Yes, international finance has long been a factor in domestic politics. Barack Obama's electoral prospects depend to a significant degree on decisions made by central bankers in Europe and Asia. And yes, the financiers in Germany and France have some legitimate gripes against Greek and Italian fiscal policy.
Still: what has happened in Greece and now Italy is something we haven't seen before. It's a shift of sovereignty of a sort that was logically inevitable, given the structure of the European monetary union, but that hadn't taken so dramatic a form until now. The British figures who warned against ever sacrificing the UK's sovereignty by joining the Eurozone had their Blimpish aspects, but they were talking about problems like this.
Former guest blogger Piero Garau, a retired UN official who lives in Rome, writes in with this report on how that change feels from inside the Eurozone's latest problem child, Italy.
EURODEBT: A GIANT PONZI SCHEME?
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation.
The odd thing about the current EU panic about sovereign debt is that attention is focused on the consequences of borrowing, indebtedness, and on what is seen as the inevitable remedy -- reduction of debt and indebtedness through slashing of social expenditure (a practice that in Italy is called "social butchery"). Nobody seems to show concern about the vicious nature of sovereign indebtedness in the eurozone.
In pre-euro times, characterized by the odd combination of high inflation, high employment and growth, sovereign debt was considered the safest form of investment. This was because a) governments could repay debt by raising taxes and b) by printing new money. Hence, speculation against sovereign debt did not exist.
The globalization, or rather the neoliberalization, of the European economy brought about two massive changes. First, taxation became a no-no. Today, no government can hope to be reelected by admitting to what they will do anyway: raising taxation. Second, Eurozone countries have lost the option of printing money to pay their debt.
The escalation of public expenditure in Europe, a non-virtuous process brought about by a new form of speculation, "services inflation" (i.e. the enormous increases in the per-capita costs of state-delivery services like health, defense, and education) coupled to the previous two constraints, has brought about a massive gap between revenue and expenditure (See Eurostat figure below).
In the 17 Eurozone countries, this gap cannot be filled by means of printing money. Therefore, the only recourse is indebtedness by issuing national bonds in Euros. This is what attracts speculators: the knowledge that highly exposed Eurozone sovereign borrowers have little or no virtuous means to repay their debt.
In fact, Eurozone sovereign borrowers are now reduced to applying a classical Ponzi scheme. They borrow money from new investors to raise the money they need to pay previous investors. And as their credit standing worsens, they are forced to borrow more and more money to pay higher and higher interest rates.
As we know from experience, this is a recipe for disaster. Or rather, for the disaster of the Euro.
This author, a former UN staff member who enjoys the handicap and the advantage of not being an economist, is of the opinion that Greece's default, for example, is a sensible course of action. The massive efforts under way to avoid it are not due to benevolence (the suspect virtue Adam Smith warned us about). They come mainly from Greece's creditors (of course) and from German exporters, who would hate to see Greece apply import substitution or get their exports to Greece paid in new drachmas. So be it.
European countries who wish to stay in the Euro should simply do two things. First, put a rein to their debt emissions. Second, drastically reduce their income-expenditure gap. Social butchery is one way - the easiest and the worst one. The best way to reduce the income-expenditure gap is to a) invest in education, research, green entrepreneurship ('green" in the dual sense of "young" and "eco-friendly"), b) cut waste, starting from services inflation and c) eliminate tax dodging. All three areas offer ample opportunity for action, and nowhere more so than in the current panic area of the Eurozone - Italy.
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