EUROPE: THE FISCAL DEFICIT VS THE SOCIAL DEFICIT

By Roberto Savio and - - Reprint | | Print |

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ROME, Apr 18 2011 (IPS) - President of the Council of European Finance Ministers and Prime Minister of Luxembourg, Jean Claude Junker, won sudden fame when he stated, “We all know what we have to do, but if we did it we would all lose in the next elections.” This comment reflects the impotence of politics and the road that Europe now finds itself on.

The government of Portugal is the latest victim of this process. All of the mechanisms created by European institutions to help members in crisis have as a condition the elimination of national budget deficits. Greece, Ireland, and now Portugal have access to billions of euros in assistance, but it is in the form of loans and while the interest rate might be slightly lower than market, it is still very high and debt piles up fast.

To receive these loans, governments must promise to cut their budgets more than is politically acceptable, and in the case of economies that are dependent on public spending to maintain stability and growth, drastic cuts have always meant economic slowing if not inflation, which makes it even more difficult to pay off the loans.

In economic parlance, this is called “the debt trap”. The traditional solution is devaluing one’s currency -impossible for the 17 countries now part of the euro zone- or declaring bankruptcy, equally impossible because it would bring down the whole European system. Simon Tilford, chief economist of the Centre for European Reform in London, has written: “There is a limit to the budget cuts that a government can impose and still survive politically if there is no light visible at the end of the tunnel, meaning no prospect of economic growth.”

But we know they see no such light in Greece, Ireland, or Portugal. The statistics thus far show that governments have not been able to increase revenue but are seeing it drop, largely because the social deficit is growing, with unemployment up and decreasing private and especially public investment. Note the remarks of Antonio Nogueira Leite, an economist of Portugal’s Social Democratic Party (the rightist opposition of the centre-left party of Jose Socrates, who is stepping down after his austerity budget was rejected): “The likelihood that Greece has to restructure its debt is no less today than it was a year ago, and the negotiators will bear this in mind when the country applies for European loans.”

The Economist put it this way: “The international plan to save Greece is in fact paralysing it.”

As always we are seeing that the financial sector is playing an important role. The banks of Germany, France, Great Britain, and Holland, for example, have a large quantity of bonds for Greece, Ireland, and Portugal. But if the latter can’t pay their debts, the banking system of the former, thought to be in good shape at present, will be faced with another serious crisis.

Meanwhile British financial reform, which many hoped would finally introduce measures to prevent future excesses of speculation like that which caused the current crisis, have proved to be of limited effectiveness. Bankers have gone back to being paid outlandish salaries with no relation whatsoever to performance, and we know that half of the toxic assets remain in circulation despite the billions spent on trying to correct the situation.

In this context, the United States is contributing significantly to international instability. Its crisis was symbolised by the Republicans’ fight to slash the federal budget, which ended in a defeat for President Obama, who had to accept 83 billion dollars in cuts. And an even more ominous fight looms on the horizon as Republicans prepare to slash spending on social programmes.

Sadly the reality is very simple. The American public will not accept a taxation rate above 28 percent, though it would have to be raised to 32 percent to balance the budget. This is politically impossible. Moreover, it is no longer possible for the US to export its domestic problems to the world economy by taking advantage of the dollar’s status as international reserve currency. Each year there is less and less demand for US treasury bonds, the dollar keeps dropping, and the 600 billion so-called “quantitative easing” manoeuvre by the Federal Reserve is probably the last such intervention that could be made without grave consequences.

As is plain to see, even in the US the fiscal deficit trumps the social deficit. And just a few days ago the people of Iceland voted against a measure that would use public money to cover private bank losses and protested against budget cuts. Is this a sign of what lies ahead? (END/COPYRIGHT IPS)

(*) Roberto Savio is founder and president emeritus of the Inter Press Service (IPS) news agency.