Germany and the Eurozone Sovereign Debt Crisis:
the Lessons of History

Hugo Radice

“The eurozone has decided that the losses of private sector creditors should be socialized and the ultimate burden fall on the taxpayers of deficit countries. The latter will then suffer first a slump and then years of fiscal austerity.”— Martin Wolf, “The eurozone after Strauss-Kahn,” Financial Times, 18 May 2011.

Demonstrators hold a banner depicting a big fish as IMF-EU-ECB during a protest in Athens, Greece.

With pig-headed persistence, Germany is continuing to prioritize the rescue of German banks from their reckless lending to europeriphery banks and governments, over the wellbeing of millions of working people in the so-called ‘deficit countries.’ As financial journalists are now pointing out, the markets for Greek, Irish and Portuguese government bonds, and for the credit derivatives used to insure them, already show that the German obstinacy lacks any credibility. In the short term, forcing the repayment of debts through savage cuts in public expenditure is having exactly the consequences that Keynesian economics predicts: slashing public sector employment and incomes leads to a worsening of the public sector deficit, as tax revenues fall (from both incomes and consumer spending) and the state welfare bill rises. In the medium term, continuing austerity makes it impossible to undertake the investments, both public and private, that are essential if the indebted countries are to improve their international competitiveness. Sooner or later, sovereign bondholders are going to have to be forced to accept losses, and that means that ultimately banks all across Europe will have to do the same.

Exit Strategies?

The focus of current discussions is on finding a way out of this dilemma. According to Martin Wolf’s data, originating from the IMF, German banks which have lent abroad are currently owed over 150% of their total equity capital by banks and governments in Portugal, Ireland, Greece and Spain. French banks are second with just under 100% of their equity exposed, banks in the rest of the Eurozone about 50%, and UK banks some 45%. The rankings reflect the relative positions of these countries in terms of trade and fiscal balances: Germany is noted for its permanent trade surplus, both with the rest of the eurozone and with the rest of the world as a whole, and for its high rate of domestic savings.

The great dilemma facing German Chancellor Angela Merkel is that precisely because German banks could not make money, as their British counterparts did, by pushing high-interest loans upon a profligate household sector, they ended up lending abroad; and since they had neither the branch networks nor the local knowledge to lend directly to households and businesses in the europeriphery, they were happy to find that governments and local banks were only too willing to borrow from them. What is more, the local banks were all too often able to make easy money by using those loans to purchase bonds issued by their own governments.

What can we learn from economic and financial history that might help Mrs. Merkel and the eurobankers in their time of trouble? The obvious place to start might be the sovereign debt crisis that afflicted the Third World, and especially Latin America, in the 1980s. Here the present OECD Secretary-General, Angel Gurría, who has been a steadfast supporter of Chancellor of the Exchequer George Osborne‘s austerity programme in Britain, is particularly well-placed to advise them; for he was one of the small group of Mexican officials who negotiated the resolution of the Mexican debt during the great stand-off of 1982. The great money-centre banks of New York, London and Tokyo, as well as the IMF and oil-rich sovereign creditors like Saudi Arabia, were all persuaded to take what is now insouciantly called a ‘haircut,’ under the threat that the Mexican debt service moratorium would, if it became a complete debt default, lead to the collapse of the international financial system.

Unrepayable Debt

Of course, Mrs. Merkel’s advisers, and especially the European Central Bank, will respond that the eurozone in 2011 is not the Third World in 1982. However, an unrepayable debt is an unrepayable debt, regardless of time and place. In the usual textbook case, unrepayable debts, whether private or public, can be socialized by the sovereign state imposing the necessary tax burden upon its citizens: this is precisely why in normal times government debt is regarded as the least risky. But however much we may have tried to ignore the fact, we have all known ever since its launch that the euro could not function in the same way as a textbook currency in the absence of a single European fiscal authority and unified budget. It is possible that this accounts for the unwillingness of monetary authorities around the world to accord the euro the role of a real alternative to the dollar as a reserve currency, although this might be crediting them with more intelligence than they displayed in other respects in the last twenty years of bubbles and busts. What is more, had we examined more closely the public finances of certain federal states, notably the USA and Germany but also more remotely Mexico and Nigeria, we might have realised how the diffusion of political authority in matters fiscal can also seriously undermine the textbook story.

In any case, applying the old adage of ‘follow the money’ – in this case, back from borrowers to lenders and thence to its ultimate source in savers of various kinds – we can see how frustrating it is for German high finance. It seemed to have had remarkable success in getting German workers to pay for the costs of the post-communist unification of Germany: the Hartz rounds of labour market ‘reforms,’ and the close cooperation – whatever their rhetoric – of the unions, enabled Germany to regain and then increase its competitive advantage in manufacturing. Within the newly-formed eurozone, this could only mean one thing: large trade deficits in the least-competitive member states, matched by capital inflows from Germany and the rest of the rich euronorth.

Just as China sustained U.S. demand by the loyal purchase of U.S. Treasury bonds, so Germany sustained europeriphery demand by its banks’ willingness to purchase government and bank debt. But there is a vital difference: the dollar is the world’s preeminent reserve and trading currency, by a very long way (over 60% compared to around 25% for the euro), and the U.S. monetary authorities therefore enjoy the privileges of ‘seigniorage’: in other words, the money markets will absorb pretty much as many dollars as they choose to issue. Indeed, paradoxically it is to the dollar that global investors flee for security in times of trouble, their herd behaviour confirming the dollar’s uniquely privileged position. All the Fed has to worry about is opposition from monetary faddists in Congress; whereas the European Central Bank (ECB) has not only to convince the markets that they know what they are doing, but also has to get the 17 eurozone governments to agree. There are thus powerful reasons for institutional inertia and indecision.

Whatever transpires in the coming months, it seems increasingly clear that forcing complete debt repayment on schedule upon Greece, Portugal and Ireland cannot work. But this serves to highlight a lesson from history that takes us way back beyond the 1980s Mexican case. And the great irony is that the debtor country in question was not Portugal, Greece or Ireland, but – Germany. When the victorious allies enforced an impossible burden of war reparation payments upon Germany at Versailles in 1919, the outcome was disastrous, as the young Keynes warned at the time in his famous pamphlet The Economic Consequences of the Peace. To very many historians, it was the imposition of endless austerity upon the Germans that provided the economic and social conditions underlying the rise of Hitler. What is more, it was through absorbing the lessons of that disastrous policy that the USA was persuaded, after 1945, to take a completely opposite course of action in the Marshall Aid programme, which enabled the economic reconstruction of Germany and of Western Europe as a whole. Surely the political and financial élite of Germany today know enough of their own country’s history to appreciate that austerity is not the answer? •

Hugo Radice is Life Fellow at the School of Politics and International Studies, University of Leeds.

Shamus Cooke

Connecticut's Democratic Gov. Dannell Malloy: Nice rhetoric to camouflage Republican policies.

OBVIOUS POLITICAL TRUTHS are sometimes smothered by special interests. The cover-up of the Democrats’ national anti-union agenda is possible because the truth would cause enormous disturbances for the Democratic Party, some labor leaders, liberal organizations and, consequently, the larger political system.

Here is the short list of states that have Democratic governors where labor unions are undergoing severe attacks: Massachusetts, Connecticut, Oregon, California, New York, Illinois, Washington, Hawaii, Minnesota, Maryland and New Hampshire. Other states with Democratic governors are attacking unions to a lesser degree.

For example, the anti-union Democratic governor of Connecticut is demanding $1.6 billion in cuts from state workers! The contract has not been ratified yet, but Governor Malloy referred to the agreement as:

The anti-union Democratic governor of the state of Washington uses similar language:

The anti-union Democratic governor of Oregon is demanding 20 to 25 percent pay cut for state workers:

But [says the Governor] those concessions will be made across a bargaining table through our collective bargaining process and with mutual respect.

These union campaigns are doomed to fail if the energy generated by them is funneled into the 2012 campaign for Barack Obama.

If labor unions continue down their current path of making huge concessions in wages and benefits while making excuses for the Democrats attacking them, the movement will wither and die.

Without using aggressive demands aimed at solving the immediate problems facing working people, a social movement cannot be created to deal with the crisis facing labor unions and working people in general.  ONLY a national social movement with Wisconsin-like energy has the potential to shift the direction in which the country is going, away from the rich and corporations towards working people. Such a social movement cannot be born from soft demands, half-fought battles, or campaigning for Democrats.

About the Author: Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action. He can be reached at portland@workerscompass.org

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Morris Berman | APRIL 11, 2011

Morris Berman at book reading

WE ARE AT A POINT IN AMERICAN HISTORY where, to paraphrase Blake, Bad is Good. This is why I’m rooting for a Palin presidency: if anyone can deepen our self-destruction, it’s Sarah. Meanwhile, two articles just appeared documenting the process even further, so I’d like to share them with you. The first is by my hero and yours, Chris Hedges: “Why the United States Is Destroying Its Education System,” which he posted yesterday on truthdig.com. The second is by Nobel laureate Joe Stiglitz, titled “Of the 1%, by the 1%, for the 1%,” which you can find at vanityfair.com. 
To start w/Chris, then: He points out that the American educational system “celebrates rote vocational training and the singular, amoral skill of making money. It churns out stunted human products, lacking the capacity and vocabulary to challenge the assumptions and structures of the corporate state.” 

[What we have in this country by now, of course, are nearly 310 million stunted human products. Not exactly the best raw material for turning the system around, I’m guessing.]

Talking about the NYC school system, Chris goes on: “In the past 10 years we’ve had the emergence of both Mike Bloomberg’s Leadership Academy and Eli Broad’s Superintendents Academy, both created exclusively to produce instant principals [without principles, one might note] and superintendents who model themselves after CEOs.” The problem, he says, is that “To truly teach is to instill the values and knowledge which promote the common good and protect a society from the folly of historical amnesia. The utilitarian, corporate ideology embraced by the system of standardized tests and leadership academies has no time for the nuances and moral ambiguities inherent in a liberal arts education. Corporatism is about the cult of the self. It is about personal enrichment and profit as the sole aim of human existence.” [Sound like any country you know of?]

But there’s more: “The truly educated become conscious. They become self-aware. They do not lie to themselves. They do not pretend that fraud is moral or that corporate greed is good. They do not claim that the demands of the marketplace can morally justify the hunger of children or denial of medical care to the sick. They do not throw 6 million families from their homes as the cost of doing business.” And they know that “moral independence is the only protection from the radical evil that results from collective unconsciousness.” For “Once justice perishes…life loses all meaning.” As Hannah Arendt put it, “The greatest evil perpetrated is the evil committed by nobodies, that is, by human beings who refuse to be persons.”

“Unconscious civilizations,” Chris concludes, “become totalitarian wastelands.”

Of course, with 310 million nobodies (stunted human products), what other future is there for the US? Rhetorical question. Let’s turn to Joe Stiglitz.

The data: the upper 1% of the American population is now taking in nearly 25% of the nation’s entire income every year. In terms of wealth, they control 40% of it. Over the past decade, their incomes rose by 18%; those in the middle have actually seen their incomes fall. All growth in recent decades, and more, has gone to this upper 1%. “In terms of income equality,” he tells us, “America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.” Joe goes on:

“The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards ‘performance bonuses’ that they felt compelled to change the name to ‘retention bonuses’ (even if the only thing being retained was bad performance)…. Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul.”

“With youth unemployment in America at around 20 percent,” writes Stiglitz (and in some locations, twice that); “with one out of six Americans desiring a full-time job and not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from ‘food insecurity’)—given all this, there is ample evidence that something has blocked the vaunted ‘trickling down’ from the top 1 percent to everyone else.”

An additional problem here, he says, is that while “Trickle-down economics may be a chimera…trickle-down behaviorism is very real.” In other words, the rest of the country wishes to live like the top 1%, but they can’t; so they live beyond their means.

With this, it seems to me, we come to the crucial point. Joe writes that “Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is…the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important.” But frankly, except as an abstraction, I find this dubious. Americans may pay lip service to these ideals, but if, as Joe says, the goal of our fellow-countrymen is to live like the top 1%, then there is no getting around the fact that they have no larger vision than making a lot of money. (“In the United States,” wrote John Steinbeck, “the poor consider themselves temporarily embarrassed millionaires.”) They are not enraged that they live in a system in which one person, Bill Gates, can accumulate $50 billion–not at all. Rather, they just want to accumulate $50 billion themselves. Which brings us back to Chris’ notion of a system that turns out “stunted human products,” Arendt’s “nobodies…who refuse to be persons.” Dummies, in a word; moral and intellectual dummies. The goal of these 310 million nobodies is hardly fair play or a more equitable distribution of wealth or a sense of community (let alone, community); no, it’s getting a larger cut of the pie, period. The vision is empty, and the people are empty. And thus, so is the American future.

Stiglitz was, of course, paraphrasing the Gettysburg Address with his title. Lincoln’s concluding words were: “government of the people, by the people, for the people, shall not perish from the earth.” Tomorrow is the 150th anniversary of the start of the Civil War, and obviously a lot of water has gone under the bridge since then. So perhaps we need to complete Joe’s thought, and paraphrase Lincoln’s conclusion a bit differently (pardon the verbiage—or “verbage,” as Sarah Palin calls it): “government of the stunted human products, by the stunted human products, for the stunted human products; which thus cannot help but perish from the earth.”

ABOUT THE AUTHOR

Morris Berman is well known as an innovative cultural historian and social critic. He has taught at a number of universities in Europe and North America, and has held visiting endowed chairs at Incarnate Word College (San Antonio), the University of New Mexico, and Weber State University. During 1982-88 he was the Lansdowne Professor in the History of Science at the University of Victoria, British Columbia. He resides in Mexico. 

(c)Morris Berman, 2011

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Cornel West

CORNELL WEST debates Al Sharpton.

ONE OF THE QUESTIONS that puzzle us is why Cornel West took almost a whole decade to step forth and denounce Barack Obama’s frequent and clear departures from the implicit progressive agenda he ran on. 

By Morris Berman

Berman

GIVEN HOW MUCH WE HAD IN COMMON, it’s perhaps a bit odd that Joe Bageant (1946-2011) and I never met (although I think we did correspond at one point). He even wound up living in Mexico a good part of the time. But the real connection between us is the congruence of perception regarding the United States. Joe came from unlikely roots to have formulated the political viewpoint that he did: working-class, right-wing, anti-intellectual, flag-waving, small-town Virginia. A “leftneck,” someone dubbed him; it’s not a bad description.

There aren’t too many leftnecks in the United States; of that, we can be sure. This was the source of Joe’s frustration: extreme isolation. Because he realized that the U.S. was the greatest snow job of all time. He likened the place to a hologram, in which everyone in the country was trapped inside, with no knowledge that the world (U.S. included) was not what U.S. government propaganda, or just everyday cultural propaganda, said it was. He watched his kinfolk and neighbors vote repeatedly against their own interests, and there was little he could do about it. The similarity between his last book, Rainbow Pie, and my forthcomingWhy America Failed, is in fact quite startling. True, I’m analytical where Joe is homey, and my historical perspective is that of 400 years rather than just the twentieth century; but Joe’s way of addressing the issues is gritty, and right on the money. One can only hope that his book gets the posthumous attention it deserves.

Joe’s focus was his own class: the white underclass of America, 60 million strong. “Generally unable to read at a functional level,” he writes,

“they are easily manipulated by corporate-political interests to vote against advances in health and education, and even more easily mustered in support of any proposed military conflict….Low skilled, and with little understanding of the world beyond either what is presented to them by kitschy and simplistic television, movie, and other media entertainments…the future of the white underclass not only looks grim, but permanent.”

On the positive side, however, these folks lived in what can be called the last genuine community in the U.S.:

“One neighbor cut hair; another mended shoes. From birth to the grave, you needed neighbors and they needed you. I was very lucky to have seen that culture…[and I learned] how our [present] degraded concepts of community and work have contributed to the development of physical and cultural loneliness in America. Not to mention the destruction of a sense of the common good, the economy, and the the natural world.”

“Damn few of us,” he concludes, “grasp how the loss of traditional aesthetic and foundational values…are connected with so much American tragedy.”

One of Joe’s descriptions of that vanished world reminds me of a very moving poem by Gary Snyder, “Axe Handles”. Joe writes of his father:

“All his life he had made his own world with his hands, and fixed it the same way. I’d watched him and [Uncle] Nelson make hickory axe-handles, hoe handles, and oaken mallets, and watched them smooth out the hickory and oak wood by scraping the handles with large shards of broken glass, a practice that went back to pre-sandpaper colonial times. They were quiet and thoughtful as they worked—with their long, patient strokes, handle in lap, pulling the glass along the contours—in what I don’t think it would be exaggerating to call a metaphysical, reflective space…. Pap had learned it from his father, and Nelson had learned it from Pap, and by watching, I learned it from them.”

All of this, he continues, got replaced by the world of chasing money, and by jobs that have no inherent meaning. We no longer have any sense of who we are as a people, he asserts; the “American exhortation to ‘follow opportunity’ is birth-to-grave and relentless.” Meanwhile, with millions unemployed (nearly 20%, in fact), we now have a government “that sends police to break up the tent camps and car camps of homeless unemployed citizens who once belonged to the middle class.” And yet—no one complains! America, Joe tells us, “doesn’t like whiners. A whiner or a cynic is about the worst thing you can be here in the land of gunpoint optimism. Foreigners often remark on the upbeat American personality. I assure them that our American corpocracy has its ways of pistol-whipping or sedating its human assets into the appropriate level of cheerfulness.”

Yet some refuse to take it, and like Timothy McVeigh, come up with a pathological reaction to a pathological situation—in his case, the Murrah Center bombing in Oklahoma City. For McVeigh understood that whatever democracy we once had,

“has been subverted by corporations and bought politicians…[he] believed that America had become a corporate-backed police state consisting of only two classes—the elites and the rest of us—regardless of the party in power. If he was paranoid, he certainly was not alone…. [For] no matter how you connect the dots, or which dots you choose to connect, it comes out the same: our parents’ lives were displaced; our own have been anxious and uncertain; and our children’s are sure to be less certain than ours.”

Nevertheless, the fear that some elites have, that the poor and the working class might eventually figure out where their true political interests reside, is an unfounded one:

“We dumb working folk were clubbed into submission long ago, and now require only…a 24/7 mind-numbing spectacle of titties, tabloid TV, and terrorist dramas. Throw in a couple of new flavors of XXL edible thongs, and you’ve got a nation of drowsing hippos who will never notice that our country has been looted, or even that we have become homeless ourselves….And besides, there’s always bourbon.”

One would think that the widening gap between rich and poor would inflame these folks, right? No such luck, because both classes refuse to acknowledge it. The reigning dogma is that there are no classes or masses, just 310 million individuals, “Marlboro Man types in charge of their own destinies.” Meanwhile, at least 67% of Americans are counting on Social Security for their entire retirement income, and by 2008, the top 1% of Americans earned as much as the bottom 45%. According to the CIA’s World Factbook, in 2009 the U.S. ranked 46th in infant mortality rates (behind Cuba, among other countries), and more than 40 million citizens suffer food scarcity or hunger. “The combination of our poorly educated workforce,” Joe observes,

“and ruthless demagogic oligarchy are not a nationwide problem: they are a national tragedy. It’s one that’s getting worse and is not likely ever to be fixed. The Empire is collapsing inward upon its working base. The oligarchs have skipped town with the national treasury; many have multiple homes in other countries. The inherent natural resources upon which America was initially built by laboring men and women have been squandered….When empires die, they die broke.”

That’s the domestic situation. As for Americans’ awareness of what their government is doing overseas—forget it. We are, he writes, the “Republic of Amnesia.” Couple this historical amnesia with our abysmal public educational system and our daily “engorgement on cheap spectacle, and you get a citizenry whose level of world and social comprehension is somewhere between a garden toad’s and a bonobo chimp’s.”

Meanwhile, we live out a “homogenized national story line.” Corporations own the media, and they employ writers to do our dreaming for us. And the dream they produce is strictly about wealth, and why we as Americans are particularly entitled to it, with no reference to its historical costs—such as the money spent on meaningless wars. In fact, “historical memory has been shaped to serve the ends of empire.” As for the American Dream, this is simply “one of maximum material wealth and ownership of goods and commodities, and the ‘freedom’ to pursue those things until you drop dead.” But the questions won’t go away: “If we are so rich, why do I feel so insecure? If we are so united in our goodness and purpose, why am I so lonely?” Why indeed.

Joe knew what he was talking about, and knew it intimately; which meant he understood that there was no reversing the situation, no saving America at the eleventh hour. He made his own exit, from cancer, on March 26th of this year.

A great American. R.I.P.

©Morris Berman, 2011

ABOUT THE AUTHOR

Morris Berman is well known as an innovative cultural historian and social critic. He has taught at a number of universities in Europe and North America, and has held visiting endowed chairs at Incarnate Word College (San Antonio), the University of New Mexico, and Weber State University. During 1982-88 he was the Lansdowne Professor in the History of Science at the University of Victoria, British Columbia.

Western civilization and with an ethical, historically responsible, or enlightened approach to living within it. Emphasized in his work are the legacies of the European Enlightenment and the historical place of present-day American culture. His books include Dark Ages America: The Final Phase of Empire (Norton, 2006), The Twilight of American Culture (Norton, 2000), Wandering God: A Study in Nomadic Spirituality (State University of New York Press, 2000), Coming to Our Senses: Body and Spirit in the Hidden History of the West (1989), and The Reenchantment of the World (Cornell University Press, 1981). He currently resides in Mexico.

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