I read an article in the Financial Times earlier this week (September 23, 2023) -…
Mainstream macroeconomics has mounted a range of arguments over the years to argue against any discretionary involvement by governments or regulators in the economy. The claim is always that the ‘market’ will self regulate and weed out bad players and produce the best outcomes with the least resources each period of activity. Various fancy terms are introduced into textbooks that make these arguments seem to have scientific weight. In narratives, there is often claims that left-wing groups blurred as trade unions have too much influence on political processes, particularly when a non-conservative party is in power. Rarely, is there any discussion of the way governments (of all political persuasions) become captured by the financial and industrial capitalist elites and become meagre conduits for capitalist rule. The west talks a lot about democratic rights and freedoms and people dutifully wander off at appointed times and cast votes which by the end of the day usually result in a government being elected. But they rarely realise that lying behind all of that flim-flam is rule by capital. There is very little democracy in advanced nations. We might turf out one party and elect another but the domination of capital persists and the lobbyists just duchess and bully a new political machine. The European Union takes this violation of democratic rights to new heights.
Last week (August 29, 2014), the Alliance for Lobbying Transparency and Ethics Regulation in the European Union (ALTER-EU), which is “a coalition of over 200 civil society groups, trade unions, academics and public affairs firms – was born out of the need to provide a cohesive and consolidated approach to campaigning in Europe on curbing the influence of corporations on EU decision-making” released a Press Statement – New Commission must end corporate dominance of EU expert groups.
It called on the European Commission (which is just about to change Presidency) “to tackle the persistent over-representation of corporate interests in European Commission ‘expert groups'”.
ALTER-EU was formed in 2005. You can access information about its funding – HERE.
Two interesting research papers released by the group are:
1. A captive Commission – the role of the financial industry in shaping EU regulation – released October 2009.
2. A Year of Broken Promises: Big business still put in charge of EU Expert Groups, despite commitment to reform– released November 6, 2013.
The 2009 Report examined the role of so-called ‘Expert Groups’, which are formed by the European Commission as consultancies to advise it on policy. The Commission claims that these Groups should represent “a cross-section of views” but that is rarely the case.
Expert Groups play a significant role in the development of European legislation both through the Parliament and the Council.
In the European Commission – On the Collection and Use of Expertise by the Commission: Principles and Guidelines – (2002) it is clear that the guidelines should provide for “accountability, plurality and integrity of the expertise used”.
The Commission claim that:
Three determinants of quality of advice can be distinguished: excellence; the extent to which experts act in an independent manner; and pluralism … experts should be expected to act in an independent manner … he aim is to minimise the risk of vested interests distorting the advice proffered … Wherever possible, a diversity of viewpoints should be assembled. This diversity may result from differences in scientific approach, different types of expertise, different institutional affiliations, or contrasting opinions over the fundamental assumptions underlying the issue. (emphasis in the original).
They claim that the desire for plurality encompasses the need to consult “minority and non-conformist views” before determining policy.
ALTER-EU demonstrate that “In practice, the Commission habitually flouts its own rules”. The Expert Groups are dominated by narrow business representatives and the Commission “is predominantly receiving advice from corporate interests. This is also true for the advice it has received on financial sector matters”.
ALTER-EU show that in relation to advice to the Commission on financial issues, there is:
… an overwhelming dominance of representatives from the financial industry. This means that large private banks, insurance giants
and a whole range of financial enterprises are hugely over-represented and wield significant power within the EU legislative process – from the drafting of EU strategies and laws to their implementation.
In terms of key policy initiatives prior to the GFC, the evidence shows that:
… the financial sector were actively involved in designing the policies which contributed to the global financial crisis. The EU is now consulting the same experts on its plans to tackle the crisis.
Examples include the role of credit ratings – and ALTER-EU show that the Credit Rating Agencies dominated the relevant Expert Group, which advised the Commission “that rules on ratings and procedures were not needed”.
In the aftermath of the GFC, evidence given to the US Senate in 2010 during the hearing into – Wall Street and the Financial Crisis: The Role of Credit Rating Agencies – found that:
1. “While making record profits from 2004 to 2007” … the agencies .. “which are paid by the issuers of the securities they rate-gave the highest possible ratings to securities underpinned by high-risk homeloans”.
2. They used inaccurate risk models.
3. They were motivated to maintain market share which compromised their judgements.
4. They knew by 2006 that their ratings on residential mortgage backed securities and collaterised debt obligations were innacurate but failed to revise their ratings.
5. They knew there was fraud in the mortgage broking sector but didn’t take that information into account when making their ratings.
6. Didn’t allocate enough time or staff to fully analysing the products they were being paid to rate.
7. A significant proportion of their ratings of RMBS, which were given AAA by two leading agencies were downgraded within 6 months.
They were clearly part of the criminal conspiracy to defraud purchasers of financial products but were still highly influential in the formation of lax European Commission policy with respect to the ratings sector.
ALTER-EU also note that the Commission’s “light touch regulatory approach” to hedge fund behaviour was influenced by the domination of these funds on the Expert Groups.
The reality is that policy and enforcing regulatory environments are:
… often shaped to protect the profits of big banks and private companies, and not the general interest of the public.
ALTER-EU also showed that once the GFC had begun, the European Commission set up an Expert Group (the de Larosière Group) to advise it on banking reform. Jacques de Larosière was a major banking figure and “Four of the de Larosière Group’s eight members had close links to giant financial corporations which had been deeply implicated in the crisis”.
The 2009 Report documents across a range of key policy issues the distortions that these biased experts produce.
The more recent report covers more of the same in more detail. It documents four ways in which the Commission has failed to keep its promises with respect to transparency and plurality.
1. Corporate domination of the Expert Groups persists. 80 per cent of the all ‘experts’ appointed since September 2012 represent big business interests.
2. Many independent experts appointed as individuals in fact are “wolves in sheep’s clothing” – they “actually represent corporate interests”. Moreover, some of “Brussels’ biggest corporate lobbyists … [pass] … under the radar unnoticed” being classified as NGOs, trade unions, etc to give the semblance of plurality.
How can “BusinessEurope, arguably the most influential corporate lobby outfit in Europe and sitting in all three of TAXUD’s new groups” be classified as a trade union by the European Commission? It was!
3. Around 60 per cent of the new groups fail “to put out open calls for applications”.
4. It is not possible to access minutes, agendas etc of many Expert Groups and many groups fail to dislose their member affiliations – ” the worst culprits for not identifying organisations within their Groups as corporate representatives, while DG Internal Market has not entered any of its group members into the Expert Group Register.”
The rest of the Report is pretty damming stuff but hardly surprising. What the group doesn’t consider is that even if their call for more diverse representation was heeded by the Commission, in areas of policy development relating to economic matters, adding more academics, for example, is unlikely to alter the neo-liberal dominance of these Expert Groups.
While researching my book on the Eurozone this year it became obvious that in the lead up to the 1991 Maastricht meetings, which sealed the deal with respect to the creation and design of the European Monetary Union, that the Expert Groups advising the Commission were stacked with mainstream economists who not only failed to understand the implications of what they were advising but were in denial of the basic requirements of an effective federation.
The point is that while individuals might be closet corporate lobbyists, academic economists in the maintstream tradition are also not ‘independent’ and impartial. They skew the evidence to suit their ideological belief that free markets deliver better outcomes even though the facts cannot support that viewpoint.
They are also often paid by corporate interests to publish so-called ‘academic research reports’, which give the impression that they are independent and have the authority that only original research untainted by vested interests, can bring. Whereas, in fact, they are just commissioned reports.
Remember the Icelandic banking crisis, which had its roots in deregulation and privatisation of the banks which saw them expand their balance sheets several times over in the four years to the 2008 collapse. They were aided by flawed credit rating reviews and consulting reports provided by hired academics, which waxed lyrical about the solid state of the economy.
One of those academics was Columbia University’s Frederick Mishkin, who featured in the 2010 movie Inside Job and was paid a considerable sum by the Iceland Chamber of Commerce in 2006 to produce the report the ‘Financial Stability in Iceland’.
At the same time that Mishkin and his co-author were giving the financial system in Iceland a clean bill of health, the Icelandic banks were engaged in elaborate and not so elaborate growth schemes based on refinancing debt with extra borrowing using both accounting mirages and illegal manipulation of markets to allow them to become many times bigger than they could justify on fundamentals.
The Inside Job highlighted that the payment to Mishkin was not initially disclosed and thus his Report appeared to be independent academic research, which gave it considerably more gravitas.
After the crisis broke, Mishkin was caught changing his CV by renaming the paper ‘Financial Instability in Iceland’.
When the Inside Job challenged him about this during an interview, he stumbled, in a dissembling fashion and eventually managed to get it out that it must have been a ‘typo’.
There were many cases documented of that sort of behaviour and deception.
When considering the case for a ‘federal fiscal capacity’, an essential part of a federal monetary system, it was clear that the various discussion groups and reports that were issued understood that if tight fiscal rules were used to coordinate national-level fiscal policy positions in the absence of such a federal capacity, then the ability of nations to absorb ‘shocks’ in economic activity would be reduced, especially given that the capacity for exchange rate adjustment would be eliminated.
Yet, they still advocated tight fiscal restrictions. Why? Because they had been sucked into the Monetarist revolution in economic theory that claimed as an article of faith that fiscal policy was ineffective and attempts to use it to maintain low unemployment would only be inflationary.
That ideological straitjacket infested the academic departments around the world and provided the European Commission with so-called ‘experts’ who all sang off the same hymn sheet.
It was clear to those outside of the neo-liberal Brussels coterie that imposing rules on the capacity of fiscal policy to cope with private sector spending adjustments would ensure that an economic downturn would cause higher unemployment than is otherwise the case. The situation would be amplified the larger the private downturn.
But the Expert Groups that fed into the Commission processes in the late 1980s denied that would happen. because they were besotted by the Monetarist bias towards promoting inflation control as the dominant and prioritised policy goal.
They knew that if the system were to face a major reduction in total spending (from whatever source), the stabilisers built into the national government fiscal policy would be prevented from working in a normal and flexible fashion by the uniform and tight fiscal rules.
In that context, they knew that unemployment would rise sharply and persist and fiscal deficits would rise, and the only way that nations could obey the fiscal rules being proposed would be to attack domestic wages, pension entitlements and public services and infrastructure provision and further push up unemployment.
The economists advising the European Commission knew all that but left it unstated and the politicians did not tell the ‘people’ that this was a likely outcome of what they were doing in their name.
All the credible research at the time indicated the EMU would be a disaster. But the Expert Groups claimed otherwise.
I document the decade or more of deceptive reports and analyses that these various Expert Groups put out to justify the arbitrary design of the EMU.
All the sophistry was shattered by the GFC but the same experts in recent years have been hauled in by the Commission to provide advise on how to get out of the mess.
Their lack of shame is one thing. But their on-going advice, which continues to assert that the common currency without a major federal fiscal capacity and central bank that is largely prevented from acting as a lender of last resort to governments, will deliver growth and prosperity if only structural reforms are accelerated, amounts to professional negligence.
It is clear that part of the progressive reform process will have to include an attack on the think tanks, the structure of advisory groups, the transparency of electoral funding and the close control of lobby groups.
ALTER-EU does a great job in exposing the biases within the European Commission, which perpetuates this neo-liberal insanity.
That is enough for today!
(c) Copyright 2014 Bill Mitchell. All Rights Reserved.