Economy & Trade, Europe, Financial Crisis, Global, Headlines

Listening to ‘Appalled Economists’

Julio Godoy

BERLIN, Dec 2 2011 (IPS) - A paper written by a handful of French economists criticising the economic policies applied in the European Union to deal with the sovereign debt crisis that followed government bailouts of banks and other financial institutions in 2007 has become a manifesto supported by many worldwide.

The paper, titled ‘Manifesto of Appalled Economists’, was first published last summer by four French economists, including André Orléan, a leading European expert on the financial crisis.

The other authors were Philippe Askenazy, of the French National Centre for Scientific Research, Thomas Coutrot, member of the scientific council of the ATTAC group, which has since 1997 called for the introduction of the Tobin tax on financial transactions, and Henri Sterdyniak, of the French Observatory on Economic Cycles.

In the manifesto, Orléan et al complain that Europe’s economic policies are based on ten incorrect theoretical premises, and instead of solving the sovereign debt crisis, they are only serving to reinforce the influence of speculative financial transactions and deepening the crisis. The paper also proposes 22 measures to “drive the debate out of the dead end”.

According to the manifesto, Europe, in its ill-conceived battle against public deficits, is “in fact caught in its own institutional trap.” European states must now borrow from the very same private financial institutions they bailed out four years ago, “which obtain cheap cash from the European Central Bank. As a consequence, the markets hold the key to the funding of the states,” the paper says.

“In this context, the lack of European solidarity gives rise to speculation, all the more so when the rating agencies’ game accentuates the mistrust.”

In an interview with IPS, Orléan said that the European attention to the rating agencies and the “financial markets” is “completely absurd”, because agencies and markets frequently commit enormous errors in valuation and estimation of transactions.

“Financial markets go from one false, exaggerated evaluation of situations to the other,” Orléan said. “Before 2007, markets and agencies gave high ratings to junk papers and to the creditworthiness of all European countries. Greece enjoyed the same rates as Germany. Now, the pendulum is going in the opposite direction, and is branding countries such as Italy and France in an irresponsible way.”

Orléan called the interest rates Italy presently pays for its bonds “astronomical”.

Orléan explained that the markets’ collective exaggerations are caused by the mimetic behaviour of their operators. “The estimation of values by operators in the financial markets is predetermined by the estimation of value of other operators, and by the transactions that are taking place in the markets,” Orléan said.

This means that prices in financial markets are determined by imitation. “In theory, what an investor pays for a share or a bond is its future price. But this price is not determined by any fundamental data underlying the investor’s estimation, but by the estimations of other investors.”

Such behaviour is what economists analysing the financial crisis of the late-1920s such as John Maynard Keynes dubbed “herding” in the 1930s.

Orléan recalled that Keynes compared international financial markets to beauty contests. “Every trader is observing what the next one is doing, and makes decisions on the basis of other traders’ consensus,” Orléan said.

In addition, he said, “the forecasts of financial markets are self-fulfilling prophecies. Take the case of Italy. Because there were doubts about its solvency, the interest rates on its bonds skyrocketed, further intensifying the difficulties the country has in paying its debts, and so on.”

These characteristics of financial markets and their mimetic behaviour are stronger now than ever before, thanks to the widespread use of computer programmes to evaluate future prices and risks in financial transactions, Orléan told IPS.

Although the ‘manifesto of the appalled economists’ was first intended to serve as a basis for debate amongst economists on European economic policies, it has rapidly become a manifesto for thousands who have signed it, not just in Europe, but also across continents and countries from Australia to Brazil. The manifesto is also being discussed in numerous forums.

In the paper, Orléan and his co-authors complain that “the neoliberal paradigm is still the only one that is acknowledged as legitimate, despite its obvious failures.”

Based on the assumption of efficient capital markets, this paradigm advocates reducing government spending, privatising public services, making labour markets flexible, liberalising trade, financial services and capital markets, and increasing competition at all times and in all places.

“As economists, we are appalled to see that these policies are still on the agenda, and that their theoretical foundations are not being reconsidered,” despite their obvious failures.

This criticism is shared by other social scientists across Europe, even those who have not signed the manifesto. Wolfram Elsner, professor of economics at the University of Bremen in Germany, is one such social scientist. In an interview with IPS, Elsner denounced the “complicity of European governments with banks and speculative investment funds. First, taxpayers had to bail out the banks’ follies, and now taxpayers are suffering the cuts in government spending.”

Similarly, Colin Crouch, professor of governance and public management at the British Warwick Business School, says that the failure of the theoretical foundations of international financial markets, evident after the crisis of 2007, did not lead to the “death of neoliberalism”, but to an even stronger influence upon economic and social policies.

Crouch, author of The Strange Non-Death of Neoliberalism, published late this summer, argues that the reigning economic model in the industrialised world has emerged “more politically powerful than ever after the financial collapse” of 2007.

The international financial crisis demonstrated the folly of neoliberal assumptions, Crouch said. But instead of correcting the policies based on such erroneous assumptions, European governments have reinforced the neoliberal foundations of their policies.

“Whereas the crisis concerned banks and their behaviour, the resolution of the crisis has been redefined in many countries as a need to cut back once and for all the welfare state and public spending,” Crouch said.

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