A book shows how countries must accept stagnant growth and unemployment levels of 20 per cent or more indefinitely – or leave the euro.
The Great Rebalancing, Michael Pettis, Princeton University Press 2013 ISBN 9780691158686 £19.95
Heraklion, Crete: Greek workers demonstrate against EU-inspired cuts
Why is the eurozone in such a mess? Is it really, as the Germans tell it, down to the bad habits of its debtor nations? One economist has uncovered a hidden reason. In his book The Great Rebalancing Michael Pettis examines capitalist political economy in 2013. His view is that like the globalisation before 1914, the globalisation of today has caused massive trade imbalances that are currently masquerading as a debt crisis within certain countries.
Among his examples is the eurozone debacle, where the consequences of domestic trade imbalances between euro countries are disguised as a debt problem within the overall euro balance sheet. Pettis calls the exporting of capital within the eurozone by certain countries tantamount to importing demand from other euro participants. For example, exporting capital from Germany to Spain has contributed towards an ever-increasing German trade surplus matched exactly by an ever-increasing Spanish trade deficit.
He describes Germany as effectively taking the same position lampooned by Franklin Roosevelt in 1932 as the Republican position:
“A puzzled, somewhat sceptical Alice asked the Republican leadership some simple questions:
‘Will not the printing and selling of more stocks and bonds, the building of new plants and the increase of efficiency produce more goods than we can buy?’
‘No,’ shouted Humpty Dumpty, ‘the more we produce the more we can buy.’’
‘What if we produce a surplus?’
‘Oh we can sell it to foreign consumers.’
‘How can the foreigners pay for it?’
‘Why we will lend them the money.’
‘I see,’ said little Alice, ‘they will buy our surplus with our money. Of course these foreigners will pay us back by selling us their goods.’’
‘Oh no not at all,’ said Humpty Dumpty. ‘We set up a high wall called the tariff.’ (In 2013 read tariff to mean the German trade priced euro.)
‘And,’ said Alice at last, ‘how will the foreigners pay off these loans?’
‘That is easy,’ said Humpty Dumpty. ‘Did you ever hear of a moratorium?’”
Today’s euro equivalent of a moratorium is the EU memorandum, where the European Central Bank forces a country into re-scheduling debt built up through trade imbalance. The re-scheduling is conducted on the proviso that the debtor country agrees to cease to exist as a sovereign entity.
One of today’s Humpty Dumpties is Wolfgang Schaüble, the German Finance Minister, who said after the fall of Cyprus “I’m known for not giving in to blackmail, by nobody and nothing.” The tragedy in countries such as the Irish Republic, Spain and Portugal is that they fail to see the Alice analogy and instead want to be one of the virtuous countries that work hard, save and repay their debts and not be one of the EU “sinner states”.
Imbalances caused by acquiescent government policies in both surplus and deficit euro countries cannot be unravelled by simplistic views on hard work, Pettis points out. To suggest that a country runs a trade deficit because its working class are spendthrift, lazy and save too little is nonsense. “A nation’s cultural preferences towards saving,’’ he says, “are irrelevant because EU policies have deliberately altered the domestic relationship between investment and savings.’’ Realising where their EU policies would eventually lead, today’s Humpty Dumpties cloak their attack with prattle about blackmail.
The book is also careful to point out that although Germany has low debt and a high trade surplus, German workers during the coming period will be highly exposed to a fall in effective product demand. Pettis explains that France in the early 1930s was in a similar position. He cites comments made by an analyst at the time:
“One of the reasons for which opinion abroad admires the French people is their resistance to the world economic depression. France’s harmonious economic structure and the prompt measures taken by the authorities have facilitated this resistance. The natural prudence of the French people, their ability to adapt, their modernity, and their courage have contributed equally.”
Conditions quickly changed. Demand for French goods vanished and very soon the French economy was in a shambles and was forced off the Gold Standard in a chaotic devaluation.
Pettis in his book shows that euro moralisers propounding populist economic thinking are really saying that peripheral countries must accept stagnant growth and unemployment levels of 20 per cent or more indefinitely, or leave the euro.
The moralisers have spotted the contradiction in the minds of many European workers – although they rail against unemployment and wage repression, they have so far failed to grasp the nettle of euro exit, instead continuing to align themselves with their national ruling class in considering that option as even more unpalatable. Hence the now ex-Cypriot Finance Minister Michael Sarris was able to say, “Cyprus has avoided a disastrous exit from the eurozone.”
Workers’ lack of confidence to take the only realistic option available and force a euro exit has led to a dangerous situation that allows the ruling class to press home its attack. This trait can also be seen in Britain, although the euro cheerleaders have had their guns spiked.
A number of British trade unions still align themselves with the British ruling class and its political parties in wanting to remain in the EU. Downward wages, high unemployment and the break-up of nations are all EU prerequisites. In reality euro recovery is a false promise and it must be dawning on even the most economically befuddled that the EU is the antithesis of British trade unionism.
Pettis (who is not a Marxist-Leninist), has made a similar contribution to that of John Hobson, whose book Imperialism: A Study in 1902 was among the publications that prompted Lenin to write Imperialism the Highest Stage of Capitalism in 1916.
Pettis not only examines the euro but also analyses various forms of trade intervention, the US/Chinese trade relationship and the role of the US dollar as the dominant reserve currency. Much of his analysis rests on counter-intuitive thinking that reveals massive flaws in current populist economic views particularly concerning the capitalist balance of trade mechanism. This makes a refreshing change to the trite nonsense written about economics so often found elsewhere. ■