extent. In particular, in Italy, for example, it’s very small. And, therefore, if banks fail, you know, [incompr.] what this means is that, you know, this has a number of domino effects on the economy, not only on banks. You know, who cares about banks? But if banks fail, then depositors will not be able to get their money back, so households will, you know, not be able to get their money back and firms would not be able to get their credit, and then they would shut off, and then we’ll have mass unemployment. Yeah, we’ll have, you know, a joint debt and banking crisis in the same way we had many in the past. I mean … Argentina being the obvious examples. But debts, you know, there are scholar articles about the crisis of banking, the sovereign debt crisis. And the evidence that we have is that when we have a joint debt and sovereign debt and banking crisis, that’s the worst that can happen to the economy. You know, unemployment goes through the roof and we have poverty and, you know, at least for two or three years we really have a very bad situation. So I think this is the worry that explains why, you know, a lot of money’s put to the banks. Clearly, they should be much more constrained. I mean, there would be a credible threat, for example, of ECB to use this money not just to kind of, you know, get a fat profit by, you know, this carry trade–you borrow at 1 percent and you invest at 7 percent–but to lend, effectively, this money to the firms which are in very shaky position, and the threat could be: either you do it, or, you know, we’ll not renew these credit lines. So there must be a way in which to make sure this money gets to the economy. And about the ideology of the ECB, if I could just make a kind of comment, it’s true that there is huge ideological factors here, such that the ECB doesn’t play its proper role of lender of last resort as the Fed does in the U.S. But you have to remember that the ECB is basically the result of a compromise in which the Germans accepted this joint currency and accepted to give up their beloved Deutsche mark only if the new ECB was very, very similar to the Bundesbank and only–indeed, stated–there was written, you know, in gold and on the stone or whatever, you know, the law that it would prohibit financing, you know, budget deficits by the central bank. So it’s now–in the times of crisis, this rule is crazy, but you have to understand where it comes from.
JAY: Right. John, if I understand it correctly, most of the money that’s being borrowed by the European private banks is going to actually be used to pay loans that are coming due in 2012, and maybe buy some sovereign–some bonds from some of the European countries. Very little of it’s–is actually expected to go into actually the real economy as loans to businesses and such. So, I mean, it raises the question: is the private banking system essentially broken? Is this just an endless pit? And does there need to be some alternative to it?
WEEKS: Yes. Well, I think that what Paulo says is quite true. I mean, banks–in a market economy, a capitalist society, you need banks. I would have done what the Swedish government did in nearly 1990s: I would have nationalized them all. Those were not social democratic governments that did that in Sweden. That was a conservative government in Sweden. Now, then I think they were rather foolish. They sold the banks back to the private sector. They should have kept them in public sector. But that is the only, it seems to me, reasonable solution to this problem. What should have happened is a year ago the Central Bank of Europe should have bought all of the Greek debt. It would have been easy to do. It is, like, one-thousandth of the assets of the Central Bank of Europe. Germany would have embarked upon an expansionary policy. And we would not be in this problem now. We wouldn’t have the speculation. You could impose austerity on Greece if you wanted to after doing that, and it might–it would be less painful, because they wouldn’t have the debt overhang. They didn’t do that. So what they did is they just kept putting the solution off. And I think it’s because to a great extent the German government, first of all, it’s led by very shortsighted and small politicians. We’re a long way from, you know, the–Adenauer’s reich, right-wing as he was, and much less Willy Brandt. And they’re afraid to abandon their export-led growth policy. It was a problem when the world economy was expanding. It’s a disaster to pursue export-led growth when the world economy is contracting, as Paulo has suggested and as Bill suggested.
JAY: Right. Paulo, what do you make of that, they should have just–and maybe still should–just nationalize these banks, rather than pour more money into them?
MANASSE: Yeah. I mean, in theory I think the solution was the right one, but we are in a much worse situation, because, you know, at the time, the Swedish state was sound and where, no doubt, was not a sovereign debt crisis, in Sweden. In Ireland, you know, what happened is that the government in Ireland just basically bailed it out. So, you know, the–and gave guarantees to banks, and that worsened, and transferred a lot of money to banks to–either to buy them out or to transfer the money. And as a result, the state went bust. So the difference between Sweden and Europe now is that Europe now is in the middle of a huge debt crisis, and so that they don’t have the money to nationalize the banking system. So [incompr.] I think this option, which was in theory available a few years ago in Sweden, is simply not available any longer. So things are much more difficult.
JAY: Bill, the last word to you. What do you make of some form of public banking system as the only, perhaps, effective solution to all of this?
BLACK: Well, first, let’s get real. The intermediary function, which means the banks are supposed to get money to finance productive purposes in the real economy, broke completely. The banks did the opposite. They provided funds to the least productive activities, the most fraudulent, the most bubble-creating. Second, people in the streets may not like bankers, but people in high government love bankers, and they love bankers worldwide, and they do tend to listen to them quite heavily, because they’re a leading source of political contributions. But also, as my colleagues have mentioned, in Europe and in Japan, compared to the United States, there’s vastly more dependence on banks than on the general capital markets to get funds. Third, TINA–there is no alternative–is the great ideological disaster, coupled with the concept that there was something virtuous about not running a deficit. The United States has run deficits roughly 93 percent of every year. And it’s had its greatest growth opportunities when it’s had deficits. When it has attempted to contract and end deficits, it has been followed in every case by a depression, except this case, which is a mere great recession. [incompr.]So whether or not you nationalize the banks, you assuredly should take insolvent banks and close them and reopen them the next day, which is what we do in the United States routinely, in the savings and loan crisis. It’s called a pass-through receivership. And that option is fully available. It will keep the economy going, and you can choose your national policy on public versus private or some mixture. But the current system is broken. Ireland is broken because de facto it sought to bail out the German banking system. And there’s a small scale problem in terms of the size of the Irish economy versus the German banking problem. So the euro is fundamentally flawed as it is set up. The ECB is fundamentally flawed as it is set up. Yes, we all understand the historic reasons why it screwed up, but what a population needs to do is adopt some degree of pragmatism and learn when events have changed. And so the bogeyman is not hyperinflation. We should be so lucky as to have to 2 to 3 percent inflation. That would actually be helpful in recovery. So right now everything in the system–the so-called Stability and Growth Pact, the single currency, and the single interest rate are conspiring to make sure that the periphery cannot recover and will be locked in long-term recession with sharply falling real wages to the working class. And that is what has tipped them back into recession. And according to the ECB, it’s taking the entire eurozone back into recession. And we haven’t mentioned it, but the Brits’ Cameron is also very bad on this ideological ground.
JAY: Thank you all for joining us. And we’ll do this again. You clearly can’t unravel all this in one session. So, early in the new year, I hope we can go at this further and maybe focus more on what possible solutions there might be. So thank you, gentlemen, for joining us. And thank you for joining us on The Real News Network.
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