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Monday, February 26, 2024
Analysis by Julio Godoy
BERLIN, Nov 25 2011 (IPS) - The change of government in five countries in Europe, brought about this year by the dramatic sovereign debt crisis that broke out in 2007 has so far failed to remove the original causes of the crisis.
In Spain, the general elections held Nov. 20 brought the conservative People’s Party (PP) back to power. The verdict was a clear condemnation of the incumbent Socialist party for its failure to tackle the country’s deep economic crisis, which has seen record unemployment, rising poverty and ensuing social unrest.
The PP victory came about despite the party’s obvious responsibility in the real estate bubble that precipitated the crisis and which was created during its government between 1996 and 2004. The PP is also vague about how it will restore economic growth and, in general, respond to the general discontent expressed by the youth protest movement of the self-declared “indignados”.
The change of government in Spain is the fifth in a row in the European Union and in the eurozone this year, which can be directly related to the economic crisis caused by the collapse of the international financial markets in 2007. Two other European countries – Iceland and Hungary – which do not belong to the eurozone, have also changed governments since 2007 as a consequence of the financial and sovereign debt crisis.
Five of the changes – in Iceland, Ireland, Portugal, Hungary and Spain – were sealed at democratic elections. There is no discernible pattern in the ideological preferences shown by citizens at the ballot box, suggesting that people are simply voting for opposition parties, whether right or left-wing oriented, and chasing the ruling ones out of government, regardless of programmes and past performance.
In Greece and Italy, the governments of Giorgos Papandreou and Silvio Berlusconi were forced to abdicate because they were unable to solve their countries’ sovereign debt crisis. They have been replaced by coalitions of technocrats not sanctioned by popular vote.
So far, all the new governments are reducing public spending and social welfare programmes, and have increased taxes on consumption, or are likely to prolong the austerity programmes imposed by their predecessors, ignoring that such measures are likely to aggravate the recession and diminish the State’s capacity to improve revenues.
All the new governments installed so far within the European monetary zone in the most affected countries (Ireland, Portugal, Spain, Greece, and Italy) also aim to maintain the euro as the national currency, even though the differences in economic competitiveness within the zone suggest that the monetary union in its present form is not feasible.
What is making it more difficult to operate in the eurozone is the lack of coherence in the tax system of the various countries, and the lack of a common economic policy.
Additionally, and independently of their ideological colours, some European governments appear unwilling to attack what numerous economists and analysts consider the heart of the matter: regulating international financial markets, forbidding numerous financial transactions with no objective economic value, and restoring the reign of democratic public institutions over private interests.
An example of the unwillingness of European governments to make changes in the financial system is the failure to pass the Tobin tax on financial transactions. Proposed almost 40 years ago by the Nobel Prize winning economist, the late James Tobin, the proposed tax on financial transactions has been debated in European institutions since the financial crisis broke out in 2007.
As late as last week, however, British Prime Minister David Cameron made it clear that his government would veto any introduction of the tax in the EU. As all fiscal decisions in the EU have to be taken unanimously, the Tobin tax is slated to remain a non-starter.
The ban on highly speculative, potentially illegal financial instruments, such as short sellings, leveraged buyouts, and uncovered credit default swaps (CDS), is also unlikely to be realised.
While the EU has, during the past four years, occasionally suspended selected short sellings, and in mid- November the European Parliament proposed new rules on uncovered credit default swaps, it is expected that Britain will oppose a general application of such rules.
This British opposition to the Tobin tax and to controls on speculative financial transactions is directly related to the weight of financial markets, as represented by the City of London, in the British economy.
CDS, which have been compared to illegal fire insurance contracts on other people’s houses, were considered a key instrument in accelerating the real estate collapse in the U.S., which in turn ignited the global economic downturn and the sovereign debt crisis of the past four years.
CDS allowed speculators to bet on falling prices of houses and earn enormous amounts of money when the real estate market actually collapsed.
In the sovereign debt crisis, hedge funds and other speculators owning CDS on European state bonds, were betting that a given country, say France, would not be able to service its debt.
Hedge funds and other speculating investors can put pressure on rating agencies evaluating the creditworthiness of indebted countries, and induce them to behave in the investors’ interest. It is believed that the recent downgrading of European bonds is partly related to such deceitful collusion.
Earlier this month, an international financial rating agency wrongly downgraded France’s creditworthiness. The agency immediately corrected the error, and suggested that the e-mail containing the new false rating had been wrongly sent out. But the very fact that the agency could make such an ‘error’ shows that such agencies can be far from thorough.
At the same time, European governments are arguing that their people have been “living beyond their means”, in order to justify the cuts in public spending and social welfare programmes. The truth is that Europe is, despite the crisis, still an extremely rich continent, but with the wealth unfairly distributed and taxed.
A good example of this is Germany. According to recent surveys by the German Socio-Economic Panel Study at the Berlin-based Institute for Economic Research, the German national wealth amounts to 6.6 billion euros, against a sovereign debt of about two billion euros.
The surveys show that this wealth, which has grown steadily since decades, is also more and more concentrated in the proverbial upper crust: while roughly 27 percent of the German population has no wealth at all to speak of, the upper 10 percent owns 60 percent of the country’s riches.
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