Globalization Checkmated? Political and Geopolitical Contradictions Coming Home to Roost

By Thomas Palley (Guest blogger)

The deepening of economic globalization appears to have ground to a halt and the process may even unravel a little. The sudden stop has surprised economists, whose belief in globalization has strong parallels with Fukuyama’s (1989) flawed end of history hypothesis. The paper presents a simple analytic model that shows how economic globalization has triggered political and geopolitical contradictions. For the system to work, politics within countries and geopolitics across blocs must be supportive of the system. That is missing. The model is applied to a global economic core consisting of the US, China, and the European Union. It is revealing of multiple tensions, fracture lines, and contradictions. Within the US, globalization has delivered economic outcomes that have estranged the electoral bases of both major political parties. It has also delivered outcomes that are inconsistent with the US neocon geopolitical inclination. President Trump is a product of those forces, and he will likely prove to be a historically significant figure. That is because he has surfaced geopolitical contradictions that cannot be swept back under the rug. Ironically, his biggest impact may be on the European Union, particularly Germany, which is being compelled to recognize the neocon nature of the US and the vulnerabilities of dependence on US exports and technology. China was already aware of its vulnerabilities in those regards.

Read rest here.

James Galbraith on the European Crisis

Lecture at the Renner Insitute in Vienna, October 6.

Kicking away the ladder too

The table below comes from Broadberry and O’Rourke's The Cambridge Economic History of Modern Europe. It shows that national control of the money supply, the monopoly of emission, is a 19th century phenomena, something we discussed with L-P. Rochon in this paper back in 2003.

Note that before the mid-19th century period, which Charles Goodhart aptly calls the Victorian era, central banks had been created for supporting the State’s financing needs. Also, the role of lender-of-last resort (LOLR) in the late 19th century, associated to Bagehot, did not lead to a significant change in the Victorian preoccupation with price stability.

It is only with the Great Depression that the Victorian dreams of a self-adjusting economy with a tendency to full employment and an orderly division of labor, where the periphery only produced commodities and imported manufactured goods, were utterly shattered. In my view, an contrary to Goodhart, the crucial element on the rise of Keynesian Central Banks was the abandonment of Say's law, not of the Real Bills Doctrine, as we discuss here with Esteban Pérez.

I wrote a paper (in Spanish), when I was at the Central Bank of Argentina, that has not been published on these topics, titled 'Kicking Away the Ladder Too,' in obvious allusion to Ha-Joon Chang's use of List's expression. The point is that central banks were used as tools of economic development (the Bank of England for sure), but once central economies went up the ladder they kicked it, suggesting that central banks should only be concerned with inflation. Now that the Keynesian moment has passed, the mainstream has gone back to the inflation obsession.

CIGI Senior Fellow Miranda Xafa on State of The Eurozone

Centre for International Governance Innovation Senior Fellow Miranda Xafa comments on the "State of the Eurozone" discussions which took place on October 6th, 2014 at the the German Marshall Fund of the United States in Washington, D.C. Xafa notes that the recent ECB announcement on asset purchases and the likelihood of a relatively successful forthcoming banking union may help to reduce Euro fragmentation and possibly ease credit issues. She cautions, nevertheless, that such structural reforms alone will not be enough to get the Eurozone out of its current long-run low-growth equilibrium.

Don't Cry For Me Scotland? Bill Black on Failed Banks and Scottish Independence

By Bill Black

I do not know whether the Scots should vote for independence.  I assume that the odds are they will vote against it.  I do know that the reasons advanced for voting against independence by business interest are false.  Indeed, the opposite of what they claim is far more likely to be true.  What I find a joy to behold, however, is the suggestion by the banksters that the Scots should get their economic advice about independence from a group of failed and often fraudulent parasites and that they should avoid any action that creates “uncertainty” or would cause them to act as a Nation rather than a U.K. province.  There is a serious effort to make independence from the Brits sound like the path of economic madness. Each of these asserted business bases for cowering from independence is an insult to the people of Scotland.  In an irony that, if the polls are accurate, is increasingly sensed by Scots, the business arguments against independence, unintentionally, have made a compelling case for independence.  The thrust of the Brit’s strategy is to promise that they will try to cripple Scotland economically should it vote to restore its independence and sovereignty.  Thus we see the English, and their EU allies, claiming that they would prevent Scotland from joining the EU or extort it to adopt the euro (a terrible idea) as a condition of entry into the EU, block its ability to continuing to use the pound as its currency, and even major businesses in Scotland threatening to flee the Nation should it vote in favor of independence.  Labor leader Ed Miliband went so far as to threaten to place armed border guards on the border with Scotland should the Scots vote to restore their sovereignty.

Read rest here.

Riccardo Bellofiore on why Italy’s stagnation could be future for Euro Zone

From The Guardian

This summer Italy fell into a triple-dip recession. After the 2008/09 collapse, the economy stagnated, heading back into recession during 2011 and never really recovering. The philosophy of Giulio Tremonti, who was the economic minister at the time, was to wait and see, until speculation killed Berlusconi’s government. Prime ministers Mario Monti and Enrico Letta followed Brussels’ self-defeating diktat for fiscal rigour, but even with moderate deficits the public debt/GDP ratio soared. The situation remained under control only thanks to the zero rate of interest and rhetoric by the European central bank president, Mario Draghi. Then came along Matteo Renzi, and Italian economic policy was all talk, talk, talk. While turning the screw of authoritarian parliamentary and electoral reforms, future lower taxes and liberalisations are promised to compensate for public cuts and to attract foreign investments. The €80 monthly tax break to lower-paid workers did not raise household consumption, and was instead spent on tariffs and local taxes. Yet in the past few weeks the outlook has changed, with 2014 second-quarter data showing France flat and Germany experiencing negative growth. Greece, Spain and Portugal registered rosier figures only because they were recovering from severe austerity. The eurozone cannot but be driven by the three biggest economies alone. This is a continental crisis within an anaemic global economy. However, an old Gramscian truth about Italy must be remembered: the “backwardness” of its capitalism is paradigmatic. Europe’s exit from the crisis needs the same policies that Italy needs, and without them Italy’s stagnation is the future for the entire continent.

Read rest here.

Bill Lucarelli on The Euro: A currency in search of a state

 

New paper concerning Euro by Bill Lucarelli

From the abstract:

To understand the structural dynamics of the current eurozone crisis, it is necessary to examine the longstanding internal contradictions that the system has inherited from its inception under the Maastricht Treaty and the neoliberal strategy which has governed its evolution from the first experiments in economic and monetary union in the 1970s. A brief narrative of the evolution of the European Monetary Union yields some insights into its peculiar institutional design. More specifically, the article examines the dangerously self-reinforcing logic between speculative bond markets and cascading, deflationary policies of austerity imposed on those countries encountering severe debt crises. This examination reveals the fragile foundations upon which the eurozone was constructed [...] The stark contrast between US monetary and exchange rate policies and the straightjacket imposed in the eurozone by the ECB during the financial crisis that began in 2008 could not be more revealing. As David Fields and Matias Vernengo (2012) [see here] contend,

By buying great quantities of Treasuries, the Fed not only keeps stable bond prices and low interest rates, but also provides assurances that Treasury bonds remain a secure asset. That allows the US Treasury to maintain high fiscal deficits on a sustainable basis. That is the exact opposite of what the ECB has done for the countries in the periphery of Europe. Countries in the currency union lose control of monetary policy and cannot depreciate the exchange rate. But a common currency setting also brings to an end the possibility for a single nation to run fiscal deficits since the sources of funding are either removed or subjected to supra-national control.

Read rest here (subscription required).

Neoliberal Authoritarian Greece: A Nation for Sale & Death of Democracy

According to Henry A. Giroux (2005/6), 'neoliberal authoritarianism' is the process by which upper capitalist class interests reinvent the past, present, & future in the image of a crude exercise of power that unleashes unimaginable human suffering, in order to maximize wealth and influence in social, political & economic affairs at whatever social costs. From Truthout:

When the European Union (EU) and the International Monetary Fund (IMF) came to Greece's rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a euro-zone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were mult-ifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece's gross foreign debt amounted to over 410 billion euros by the end of 2009, so a default would have led to substantial losses for foreign banks and bondholders, but also to the collapse of the Greek banking system itself as the European Central Bank (ECB) would be obliged in such an event to refuse to fund Greek banks.

Read rest here.

Giroux, Henry A. 2005. “The Terror of Neoliberalism: Rethinking the Significance of Cultural Politics.” College Literature 32(1):1-19.

Giroux, Henry A., and Susan Searls Giroux. 2006. “Challenging Neoliberalism’s New World Order: The Promise of Critical Pedagogy.” Cultural Studies ↔ Critical Methodologies 6(1):21–32.

A Call for Change in Europe by the Progressive Economy Foundation

The Scientific Board of the Progressive Economy Foundation of the European Parliament, chaired by Joe Stiglitz and Jean-Paul Fitoussi, and signed by Jamie Galbraith, Ilene Grabel, and Stephany Griffith-Jones among others, has just published a statement called "A Call for Change" that should have an effect on the terms of policy discourse in Europe.You may find the full statement here, in five languages here.

Mark Weisbrot: Why the European Economy Has Done So Much Worse Than That of the United States

 

By Mark Weisbrot,

If we compare the economic recovery of the United States since the Great Recession with that of Europe – or more specifically the eurozone countries – the differences are striking, and instructive. The U.S. recession technically lasted about a year and a half – from December 2007 to June 2009. (Of course, for America’s 20.3 million unemployed and underemployed, and millions of others, the recession never ended – but more on that below.) The eurozone had a similar-length recession from about January 2008 to April 2009; but then it fell into a longer recession in the third quarter of 2011 that lasted for about another two years; it may be exiting that recession currently.

Read the rest here.

European Amnesia: Lithuania Considers Euro Adoption

 

Well, it is quite apparent that the euro crisis had done little to transform the sociology of knowledge concerning inherent problems related to common currencies; Lithuania is on track towards adopting the Euro. Read here. A related post on the issue can be seen here.

PS: Euroization is similar (wrt consequences for countries in the periphery) to the process of dollarization - see here.

Lessons Unlearned: Latvia Adopts Euro

Latvia officially adopted the euro to start off the new year. The prime minister has noted that although this is not necessarily a guarantee towards economic prosperity, it's an opportunity...I deem it a death sentence - For more on the sinking ship that is the euro, see here.

Can Europe be Saved? Yes it can, says Jamie Galbraith

Jamie explains the relevance of the Modest Proposal (co-authored with Yanis Varoufakis and Stuart Holland). There is an alternative!

The fulcrum of the Modest Proposal is an public investment-led recovery. In their words:

The Investment-led Recovery and Convergence Programme (IRCP) will be co-financed by bonds issued jointly by the European Investment Bank (EIB) and the European Investment Fund (EIF). The EIB has a remit to invest in health, education, urban renewal, urban environment, green technology and green power generation, while the EIF both can co-finance EIB investment projects and should finance a European Venture Capital Fund, which was part of its original design. A key principle of this proposal is that investment in these social and environmental domains should be europeanised. Borrowing for such investments should not count on national debt anymore than US Treasury borrowing counts on the debt of California or Delaware. The under-recognised precedents for this are (1) that no major European member state counts EIB borrowing against national debt, and (2) that the EIB has successfully issued bonds since 1958 without national guarantees.

See all the conference videos here.

Why did Marx understand America better than Europeans do today

I somehow didn't see this one before. On June 28, James Galbraith delivered a keynote lecture to the 50th anniversary symposium of the John F. Kennedy Institute for North American Studies, Freie Universität Berlin. The talk is titled "How Come Europeans Understood the Political Economy of America So Much Better in 1861 than Today, and What Did Karl Marx Have to Do with That?" Listen to the audio here.

Jamie Galbraith on Europe and the United States

Yannis Varoufakis posted a translation of an interview given by Jamie Galbraith here. Among other things Jamie suggests that:

"the dominant European narrative of the United States now as then is utterly misleading. It’s the notion that we have somehow in the thirty years since Ronald Reagan transformed ourselves into a free-market, deregulated, privatized, flexible labor market, weak-welfare-state country, which, if you just cast your memory back to the 60′s and 70′s, a totally unrecognizable view of the country, a country that was built by Roosevelt and Kennedy and Johnson, especially Roosevelt and Johnson, and which had extended even into the Nixon administration, which had and has a very substantial social insurance, public investment and regulatory framework. Many things about this have been under assault, some of them have failed entirely, including the regulation of finance, but this is not a Hayekian vision that has triumphed, but rather the one I described in my book, The Predator State. The real politics of the country controls these apparatuses and how much of the benefits are diverted to cronies and oligarchs and political constituents, which captures what happened in the Clinton and the Bush years – and ongoing, of course."

This was first discussed by Jamie in his paper "What is the American Model Really About," which argues that the public sector supports more than half of the economic activity in the US, and in so doing is the main force behind the growth of the economy as a whole.

The Latin American left and its discontents

Since the election of Chávez, fifteen years ago, to the more recent re-election of Correa and the election of Maduro earlier this year, the left of center parties have been on the rise in Latin America. The list is long and includes the Kirchners in Argentina, Lula and Dilma in Brazil, Evo in Bolivia, Correa in Ecuador, Funes in El Salvador, the return of Ortega in Nicaragua, Tabaré and Mujica in Uruguay, and Chávez and Maduro in Venezuela. The Concertación (particularly the Socialists, Lagos and Bachelet), and Ollanta in Peru seem to be in a different category altogether. Lugo in Paraguay and Zelaya in Honduras were brought down by coups (yes they are still around), and López Obrador in Mexico was prevented from getting the job by fraud (these never vanish completely).

Overall the period was one of relatively fast growth for the region as a whole, particularly since 2003. And the recovery from the 2008-9 global crisis was relatively fast in most countries. Further, income inequality and poverty tended to decrease, with the expansion of social spending. Yet, even though growth was more or less general, some countries did better than others, and not all can be simply attributed to the external conditions.

As noted by UNCTAD (2012, p. 58): "the income gap has narrowed in Latin America since the early 2000s, in parallel with a significant economic recovery. Between 2002 and 2010, the average regional Gini coefficient declined by 4 percentage points, and by even more in several countries in South America (Argentina, the Bolivarian Republic of Venezuela, Bolivia, Brazil, Paraguay and Peru). Together with significant improvements in external conditions, the general policy reorientation played a central role in achieving growth with better income distribution. On the macroeconomic side, many of the successful countries followed countercyclical fiscal policies, achieving fiscal balances through an increase in public revenues (including commodity rents) rather than by expenditure cuts." Note that the improvement in income inequality in the 2000s is not a global phenomenon (see figure below from UNCTAD, 2012, p. 56).

There are, obviously, problems, and not everything is perfect. The strategy of development is over-dependent on commodity exports in South America, and the export of people (directly through migration, and indirectly through maquilas; both cases of cheap labor) in Central America and Mexico (see more here or here for the full paper). And that implies that Import Substitution has not gone too far in this last decade. A risk of integrating once again as an exporter of commodities and cheap labor into world markets, this time around with the Asian periphery (i.e. China) rather than Europe and the US, is dangerous. Risks are associated to the instability of terms of trade, remittances and demand for consumption goods in developed countries.

But note that the opposition to the left of center governments has not changed its discourse from the Washington Consensus period. The alternative offered is basically the extension of bilateral Free Trade Agreements (FTAs) and Bilateral Investment Agreements (BITs), like the one recently signed by Colombia, that ossify a peripheral integration into world markets, in the case of Colombia as an exporter of commodities, increasingly oil to the US (see here), which favors mostly transnational corporations and the powerful few in the region (for the Colombian FTA go here).  And ultimately, it is important not to forget that the US geopolitical project for the region is fundamentally one that expands 'free trade' in region (see here). Note that on the Pacific coast, with the exception of Ecuador, the US does indeed already have a FTA.*

MERCOSUR (or MERCOSUL in Portuguese) is the only alternative in town. And yes, it was originally thought as a regular FTA in the 1990s, but the current problems between Argentina and Brazil are a good starting point for a return to the old ECLAC idea that integration was necessary for productive reasons. That is, to increase the size of markets and the returns to scale associated to larger production levels. Development banks like the Bank of the South and the Brazilian BNDES could play a role in that, including pushing infrastructure integration, which is desperately needed. And for now MERCOSUR is there to preclude the expansion of more FTAs, which is in of itself a good thing.

Protesters in the region, the Brazilian ones being the more recent, are welcome and show a thriving civil society willing to demand more and better public spending on services (from transportation to education), less environmental degradation, and accountability from their representatives, and more. But note that while most protests are punctual and associated to specific problems within their respective communities, there are also in Latin America several groups that resemble the Tea Party in the US, in Latin America associated to middle class groups for the most part. They want the reversal of the policies of the last decade that have been good for the majority (including for them too). And like the Tea Party in the case of the US, if governments actually followed their demands they would actually hurt the poor. The cries against the 'populism' of the left of center governments is a thinly disguised demand for the return of the failed neoliberal policies of the 1990s.

* Ecuador, the exception, is interestingly enough dollarized, as are El Salvador and Panama, the only cases of dollarization with FTA. Mind you, while the US does not officially push for dollarization, informally the use of the dollar is always encouraged, and loans from multilaterals guarantee that a sizable amount of debt is in dollars. In a sense, dollarization cum FTA is the US project for integration with Latin America, which makes the European project, hijacked by neoliberals with the euro and Free Trade look good in comparison. Of course, go ask the Greeks, Irish, Italians, Spaniards, and Portuguese what are their views on the euro and the European neoliberal project of integration these days.

The Trade Deal Scam

From Dean Baker

As part of its overall economic strategy the Obama administration is rushing full speed ahead with two major trade deals. On the one hand it has the Trans-Pacific Partnership which includes Japan and Australia and several other countries in East Asia and Latin America. On the other side there is an effort to craft a U.S.-EU trade agreement. There are two key facts people should know about these proposed trade deals.

See rest here.

The US and the Euro-crisis: Lessons from a comparison

There is a striking contrast between how the eurozone and the United States have handled their economic depressions.

From Mark Weisbrot:

"The eurozone recession is now the longest on record for the single currency area, according to official statistics released last week, as the economy shrank again in the first quarter of this year. A comparison with the US economy may shed some light on how such a profound economic failure can occur in high-income, highly-educated countries in the 21st century..." (rest - see here).

Eichengreen on Cypriot Crisis

This column was originally published in Estadao Sao Paulo on March 31st.

All of a sudden, tiny Cyprus is making headlines. How could such a small country, with an economy approximately the size of the State of Maranhao, create such big problems?

The answer is that the crisis in Cyprus epitomizes everything that is wrong with the European Union.

Most fundamentally, there is the very fact that Cyprus was allowed to adopt the euro in 2008. It was already an offshore money-laundering center. Even after problems struck other European countries with oversized banking systems, the EU looked the other way when Cyprus offered high interest rates in order to attract additional hot money. It looked the other way when the banks loaded up on high-yielding Greek debt.

The big Cypriot banks all passed the EU’s bank stress tests with flying colors in the summer of 2011, which seems incredible with hindsight. The government had already lost market access, and it was clear that it would require a bailout. It was clear that Greece would restructure its debt and that this would punch a hole in the balance sheets of the banks. In July 2011 the largest power station on the island then blew up, literally, because the government in its wisdom chose that spot to store live ammunition.

For all these reasons, the writing was on the wall. But no serious negotiations were undertaken for the next year and a half. Cypriot officials didn’t want to admit their negligence, while the European Commission for its part didn’t want to negotiate with a Communist-led government. When negotiations finally commenced last month following the election of a new Conservative government, they took place under severe pressure of time.

But this is no excuse for the ham-handed nature of the package. The Cypriot authorities sought to preserve a broken business model – to hold onto their big Russian deposits by taxing small depositors. They are heavily responsible for the panic that ensued.

But nothing forced the European Commission, the ECB and the IMF – the members of the so-called Troika – to agree to a plan that called into question the inviolability of deposit insurance. The IMF had spent years studying the optimal design of deposit insurance. As we speak, the Commission and the ECB are pondering the design of a common deposit insurance scheme as part of their prospective banking union. Now there are doubts about the safety of small deposits not just in Cyprus but in Italy, Spain and throughout the European Union.

The euro group and its new head, Dutch finance minister Jeroen Dijsselbloem, deserve special recognition. It is the nature of the euro group that the chairmanship rotates. Unfortunately, it rotated to an inexperienced chairman at the worst possible time. By first asserting and then denying that the Cyprus depositor bail-in was a template for how the EU would manage subsequent crises, Mr. Dijsselbloem created high anxiety about the future and raised the likelihood that more bank runs and crises will follow.

The ensuing panic has called into question the very survival of the single currency. To halt depositor flight, Cyprus has been forced to impose capital controls. As any Brazilian knows, once capital controls have been imposed they are very hard to remove. The idea that they will be taken off after a week or a month is fanciful. Those controls make a euro deposit in a Cypriot bank worth less than a euro deposit elsewhere. So much for the principle of a single currency. And so much for the “three freedoms” – free movement of not just goods and people but also capital – that EU membership is supposed to confer.

What should have been done instead? EU authorities were right to acknowledge that loaning large amounts of money to the government so it could bail out the banks was no solution, since this would have saddled the sovereign with unsustainable debts. But they were wrong to insist that the government immediately write down bank deposits, even large deposits above €100,000, since doing so meant destroying at a stroke the financial sector that was the Cypriot economy’s most important business. It consigned Cyprus to a depression of historic proportions.

Instead, EU leaders should have acknowledged that Cyprus hadn’t gotten into this mess without their help. The EU had looked the other way when Cyprus adopted the euro. It looked the other way when its banks went after Russian money. It even gave those banks its seal of approval. The EU should therefore have used its rescue fund, the European Stability Mechanism, to inject funding directly into the banks, repairing their balance sheets. Over time, the banks could have been downsized. Standards for foreign deposits, from Russia and elsewhere, could have been tightened. The problem could have been solved without bankrupting the country.

This approach would have come at some cost to other EU countries. But that cost would have been small, given Cyprus’ small size. And cost sharing would have been fair and just, given the role of the EU in allowing the problem to develop. But this presupposes European politicians willing to make the case to their constituents. It imagines an EU in which decisions are driven by economic common sense and not by Germany’s impending elections.

That, of course, would be a very different EU than the one we actually have, in turn raising the question of whether the actual existing EU can survive.

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.

Troika Kleptocracy

From the Guardian (see here):

"The imposition of a levy on savers in Cypriot banks marks a new turn in the European crisis. Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%, although it's reported these levels may change. The raid has been instructed by the "Troika" – the European commission, the IMF and the European Central Bank – as part of a characteristic "take it or leave it" ultimatum to the Cypriot government. The parliament in Nicosia is being pressed to ratify the deal with the threat that without it there will be no bailout funds and the ECB will withdraw all liquidity support to the stricken banks.

The Troika and its supporters have justified the levy by arguing that the state could not support the debt burden of a bank bailout. But this simply means the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

 ...
But it is foolish of the Troika to assume that its confiscation of Cypriot savings will have no international implications. Savers all across Europe will look on in horror, and are bound to wonder whether it could happen in their own countries. It is entirely possible they will respond by shifting their savings into state or postal savings banks at the very least, even if outright bank runs are avoided. If this happens on sufficient scale, it could further undermine the fragile banking system in a number of countries.

To prevent Troika raids, deposits need to be put into protective custody to preserve both savings and the domestic banking sector. For anti-austerity governments, these funds could then be used to support state-led investment and reverse the European depression."

Read the full piece here.