Fears, ideologies and rational solutions to the European debt crisis

Carlo Panico and Francesco Purificato, Guest Bloggers

The media and some professional blogs are spreading the view that the European debt crisis is caused by the decision of the political authorities of the countries under attack to let their citizens live beyond the material possibilities of the economy. They advertise the unfounded fears that the taxpayer of the other euro-countries is becoming the victim of a money machine that rewards the profligacy of Southern European countries. As shown in our PERI paper The debt crisis and the ECB’s role of lender of last resort, these fears have become powerful political forces inhibiting rational solutions.

When the crisis began in April-May 2010, the Greek sovereign debt was around 300 billion euros and it was sufficient to buy a portion of it to persuade the markets that the authorities were determined to stabilise the interest rates. Yet, in spite of its independence, the ECB waited the end of the regional elections of May 9 in Renania-Westfalia (Germany) to respond to the speculative attacks, which had gambled on the view that the European authorities would not react until the election had ended.

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Sharers, Takers, Carers, Makers

Nancy Folbre, Guest Blogger

Some of the most vivid political rhetoric of 2012 reflects a debate that has lasted centuries. Who are the makers and who are the takers? Much economic theory revolves around efforts to distinguish the two. The conceptual effort is motivated by noble intent: presumably, a good economic system encourages making (creating more to go around) and discourages taking (redistributing what others have made).

Yet it is surprisingly hard to create a consensus about these labels, and past disagreements, still unresolved, lurk in the background. History is shaped by contending claims over who is more productive than whom. Powerful groups like to describe themselves as makers rather than takers, partly to glorify themselves and partly to discourage take-backs.

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US fiscal crisis far from over

Martin Khor

So, the United States at the last minute averted a “fiscal cliff” crisis last week, and the world gave a sigh of relief, since the fate of the US economy has strong impact on other countries.

But that sigh was accompanied by a shake of the head at how this drama involving a contest of wills between the President and the Republicans in Congress has become an American way of life.

Has the economy of the US and the rest of the world economy become too dependent on how Washington’s budget politics plays out?  It seems so, for some time to come.

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Credit River and the Green Cheese Factory: The Scandal of Endogenous Money

Alejandro Nadal

In 1964 Mr. Jerome Daly took a mortgage for $14,000 US dollars from the First National Bank of Montgomery in Minnesota. In 1967 he was $476 in arrears, the bank initiated foreclosure proceedings and bought the property at a sheriff’s sale. The bank then sued for possession and a jury trial was held in December 1968 in a township with a very appropriate name, Credit River.

Daly argued that the mortgage contract was null and void because it lacked consideration on the part of the bank. In legal parlance this means that in any contract both parties must exchange something of inherent value. When the bank had granted the loan it had simply inserted an entry in a ledger, thus “creating money out of thin air.” Because the bank did not commit anything of value into the contract, there was no consideration and the contract was null and void. The plaintiff had no legal base to claim Daly’s house.

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The Freshwater and Biodiversity Crisis

Edward Barbier

Yes, the “and” in the title is deliberate.  The world is on the verge of a crisis that is endangering both human water security and freshwater biodiversity.  That crisis is the rapid disappearance and degradation of one of the most endangered global habitats – freshwater ecosystems.

Around 3% of the world’s water is fresh, and 99% of this supply is either frozen in glaciers and pack ice or found underground in aquifers. Freshwater ecosystems, which comprise ponds, lakes, streams, rivers and wetlands, account for the remaining 1% of the world’s freshwater sources.  Lakes and rivers are the main sources for human water consumption, but contain just 0.26% of total global reserves.  Other important human uses of freshwater ecosystems include inland capture fisheries, which contribute about12% of all fish consumed, irrigated agriculture, which supplies about 40% of the world’s food crops, and hydropower, which provides nearly 20% of global electricity production.  Excessive nutrient loading of water bodies is also a leading cause of water pollution worldwide.  Human-induced biological invasion is another major threat to freshwater habitats worldwide.

Although freshwater ecosystems occupy only 0.8% of the Earth’s surface, they account for 100,000 to 126,000 (6-7%) of the estimated 1.8 million species globally.  Thus, as the various human uses put pressure on scarce freshwater habitats worldwide, their biodiversity invariably will decline.  This process is exacerbated by global environmental threats, such as climate change, nitrogen deposition and shifts in precipitation.  Already, freshwater ecosystems are experiencing declines in biodiversity far greater than those in the most affected terrestrial ecosystems.

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Biofuels and Hunger: The Story from Guatemala

Timothy Wise

It’s bad enough when bad policy causes unneeded suffering for those governed by that policy. It’s worse when the victims include those far from the policymaking. Such is the history of U.S. farm policy. Today, that history is being written in places like Guatemala, where the U.S. ethanol boom is contributing to hunger and landlessness among that country’s indigenous majority.

Thanks to the New York Times’ Elisabeth Rosenthal, we can see that history unfold in all its ugliness. She traveled to Guatemala for her feature, As Biofuel Demand Grows, So Do Guatemala’s Hunger Pangs. Her expose makes my own, which showed how U.S. corn ethanol has driven up corn import costs for poor countries, seem like just the proverbial outer layer of the onion.

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Stephen Resnick, professor of economics at UMass-Amherst, dies at age 74

On January 2nd, we lost a brilliant economist, Stephen Resnick, one of the founding members and a cornerstone of the heterodox Economics Department at the University of Massachusetts, Amherst. Steve, a devoted and fabulous teacher,  touched the lives of hundreds of undergraduate and graduate students over his career. Steve, along with his colleague Richard Wolff, worked tirelessly for decades to transform Marxian Economics and influenced the researching and teaching of scores of students. He will be sorely missed. Here we reprint an early obituary, written by one of his former students from Umass.

-Gerald Epstein

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The Return of Austerity-The View From Africa

Leonce Ndikumana

Following the intense debate on the fiscal deficit during the U.S. presidential campaign, fiscal consolidation continues to dominate discussions in policy circles and academia. The large fiscal deficit in the U.S. and sovereign debt woes in the Eurozone are used by proponents of the “small government” mantra as a means to advance the belief that fiscal consolidation is the only way to bring the economy back to sustained growth and full employment. While the arguments are not new, the current circumstances of a global recession and a slow recovery in the U.S. make it somehow easier for proponents of this school of thought to fool the public into believing that tying the hands of the government is the only road to salvation.

African countries and developing countries in general know too well about the ravages of austerity programs; they certainly would not want to revisit the era of the 1980s that left permanent scars from fiscal retrenchment. While arguments for the alleged benefits of fiscal consolidation in terms of accelerated recovery and long-run growth are built on shaky empirical grounds in the case of developed countries,[1] they are even more tenuous for African countries. First is the chimera of “expansionary fiscal contraction” whereby fiscal consolidation is arguably supposed to boost growth through expansion of private spending driven by improved business confidence. In the case of developing countries, fiscal retrenchment typically involves substantial cuts in public expenditures including infrastructure, which worsens rather than improves the business environment by raising production costs. So, “expansionary fiscal contraction” isn’t, and can’t be, a developing country phenomenon.

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Solving Emerging Debt Crises

Martin Khor

The issue of foreign debt has made a major comeback.  This is due to the crisis in Europe, in which many countries had to seek big bailouts to keep them from defaulting on their loan payments.

Before this, debt crises have been associated with African and Latin American countries.  In 1997-99, three East Asian countries also joined the indebted countries’ club.

This year, European countries, notably Germany, insisted that private creditors share the burden of resolving the Greek crisis.  They had to take a “haircut” of about half, meaning that they would be repaid only half the amount they were owed.

It is increasingly realised that bailouts, where new loans are given to indebted countries in order to enable them to keep up to date with paying their old loans in full, are not enough and may be counter-productive, when the countries are facing a problem of insolvency and not just temporary lack of liquidity.

The restructuring of some Greek debt that was owed to private creditors is an example of what needs to be done.

However, the ad hoc restructuring undertaken in the case of Greece is not enough.  There needs to be a more systematic framework available to countries on the verge of debt default to conduct a proper debt workout, with principles agreed to internationally.

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What’s Up For 2013? “We simply do not know” but:

Gerald Epstein

Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.

John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.

Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”

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