{"id":17069,"date":"2011-11-25T17:54:26","date_gmt":"2011-11-25T06:54:26","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=17069"},"modified":"2011-11-25T17:54:26","modified_gmt":"2011-11-25T06:54:26","slug":"austerity-begets-austerity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=17069","title":{"rendered":"Austerity begets austerity"},"content":{"rendered":"

\t\t\t\tIt is Friday and in Newcastle today it feels like Winter is back although I am aware that complaining about 19 degrees centigrade is somewhat disingenuous to the Northern Hemisphere and temperate region dwellers. But still we complain – more than one person today has said “isn’t it freezing”. So I have been bunkered down reading a lot. Which isn’t that much different to any other day real – hail, rain or shine. The European laboratory is dominating the daily news though and providing us with scripts that no professional playwright could conceive. This week we have seen the European Commission release its latest gee-whiz (you-beaut) plan to save Europe from itself and like all the previous announcements lots of speeches and photos were taken but the substance is missing. The only development that these plans seem to be leading to is a suppression of national democracy. That is my assessment of the EC’s latest proposal. From an economic perspective it maintains the rule – austerity begets austerity.
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\nThere was an article on the ABC News Drum site (November 24, 2011) – Germany stung by Europe fear factor<\/a> – which had the usual statements about the failed German auction and how the “PIIGS acronym might soon be joined by another ‘g'” which led me to wonder how we might also fit F into the acronym.<\/p>\n

The article is mainly about the hopeless EU leaders who have staged “multiple summits and demonstrations of unity” which have “amounted to little more than photo opportunities” and how the “political muddling and dithering makes a recession in Europe possibly the best case scenario”.<\/p>\n

It warned Australians to control our celebrations as the RBA is almost certainly going to cut rates again because our lower mortgage payments are just a sign of the “consequences that a generation of debt is wreaking on the world”.<\/p>\n

When I read that I wished that the world was actually focusing on that point – the world is enduring the consequences of a generation of excessive (private) debt.<\/p>\n

Questions that arise include – What led to the credit binge? Were governments acting in our best interest when they allowed financial markets to virtually take over economies? What are we going to do about this power grab? And more questions along those lines.<\/p>\n

But these issues are silent in the daily and increasing maelstrom that has become the “crisis”. Somehow the neo-liberal elites that got us into this mess have contrived not only to stay out of prison but also to keep their positions of power – whether in corporations or governments – and continue on, virtually as before.<\/p>\n

Except now they have a different agenda. They have worked out that to advance the interests of the financial markets who reward them in various ways it is better to focus attention on blighting the capacity of governments to act according to their democratic remits rather than make deregulation the flavour of the month.<\/p>\n

Well they are proposing tightening regulations on government while refusing to re-regulate the financial sector in any coherent manner.<\/p>\n

The private debt crisis (which was real) has now become the sovereign debt crisis (which is largely a total fabrication or voluntary accession). Even in the flawed EMU, the leaders could simply pressure the ECB to support growth by funding the deficits of the member states.<\/p>\n

I don’t advocate that as the best way forward. It clearly doesn’t address the key flaws that will haunt the EMU every time there is a negative aggregate demand shock. The solution to the Euro problem is to abandon the Euro and restore full currency sovereignty for each member state. A coordinated dismantling would be a difficult but superior path to follow compared to the chaotic mess that they are finding themselves in now which is damaging the growth outlook for all of us.<\/p>\n

I was thinking about all that the other day when I was reading the documents accompanying the recent Federal Constitutional Court hearing in Germany which heard a challenge against the bailout packages.<\/p>\n

By way of background, several notable Germans challenged the so-called “Monetary Union Financial Stabilisation Act” (W\u00e4hrungsunion-Finanzstabilisierungsgesetz) which gave the German government the power to “provide aid to Greece” and make guarantees to the EFSF, as being unconstitutional because in their view it compromised the budget autonomy of current and future Parliaments.<\/p>\n

Here is the complete text of the Grundgesetz f\u00fcr die Bundesrepublik Deutschland<\/a> (the Basic or Fundamental Law<\/em> of Germany – Official English translation<\/a>). It came into effect on May 23, 1949 and acts as the constitution of the Federal Republic.<\/p>\n

The Germans embedded budget rules in their Basic Law (Article 110 deals with the Federal Budget). Articles 104-115 deal with financial matters generally. A key section relates to the budget autonomy of Parliament which the constitution considers to be an indispensable aspect of national democracy.<\/p>\n

You can follow the case – blow by blow – at the case home page<\/a> of the German Federal Constitutional Court. Here is the English Press Release<\/a> that accompanied the decision.<\/p>\n

You might like to read this interpretation of the ruling – Casenote – Euro Rescue Package Case: The German Federal Constitutional Court Protects the Principle of Parliamentary Budget<\/a>.<\/p>\n

On September 7, 2011 the Federal Constitutional Court of Germany made their decision which rejected the petition. They said:<\/p>\n

\nArticle 38 GG demands, in connection with the tenets of the principle of democracy (Article 20.1 and 20.2, Article 79.3 GG), that the decision on revenue and expenditure of the public sector remain in the hand of the German Bundestag as a fundamental part of the ability of a constitutional state to democratically shape itself.\n<\/p><\/blockquote>\n

The principle that a national government should have budget autonomy to fulfil its socio-economic mandate in response to its democratic election is one I would agree with. We can quibble about what democracy actually means and who influences the voting process until the cows come home. But having a vote is better than not having one!<\/p>\n

The Federal Constitutional Court also said:<\/p>\n

\nWhen establishing mechanisms of considerable financial importance which can lead to incalculable burdens on the budget, the German Bundestag must therefore ensure that later on, mandatory approval by the Bundestag is always obtained again. In this context, the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions especially if they have consequences whose impact is difficult to calculate. Every larger scale aid measure of the Federation taken in a spirit of solidarity and involving public expenditure at international or European Union level must be specifically approved by the Bundestag. Sufficient parliamentary influence must also be ensured with regard to the manner in which the funds that are made available are dealt with.\n<\/p><\/blockquote>\n

Again, when we elect Parliaments we expect them to call the shots and not take orders from some other group.<\/p>\n

I also liked this part of the Federal Constitutional Court’s assessment:<\/p>\n

\nThe German Act Approving the Treaty of Maastricht in the version of the Treaty of Lisbon still guarantees in a manner that is sufficiently definite under constitutional law that the Federal Republic of Germany is not subjecting itself to an incalculable automatism of a liability community which follows a course of its own that can no longer be steered.\n<\/p><\/blockquote>\n

Incalculable automatism sounds to me like budget rules that are applied without regard to the circumstances and only justified because they are “the rules” and whose impacts on community welfare cannot be calculated in advance although we know from logic and experience that they will be extremely damaging.<\/p>\n

I consider the German constitution in this regard to be uncontroversial. Governments should act in the interests of the community and avoid compromising the general welfare to advance the interests of a few.<\/p>\n

The principle the Federal Constitutional Court confirmed was that in their view the sovereignty over a national budget represents a fundamental component of a working conception of national democracy.<\/p>\n

So how does that square with the recent utterances from the European Commission boss Jos\u00e9 Manuel Barroso who wants national governments to be subjugated by various fiscal commissions and the bureaucrats in Brussels (and presumably Frankfurt)? The answer is that the latest mad plan that is being proposed by the leadership in Europe (or one part of it) would compromise and violate national democracies right across Europe.<\/p>\n

Europe has swung to the extreme right before. There is history.<\/p>\n

On Wednesday (November 23, 2011) Jos\u00e9 Manuel Dur\u00e3o Barroso, President of the European Commission, gave a speech in Brussels outlining the – 012 Annual Growth Survey and economic governance proposals<\/a>.<\/p>\n

On the same day the EC released a document outlining their proposed – New action for growth, governance and stability<\/a>.<\/p>\n

The Germans and French leaders seemed to hate the plan, which is probably a good reason to like it. But their judgement was correct (although for all the wrong reasons).<\/p>\n

Barroso said that the emphasis of the EC was on “stability and further strengthening economic governance” and about the “currency”. <\/p>\n

He admitted that the latest “Growth Survey” showed “the economic picture is much bleaker than in January” when they conducted the last survey. All the signs were bad and private confidence was lower (from an already plunged base!).<\/p>\n

Question: Doesn’t this suggest that the dominant policy agenda being pursued (since 2008) is not working? Answer: yes to anyone but Barroso and his cronies.<\/p>\n

He then announced the five key priorities:<\/p>\n

1. Fiscal austerity (read: further growth-damaging cuts to discretionary net public spending only to observe the automatic stabilisers biting their a’s and pushing the deficits up).<\/p>\n

2. Repairing the bank system (read: not reforming them in any way).<\/p>\n

3. Structural reforms (read: accelerated privatisation, deregulation of private sector activities etc).<\/p>\n

4. Fight unemployment – removing rigidities in welfare systems which “have the perverse effect of perpetuating unemployment and reinforcing poverty” (read: Can you believe that? There are plenty of jobs but the unemployed are choosing not to take them because of perverse welfare systems).<\/p>\n

5. Modernise public administration – to stop them hindering private entrepreneurship (read: hand over even more power to the private elites).<\/p>\n

If I was to write out an economic model which reflected the way the system operated and then simulated the likely policies that would accompany these five key priorities I would end up with:<\/p>\n

(a) recession.<\/p>\n

(b) rising unemployment and poverty.<\/p>\n

(c) increased private sector bankruptcies.<\/p>\n

(d) a demolition of public infrastructure and public services.<\/p>\n

(e) declining private sector productivity as firms exploit falling wages and entitlements and lose their incentive to invest in high productivity capital.<\/p>\n

(f) increased inequality.<\/p>\n

(g) social riots and political instability leading to extremism.<\/p>\n

He then went on to describe the new “proposed Regulations aimed at further improving the economic governance of the euro area”, which presumably are intended to advance the five key policy priorities.<\/p>\n

So the EC is proposing:<\/p>\n