Social Europe Journal http://www.social-europe.eu debating progressive politics in Europe and beyond Fri, 24 Oct 2014 15:28:38 +0000 hourly 1 http://wordpress.org/?v=4.0 "Europe Is Back At Square One" by Javier Lopez http://www.social-europe.eu/2014/10/europe-back-square-one/ http://www.social-europe.eu/2014/10/europe-back-square-one/#comments Fri, 24 Oct 2014 15:25:20 +0000 Javier Lopez http://www.social-europe.eu/?p=35696
Javier Lopez

Javier Lopez

Europe is back at square one. On the verge of a third recession in five years, the relentless tide is even crashing against the insurmountable walls of the German factory powerhouse. Stagnation yet again in the Eurozone – this time accompanied by a certain whiff of Japanese-style deflation. Once more the markets are getting nervous: a volatile stock market, risk premiums are being stretched and another banking stress test is just around the corner. Brussels is holding its breath ahead of elections in Greece, and Europe is once more being blamed for the weak economic recovery worldwide.

The last chapter of the Great Depression is well known but by no means does this make it any less painful. We get self-imposed pain as a product of our economic policies of austerity at all costs and dogmatic recipes, arrogant and moralistic that come with Chancellor Merkel’s stamp, that get rid of all the tools the public sector has to escape a crisis imposed upon member states.

At the same time, the right is losing strength in the European Parliament. All analysts, editorials and international organisations are crying out: Stimulate public investment and print bank notes as leverage for demand! Simultaneously, France and Italy are betting all or nothing on budgets that fail to comply with deficit objectives.

Draghi and the ECB are making a move in Jackson Hole to call for expansive monetary policy. The Socialists are managing to extract a €300,000 million stimulus plan from the new President elect of the European Commission, Jean-Claude Juncker, which should be driven by the EIB.

The Commissioner hearings, a kind of democratically demanding parliamentary X Factor, have seen the traditional rolling of heads.

To all this, Spain reacts as if it had nothing to do with anything. Trying to play the pathetic role of the “A” student thinking: “We’re doing just fine”, while forgetting all about the unemployed and pensioners who have suffered cutbacks and are consumers of deteriorated public services. They don’t think about young people forced to emigrate or workers with devalued salaries in precarious conditions either.

Meanwhile, we elect a new European Commission after the lethargy of Barroso II. An election for governments to make but in which the European Parliament has gained hard earned influence. The Commissioner hearings, a kind of democratically demanding parliamentary X Factor, have seen the traditional rolling of heads (Bratusek) and marked various Commissioners changing portfolios and new supervisions.

Cañete and the Spanish Popular Party government come out especially bad. He has been pointed out and criticised by all. A candidacy stained by obvious incompatibilities, “inappropriate” statements, financial gaps and a management opposite to the objectives of the Union in reference to his own portfolio. Cañete saved his position only by throwing the entire weight of the European People’s Party behind his objective and using Moscovici, a key piece for the socialists, as a hostage in the negotiations. Efficient yet shameful, and there for everybody to see.

Europe is back to square one according to MEP Javier Lopez.

Europe is back to square one according to MEP Javier Lopez.

The Commission gains political clout, innovating its organization chart while repeating a painfully poor balance between men and women (19 to 9). There are a number of controversial Commissioners: Education and Culture, after Parliament removed Citizenship, Viktor Orban’s minister for foreign affairs, responsible for his peculiar justice “reform” (Navracsics). Immigration: the hard man in the Samaras government in the ministries of Defense, Foreign Affairs and Health (Avramopoulos). Financial Services: the Tory ex-lobbyist in the City (Hill).

The economic area, the real touchstone of the war of the Euro, is especially disturbing with two austerity hawks as vice-presidents of the area (Katainen and Dombrovskis). True cooks of the poison imposed by the Council as Prime Ministers of Finland and Latvia.

But among the new members of the Commission there are also European socialist leaders like Frans Timmermans, first vice president of the new institution; Federica Mogherini, appointed High Representative of the EU for Foreign Affairs and Security; and Pierre Moscovici, Commissioner for Economic and Financial Affairs. They have all repeated during their hearing in the European Parliament the necessity of changing and rethinking economic policy, the promotion of an investment plan of 300,000 million euros already announced and the recovery of the ambition of foreign policy in the EU.

The European institutions should start moving but those of us who want counter-cyclical policies, who want to recover the dignity of community institutions and reactivate what has up to now been the real motor of Europe, solidarity, must recognize that the battle for the Commission has not fallen on our side.

A ring of fire is being built around Europe, riddled with conflicts and with various failed states that reflect the impotence of our international policies.

The correlation of forces is moving and shifting and Europe is back at square one. But more importantly, being always brought back to the same place has in fact changed everything. The blackboard of macro-data is repeated, but the socio-political landscape is unrecognizable. Poverty, unemployment and misery in many places are unbearable. The European institutions are undergoing serious deterioration. Political crises are turned into regime crises in many countries. Populist parties torment long established democracies by waving the anti-European flag.

The world is barely recognizable from five years ago and the international order is crumbling. A ring of fire is being built around Europe, riddled with conflicts and with various failed states that reflect the impotence of our international policies, and lay bare our weaknesses, especially energy dependency.

A long walk through a minefield awaits those who wish to recover Europe’s soul: the vocation to build a space of shared dignity. But let us warn all beforehand: going back to square one so often could force us to fall on the square with the skull and crossbones. Like never before, everything is at stake.

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"Bizarre Surcharge Debate Shows British Establishment Just Doesn’t Get Europe" by Andrew Watt http://www.social-europe.eu/2014/10/bizarre-rebate-debate-shows-uk-just-doent-get-europe/ http://www.social-europe.eu/2014/10/bizarre-rebate-debate-shows-uk-just-doent-get-europe/#comments Fri, 24 Oct 2014 14:52:27 +0000 Andrew Watt http://www.social-europe.eu/?p=35709
Andrew Watt

Andrew Watt

Great Britain is up in arms. The country has been asked to pay an additional €2.1 billion to the EU budget. Prime Minister David Cameron, we are told, feels “downright anger” and has refused to pay on the due date. Surprising no-one, Nigel Farage, the leader of UKIP, the party that wants Britain to leave the EU, luridly called the Union a “a thirsty vampire feasting on UK taxpayers’ blood”. Even Labour’s shadow chancellor (finance minister), Ed Balls, found the decision “unacceptable”.

This is bizarre.

Member States’ contributions are based on a complicated formula that takes as a starting point countries’ gross national income. If it turns out that this has been higher than had been assumed, then additional contributions become due. This is exactly what happens if you get a pay rise, earn some additional taxable income on the side or, as a company, report higher-than-expected profits. Sure enough, some countries (including France and Germany) will receive rebates, as national income came in lower than had been envisaged. This has nothing to do with punishing success and rewarding failure, as some have hyperventilated; it is just the normal working of any tax system. And it is worth noting that the sum of the rebates from Brussels exceeds that of the additional payments (on the figures available, which are provisional). Overall the Commission will return more than €400 million to national capitals. Some vampire!

Even the €2.1 bn figure needs to be put into context. This financial year the UK will borrow at least €120 bn to meet its fiscal shortfall.This mere fact will no doubt not prevent politicians and the press suggesting that “Europe” is to blame for a failure to meet fiscal targets.

Government representatives, including from other countries facing payment demands, are apparently appalled that this has all been done along a technical channel, by middle-ranking bureaucrats. But this is entirely appropriate to the matter at hand. You don’t get a personal letter from the finance minister every time your tax assessment changes.

David Cameron has called for a renegotiating of the UK's relationship to the European Union. (photo: CC BY 2.0 DFID)

David Cameron has called for a renegotiating of the UK’s relationship to the European Union. (photo: CC BY 2.0 DFID)

A number of the British officials interviewed have mumbled darkly that this is all symptomatic of the unacceptable way that the EU works, implying that it justifies and will feed the pronounced and growing euroscepticism on the island. In fact many of their remarks merely show the delusional nature of the attitudes of the UK establishment to Europe.

For instance take conservative MP John Redwood, who insisted that if the Commssion raises the contribution Britons must be told “what we will receive in return”. This is taking the juste retour principle, always dubious, to ridiculous lengths. (“I have had to pay a tax surcharge of one thousand pounds. How much more frequently will a police car drive past my house and the road be swept?).

One Downing Street source is quoted as follows: “The European Commission was not expecting this money and does not need this money and we will work with other countries similarly affected to do all we can to challenge this.” Would he or she tell his/her local tax office in response to a demand for a surcharge that the British government neither expected nor needed additional revenues – and refuse to pay? And note the typical inability to see that Britain is merely one of twenty-eight member states: on net the EU is paying out, not taking in additional money, so the argument has no basis at all.

On a similar note, horror is frequently expressed that the news is a gift to British Eurosceptics and will make the task of keeping Britain in the EU even harder. What should the Commission do? Wait for an opportune moment that suits the governments of all twenty-eight member states? The core problem is that the British authorities act like the parent who wants all class activities to be tailored to their own kid’s “special” needs: but there are twenty-seven other pupils in the class.

Of concern is that these bizarre hyperventilations have been given extended and uncritical coverage in the Financial Times, which, while UK-based and City-centred on some issues, normally offers balanced and reasoned discussions of European issues. What Britain’s yellow press will make of the issue will surprise no-one. I am a Brit. I would like the country to stay part of the EU. But not at any price. If Britain simply cannot “get” Europe it should go in peace.

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http://www.social-europe.eu/2014/10/bizarre-rebate-debate-shows-uk-just-doent-get-europe/feed/rss2/ 10 Andrew Watt Andrew Watt David Cameron David Cameron has called for a renegotiating of the UK's relationship to the European Union. (photo: CC BY 2.0 DFID)
"Will The Juncker Commission Continue To Entrench Neoliberal Policies?" by Lukas Oberndorfer http://www.social-europe.eu/2014/10/juncker-commission/ http://www.social-europe.eu/2014/10/juncker-commission/#respond Wed, 22 Oct 2014 11:36:00 +0000 Lukas Oberndorfer http://www.social-europe.eu/?p=35684
Lukas Oberndorfer, Juncker Commission

Lukas Oberndorfer

A few days ago, the designated European Commission finally showed its true colours: It wants to make sure that its economic policy recommendations become enforceable. Deregulation of rent setting systems, adjusting the retirement age to account for life expectancy and increased flexibility in wage-setting mechanisms were mere recommendations in 2014. That is supposed to change now. Its instruments are the competitiveness pacts 2.0 and a separate budget for the Euro area, even though there is no legal basis for such a measure. A decision is going to be made at upcoming meetings of the European.

Convergence and Competitiveness Instrument; Competitiveness Pacts; Partnerships for Growth, Jobs and Competitiveness – as numerous as their names are the attempts of the European Council to create consensus about binding contracts for neoliberal structural reforms.

Angela Merkel – the organic intellectual of a “reform alliance” consisting of trade associations, the financial industry, national ministries of finance and the economy, the EU Commission, neoliberal heads of state and government and the ECB – has been pursuing such plans since the beginning of 2013.

But is this about the countries who face financing difficulties on the financial markets or about the economies that show excessive trade deficits? No. For those countries, instruments were already put in place in the wake of the economic crisis that obligated them to accept the standards of the neoliberal reform alliance as economic policy.

The Neoliberal Reform Alliance Is Targeting The Remaining Countries

Now, the competitive pacts aim to include the remaining countries, such as France, Germany and Italy. For all Euro states, a mechanism shall be created that will, in the words of the Commission, overcome “political [...] deterrents to reform”: In binding contracts, the countries shall commit to “structural reforms of the labour market, the social security and health care systems and of retirement regulations”. Countries with timely adoption shall receive “financial” incentives.

No mention shall be made of the abuse that corporations inflict on social systems through tax evasion, which deprives public coffers of one billion euros yearly, according to estimates by the Commission itself. No mention of the ever quicker redistribution of wealth from the bottom to the top. And no mention of the erosion of democracy, in both economy and society, that is driven by financial markets. Rather, the competitiveness pacts strengthen those actors who have spent years calling for “painful but necessary” reforms of the social infrastructure. In times of tight budgets, who can afford to leave money in Brussels?

But for now, voting in the European Council has not been unanimous, as would be required for the competitiveness pacts. Resistance by the unions and by transnational alliances such as “Another Europe is possible,” among others, was too strong and the outgoing Commission too weak.

Will Jean-Claude Juncker's Commission continue the push to entrench neolibradl economic policies? Juncker Commission

Will Jean-Claude Juncker’s Commission continue the push to entrench neoliberal economic policies? (photo: CC BY-SA 2.0 euranet_plus)

Old Ideas, New Candour: Enforceability For The Commission’s Recommendations

That is supposed to change now. Just a few days ago, the Handelsblatt reported that EU commissioners Moscovici and Dombrovskis, who have been suggested as heads of the relevant departments, want to “ensure that governments follow the EU’s economic recommendations, which have so far been accorded little attention”. Even though this was “one of Merkel’s ideas which had been regarded as rejected,” parts of the proposal are new:

1) Up to now, the Commission has shied away from stating explicitly that its country-specific recommendations should be the object of the pacts.

2) In order to provide the financial incentives for fulfilment of the competitiveness pacts, a separate budget for the Euro zone shall be established in the medium term.

But what, exactly, is the content of the country-specific recommendations? Since the competitiveness pacts, according to all proposals to date, must be concluded between “the member states of the euro zone and the Commission,” it is worthwhile to take a look at the recommendations that the Commission issued in 2014, before they were toned down by the Council:

Belgium, for example, should aim for a “reform of the wage-setting system, including wage indexation [and] to provide for effective automatic corrections when needed”. Bulgaria is advised to lower its minimum wage. France should commit itself to the German model: The unemployment benefit system shall be “reformed” in such a way that “incentives to return to work” are strengthened. Germany, in turn, shall lead the way once more and “[increase] incentives for later retirement”. Slovenia and Croatia are called upon to privatize and Sweden is even asked to deregulate its rent setting system in order to ensure “more market-oriented rent levels”. For Austria, the Commission envisions linking the statutory retirement age to life expectancy and harmonizing the statutory retirement age for women and men sooner.

But are the competitiveness pacts really about a contest between the EU and the nation state? No. Rather, nation state actors belonging to the neoliberal reform alliance are trying to use the European level to further their interests — to push through demands that are, to date, not enforceable within the democracies of the nation states due to a power balance that does not favour these interests that strongly.

Overcoming Democratic Obstacles

The manner in which the competitiveness pacts are to be established makes it obvious that the main conflict is not between “the EU” and, say, “France,” but rather between the executive (both on the European and the national level) and representative democracy. Jean Claude Juncker, the new president of the Commission, lets us know on that point: “I want to launch legislative and non-legislative initiatives to deepen our Economic and Monetary Union during the first year of my mandate. These would include [...] proposals to encourage further structural reforms, if necessary through additional financial incentives and a targeted fiscal capacity at Euro zone level [...].”

The wording suggests that the competitiveness pacts are to be implemented through a regulation. However, the European Treaties clearly do not grant the Commission authority to establish competitiveness pacts or to pay out the financial incentives associated with them. It seems that also the new president of the Commission has chosen the path of authoritarian constitutionalism which will weaken both national parliaments and the European parliament by circumventing regular treaty amendment procedures.

Yet, you cannot accuse the Commission of being dishonest. For two years now, it has clearly articulated what this is all about: overcoming political obstacles. It remains to be seen, however, if the heads of states will join in this new instance of bypassing the parliaments where the wage-earning population is able to advance their interests with comparative ease. A landmark decision will probably be made at one of the next two upcoming European Councils (October 23 or December 18, 2014).

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http://www.social-europe.eu/2014/10/juncker-commission/feed/rss2/ 0 Lukas Oberndorfer Lukas Oberndorfer Jean-Claude Juncker Will Jean-Claude Juncker's Commission continue the push to entrench neolibradl economic policies? (photo: CC BY-SA 2.0 euranet_plus)
"Why Did Britain’s Political Class Buy Into The Tories’ Economic Fairytale?" by Ha-Joon Chang http://www.social-europe.eu/2014/10/britains-political-class-buy-tories-economic-fairytale/ http://www.social-europe.eu/2014/10/britains-political-class-buy-tories-economic-fairytale/#comments Wed, 22 Oct 2014 11:11:04 +0000 Ha-Joon Chang http://www.social-europe.eu/?p=35679
Ha-Joon Chang, Political Class

Ha-Joon Chang

Falling wages, savage cuts and sham employment expose the UK recovery as bogus. Without a new vision we’re heading for social conflict.

The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.

That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese.

Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity.

First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.

More importantly, this rise in the deficit between 2003 and 2007 was not due to increased welfare spending. According to data from the Office for National Statistics, social benefit spending as a proportion of GDP was more or less constant at about 9.5% of GDP a year during this period. The dramatic climb in budget deficit from there to the average of 10.7% in 2009-2010 was mostly a consequence of the recession caused by the financial crisis.

First, the recession reduced government revenue by the equivalent of 2.4% of GDP – from 42.1% to 39.7% – between 2008 and 2009-10. Second, it raised social spending (social benefit plus health spending). Economic downturn automatically increases spending on many social benefits, such as unemployment benefit and income support, but it also increases spending on things like disability benefit and healthcare, as increased unemployment and poverty lead to more physical and mental health problems. In 2009-10, at the height of the recession, UK public social spending rose by the equivalent of 3.2% of GDP compared with its 2008 level (from 21.8% to 24%).

David Cameron, Political Class

David Cameron’s economic policy is wrong and the narrative a fairytale according to Ha-Joon Chang.

When you add together the recession-triggered fall in tax revenue and rise in social spending, they amount to 5.6% of GDP – almost the same as the rise in the deficit between 2008 and 2009-10 (5.7% of GDP). Even though some of the rise in social spending was due to factors other than the recession, such as an ageing population, it would be safe to say that much of the rise in deficit can be explained by the recession itself, rather than Labour’s economic mismanagement.

When faced with this, supporters of the Tory narrative would say, “OK, but however it was caused, we had to control the deficit because we can’t live beyond our means and accumulate debt”. This is a pre-modern, quasi-religious view of debt. Whether debt is a bad thing or not depends on what the money is used for. After all, the coalition has made students run up huge debts for their university education on the grounds that their heightened earning power will make them better off even after they pay back their loans.

The same reasoning should be applied to government debt. For example, when private sector demand collapses, as in the 2008 crisis, the government “living beyond its means” in the short run may actually reduce public debt faster in the long run, by speeding up economic recovery and thereby more quickly raising tax revenues and lowering social spending. If the increased government debt is accounted for by spending on projects that raise productivity – infrastructure, R&D, training and early learning programmes for disadvantaged children – the reduction in public debt in the long run will be even larger.

Against this, the advocates of the Conservative narrative may retort that the proof of the pudding is in the eating, and that the recovery is the best proof that the government’s economic strategy has worked. But has the UK economy really fully recovered? We keep hearing that national income is higher than at the pre-crisis peak of the first quarter of 2008. However, in the meantime the population has grown by 3.5 million (from 60.5 million to 64 million), and in per capita terms UK income is still 3.4% less than it was six years ago. And this is even before we talk about the highly uneven nature of the recovery, in which real wages have fallen by 10% while people at the top have increased their shares of wealth.

But can we not at least say that the recovery has been “jobs-rich”, creating 1.8m positions between 2011 and 2014? The trouble is that, apart from the fact that the current unemployment rate of 6% is nothing to be proud of, many of the newly created jobs are of very poor quality.

The ranks of workers in “time-related underemployment”, doing fewer hours than they wish due to a lack of availability of work – have swollen dramatically. Between 1999 and 2006, only about 1.9% of workers were in such a position; by 2012-13 the figure was 8%.

The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance.

Then there is the extraordinary increase in self-employment. Its share of total employment, whose historical norm (1984-2007) was 12.6%, now stands at an unprecedented 15%. With no evidence of a sudden burst of entrepreneurial energy among Britons, we may conclude that many are in self-employment out of necessity or even desperation. Even though surveys show that most newly self-employed people say it is their preference, the fact that these workers have experienced a far greater collapse in earnings than employees – 20% against 6% between 2006-07 and 2011-12, according to the Resolution Foundation – suggests that they have few alternatives, not that they are budding entrepreneurs going places.

So, in between the additional people in underemployment (6.1% of employment) and the precarious newly self-employed (2.4%), 8.5% of British people in work (or 2.6 million people) are in jobs that do not fully utilise their abilities – call that semi-unemployment, if you will.

The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance, with stagnant productivity, falling wages, millions of people in precarious jobs, and savage welfare cuts.

The country is in desperate need of a counter narrative that shifts the terms of debate. A government budget should be understood not just in terms of bookkeeping but also of demand management, national cohesion and productivity growth. Jobs and wages should not be seen simply as a matter of people being “worth” (or not) what they get, but of better utilising human potential and of providing decent and dignified livelihoods. Ways have to be found to generate economic growth based on rising productivity rather than the continuous blowing of asset bubbles.

Without a new economic vision incorporating these dimensions, Britain will continue on its path of stagnation, financial instability and social conflict.

This column was first published by The Guardian

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"The Politics Of Climate Change 2014" by Anthony Giddens http://www.social-europe.eu/2014/10/politics-climate-change-2014/ http://www.social-europe.eu/2014/10/politics-climate-change-2014/#respond Tue, 21 Oct 2014 08:15:40 +0000 Anthony Giddens http://www.social-europe.eu/?p=35662

Professor Lord Giddens published The Politics of Climate Change in 2007 and is currently preparing a new edition for publication in 2015. In this lecture recorded at the London School of Economics and Political Science in October 2014, he consider how much progress has been made since the work was first published in containing global warming – arguably one of the greatest threats to a stable future for humanity.

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http://www.social-europe.eu/2014/10/politics-climate-change-2014/feed/rss2/ 0 The Politics Of Climate Change 2014 - Social Europe Journal Professor Lord Giddens published The Politics of Climate Change in 2007 and is currently preparing a new edition for publication in 2015. In this lecture he will consider how much progress has been made since the work was first published in containing global warming - arguably one of the greatest th Climate Change,global warming,Politics,Climate Change
"The Spider Of Finance" by Howard Davies http://www.social-europe.eu/2014/10/spider-finance/ http://www.social-europe.eu/2014/10/spider-finance/#respond Tue, 21 Oct 2014 07:30:45 +0000 Howard Davies http://www.social-europe.eu/?p=35656
Howard Davies, Finance

Howard Davies

The global system of financial regulation is extraordinarily complex. Partly for that reason, it is little understood. In order to explain it to my students at Sciences Po in Paris, I have devised a kind of wiring diagram that shows the connections among the different bodies responsible for the various components of oversight. It makes a circuit board look straightforward.

Many people show some spark of recognition at the mention of the Basel Committee on Banking Supervision, which sets capital standards for banks. They may also have heard of the Bank for International Settlements, the central banks’ central bank, in which the Basel Committee sits. And the International Organization of Securities Commissions (IOSCO), which sets standards for exchanges and securities regulators, has name recognition in some quarters. But when you get to the International Association of Insurance Supervisors, brows furrow.

There are many other groupings. The International Accounting Standards Board does roughly what you might expect, though the Americans, while members, do not in fact use its standards – which are now confusingly called International Financial Reporting Standards. But the IASB has spawned other committees to oversee auditing. There is even – reminiscent of Hermann Hesse’s last novel, The Glass Bead Game – an international body that audits the bodies that audit the auditors.

The Financial Action Task Force sounds dynamic, like a rapid-response team one might send to a troubled country. In fact, it is the part of the OECD that monitors the implementation of anti-money-laundering standards. Why it is part of the OECD when its remit is global is a mystery few can explain.

This elaborate architecture (and there is a lot more) was assembled piecemeal in the 1980s and 1990s. Until the Asian financial crisis, it was a web without a spider at its center. When Hans Tietmeyer, a former head of the Bundesbank, was asked by G-7 finance ministers to review its effectiveness, he recommended a new spider, known as the Financial Stability Forum (FSF), which would examine the financial system as a whole and try to identify vulnerabilities that might cause future trouble.

I was a member of the FSF for five years. I confess that I am rather afraid of spiders, but even an arachnophobe like me found little reason to be worried. The FSF was not a scary creature, and the individual regulators, national and international, were largely left to their own devices, with all of the unhappy consequences with which we have become acquainted.

Finance

Regulating financial markets still remains unfinished business as the political will is lacking.

Before 2007, there was little political interest in tougher global standards, and individual countries resisted the idea that an international body might interfere in their sovereign right to oversee an unsound banking system. So when the next crisis hit, the FSF was found wanting, and in 2009 the G-20 governments decided that a tougher model was needed – the Financial Stability Board. The FSB has now been in operation for five years, and is currently working on some new proposals to deal with too-big-to-fail banks, which will be on the menu of the forthcoming G-20 meeting in Brisbane (along with surf and turf, Pavlovas, and other Australian delicacies).

There is not (yet) an international group that audits the FSB’s effectiveness. But if there were, what would it say about the FSB’s performance so far, under the leadership of Mario Draghi and then of Mark Carney, each of whom did the job in his spare time, while running important central banks?

On the asset side of the balance sheet, the auditors would be bound to note that the Board has done much useful work. Its regular reports to the G-20 pull together the diverse strands of regulation in a clear and comprehensible way. There is no better source of information.

They would also record that pressure from the FSB has accelerated the work of sectoral regulators. The second Basel accord took more than a decade to conclude; Basel 3 was drawn up in little more than 24 months (though implementation is taking quite long). The performance of the IOSCO and the IAIS has similarly been sharpened by the need to report progress through the FSB.

The Board has also issued some valuable warnings in its so-called “vulnerabilities” assessments. It has pointed to emerging tensions in the system, without falling into the trap of forecasting ten of the next three crises. And its peer review mechanism is prodding individual countries to strengthen their regulatory institutions.

Nonetheless, a frank assessment would acknowledge that this spider has so far caught few flies. To switch animal metaphors, it is a watchdog without teeth. It can neither instruct the other regulators what to do (or not do) nor force member countries to comply with new regulations.

Indeed, the entire edifice of global financial regulation is built on a “best endeavors” basis. The FSB’s charter, revised in 2012, says that signatories are subject to no legal obligations whatsoever. Unlike the World Trade Organization, for example, no international treaty underpins the FSB, which means that countries cannot be sanctioned for failing to implement the standards to which they are ostensibly committed.

So a fair verdict would be that the FSB has done no more and no less than what its political masters have been prepared to allow it to do. There is no political will to create a body that could genuinely police international standards and prevent countries from engaging in competitive deregulation – and prevent banks from engaging in regulatory arbitrage. It seems that we must await the next crisis for that resolve to emerge. In the meantime, the FSB, with all of its weaknesses, is the best we have.

© Project Syndicate

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http://www.social-europe.eu/2014/10/spider-finance/feed/rss2/ 0 davies Howard Davies Bull Wall Street Regulating financial markets still remains unfinished business as the political will is lacking.
"The Inequality Trifecta" by Mohamed A. El-Erian http://www.social-europe.eu/2014/10/inequality-4/ http://www.social-europe.eu/2014/10/inequality-4/#respond Mon, 20 Oct 2014 11:52:46 +0000 Mohamed A. El-Erian http://www.social-europe.eu/?p=35645
Mohamed El-Erian

Mohamed El-Erian

There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination – one that must urgently be addressed.

There is good reason for the spike in interest. While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike. The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.

In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.

In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times. With political gridlock blocking an appropriate fiscal response – after 2008, the United States Congress did not pass an annual budget, a basic component of responsible economic governance, for five years – central banks have been forced to bolster economies artificially. To do so, they have relied on near-zero interest rates and unconventional measures like quantitative easing to stimulate growth and job creation.

While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike.

Beyond being incomplete, this approach implicitly favors the wealthy, who hold a disproportionately large share of financial assets. Meanwhile, companies have become increasingly aggressive in their efforts to reduce their tax bills, including through so-called inversions, by which they move their headquarters to lower-tax jurisdictions.

As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.

Inequality remains one of the biggest social problems. (photo: CC BY 2.0  Christopher Allen)

Inequality remains one of the biggest social problems. (photo: CC BY 2.0 Christopher Allen)

Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.

This is a dangerous combination that erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda. Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve.

Most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences.

In fact, a number of steps can and should be taken to stem the rise in inequality. In the US, for example, sustained political determination would help to close massive loopholes in estate planning and inheritance, as well as in household and corporate taxation, that disproportionately benefit the wealthy.

Likewise, there is scope for removing the antiquated practice of taxing hedge and private-equity funds’ “carried interest” at a preferential rate. The way home ownership is taxed and subsidized could be reformed more significantly, especially at the top price levels. And a strong case has been made for raising the minimum wage.

To be sure, such measures will make only a dent in inequality, albeit an important and visible one. In order to deepen their impact, a more comprehensive macroeconomic policy stance is needed, with the explicit goal of reinvigorating and redesigning structural-reform efforts, boosting aggregate demand, and eliminating debt overhangs. Such an approach would reduce the enormous policy burden currently borne by central banks.

It is time for heightened global attention to inequality to translate into concerted action. Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it. Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.

© Project Syndicate

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http://www.social-europe.eu/2014/10/inequality-4/feed/rss2/ 0 Mohamed El-Erian Mohamed El-Erian inequality Inequality remains one of the biggest social problems. (photo: CC BY 2.0 Christopher Allen)
"The Return Of Class Politics In The UK" by Mark Blyth http://www.social-europe.eu/2014/10/class-politics/ http://www.social-europe.eu/2014/10/class-politics/#comments Mon, 20 Oct 2014 10:20:13 +0000 Mark Blyth http://www.social-europe.eu/?p=35637
Mark Blyth, Class Politics

Mark Blyth

For David Cameron, cutting spending in a highly unequal society works because it doesn’t affect those who matter to him. This used to be called class politics.

The prime minister’s speech at the lord mayor’s banquet last year was notable in part because its main message, that “we need to do more with less. Not just now, but permanently,” was delivered from a throne bedecked in gold to applause from members of the financial elite. But it’s the other less commented upon aspects of last year’s speech that signal why the government felt confident enough to reveal its true colours. David Cameron’s claims simply don’t add up to a coherent explanation as to why “more with less” – perma-austerity – is a policy worth pursuing.

First of all, he insisted that “the biggest single threat to the cost of living in this country is if our budget deficit and debts get out of control again”. Yet while the deficit rose to 11.2% of GDP in 2010, the markets that fund British debt never once thought the situation “out of control”. Quite the contrary occurred as the interest payments due on UK bonds have gone steadily down since 2006, and have only risen now, when the UK is supposedly in recovery. A much more likely culprit for the drop in living standards is the fall in British real wages of over 5% since 2010 coupled with relatively high price inflation, but that doesn’t fit with the story of “out of control” spending needing to be reined in for the common good.

Because of these efforts British government debt has gone up, not down, despite the cuts, from 52.3% of GDP in 2009 to 90.7% in 2013.

Second, when you have a deficit, you can either raise taxes or cut spending to fill the gap, and the coalition have favoured the latter. And because of these efforts British government debt has gone up, not down, despite the cuts, from 52.3% of GDP in 2009 to 90.7% in 2013. This is hardly a surprise given that exactly this same pattern of cuts leading to more debt as the underlying economy shrinks has been the story throughout the Eurozone too.

Given this, you might think that finding some new tax revenue to balance the books is a good idea. The prime minister seemed to agree when he applauded the G8’s Lough Erne declaration that will “ensure companies pay their taxes”. Then, almost in the same breath, he announced that the UK would cut corporation tax to 20%, “the lowest in the G20″ – thereby copying the growth model of such dynamic economies as Ireland and Latvia.

Third, if what got us all this debt in the first place was a “too big to fail” banking system that was bailed out at taxpayer expense, you would expect the government to make sure that we don’t “simply try and rebuild the same type of economy we had before the crash”, as the prime minister put it in his speech. But of course, quite the opposite has happened. The government has deliberately stoked another London-centred housing bubble just in time for re-election that basically gives anyone that qualifies their own personal Fannie and Freddie mortgage guarantee. Meanwhile, British banks are bigger than ever and are expected to grow bigger still.

Finally, the point of all this effort, according to the prime minister, is to engineer “a fundamental cultural change in our country” that is necessary to foster greater innovation. Yet in the same speech Cameron lauded British universities, British genetics, British material science and British microelectronics as “the envy of the world”. But if the UK has all this, why would you need such a radical cultural change?

Class Politics

UK Prime Minister David Cameron is practising class politics, according to Mark Blyth.

So if the contents of the speech and the arguments for perma-austerity don’t add up, why then double down on the policy? One answer is to follow the money in terms of who benefits and who loses from such a policy.

We need to remember that the crisis that brought us here was a private sector crisis. Their debts landed on the balance sheet of the public sector through bank bailouts, recapitalisations and unlimited quantitative easing. In other words, taxpayers bailed bankers and the price was a ballooning deficit.

That deficit took the form of what finance-types call a “class-specific put option”. A “put” option is a contract where the buyer of the contract has the right, but not the obligation, to re-sell the contract at a future point, while the seller must buy back the contract at a pre-determined price and time. In other words, the seller is selling insurance and the buyer is purchasing the right to cash it in.

Tell tall tales about “out of control” spending habits, despite the evidence, while assiduously avoiding taxing your constituents. This used to be called class politics.

Now why is this a “class specific” put option? Over the past 35 years the UK has become an increasingly unequal country, with those holding appreciating assets (mainly housing in the south) and high incomes (mainly financial salaries and bonuses) reaping most of the gains. These are also the folks that cashed in that insurance policy when the banks failed – they got their assets bailed. The balance due for this cashed-out insurance policy is still either tax increases – which as we saw with the fate of the 50% income tax rate and with regard to corporations, is off the table – or more cuts to government spending. So who pays?

The nice thing about cutting government spending in a highly unequal society, at least for the coalition, is that it doesn’t affect those with most of the assets and income. These folks don’t rely on government services, and their assets and incomes are, thanks to government policy, on the rise once again. They are also the folks that fund elections and show up to vote.

Perhaps the real message of Cameron’s speech was then the following? If austerity doesn’t work, just pump up the assets of those who matter and pass the cost on to those who don’t through spending cuts since they will not vote for you anyway. Then tell tall tales about “out of control” spending habits, despite the evidence, while assiduously avoiding taxing your constituents. This used to be called class politics. Maybe it will once again be recognised for what it really is, even without the gold chains and the throne in the room as a clue for the uninitiated.

This column was originally published by the Guardian in November 2013 and it has not lost any of its value in the last 11 months.

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http://www.social-europe.eu/2014/10/class-politics/feed/rss2/ 4 Mark Blyth Mark Blyth David Cameron UK Prime Minister David Cameron is practising class politics, according to Mark Blyth.
"Minimum And Living Wages In Times Of Cuts" by Iyanatul Islam http://www.social-europe.eu/2014/10/minimum-living-wages-times-cuts/ http://www.social-europe.eu/2014/10/minimum-living-wages-times-cuts/#respond Fri, 17 Oct 2014 10:18:44 +0000 Iyanatul Islam http://www.social-europe.eu/?p=35608

Iyanatul Islam, Living WagesA few years ago, Richard Anker, a former ILO official, wrote an important paper on the historical evolution of the notion of ‘living wages’ and different ways of measuring them. This paper is one example of a growing realization that mandated minimum wages, however effectively enforced, can diverge significantly from ‘living wages’ that can sustain a worker and his/her family. Not surprisingly, the notion of the ‘living wage’ is embedded in the ILO’s normative framework. The 2008 Declaration refers to a ‘minimum living wage’. The 1970 convention on minimum wages demonstrates flexibility and pragmatism by suggesting that a policy on minimum wages should strike the right balance between the need to meet the living expenses of workers and their families and national goals pertaining to employment and economic development.

The harsh reality is that even in rich countries minimum wages can be well below the living wage. In New York City, USA, for example, the hourly minimum wage is $ 7.25, but the living wage for a single person is $12.75, while for a worker with a family of four, it is $ 26.12. In London, the minimum hourly living wage is £8.80 while the national minimum wage is £6.31 (as of 2013). Furthermore, this gap has increased significantly between 2003 and 2013.

The chasm between the decrees of governments and the needs of workers epitomizes the problem of low pay in wealthy societies that pre-dates the last global recession. Andrew Watt laments the fact that in Germany ‘(t)he 2000s were a lost decade for wage earners…(R)eal wages …declined by 4% during the last ten-year period’. In the post-recession era, workers in the UK are more than £3000 worse-off on an annual basis relative to the pre-recession peak.

Not surprisingly, a ‘living wage movement’ has taken root and gained salience in recent years in the developed world, especially in light of stagnant living standards in the post-crisis era.

Not surprisingly, a ‘living wage movement’ has taken root and gained salience in recent years in the developed world, especially in light of stagnant living standards in the post-crisis era. What is important to emphasize is that the adverse impact of paying living wages on business operations is considered to be relatively modest. One evaluation shows that if Wal-Mart in the USA pays living wages, ‘…the average Wal-Mart shopper would spend an additional $9.70 per year’, while low wage workers will benefit disproportionately.

Paying living wages is also a fiscally smart strategy as it reduces the fiscal support that the state has to provide to its low wage workers to bring them above the poverty line. For example, one estimate by a UK think-tank suggests that, if every low-paid worker in the UK (currently around 5 million) was moved to a living wage, the government would save on average £232 in lower social security expenditure and £445 in higher tax receipts. What is perhaps noteworthy is more than 800 British employers have voluntarily agreed to pay living wages to its low-paid workers in line with the calculations and recommendations of the Living Wage Foundation.

Workers in New York argue for higher wages. (photo: CC BY SA 2.0 All Nite Images)

Workers in New York argue for higher wages. (photo: CC BY SA 2.0 All Nite Images)

Of course, there are influential critics of the living wage movement. A good example is The Economist. Reflecting on contemporary UK experience, The Economist argues that ‘…large cuts in real wages help explain why the jobs market has hummed along in an otherwise sluggish economy… Brits, it seems, much prefer the hardship of low wages to the misery of no wages’. The Economist, it seems, has displayed its predilection: any job, however ill-paid, is better than no job. This is a re-statement of the influential view that there is a wage-employment trade-off.

The state-of-the-art evidence, on the other hand, is much more equivocal suggesting that the impact of paying higher minimum wages on employment is, in statistical terms, rather negligible. This is in line with the finding noted above that a major retailer, such as Wal-Mart, can readily absorb the payment of living wages without hurting customers in any significant way while helping low-paid workers. This result can be explained, at least partially, by the fact that costs of higher wages can be offset by a number of factors. Higher wages reduce turnover costs and thus reduce hiring expenses. Higher wages can boost morale and productivity that are best interpreted as payment of ‘efficiency wages’.

Despite the benign evidence on the wage-employment trade-off and the move by some employers to act as distinguished exemplars, the living wage movement is likely to face onerous obstacles.

Despite the benign evidence on the wage-employment trade-off and the move by some employers to act as distinguished exemplars, the living wage movement is likely to face onerous obstacles, at least in the European Union (EU). There was a time when the ‘…European Parliament repeatedly expressed its concern about low pay and minimum wage levels in Europe’. Such concerns were, in turn, complemented by explicit proposals to link minimum wage levels to certain desirable benchmarks (such as 60 per cent of median wages) that would align them with the poverty and social exclusion dimensions of the Europe 2020 strategy.

Alas, times have changed. The prevailing view is that the current economic crisis in the European Union (EU) can be resolved through wage moderation policies (to induce competitiveness via the vehicle of ‘internal devaluation’), complementary structural reforms and fiscal consolidation. Thus, ironically, while ‘…treaties still exclude wages from EU competencies, the crisis has made wages… one of the central targets of EU policy-making’. How to sustain the living wage movement in light of such developments remains a central challenge.

The author writes in a strictly personal capacity.

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http://www.social-europe.eu/2014/10/minimum-living-wages-times-cuts/feed/rss2/ 0 Iyanatul Islam Living wage Workers in New York argue for higher wages. (photo: CC BY SA 2.0 All Nite Images)
"New Thoughts On Capital In The Twenty-first Century" by Thomas Piketty http://www.social-europe.eu/2014/10/new-thoughts-capital-twenty-first-century/ http://www.social-europe.eu/2014/10/new-thoughts-capital-twenty-first-century/#respond Fri, 17 Oct 2014 09:22:10 +0000 Thomas Piketty http://www.social-europe.eu/?p=35603

French economist Thomas Piketty caused a sensation in early 2014 with his book on a simple, brutal formula explaining economic inequality: r is greater than g (meaning that return on capital is generally higher than economic growth). In this TED presentation, he talks through the massive data set that led him to conclude: Economic inequality is not new, but it is getting worse, with radical possible impacts.

If you want to know the basic argument of Piketty’s groundbreaking research and its implications have a look at the video below.

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http://www.social-europe.eu/2014/10/new-thoughts-capital-twenty-first-century/feed/rss2/ 0 New Thoughts On Capital In The Twenty-first Century - Social Europe Journal French economist Thomas Piketty caused a sensation in early 2014 with his book on a simple, brutal formula explaining economic inequality: r is greater than g (meaning that return on capital is generally higher than economic growth). In this TED presentation, he talks through the massive data set th Capital In The Twenty-First Century,Economic Inequality,Economist,Thomas Piketty,Twenty First Century,Capital In The Twenty-first Century