Socialist Economic Bulletin

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BRICS say Greek bailout too soft on the banks

By Michael Burke

The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries.

The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold – that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small.

According to the FT, ‘Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.

“Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”’

Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses).

Further, the FT reports, ‘Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.

“I am not convinced [the plan] addresses the basic problem of liquidity versus solvency,” he said, adding the fund had dodged the question for more than a year.’ The clear implication is that Greece requires further debt write-offs if it is to become solvent.

Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses.

According to the latest official documents, the debt-reduction for Greece will be €26.1bn, less than 12% of total debt outstanding of €350bn. Clearly, this is a welcome first step but wholly insufficient to bring about solvency. Once all forms of ‘credit enhancement’ (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the €28bn projected level of Greek privatisation receipts.

As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.

The stats show the Tories make you worse off and less safe

By Michael Burke

A small but growing number of commentators have analysed the way Tory policies make the average person worse off. New data released on police numbers and crime also show the way Tory cuts are making you less safe.

Even the Tories admit that the recession, which their cuts policies are deepening, will raise the threat of crime. In particular crime is increased by the cuts in welfare benefits – which is what the Tories are concentrating on.

The Times reported (£) on June 29th on the opinion of senior police officers on this coming increase in crime:

“It won’t be an even, upward progress, there will be a ragged line with different patterns in different areas and some crime types shooting up, while others remain level,” one said.

Chief constables and criminologists say that there is usually a gap between the worst of the financial crisis and the impact of austerity on the public before the effects are reflected in crime patterns.

They believe that crime will rise more dramatically as sections of the public feel the impact of public spending cuts, unemployment and, perhaps most significantly, cuts in benefit payments.

As The Times reported (£), some crimes are already going up:

Kenneth Clarke, the justice secretary, told the Commons last week that burglary was one of the crimes that is “rising at the moment”, adding: “It is going up rather alarmingly compared with a year ago.”

Ministers are nervous that rises in property crime herald the long awaited recession crime wave that will worsen if unemployment increases substantially and people have less cash in their pockets…

“There are indications that crime is about to turn. The reason it has not gone up yet is because unemployment has not risen that much,” one minister admitted.

Yet confronted with this rising threat of crime the Tories are actually cutting police numbers. The report (pdf) published by Her Majesty’s Inspectorate of Constabulary (HMIC) on July 21st confirmed there will be 16,200 fewer police officers in the UK as a result of the Tory led government’s cuts.

London – the Tory Mayor makes you less well-off and less safe

This increase in various types of crime is already feeding through into London. After the Tory Mayor of London has made Londoners worse off through his unnecessarily large above-inflation fare increases, the Conservative-led government and the Tory Mayor are additionally making Londoners less safe.

As The Times reported (£):

Burglaries, robberies and muggings are on the rise for the first time in years as fears grow among ministers that the economic downturn is driving up crime.

Figures from Britain’s biggest police force provide the first indication that years of falling crime are coming to an end. The Metropolitan Police has reported big increases in robbery, burglary and motor vehicle crime in the past 12 months…

Robbery, including muggings, pick-pocketing, burglary, shoplifting, theft of bicycles and interfering with motor vehicles increased, the Metropolitan Police report says. Figures show that there were more than one thousand more burglaries last month compared with May last year.

Robberies in the capital jumped by 15 per cent from 3,257 in May last year to 3,749 this May; house burglaries rose by 18.5 per cent from 4,410 to 5,228; and thefts of and from vehicles by 6 per cent to 9,299.

Yet despite this trend the Tory Mayor is pressing ahead with cuts in in police numbers. In the last year police numbers in London were already cut by 926. By 2014 there will be 3,111 fewer Metropolitan Police staff including 1,907 fewer officers, 820 less PCSOs, and 324 less police staff.

Tories – talk and not action on crime

These trends show clearly the picture which always exists: the Tories, whether as the UK government or as the Mayor of London talk a great deal about crime but take actions which increase it – both by deepening the recession and by cutting police numbers.

As Ken Livingstone said about the situation in London:

“Boris Johnson’s cuts mean on average every London borough will lose over 50 police officers. These cuts risk undermining the work which the police and local communities are doing to make our streets safer.

“The Conservative Mayor’s cuts will mean some of the most experienced and able officers losing their jobs, including 300 of the 600 sergeants who manage local police teams.”

The story is the same across Britain and in London: the Tory-led government and the Tory Mayor make you less well-off and less safe.

* * *

This article originally appeared on Left Foot Forward.

British Economic StagnationBy Michael Burke

The British economy continues to stagnate. Just over one year after the Tory-led Coalition announced its first Budget the British economy is virtually still in the water. In the preliminary estimate of GDP in the 2^nd quarter growth was just 0.2%. In the three quarters since the Comprehensive Spending Review (CSR) this figure constitutes the sum total of economic growth, i.e. just 0.2% – with the previous 6 months having registered no growth at all.

Tory supporters are sufficiently concerned to have begun he discuss the need for a growth strategy, although the remedies offered are likely to exacerbate the situation, as will be discussed below.

As SEB has previously shown , before the Tory-led government’s policies began to take effect there had been an economic recovery. For comparison, in the three quarters preceding the CSR the economy had grown at a moderate rate of 2.1%. This is in sharp contrast to current performance which now reflects the effects of cuts to public spending and their wider impact on the economy.

In the three quarters since the CSR, the economy has expanded by just £660mn, compared to £26.7bn in the preceding 9 months. No wonder most households and businesses feel poorer and gloomier.

It is possible that the situation may get worse. Economies only respond to policy changes after a certain time lag. In both the phases of recovery and in the subsequent stagnation the economy as whole responded two quarters after significant changes in government spending. Although there was an ‘emergency budget’ in June 2010 and VAT was increased in January 2011, most of the cuts did not take place until the beginning of the Financial Year in April 2011. The depressing effect of those cuts is therefore only beginning to be felt and is likely to increase throughout the rest of this year.

Despite the fact that the recovery began at the end of 2009 GDP output is still 3.9% below its peak level. Other European economies such as Germany and Sweden have already recovered all the output lost in the recession, by taking precisely the opposite course. Growth was stimulated via a series of measures – most effectively by increased government spending. The consequence is their public sector deficits are falling, while in Britain the official forecasts for the deficit are being revised upwards. The reason for this is simply that tax revenues in Britain continue to disappoint as growth remains elusive.

In the Great Depression of the 1930s it took exactly 4 years for the previous level of output to be restored. The 2nd quarter of this year was the beginning of the 4^th year since the recession. It seems extremely unlikely that the economy will grow by close to 4% by the 1^st quarter of 2012. This depression will not be as severe as the Great Depression, but it seems likely to be even longer.

The stagnation of the economy and the damage this is doing to Tory popularity has sparked a debate about the need for growth. Predictably, it ignores that fact that the recovery was fostered by increased government spending, including investment and is being throttled by government spending cuts. Instead, the focus is on tax cuts for corporations and the rich, an end to all carbon reduction policies, a reduction in the minimum wage, abolishing employment laws, privatisation and so on.

This is a recipe for more of the same and, as in other countries, the effect of this huge transfer of incomes from poor to rich would be to depress economic activity even further as well increasing the public sector deficit.

Few of these ideas are likely to find much support outside Tory circles. But one which has is the idea of a corporate tax cut to boost investment. This call ignores two important facts. First, the government is already cutting corporate tax rates from 28% to 23%, yet the private sector’s investment strike continues and accounts for 80% of total lost output. Secondly, the non-financial corporate sector is already sitting on a cash mountain, which is simply financing dividend payments, enormous executive pay and takeovers- that is, everything but investment.

The call for lower corporate taxes obscures a central truth about the current crisis. In any normally functioning market economy the household sector is a net saver, that is it retains a portion of its income and does not consume it immediately. The savings are mainly held in banks. The corporate sector is a normally a net borrower for investment, and borrows from the banks. The government can either be a saver (budget surplus) or borrower (budget deficit). This depends on its own tax and spending policies, but also on what happens in the rest of the economy.

In the chart below, the level of lending or borrowing for these 3 main sectors is shown. Borrowing is a negative number and lending positive. Other important sectors (especially financial corporations and the rest of the world) have been disregarded for the sake of clarity.

Figure 1

What the chart shows is the British non-financial corporate sector has not been performing its designated role over a prolonged period. It has been a net saver. Disregarding the sectors not shown, in general the sum of these three sectors must balance to zero. Saving by one sector must have another sector its borrowing counterpart.

The saving of the corporate sector had two effects. In the first instance corporate savings (achieved through lack of investment and low wages) obliged the household sector to become a net borrower to finance consumption. It also obliged the government to increase its borrowing as the lack of investment depressed taxation revenues. When, at the beginning of 1998, the household sector took fright and returned rapidly to its traditional role of net saver, the government was obliged to sharply increase its own borrowing and the public sector deficit ballooned.

The primary cause of both the unsustainable nature of the prior business expansion and the subsequent recession was the failure of the corporate sector to borrow to invest. Rather than cut their taxes and increase this saving, the whole thrust of policy should be designed to oblige the corporate sector to borrow for investment.

A progressive government policy would be to encourage business investment by increasing the government’s own investment. If necessary, a radical government would simply seize these corporate savings and use them for investment purposes on its own account. But in no case should there be a reduction in the incomes of the household sector via wage cuts and public spending cuts. This only diminishes its ability either to spend or save, and does not create business investment.

The electoral myths of ‘blue Labour’

By John Ross

Recent reports are that the current ‘blue Labour’ is coming apart – with former leading supporters stating they no longer wish to be associated with the project following Maurice Glasman’s widely criticised interview with the Daily Telegraph on immigration. But it is also important to understand that the entire basis of the factual claims by blue Labour were inaccurate.

The name ‘blue Labour’ summarises its analysis. It claims that the politics represented by the colour ‘blue’, that is the Conservative Party, are deeply attractive to those who can or did support Labour. As one analysis by a blue Labour leader put it: ‘Appealing to Lib Dems is all well and good. But we have to start to reach out to the millions of working class former Labour voters who left us for the Tories.’

Unfortunately there is no factual basis for a claim that the fundamental reason for Labour’s decline in support is the attractiveness of the Conservative Party and values it represents. Indeed the facts show the reverse.

There are naturally short term swings at elections, but Labour’s entire strategic net loss of votes over the period since it last came close to enjoying majority support in the electorate, a decline from 47.9% in 1966 to 29.9% in 2010, has been to the Liberal Democrats and other parties – chiefly Scottish and Welsh nationalists. None of this net loss of votes was to the Conservative Party.

Labour

To show clearly the factual trends of Labour support Figure 1 charts the Labour percentage of the vote at all general elections up to 2010.

As can be seen the trend is clear. There are, naturally, many short term fluctuations, but Labour’s support rose until the early 1950s, the absolute peak being reached at 48.8% in 1951. Support remained at a high level until the mid-1960s – with 47.9% of the vote being secured in 1966. After 1966, again of course with short term fluctuations, Labour’s vote fell from its previous level.

Figure 1

It therefore may be accurately said that from 1966 the social/political coalition which had made Labour a force commanding the support of almost half the total electorate progressively came apart. The key strategic issue therefore is where did Labour’s votes go?

To show what happened to Labour’s former support Figure 2 shows the change in the party’s share of the vote after 1966. As may be seen in that period:

• Labour’s vote fell by 18.9% .
• Liberal/Liberal Democrat votes rose by 14.6%.
• Support for parties other than the three major ones rose by 10.2% – this being chiefly the SNP and Plaid Cymru.
• The Tory vote, far from rising as it would have if it had attracted electors from Labour, fell by 5.9%

Therefore none of Labour’s net decline in support went to the Conservatives. The facts show, in short, that far from being attractive to Labour votes, the Conservative Party and Conservative values were deeply unattractive. The whole of the loss of Labour votes was to the Liberals/Liberal Democrats and ‘other’ parties – chiefly Scottish and Welsh nationalists.

Figure 2

The Conservative vote

Taking as a starting point for comparison 1966, a peak of Labour’s popularity, furthermore understates the decline of Tory support. Strategically the Conservative vote, naturally with short term fluctuations, has been declining for a prolonged period – as is clear from Figure 3. The post-war Conservative peak was in 1955, at 49.6% and Tory overall support, again inevitably with short term fluctuations, has been declining since.

Figure 3

The Tories failure to win an overall majority at the last general election was therefore not a ‘surprise’. Every Conservative victory since 1955 has seen the Tory vote fall to a lower percentage of the vote than the previous one.

The Conservative Party secured 49.6% of the vote in 1955, 49.4% in 1959, 46.4% in 1970, 43.9% in 1979, 42.4% in 1983, 42.2% in 1987, 41.9% in 1992, and 36.0% in 2010. The average decline of the Tory vote per year between victories is 0.3%.

The Liberal Democrats

Given Tory support was not rising but falling throughout this period the main parties receiving rising support were the Liberal Democrats – as shown in Figure 4, and ‘others’ – chiefly Scottish and Welsh nationalists, as shown in Figure 5

Between 1966 and 2010 support for the Liberals/Liberal Democrats rose by 14.6%. Support for other parties rose by 10.2%

Figure 4

Conclusion

The facts on the erosion of Labour’s former support are therefore clear.

• Strategically the Tory party has not shown itself attractive to Labour voters. None of the strategic net loss of support of Labour has gone to the Tories. On the contrary the Tory it is a party whose vote is in long term decline.

• The strategic loss of Labour support has been to the Liberal Democrats and Scottish and Welsh nationalists.

Posed in terms of values the conclusion of this is equally clear. Conservative values have not shown themselves attractive to former Labour supporters at all – on the contrary they have shown themselves unattractive. It is Liberal, Democrat and Scottish and Welsh nationalist values that have shown themselves attractive to Labour voters. Therefore, far from moving closer to Tory values, what Labour has to do is to be more attractive to those who have shared the values of Liberal Democrats and Scottish and Welsh nationalists.

Appendix – Percentage of the Vote at General Elections 1931-2010

The vote at general elections is set out in Table 1 below.

Table 1

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com4

The Job Losses at Bombardier

By Michael Burke

It is widely expected that Bombardier’s failure to win the government contract for new Thameslink rolling stock will lead directly to the loss of approximately 1,400 jobs. This will indirectly cause other job losses in the area around the Derby works as well as in related industries. It will also negatively impact government finances.

The contract has been won instead by Siemens. The fact that Siemens is a German company has inevitably led to expressions of chauvinism on the British press, with the Daily Mail in particular

How To Wreck A Recovery- Tory policy and Q1 GDP Data

July 2, 2011 Socialist Economic Bulletin Uncategorized

How To Wreck A Recovery- Tory policy and Q1 GDP Data

By Michael Burke

The latest publication of the British GDP data for the 1^st quarter of 2011 (Q1 2011) is unrevised – the economy expanded by 0.5% having contracted by 0.5% in Q4 2010.

However the much fuller data provided in this third estimate of growth, as well as revisions to prior quarters, gives a clear picture of the dynamic of the economy. The economy has effectively stagnated since the Tory-led government introduced the Comprehensive Spending Review in October (in fact it has marginally contracted). In the previous four quarters to Q3 2010 the British economy had expanded by 2.5%. By examining the data in detail it is possible to determine the causes of that stagnation.

Cause of Recession

The peak of the last business cycle was in Q1 2008 and the trough of the recession was in Q3 2009. From the beginning of 2008 to that latter date the economy contracted by £88.6bn in real terms, on an annualised basis. Household consumption fell by £41.5bn, one of the biggest percentage declines of the major economies, a drop of 4.9%. In the OECD as a whole the fall in household consumption was a more modest 1.5%.

By contrast government current spending rose by £7.4bn. Net exports also rose entirely as a function of collapsing demand for imports, which fell faster than exports. Combined net exports made a positive contribution to growth of £16.4bn during the recession. But investment (gross fixed capital formation, GFCF) fell by £43bn. Of this decline in investment, the private sector is responsible for £51.1bn, as government investment expanded during the recession by £8.1bn. Therefore of a total decline in GDP £88.6bn the decline in private sector investment accounts for £51.1bn, or 57.7% of the total.

These main aggregates of the national accounts in the recession are shown in figure 1 below.

Figure 1

Despite a recovery that began in Q4 2009 the level of GDP remains well below its peak. At the end of Q1 2011 GDP is still £56.3bn below its previous peak level three years ago in Q1 2008, a shortfall of 4.1%. Household consumption has recovered to some extent so that it is now £36bn below its peak level. Government current expenditure and net exports have both risen, by £13bn and £17.3bn respectively. Investment has resumed its decline in the last two quarters. It is now £36.1bn below its peak, fractionally more than the decline in household consumption. Of this decline in investment, the private sector is responsible for £44.9bn as government investment has risen by £8.8bn. This private sector investment strike accounts for £44.9bn of a total loss of output of ££56.3bn – this is 79.8% of the total.

The main aggregates of the national accounts in from the end of the prior boom to date are shown in Figure 2 below.

Figure 2

Cause of Recovery

As previously stated, recovery began in Q4 2009 and lasted four quarters – the economy expanding by £32.8bn. Consumption rose by £11.7bn, up 1.4%. Net exports did not add to growth, but subtracted from it by £12.6bn. Government current spending rose by £3.8bn. Investment rose by £12.5bn. The private sector contribution to this was £15bn, as government investment has been contracting under the impact of the new government’s policies.

This may have lulled the government and the Office for Budget Responsibility (OBR) into the false idea that that recovery would be driven by investment even as government spending was cut. (The other officially projected component of growth is net exports, but the rise in net exports currently remains entirely a function of the slump in import demand. British exports in Q1 2011 remain below their pre-recession peak despite the sharp rebound in world trade).

The OBR forecast¹ in March this year that private investment would rise by 6.7% this year. Currently it is moving in the opposite direction. In Q1 private sector investment fell 3.8% from the final quarter of last year.

To see why the government and the OBR have been proved wrong in projecting higher private sector investment the dynamic underlying the recovery and subsequent stagnation must be examined.

In Figure 3 the trends in GDP and investment are shown in relation to the end of the expansion in Q1 2008.

Figure 3

As already noted the decline in investment is the driving force behind the recession and the subsequent failure to recover to the previous peak level of output. Private sector investment accounts for 79.8% of that total shortfall. As the chart shows public investment moved in the opposite direction, increasing through 2008 and rising sharply in 2009 and peaking in Q1 2010 – the last quarter of the Labour government.

By the time GDP began to recovery modestly in Q4 2009, public sector investment had risen by an annualised £10.5bn. This was far greater than the initial rise in GDP, which was just £6.1bn higher. Therefore the rise in public sector investment was entirely responsible for the recovery.

Private sector investment did not rise as soon as the economy began to expand. It began to rise only after recovery had begun. Since all private investment is determined by anticipated profits, this inability of the private sector to lead the recovery is no surprise.

However, over the course of 2010 private sector investment was the biggest single contributor to growth rising by £22.3bn. Private sector investment increased as a result of growth fostered by the sharp increase in the level of public sector investment.

But instead of understanding that public sector investment was leading to economic recovery, including stimulating private sector investment, both the Tory-led government and the OBR subscribe to the idea that government spending ‘crowds out’ the private sector and if public spending is cut, private investment will increase. The opposite is the case. Government investment ‘crowds in’ private investment.

The false Tory/OBR idea is also demonstrated by the negative reaction to the subsequent cut in public sector investment. Public sector investment peaked in Q1 2010 where it was 38.4% higher than at the end of the prior business expansion. It began to fall as soon as the Tory-led Coalition took office in Q2 2010. Shortly afterwards, in Q4 2010 GDP began to stagnate. Immediately afterwards, private sector investment began to contract once more.

Technical Issues

For those readers interested in these topics, this next section deals very briefly with some interesting technical issues highlighted by the recent zig-zagging of the British economy- from recession to recovery to stagnation. Other readers can skip straight to the Conclusion.

Leading and lagging indicators: Public investment has clearly behaved as a lead indicator for the economy as a whole. Private investment is a lagging indicator. While public investment rose continuously throughout the recession, the significant increase did not take place until after the March 2009 Budget, when the rate of increase doubled. GDP responded two quarters later, in Q4 2010. Private sector investment responded 3 quarters later by recording its first rise in Q1 2010.

Similarly, public investment began to fall in Q2 2010. GDP contracted two quarters later, in Q4 2010. Private investment fell once more 3 quarters later in Q1 2011.

Multipliers: The OBR concedes a point that is almost unanimous in the literature – that the multiplier effect of government investment is greater than all other types of government spending. However, hamstrung by the notion of ‘crowding out’ and determined to promote it, the OBR’s multiplier for government investment is just 1, meaning that there is no more economic effect than simply the government spending itself². Its multiplier for cuts in welfare is 0.6 and for a VAT hike is 0.35, meaning that both of these have far less than the effect of government cuts or increased spending. Bizarrely, the logic is that private agents, both households and businesses, become more confident because of the cuts, and so offset their effects by increased spending and investment.

The economy’s recent gyrations provide evidence to the contrary. It is impossible to determine the precise effect of increased government investment in stabilising the economy prior to actual recovery. But it has already been shown that a cumulative rise in public investment of £10.5bn led to a rise in private sector investment of £22.3bn. This alone is a multiplier of 2.12. The rise in investment will also have boosted household incomes a well as government income (both via increased tax revenues and lower welfare outlays than otherwise). But, as a minimum, it can be stated that the multiplier from government investment is higher than 2, and is likely to be considerably higher.

Conclusions

The recession was driven by the collapse in private sector investment. The fall in household consumption was also important, much more so than in the OECD as a whole.

The resumed private sector investment strike now accounts for close to 80% of the entire output loss since the recession, and the economy remains more than 4% below its prior peak level.

The government and the OBR promote the notion that cuts to government spending will lead to spending in the private sector from households and businesses. The opposite has been the case. The entire recovery was engendered by the rise in public sector spending and private investment followed later.

The Tory-led government has reversed the rise in public investment through its cuts policy. This has led first to stagnation and now contraction of private investment in Q1 2011. The fall in private and public investment combined more than accounts for the entire slowdown in the British economy in the last two quarters. Tory policies have wrecked the recovery. Only a rise in public investment can revive it.

Notes

1. OBR, March 2011, Economic and Fiscal Outlook

2. Treasury, June 2010 Budget, Table C8.

Greece and other failures of EU bailout packages

By John Ross

The great majority of serious economic commentators know that the ‘bailout’ package just agreed between the EU and Greece is going to fail. That in the end Greece will be forced into partial default worsening the terms for its creditors. This will, of course, be politely termed ‘rescheduling’, ‘reprofiling’ or some similar phrase in order to attempt to camouflage reality. The camouflage may, however, be so transparent that the ratings agencies will still declare a default. The main discussion is whether it is better for Greece to default immediately or whether the bailout package is a good idea, not because it will work in the end, but because it will postpone the default.

It is therefore useful to understand that all three bailout packages agreed between the EU and its member countries struck by debt crisis are failing in their declared purpose of promoting economic recovery – that is not only in Greece but also in Ireland and Portugal. This is clear from Figure 1, which shows the trend in GDP for these three countries since its peak in the last business cycle.

As may be seen in none of these countries is serious recovery occurring. Attempts to claim it is, for example by making optimistic publicity about the latest quarter’s GDP figures from Ireland, consists of taking data out of context – Ireland’s GDP figures were better only in comparison to the precipitate collapse which had occurred in the previous quarter.

Taking the three countries which have made agreements with the EU the latest available data, for the 1st quarter of 2011, shows:

• Greece’s GDP is 9.9% below its peak with an insignificant recovery from the low of 10.0% below.
• Portugal had been recovering, but its GDP has turned down in the last two quarters and is now 2.7% below its peak.
• Ireland’s GDP is 11.5% below its peak and is the same level as in the 3rd quarter of 2009 – i.e. no net growth has taken place for the last year and a half of austerity packages.

In short no serious recovery has been created by any EU ‘bailout’.

Figure 1

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This article originally appeared on the blog Key Trends in Globalisation.

The Greek Crisis

By Michael Burke

The Greek economic and social crisis continues to unfold. Around it a series of myths have arisen and been perpetuated. It is necessary first to dispose of some of those myths before moving onto a concrete analysis of the situation.

The present author has a piece in the Guardian‘s Comment Is Free web blog which addresses some of these issues. The present article will deal with rebutting those myths in slightly greater detail before setting out an alternative policy that could both resolve the Greek crisis and reconstitute the European Union and Euro Area on a more stable basis.

Greek Mythology

When the European and international authorities announced over a year ago that there would be a €110bn rescue package for Greece it was claimed that this would be sufficient for the Greek government until at least 2013, at which time the newly-restored health of the Greek economy would allow it to return to international financial markets – especially since it would by then have a far lower borrowing requirement. This rebound in activity would arise from the policies implemented by the Greek government under instruction from the EU/IMF/ECB. On all these fronts, the claims have been shown to be false and the policy a failure.

The EU/IMF/ECB is frequently described as the ‘troika’. The troika have produced a conditional emergency lending programme of €12bn because the €110bn is being rapidly consumed. Greece’s economy has gone into a tail-spin. GDP in the first quarter of 2011 is 5.5% lower than in the same period in 2010, and the rise in output from the fourth quarter of 2010 is entirely accounted for by a collapse in import demand. As a result the public sector deficit has been on a widening and not a narrowing trend. Because of the troika’s policies, the budget deficit has widened to €10.3bn in the first five months of this year, compared to €9.1bn in 2010 before those policies took effect.

It is widely reported that the further emergency funds are required because Greece has missed targets set by the troika. The targets have been missed, but only by a cumulative €1.2bn over five months. Neither this shortfall nor the total €10.3bn deficit level can explain the need for additional funds over and above the €110bn already available.

The capital which was injected has been consumed by the holders of Greek government debt, both short and long-term. As these debt obligations have been redeemed on their due date international investors have simply taken the money. They have not bought any newly issued Greek debt with the proceeds. This redemption of bond holdings has combined with continuing interest payments on the outstanding debts for a total payment to bondholders of over €40bn since the bailout was announced in May last year.

The bailout was therefore one for private creditors – primarily European (including British) and US banks. This was both predicted and predictable, with the FT’s chief economics commentator Martin Wolf noting at the time that the impositions on Greece were worse even than those on Argentina, because the private creditors were being paid to exit the market.

Furthermore, it should be noted that, while the budget deficit has not at all driven the need for extra funds, the €1.2bn overshoot is entirely a function of the collapse in tax revenues, not government overspending. In fact spending is €0.7bn lower than the EU/IMF impositions, but tax revenues are also lower by €1.9bn. This too was predicted, including by SEB.

This reality has not prevented widespread media reports that it is the widening public sector deficit which is the cause of the renewed financial crisis , even that this reflects recent overspending, which is factual nonesense.

This latter point is supplemented by the assertion, applauded by sections of the Greek right wing intelligentsia, that the underlying cause of the crisis is a ‘bloated public sector’. In fact Greek public spending before the crisis in 2007 was 46.3% of GDP, compared to 46% for the Euro Area as a whole. Greece has among the lowest proportions of public spending on both health and education in the Euro Area, while more than half of the concealed government spending in 2000-2003 was on the military – 5.5% of GDP in total.

Added to all this is the campaign to end any further payments to Greece, with Cameron declaring ‘not a penny more’ – so joining the charge led by Boris Johnson and George Osborne and including the reactionary nationalist True Finn party, all of whom ignore the small matter that ‘Greece’ is not the beneficiary of the funds to date. Its creditors are and these include British banks.

To avoid addressing the real dynamics of the situation, the mythology in both Britain and Germany also sinks to reinforcing insulting and wholly untrue stereotypes about the lazy Greeks. In fact, Greeks have the second-longest working hours in the whole of the EU.

Debt Sustainability

Now let us turn to assessing the actual dynamics unfolding in the crisis as well as the likely or preferred policy outcomes.

There is a growing consensus that a debt default by Greece is inevitable. Economists have developed a series of metrics in an attempt to determine where a specific level of debt is sustainable. An influential study from Professors Reinhart and Rogoff is widely quoted that for advanced economies output will slow markedly when the public debt level exceeds 90% of GDP . But this is not substantiated by the post-World War II experience where a host of countries had debt levels for in excess of that. Britain’s debt level exceeded 250% yet the growth in GDP in the last 10 years has been little over half that of the 10 years from 1948 onwards.

A more sophisticated and robust measure of debt sustainability is as follows: the real interest rate minus the real growth rate multiplied by the debt/GDP ratio must be lower than the primary budget balance (primary, meaning before debt interest payments are included).

In a less technical formulation of the same proposition; the economy must be able to grow it way out of the debt. However, if total interest payments rise at a faster rate than GDP growth, the debt burden becomes unsustainable.

In the case of Greece currently interest rates (borrowing from the EU/IMF at approximately 6%) exceed the growth rate (-5.5%) by 11.5%. The debt/GDP ratio is 158%, according to Eurostat. This means the interest burden is 18.17 (11.5 multiplied by 1.58) whereas the primary budget balance is forecast by Eurostat to be a deficit of 2.8% of GDP in 2011. The primary surplus would need to rise by 21% of GDP to be sustainable, effectively that government spending would have to be halved without any detrimental effects on the economy or on taxation revenues.

However, the detrimental effects of far more modest cuts- at least compared to this projected level – have already been so great as to overwhelm any supposed ‘savings’. There is no reason to suppose that cuts of an even greater magnitude will have any other effect. Yet this is the prescription demanded by the EU/IMF/ECB.

Under these policy settings a Greek default seems inevitable. (Using the same metrics and applying the Eurostat data and forecasts in each case, Irish and Portuguese defaults are also unavoidable, without a change of policy).

A Progressive Approach

On current trends for the year to date, the Greek public sector deficit could reach €24bn. However, in common with nearly all advanced economies the recession itself is caused by a private sector investment strike. Of the €11.8bn fall in output in the two years of recession to 2010 the decline in investment (gross fixed capital formation) accounts for €9.9bn, or 84% of the total. This is not to say that households have not been badly hit, and consumption has fallen by nearly as much, €8.9bn (statistically offset by other factors such as falling import demand). But this is in response to falling incomes, rising unemployment and increasing taxes. The driving force is the investment strike- which actually began prior to the recession and now has fallen by 25.9%, compared to a decline of 6.6% in household consumption.

Since the financial accounts of the main sectors of the economy must balance; businesses, households and government if the former two increase their savings/reduce their consumption, then (excluding the external sector) government is obliged to decrease its own saving/increase its borrowing. As elsewhere, the cause of the increase in the public sector deficit and the recession is the same – the private sector investment strike.

But troika policy has not been focused on addressing this investment shortfall but has instead attempted to correct the public sector deficit via sequestration of the incomes of the household sector both directly (lower wage, tax increases) and indirectly (public spending cuts, reduced welfare payments). The effect has been disastrous because it attacks households’ ability to save, a necessary function in any market economy. The more ‘austerity’ that is heaped upon them the sharper the fall in household incomes, and the greater the propensity to save. Instead, a policy should be pursued which addresses the cause of the economic and fiscal crisis. This should be a policy aimed at increasing investment in the economy.

Increasing investment can be pursued in two ways, through international efforts and domestically.

On the international front, clearly the Greek government cannot borrow in the markets and under the impositions of the troika will not be allowed to borrow from them for investment. Yet the EU has traditionally recognised the need to make capital transfers to poorer regions/countries in order to bolster investment, via cohesion, structural and other Funds. These payments are still being made in Eastern Europe, and account for Poland‘s ability to escape recession entirely, for example.

The crisis-hit countries of the Euro Area have just become a lot poorer and on current policy settings will become further impoverished. The previous transfer payments were not altruism, but increased the market for goods and services produced in the ‘core’ economies. At the same time they had the intention of keeping economies together in a single currency area despite their widely different levels of productivity. They prevented repeated rounds of competitive devaluations, which also benefited the core economies.

Therefore, rather than another bailout for private creditors there should be a first bailout for the Greek economy, so that it can be invested productively and growth restored. This should be financed by the core economies, at no greater cost than their intended further bank bailout. Other countries might be willing to participate if there were reasonable investment returns on infrastructure, housing or other investment, perhaps including China.

On the domestic front, there are large resources available in the Greek economy, if only the government chose to access them. In the table below we show the Gross Domestic Product (GDP) for the Greek economy, a measure of output which simply excludes the effects of taxes and subsidies. These are in nominal, not real €.

There are a number of striking features from the data. First the Gross Operating Surplus (GoS) of firms is vastly in excess of the compensation of employees (CoE), that is akin to capital and labour’s relative share of value created. On this measure the GoS is nearly 53% of all value created, compared to just 36.3% for labour, and Greece is by far the most exploitative economy in the Euro Area.

Capital’s excessively high share of income combined with an investment strike starves the economy of its lifeblood, while the excessively low compensation share also weakens its effective final demand.

Secondly, the sums are enormous. It should be recalled than the Greek deficit may amount to €24bn in 2011. Yet taxes on production amount to just €28.4bn, even while the GoS is a staggeringly high €121.8bn. Therefore taxes on production could be significantly increased as a decisive contribution to the necessary combination of deficit-reduction and investment.

A Progressive Default

There have been widespread calls for default and even for unilaterally exiting the Euro Area and reintroducing the Drachma. This last policy is in fact especially dangerous to the Greek economy and most of its population (the exception are those whose wealth can be held overseas or whose incomes derive from overseas, such as the shipping billionaires).

Any New Drachma would immediately devalue versus the Euro and thereby increase the local currency value of the existing debt. Since there is no legal mechanism for such an exit it would no doubt be declared illegal by the authorities working for the bigger powers, not just Germany and France but also Britain and the United States. Since they are already insisting on privatisation as the next chapter in the dismemberment of the Greek economy, the ‘illegal’ exit could be the pretext for the seizure of all manner of Greek assets, including public utilities and state-owned enterprises as ‘compensation’.

In addition, Greek banks have accepted deposits in Euros but their key asset would now be in devalued New Drachma so they would immediately be rendered bankrupt. Only a government prepared to protect all the deposits by taking them into public custody, and itself taking control of key assets to forestall their seizure by the foreign powers, could deal with this. Since Mr Papandreou or any likely successor in the foreseeable future is not Fidel Castro, then that is unlikely to happen. Instead, it is Germany, France, Britain and the US who would be in a position to seize assets. Advocating unilaterally leaving the Euro would unleash just such a dynamic.

As already stated, the question of default seems unavoidable. But efforts should be made to avoid a ‘disorderly default’ which would lead to the same consequences as unilaterally exiting the Euro. It is this type of default being promoted now by Cameron, Osborne, Boris Johnson and others and coincides with the interests of British banks who have exited the Greek government bond market and who feel that they can at least gain a relative advantage from competitors’ distress, or may even have a position to profit from a default.

It is possible if, for example, that the ECB retaliates to a default by withdrawing its liquidity provisions to the Greek banks or by refusing once more to accept Greek government bonds as collateral for liquidity provided to other Euro Area banks. This would bankrupt Geek banks, freeze Greece out of international markets for a prolonged period, and require the immediate closing of the deficit. Unless most of the public sector was fired and welfare payments abandoned, the only way to avoid that would oblige the government to introduce a new currency, or quasi-currency.

Comparisons with the Argentinan and Russian defaults are invalid for that reason. These countries had only debt obligations to countries such as the US. Greece, a far smaller economy than either, has Treaty obligations too which can be used against it.

Instead, a programme of investment-led deficit reduction, financed by core economies and Greece’s own resources would address the objective requirements of the economy. Under those circumstances, it would make no sense to continue further payments to private creditors, so default (or ‘restructuring’) is required. In addition, the accumulated debt burden is unsustainable, so all existing holders of Greek government debt would be obliged to take significant losses. If the Maastricht Treaty insists that 60% is the maximum permissible debt/GDP ratio then it can be asserted that the ‘haircut’ imposed on holders of Greek government debt (which stands at 154% of GDP) must be no less than 61 cents in the Euro, preferably more, for prudence sake.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

Job Fears ReinforcedBy Michael Burke

SEB recently wrote that the improvement in Britain’s employment is unlikely to last. This is because jobs growth is a lagging indicator and reflects the previous upturn in activity. As the recovery has ground to a halt in the last 6 months this will in time lead to renewed weakness in jobs.

These fears are reinforced by the latest monthly jobs survey from the Recruitment and Employment Confederation and accountants KPMG. The May data show a further deceleration in jobs growth. The survey has a good track record, with turning-points in the employment data coinciding with turning-points in the survey. The value of the survey is that it is more timely- while REC/KPMG have produced May data, the next employment release from the Office for National Statistics due on June 15 will be for the period to April.

The survey for both full- and part-time jobs is shown in the chart below. Any reading above 50 indicates an expansion in jobs and anything below 50 indicates a contraction. The May reading extends the trend of decelerating employment growth, heading back towards a stagnant jobs market or even worse.

Figure 1

The Tory-led collation has previously attempted to claim the prior improvement in jobs as supporting its contention that the economy will grow even while it cuts public spending and public sector jobs. It is even implied that private jobs have grown because of government cuts. This was wholly dishonest, as all mainstream economics accepts that changes in employment follow changes in activity. Therefore the previous growth of employment reflects the earlier recovery, not this government’s actions. Government spokespersons have since become more circumspect.

Government policy has led to economic stagnation. Both economic theory and the most recent evidence suggest that jobs losses will follow.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0