By John C. Dyer, UK Correspondent
The United States today contemplates default on its debts.
This potential default has been brought about by a game of chicken between Republicans and Democrats over raising the statutory national debt ceiling. Republicans in particular refuse to support raising the debt ceiling" unless the Obama Administration agrees to an approach closer to the European Plan than the Administration has been prepared to accept and despite the fact that the US Congress raised the debt ceiling eight times while George W. Bush was president. As Republicans insist upon this, darkness gathers in those European states that have adopted that Plan.
As Republicans urge austerity measures in the US, evidence mounts that austerity is failing Europe.
For a fortnight all other stories temporarily slipped beneath the waves of the UK phone hacking scandal: Including the news that the US economy has stalled despite quantitative easing.
Meanwhile, Moody has downgraded Portuguese bonds to junk status despite Portugal's new bailout and adoption of even tougher “austerity” measures. In the UK, both Vince Cable, the business secretary and Kenneth Clark, the Justice Secretary warned 24 July that economic figures to be released the next week will continue the persistent flat line of over nine months duration despite the UK's voluntary adoption of an “austerity programme” of public service cuts, asset sell off, and privatization.
Clark warned to expect a four to five year recovery. The Independent Centre for Fiscal studies used the "d" word 10 July 2010. These other stories resurfaced 21 July as the Eurozone partners considered what to do about the failed Greek bailout amid shrill warnings of disaster.
They are only the latest evidence that the West's Plan "A" is not working, but it may be destabilizing Europe.
Spreading Instability threatens the Eurozone
On 29 June 2011, the streets of Athens swirled with thousands of people of every political stripe angry about the austerity package required in exchange for a new European bailout package. They hoped to derail the package, but the Greek Parliament calmly debated and accepted it. Some protestors were anarchists. Some were communists. Many were neither. They were people of every political stripe and not confined to the poor. Commentators suggested the middle class organized the protests, fed up with austerity. It appears some in the middle class had concluded they would be best served by Greece declaring bankruptcy and going it alone, independent of the Euro.
In France and Germany Eurozone leadership spun the Greek implosion as the product of the Greeks' own spendthrift ways. Polls in France and Germany showed the public unwilling to bail out the spendthrifts any longer. But by 21 July the leaders of Germany and France were actively promoting a "selective" Greek default amid shrill calls from the banking sector to "do something.” Why the change? German, French, and indeed UK banks stand to lose. The "contagion" of an unresolved loss of confidence in the Euro threatened the very continuation of the Eurozone, from which Germany and France in particular have greatly benefited.
The UK Coalition spun the situation in Greece and Portugal as object lessons that somehow support the Coalition agenda of austerity cuts to public services, sale of public assets, and privatization of public services. Acting now, we're told, will prevent a Portugal/Greek-like melt down later. The Coalition also pointedly refused to participate in further help for Greece. By 21 July, however, that had also changed.
The UK, while not a member of the Eurozone, was nevertheless conscious that 40% of its exports are to Europe and no one knows the extent of the interconnection between UK banks and Eurozone banks that would face a big hit. Deputy Prime Minister Clegg went before the nation in a televised speech to educate the British public as to the risks to the UK of a total Greek default, meeting mixed reception. Clegg pointed out that Europe is the UK’s single largest trading partner and that UK banks have a substantial investment in the sovereign debt of the “dominos” of Spain, Ireland, Italy, and Portugal.)
In Greece, Portugal and the UK, Euroskeptics argued that the Greek agony may be the fault of the German dominated Eurozone itself. In the UK, Euroskeptics argued that the Greek situation vindicates their distrust of the Eurozone from its onset. As the European Finance ministers met 21 July, Greek polls showed Greeks favoured withdrawal from the Euro and bankruptcy. In the days immediately prior to the meeting there were once again riots in the streets of Athens, this time by taxi cab drivers protesting the austerity cuts. The reports were that it was a protest against the austerity cuts AND changes to the licensing arrangements.
Temporary Reprieve
By the end of 21 July the Eurozone Ministers had agreed on a package that could be applied to Ireland and Portugal as well as Greece, temporarily it seems taking the edge off the skittish "market." The measures adopted spread the pain for Greece over a longer period, hopefully making them more realistically achievable and less painful to the Greek government, but not changing the deal for the Greek people, who still must put up with the draconian austerity cuts and higher taxes on those who pay their taxes. The new deal will lower the overall interest rate to which Greek obligations are subject and double the repayment period.
Is Plan A a cure that is killing its patients?
Commentators in the Press and politicians now in power still predominantly frame the matter in terms of what the market (ie, financiers) want and fear. But as the US seems to move toward the situation in the UK, the UK toward Spain, Spain and Italy toward Ireland, Ireland toward Portugal, Portugal toward Greece, Greece toward bankruptcy and social upheaval, and the Eurozone perhaps toward extinction, more and more people ask, “is the cure killing all its patients?”
In the UK, commentators are beginning to question whether the UK Coalition's inflexible refusal to consider a Plan B reflects the strength of the Coalition plan or its weakness.
In Spain, the "Indignato" movement has picked up steam and credibility as unemployment rose from 20% to 21% as of 24 July. Thousands marched through Spanish streets 24 July.
Greece, Ireland, Spain and Portugal have been following the so-called European Plan since 2008. The European Plan, supported by the IMF, OECD, and much of Europe's leadership, calls for a combination of austerity cuts to public spending, sale of public assets, and privatization of public services.
The IMF and Eurozone have imposed this plan upon Greece, Ireland, Italy and Portugal in exchange for bailout packages to prevent their governments' default on their sovereign debt. In the UK, by contrast, the Coalition voluntarily adopted the plan last year, arguing that to do so was necessary to prevent the situation faced by Greece, Ireland, Italy and Portugal.
Greece tried to follow the required plan, implementing severe cuts and tax rises, privatizing traditional public services, selling public assets. It is true that its success in doing so has been hampered by endemic tax evasion and resistance from privileged interests within current Greek society. But the important point is, too many people have suffered sharp curtailment of services and an increased tax burden for those who did pay their taxes.
But Greece's national debt remains 150% of its GDP and is growing. The Greek economy has tanked. Unemployment has grown massively, with as much as 40% of its young people unemployed and more and more emigrating to greener pastures- as in times past. Ordinary people groan beneath this past year's taxes and consumer price increases. Creditors charged Greece over 16% interest on its national debt. The gap between the economy's ability to pay back the nation's debts and what the nation still has to pay has widened.
There are those who point the finger of blame at the high interest rate Greece pays to its creditors and its inability as a member of the Eurozone to devalue its currency. High interest is certainly a factor, but note that the lower interest rates across those who have implemented the European Plan have not yet saved anyone else either.
As expressed by a man on the streets in Athens to a BBC reporter, in the view of the man in the street Greece has nothing to sell with which to make money other than its tourist trade. Some will argue they are ignoring some key assets, but the general assessment in European creditor capitols is not far different.
It is generally acknowledged in European capitals that Greece's prospects to grow its Gross Domestic Income (GDI) sufficient to pay back the debt is nil, control over its currency or not.
Greece is not alone. Portugal and Ireland are also following the European Plan in exchange for bailouts of their sovereign debt. Each, despite following austerity plans, have required new bailouts. Their economies simply have not been able to generate margins sufficient to meet their obligations. Each has had to accept new austerity measures and increase privatization despite the demonstrable failure of their economies to cope with the terms of the original austerity plans.
Are Plan A’s neo-classical theories the right answers to the wrong questions?
The UK and the US are not subject to the hefty interest rates to which Greece, Portugal, and Italy are subject. But the UK and US economies are not improving. Borrowing in the UK still exceeds borrowing in the prior year. There is good reason in today's global market to question the assumptions for recovery. The economic condition of Southern Europe and Ireland owes much to their status as beneficiary economies to the Northern European power house and therefore to the competitive status of Northern Europe in the global economy.
Europe owes some of its luster to the post war power of the United States economy. But after WWII, only one player held the all the cards in the deck. Today dozens of players compete on the global stage, with China, India, and Brazil closing in rapidly on the leading economies. Those economies in Europe that benefited from the expanding US economic machine of the Post War era and the Marshall Plan may well have to adjust expectations regardless of measures they take because of this dispersion of economic power across the globe.
There is still no assurance that Ireland, Spain, Italy, Portugal, or for that matter, the UK will succeed despite the new and deeper cuts and privatization, or the kinder gentler repayment terms.
After three strikes, shouldn't the player be out?
Shouldn't the Plan be abandoned as failing? Apparently not. Instead, European leaders impose it with new vigor. Even in Greece, the new 21 July plan does not abandon the Plan.
Europe and the UK are following Neo Classical theory. The US is following monetarist theories. Both failed the West during the first three years of the Great Depression in the 1930s. Both are failing now. Isn't that supposed to be the definition of insanity: Persevering with a delusion in the face of contrary signals from reality?
As history repeats
Frighteningly, history seems to be repeating itself. The dark clouds of social instability and depression gather.
It is not clear where this turmoil in Eurozone, the UK and the US will lead.
But isn't it time for Plan B?