The key measures to solve the Euro crisis according to the treaty
recently adopted by most of the EU are to establish a balanced
budget or a budget surplus for the state sector.
BEARING IN MIND that the need for governments to maintain sound
and sustainable public finances and to prevent a general
government deficit becoming excessive is of essential importance
to safeguard the stability of the euro area as a whole, and
accordingly, requires the introduction of specific rules,
including a "balanced budget rule" and an automatic mechanism to
take corrective action;[
TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC
AND MONETARY UNION, Pages 2 .
];
The Contracting Parties shall apply the rules set out in this
paragraph in addition and without prejudice to their obligations
under European Union law: (a) the budgetary position of the
general government of a Contracting Party shall be balanced or in
surplus;[
TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC
AND MONETARY UNION, ARTICLE 3
]
The drafters of this treaty imagine that it is possible, by an
act of international law to impose a unilateral constraint on one
item in a mutually dependent complex of relations. The surplus or
deficit position of the government sector in the Eurozone depends
upon the net positions of all other sectors.
In Table [tab:Sectoral-balances-for] we reproduce in summary form
the latest data on the surplus deficit positions of all financial
sectors in the Eurozone. All sectors other than the state sector
run a surplus - ie, they are building up their financial assets.
The change proposed by the treaty is drastic. It proposes in
effect to wipe out all net financial transactions between the
sectors by changing the net borrowing position of the general
government sector from a quarterly deficit of €122 billion to a
deficit of 0 or even a net surplus. [float Table:
[Table 1:
Sectoral balances for the Eurozone, 2012 Q1, extracted from the
online database of the ECB on 4 Aug 2012.<tab:Sectoral-balances-for>
.
]
Non
households financial Financial Govt Rest of
Companies Companies World
Net surplus 48 22 39 -122 13
€billion
]
But the implication of this would be that the net savings of the
household sector, the compnay sector and the rest of the world
would have to be reduced to 0, effectively eliminating out all
net financial transactions as they exist today.
In the abstract this is possible. If by some means the savings of
the household sector could be completely eliminated, if the whole
company sector could be made to run at a break even position with
no net financial surplus, and if the Eurozone's trade deficit
with the rest of the world could be wiped out, then the
government sector could run a balanced budget.
At the level of accounting it is possible, but is such a measure
compatible with the continuation of a functioning capitalist
economy?
Suppose the governments attempt to achieve this by austerity
measures - essentially cutting public expenditure. How does this
affect each of the other sectors?
Household sector
The 'household sector', is an amalgum of different social
classes. It includes households from the propertied classes who
are wealthy enough to have a substantial financial surplus, but
it includes far more households who have little or no savings and
are more likely to be net debtors. The neo-liberal government
austerity measures in the EU today primarily target those on low
incomes who have no financial surplus. As such they only have a
slight impact on the fiancial surplus of the household sector.
In principle, austerity measures that would reduce the financial
surplus of the household sector: for instance steep increases in
income tax on higher incomes or a progressive tax on large houses
and landed property. The Stafford Cripps austerity policies in
the late 1940s were effective in this way. Since such policies -
top rates of income tax above 90% are not being followed, the
prospect of eliminating the financial surplus of the personal
sector is negligable.
Non financial companies
In principle it would be possible, for a while at least, for non
commercial companies as a whole to run without a financial
surplus, or even with a financial deficit, if they were carrying
out a large programme of credit financed capital investment. But
this scenario is not very likely. Investment by non financial
companies tends to be self financing taken accross the sector as
a whole. Investment by one company may require external funding,
but its purchases boost the profits of suppliers, which means
that the sector as a whole tends to self finance.
Firms will only voluntarily seek external finance to expand if
they anticipate a high rate of profit on investment, which
implies among other things a rapidly expanding market for their
products. It is hard to see how this expanding market can be
anticipated during a period in which austerity measures are
curtailing consumer demand. Beyond that, we have argued earlier
that the rate of profit in Europe has only been held up since the
1980s by a reduction in the accumulation rate. An increased
investment rate would thus be self curtailing.
Involuntary deficits by industrial and commercial firms are of
course possible in the short run when faced with a slump in
demand. But their response to this is likely to be to quickly cut
costs by shedding labour, so even involuntary deficits induced by
austerity would be short lived. Attempting to force industrial
and commercial companies as a whole to run at break even point,
which the treaty implies, would mean, given the spread of rates
of return within the sector, putting a significant fraction of
them on the path to bankruptcy. This again is not sustainable.
Financial companies
Table [tab:Sectoral-balances-for] shows that on an annual basis
financial companies in the Euro-zone are running a surplus of
some €160 Billion and that they are thus responsible for \frac{1}{3}
of the total deficit of the general government sector.
There is almost nothing that the individual nation state
governments can do to eliminate this surplus with the framework
of the Euro-zone. Indeed the whole thrust of economic policy in
the capitalist world since the banking crisis broke out in 2008
has been to protect the interests of financial companies. They
could of course levy heavy taxes on financial firms, but this is
greatly complicated by the location of the firms. The countries
in the Euro-zone whose governments are in the worst financial
position are not necessarily the ones whose financial firms are
running the biggest surpluses.
A general reduction of interest rates would cut the surplus of
the financial sector, but that, under Euro system, is outwith the
power of the nation states. Only the ECB could systematically
force down interest rates by buying up national and local
governent bonds. This would reduce the cost of re-financing and
over time would, to an extent, reduce the financial surplus of
the private banking sector.
The whole structure of the treaties governing the ECB has been
designed by the Financial sector to prevent the ECB from acting
in this way.
Rest of the world
The surplus of the rest of the world with the Euro-zone might be
reduced and even eliminated by neo-liberal austerity measures. A
sufficiently strong recession in the Euro-zone might cut imports
sufficiently to eliminate the trade deficit of the zone with the
rest of the world. But this of course would only succeed to the
extent that the rest of the world itself did not slip deeper into
recession.
One effective tool that national governments have traditionally
been able to exercise is now out of reach for the Eurozone. They
can no longer devalue to bring their trade back into balance. The
ECB again could force a devaluation were it to act as the Bank of
China used to, and systematically buy up large quantities of
dollar securities. But the national governments can not instruct
it to do so.
Conclusion on the Stability Pact
The structure set up under monetary union effectively makes it
impossible for national governments to meet the obligations that
they have undertaken in the pact. Any serious attempt to impose
balanced budgets by austerity measures will be ineffective in its
professed aim, and would as a side effect engender a downward
spiral of bankruptcies, rising unemployment and deepening
economic ruin.
The University of Glasgow, charity number SC004401
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
