gaza: the real crime i s the blockade – Page 16

JUNE 2010

WHEN DID WE ELECT THE BANKERS TO SUPREME POWER?

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Follow the money

The wolf pack stalks

Europe

Will those who sign the cheques continue to write our laws? There is at last popular resistance to currency speculation, and it is forcing governments to distance themselves from the financial industry. Although hardly far enough

BY SERGE HALIMI

Shareholders in Société Générale, reassured by a fresh European injection of €750bn into the furnace of speculation, saw the value of their assets rise by 23.89% on 10 May — the same day that French president Nicolas Sarkozy announced that, due to budgetary constraints, a programme of aid that gave €150 to families in financial difficulty would be wound up. From one financial crisis to another, the conviction grows that those in power tailor their behaviour to the mood of shareholders. Politicians from time to time ask the people to approve of parties preselected by the markets for their innocuousness.

Belief in claims about the public good is being eroded by the suspicion of prevarication. When Barack Obama reprimanded Goldman Sachs, the better to justify his financial regulation measures, the Republicans immediately put out an ad summarising the donations that the president and his political friends had received from the company during the 2008 election campaign: “Democrats: $4.5 million. Republicans: $1.5 million. Politicians attack financial industry but take millions from Wall Street.”

When the British Conservative Party, affecting concern for the poor, opposed the introduction of minimum alcohol pricing, the Labour Party accused it of being more concerned with placating the supermarket lobby (since supermarkets use alcohol as a loss leader and many people are delighted to find that beer can cost less than water). When Sarkozy eliminated advertising on France’s state-owned TV channels, it was widely suspected that this would benefit the private stations run by his friends Vincent Bolloré and Martin Bouygues, now free from competition for advertisers’ budgets.

Such suspicions are not new. People resign themselves to situations that ought to cause

The financial sector has to be reduced in scale and importance in Europe, and the EU needs a strong central bank and an integrated fiscal system. In fact, everything that isn’t being considered in the current euro panic

BY JAMES K GALBRAITH

CARMEN CALVO – ‘He is convinced that nothing is living’ (2003)

scandal. They say: “It was ever thus.” It’s true that in 1887 the son-in-law of the French president Jules Grévy used his links with the Elysée Palace to trade in honours. At the end of the 19th century, Standard Oil made certain US state governors dance to its tune. In the dictatorship of finance, the mur d’argent (wall of money) of 1920s France is often mentioned – the financiers whose control of public debt amounted to a daily plebiscite. However, laws were passed to regulate the role of capital in political life. This even happened in the US, during the Progressive Era (1880-1920) and then at the end of the Watergate scandal, always after political mobilisation. France’s “wall o f money” finances were placed under supervision after the Liberation in 1944. Things may a lways have been thus, but they’re capable of change.

They are also capable of changing back again. On 30 January 1976 the US Supreme Court struck down several key restrictions on the role of money in politics passed by Congress (the Buckley vs Valeo ruling). The judges reasoned that freedom of expression shouldn’t depend on the financial ability of an individual to engage in public debate — so limiting expenditure amounted to stifling free speech. In January 2009 this ruling was extended to allow firms to spend whatever they wanted, to back, or attack, a candidate. In the past 20 years, with former Soviet apparatchiks who turned themselves into oligarchs and Chinese bosses who hold office in the Communist Party, with European members of the parliament, ministers and executives who go through a US-style revolving door to the private sector, and with the Iranian clergy and Pakistani military intoxicated by the world of business (1) – the slide towards corruption has become systemic. It inflects the political life of the planet.

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The Greek government convened an emergency meeting of expert advisers in January. A man from the IMF flatly told the prime minister George Papandreou that the only way out was to dismantle the Greek welfare state. A man from the Organisation for Economic Cooperation and Development (OECD) proposed a test: when everyone, including all your supporters, are fighting mad, he said, you’ll know you’ve done enough. The theory behind these arguments held that markets impose discipline on states. Bond buyers judge the determination of the government’s austerity programmes; then they decide whether to trust in the repayment of debt. Given sufficiently harsh and credible measures, interest rates would fall and Greece’s refinancing could proceed.

But there was a problem. Promises are cheap. Even if the theory is right, for the policy to work, the cuts have actually to be carried out. But implementation takes time. Refinancing of previously existing debt is a precommitment; it depends on confidence that the government will carry through, long before it actually does. And how can a mere policy announcement engender such belief, in a state that has a bad reputation to begin with? Whatever was said, when Greece’s current bonds matured the actual cuts would still lie ahead (1). And the more severe the announced cuts, the less credible they would be.

This argument logically destroyed the idea that any austerity programme could reopen private bond markets on terms acceptable to Greece. The only way to avoid default was for Europe to refinance the Greek debt, bypassing

James K Galbraith holds the Lloyd M Bentsen, Jr, chair in government/business relations at the LBJ School of Public Affairs, University of Texas at Austin, and is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, Simon & Schuster, 2009

inside this issue What will happen to Europe if the single currency fails? Page 3 Clean Hands: wasn’t Italy supposed to be corruption-free? Page 4 Germany: discreet and careful Page 6 How Fortress Europe rebuffs vulnerable asylum seekers Page 8

the markets. So the question became: how to persuade the EU to do that? This challenge propelled the economic crisis to the centre of a political game. The Greek government still had to announce severe cuts and other “reforms” – not to pacify the markets, but to meet the needs of Angela Merkel. Her voters in Germany would not tolerate a “bailout” unless they saw painful sacrifices from the Greeks. Meanwhile the Greek government declared unshakeable allegiance to its debt and to the euro – while subtly reminding France and Germany that Greek default and exit, with inevitable contagion to Portugal and Spain, could not be excluded if help did not come.

second epiphany

As economic policy, this game made no sense for Europe. The cuts would mean joblessness, lost tax revenues and therefore little actual deficit reduction in Greece. You cannot cut 12% of GDP from total demand – as the eventual IMF programme called for – without cutting GDP itself. Falling Greek GDP would also cost jobs for German and French factory workers who make goods sold in Greece. Except relative to the unpayable interest rates on offer from private markets, Greece’s ability to service its debts would not improve.

Nor – without a devaluation, made impossible by the euro – would Greece’s competitiveness get better. The measures that might help over time, namely the programme of public administration and tax reforms to which the Greek government was already committed, would be much harder to implement in the atmosphere of crisis, cuts and exorbitant interest rates.

As the debt deadline neared, Europe’s leaders laboured under arcane rules, an

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Indonesia: ‘special autonomy’ fails to meet Papuans’ aspirations Page 11 Friends and influence: Japan reassesses its diplomatic options Page 12 Tokyo’s surprising WWI alliances Page 14 Gated and secure: or should that be voluntary imprisonment? Page 15