Euro crisis unresolved: the cycle of stupidity continues

by Jerome Roos on October 30, 2011

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There’s nothing more frustrating than watching this endless cycle of stupidity unfold. Sometimes it’s just more dignified to face death rather than fight it.

To regular readers of this blog, it will sound like a tiresome cliché by now, but the fact that capitalism never solves its own crises was driven home once more last week by the outcome of the much-anticipated European Union crisis summit in Brussels on Wednesday. Yet again, European leaders managed to stave off an immediate catastrophe by buying themselves some extra time. But, yet again, the fundamental problems remain unresolved.

Here’s a list of points that European heads of state agreed upon:

  • Private creditors will “forgive” 50 percent of Greece’s sovereign debt.
  • European banks will be recapitalized to the tune of 109bn euros.
  • The European Financial Stability Facility (EFSF) will be ramped up to 1 trillion euros.

And here’s a list of reasons why this is nothing but hot air:

  • The write-down of Greek debt is voluntary. It therefore remains to be seen whether foreign lenders will actually agree to take the 50 percent haircut. If enough private creditors actually refuse to accept the ‘voluntary’ write-down, the plan will formally constitute a hard default, triggering the feared Credit Default Swaps that could unleash another “Lehman’s moment”. Besides, Greece has long since ceased to be the problem. Its $400 billion debt was child’s play compared to the $2 trillion that Italy still owes.
  • Bank recapitalization will backfire. Europe wants its banks to hold a 9 percent capital-to-equity ratio by 2013, but will not inject any capital itself. Since inter-bank lending is already precarious, raising additional capital on private markets will be a costly endeavor for the banks. As “rational” actors, they will therefore have an incentive to shrink their assets (i.e., lend less money), as opposed to raising more capital. This will further aggravate the credit squeeze, which is a retarded thing to do in a context of pro-cyclical austerity measures. The banks know this and will use the argument to hold the EU hostage to their own agenda. It’s an embrace of death.
  • The enlargement of the EFSF rests upon two shaky assumptions: (1) that the large creditor nations underwriting the fund will retain their triple-A rating; (2) that the fund succeeds in raising hundreds of billions of euros in investments from emerging economies like China, Brazil and Saudi Arabia. The first point is critical because France, the second biggest contributor to the fund, is mired in its own sovereign debt and banking crisis and will probably lose its triple-A rating soon, throwing the EFSF into disarray. The second point is problematic because potential foreign creditors like China understandably remain skeptical about the fund’s profitability.

These problems will surface sooner rather than later. Don’t be surprised if EU leaders are called back to Brussels within a few weeks or months to hammer out yet another temporary solution… and so on, and so on… until the edifice finally crumbles and the eurozone’s inevitable demise finally becomes a reality. There’s nothing more frustrating than watching this endless cycle of stupidity unfold. Sometimes it’s just more dignified to face death rather than fight it.

So here’s what we believe should be done:

  • For starters, the EU should immediately impose capital controls to stem the outflow of hot money, kicking speculators in the nuts and greatly diminishing the risk of financial contagion and future speculative bubbles. A Robin Hood tax on long-term financial transactions should be imposed with immediate effect to pay for the anti-social and counter-productive austerity measures currently being imposed on the people.
  • Greece should default on all of its foreign debt, leave the eurozone and nationalize its banks (which won’t survive a large default). This will trigger a run on Portugal, Ireland, Italy and possibly Spain as well, forcing a series of defaults and the break-up of the eurozone, unleashing a major financial crisis in Europe’s crazily over-leveraged banking system. But at least these countries will then be able to to devalue and print their own currency, ramp up public investments, boost employment and avert a social disaster.
  • The countries of the core should allow their banks to fail (underwriting deposits up to a certain amount to make sure the average citizen is not affected), perhaps nationalizing the banks that are considered “too big to fail”, restructuring them into small, cooperatively-owned credit unions. The European Central Bank should pursue an expansionary monetary policy to make up for the credit squeeze induced by private bank failures. Germany and the Netherlands will oppose this. Screw them. Time to move South.
  • The previous two arrangements will render the EFSF largely irrelevant. But European nations will now be stuck with even higher sovereign debt levels as a result of the bank nationalizations and collapse of tax receipts induced by the inevitable collapse in output that will follow the break-up of the eurozone. Sorry for all of you de-growthers out there, but for now, the only way out of overwhelming debt and mass unemployment remains through growth. Public investment facilities will need to be set up to boost employment and fund the transition towards a sustainable economy.

Whatever we do, we have to make sure this crisis doesn’t further embolden the bankers. Indeed, the crisis must be used to break the bankers’ backs and sever their stranglehold over our economy. Once that is done, we can finally start considering how to build an alternative model of democracy that truly reflects the will of the people, returning power to the masses and ensuring a future based on social justice, cooperation and sustainability. It’s just an idea, you know.

{ 19 comments… read them below or add one }

Thomas Jurgensen October 30, 2011 at 09:38

Hi Jerome,

Thanks for your easy to understand analysis :)

However, I think your proposed solution overlooks perhaps the most fundamental issue: that about 97% of all money is created out of nothing by banks for their own profit – money is debt.

That is basically why we have inflation – in good times banks are more profitable the more they lend (the more money they create). And in bad times we have credit crisis – because when banks stop lending and debts are paid back, the money supply contracts.

The fact that money is created for profit also continually increases inequality by transferring wealth from citizens, businesses and governments in the form of interest to banks. Interest to banks has to be paid on almost the entire money supply!

At the aggregate level, a country can never be out of debt, because then there would also be no money. This also means that if one person is saving, another person must correspondingly be in debt. Debt money creates a situation where everyone has to fight against everyone else to stay out of debt.

A more fundamental solution therefore lies in making the creation of digital money by banks the same as counterfeiting – meaning 100% reserve lending rather than fractional reserve lending. Instead money should be issued debt free by a public but independent authority, so that neither banks nor politicians have control over the money supply, which either leads to inflation or credit crisis. Newly created money can then be spent into existence by the government or used to reduce taxes.

Please see http://www.positivemoney.org.uk/ for more information, particularly their brief video on the front page. They also have a longer lecture like video you can see here: http://www.positivemoney.org.uk/whats-wrong-with-banking-today/the-problem-with-the-banking-system-video/

Finally, I disagree with you that degrowth is not achieveable. Degrowth is exactly what Western economies are starting to do right now because of high oil prices, which leads to price inflation and therefore reduce demand for non-essential goods, constraining economic growth. Although I think your economic analysis are very good, they do miss the input of ecological economics, which says that the size of the economy is constrained by the ecosphere and the availability of physical materials. The debt crisis is fundamentally a crisis of growth – because if growth was high enough debt would be a much smaller problem. We must therefore ask why sufficient growth is not happening, and physical constraints on growth, starting with oil, is a very important reason.
See more here: http://energybulletin.net/stories/2011-10-28/are-we-reaching-%E2%80%9Climits-growth%E2%80%9D

Cheers,
Thomas

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Jérôme E. Roos October 30, 2011 at 14:41

Thanks Thomas, I fully agree with your analysis. The point of my piece was not so much to argue what the future financial system should look like, but rather to emphasize the most basic steps that will be necessary before we can even start pursuing the type of much-needed transformations you mention above. The list is FAR from exhaustive and does not constitute the ‘revolution’ as such :) I merely meant to provide points that contrast directly to what the EU is doing, rather than proposing much-needed other ones. So yeah, my outline totally ignored money creation — which is something we can’t ignore if we’re to seriously transform the financial and monetary system that led to this crisis.

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Thomas Jurgensen October 31, 2011 at 18:56

Great to hear that you do have the issue of money creation on your mind. I hope you can write a little about it one day as we can’t fundamentally solve the financial crisis without changing the monetary system. The problem is that money creation has such a great effect on society (as I mentioned), yet very few people know anything about it – maybe not even people in the Occupy Movement. So increased awareness is sorely needed.

I remember the longer Positive Money presentation quoting some important mainstream figure stating that if people realised how money is presently created and the implications, the current arrangement would not stand a chance of surviving.

Anyway please keep up your great work Jerome! I’ve followed your blog since April and it is always first on my list when reading news :)

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Jérôme E. Roos November 1, 2011 at 01:22

Awesome Thomas, thanks so much for the kind words of encouragement and for following ROAR! I will definitely take up this topic soon! :)

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Stefan November 3, 2011 at 01:56

Meanwhile ROAR Magazine made it into my personal trusted news source! :-)

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Goldstandard October 30, 2011 at 13:17

” Germany and the Netherlands will oppose this. Screw them. Time to move South”

I see. So prudent behavior is punished now, eh? F— you, Jerome. My father never invested in stocks, housing etc so as a carpenter he had to save every nickle so he would be able to retire somewhat more comfortable… You want to dilute the value of fixed incomes and small savings in Europe!?

ECB Inflation for the savers and all those debters are rewarded… what a world.

You see, it is this mentality that proves that socialism (central economic planning) fails again and again. Just look at the history of Greek defaults and the Netherlands… Google it fucker. I ain’t supplying you shit.

Truth be told. Failure is to fail and prudence is to be rewarded. Not the otherway around. #liberty

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Jérôme E. Roos October 30, 2011 at 14:20

Prudent behavior? You mean running a persistent trade surplus dependent on a currency that is 60 percent overvalued? You mean recycling the resultant capital surplus through your banking system in a way that so terribly overleverages your financial institutions that they now need a second bailout in just three years? You mean raising interest rates at a time when the periphery is about to nosedive into depression? You mean forcing pro-cyclical austerity measures onto countries that need growth more than anything in order to emerge out of their choking sovereign debt levels? You mean messing up your common currency area so pathetically that you need to install a ‘Bazooka’ stability fund just to keep things together? You call that prudence? Don’t make me laugh. Please.

Besides, gold standard? Are you joking? You do realize that the euro fulfills the functions of a gold standard in Europe today, don’t you? Fixed exchange rates, loss of sovereign monetary policy, tight money supply. The euro is the closest thing the world has to a gold standard. Truth be told. Learn some economics.

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orionorbit November 2, 2011 at 01:13

“ECB Inflation for the savers and all those debters are rewarded… what a world.”

The function of the central bank is not to enforce some moral rule that involves punishing vice and rewarding virtue. It is to implement monetary policy in such way that it makes the most people better off. Sometimes it has to be tight and hurt debtors, sometimes it has to be loose and hurt creditors. But the creditors understand these risks when they loan the money.

Finally, i’m not going to get into the economics of the gold standard because Jerome already covered this. I’ll just add that if you or your father feel cheated by holding cash, or if he feels that the purchasing power of his savings will be diluted, he is free to buy gold. So are you. So I don’t get why the rest of us should be asked to abandon fiat currencies. If some people like me and Jerome are suckers and like to invest our savings in promises of the US government expressed in pieces of Green paper with dead presidents on it, that’s our problem. We should be free to do that, just like you and your father are free to buy gold.

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Allen Ruff October 30, 2011 at 14:18

Jerome:
While I think this is a very good piece overall, I must take issue which a central point — your assertion that “capitalism never solves its own crises”. That’s not true in the sense that capital has long found ways to forestall the ultimate collapse inherent in the system — through “temporo-spatial fixes” and nouveau primitive accumulation (ala Harvey) or “creative destruction,” through war, fascism, etc.. The capacity of capital to regain its “balance” and set off on new periods of growth and expansion long ago gave lie to the “inevitableism” of so much older Marxist theory (post Marx). That isn’t to say that we may have entered a period beyond stagnation and the capacity of either neoliberalism or neo-Keynesiansim to remedy the limits of growth. Yes, the crisis is deep. Does it portend the actual birth of the new in the shell of the old? We’ll see.

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Jérôme E. Roos October 30, 2011 at 14:29

Thanks Allen. That’s the exactly Harvey’s point though: capital’s solution to one crisis lays the foundations for the next one. The system averts collapse by displacing crisis through spacio-temporal fixes, but it never truly solves the crisis as such. Here’s the crucial quote from The Enigma of Capital: “The fundamental theoretical conclusion is: capital never solves its crisis tendencies, it merely moves them around. This is what Marx’s analysis tells us and this is what the history of the last forty years has been about.”

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Fantasma October 30, 2011 at 20:00

Dear Jerome,

Try to find out and write something about what happened in Greece on October 28th.
October 28th is a national Greek holiday because Greeks celebrate their victory over the Italian Fascists that attacked Greece on 10/28/1940. Each year in all the major of Greek cities student parades are held, and in Thessaloniki (the second in population Greek city) a military parade takes place.
This year in all major Greek cities people drove away the government officials who in turn cancelled the parades.
This is considered a major event here in Greece, but international press gave little attention to it, perhaps because this overwhelming protest should be kept as “quiet” as possible.

Thanks

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Jérôme E. Roos October 31, 2011 at 00:46

Hi there, thanks so much for the notification, I’ve heard about this and would love to write about it, hope I find the time! Otherwise feel free to send a short contribution yourself to editor@roarmag.org and we’ll see if we can publish it! Thanks again!

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Fantasma October 31, 2011 at 21:38

Thank you Jerome!
A short text about the 10/28 events in Greece is waiting for you at editor@roarmag.org

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j.kelvyn richards November 1, 2011 at 20:31

October 28th is the day that the Greek partisans said ‘NO’ to the forces of oppression fron Italy, and from Germany, It represents the rejection of National Socialism, and Italy and Germany.
In 2011 the Greek government had just said ‘YES’ to the Germans, French, Italians and other members of the EU, and agreed to their supervision of Greece. To many Greeks, Papandreou and his cabinet are seen as traitors so they marched against the 28th marchers.
Today, Papandreou announced a referendum, inviting the populace to say whether their answer is ‘YES’ or ‘NO’.
The work of the EU/IMF Troika [the name given to the financial regulators] in Athens has been greeted by a wide range of anti-French/German/Dutch sentiments amongst many Greeks. So the opposition to the 28th march was rooted in anti European feelings that were not to be seen as appropriate at this time.

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Olli K October 30, 2011 at 20:19

I support the idea that each sovereign government (country) releases its own currency, debt-free. That means, the power of circulating money should immediately be taken back from the private banks. Commercial banks should be ordered to have 100 % reserve ratio (no money creation through debt). That would fix the problem. Also, making it illegal to short sell (or make any money derivatives) would be nice. Sometime in the old days speculation was a considered a crime, and by looking out how things have gone now, tells quite irrefutably why it has been so :-)

I think the Occupy movements should make these changes in their agenda top priority.

How do find this idea that crossed my mind while thinking the huge CDS bubble which is waiting out there:

As we know, money created through debt vanishes when it is paid back, and practically all national debt has been created as bits in a computer. Having said this, why won’t governments simply pay back their national debt by typing the figures back to the lender banks? The principal will vanish and bank will receive the interest and that’s it. If the banks fail, they fail. Ordinary citizens still have the real economy, there are the production facilities, they are still able to work. They should be able to go on with their lives.

And with money system that is not based on interest-bearing debt owned to some external body, there should be no more national debt crises. And with no need to “grow” endlessly forced by the debt-money pyramid scheme, the production and standard of living would settle at levels that people themselves are able to decide upon. Automation taxes and citizen pay would eliminate the need to do unethical things for money. Comments?

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diogo October 31, 2011 at 14:50

Hi,

This are probably good videos on this Euro Crisis:

http://www.youtube.com/watch?v=P8sK9gZEUac&feature=player_embedded
(Max Keiser)

http://www.creditwritedowns.com/2011/10/the-euro-bailout-explained.html
(got to it from a Max Keiser guest in “On the Edge with Max Keiser”)

I’m trying to get to another one that explains the European Financial Stability Facility (EFSF) and its dictatorial way of functioning… above justice… above anything. But I’ve just viewed it in german with portuguese subtitles…

Keep proclaiming loudly what is happening :)

Support from Portugal to the RISE UP!

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diogo October 31, 2011 at 14:57

Hi again,

Here are the EFSF videos:

http://www.youtube.com/user/courtfoolnet#g/u

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Angel November 3, 2011 at 11:44

The analysis (the first part) make sense. Your “solutions” are. sorry to say, real madness.

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Jérôme E. Roos November 3, 2011 at 11:48

Elaborate?

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