Michael Hudson was on RT’s Capital Account with Lauren Lyster, speaking about the loss of democracy that has accompanied the global financial crisis. The video is below, but recently Michael also wrote two articles for the Frankfurter Allgemeine Zeitung in which he gives one a more in depth view of his perspective.
His account is predicated on a historical understanding of credit in the context of recent creditor-favouring economic policies. The outcome can only be a debt deflationary one as creditors seek to get "paid in full". I take a less ‘moralistic’ view on economic policy but I agree with the framing of creditor-centric policies leading to debt deflationary outcomes, where a different policy stance focused more on full employment would be less pro-cyclical and therefore less deflationary. See my thoughts from "The political economy of the European sovereign debt crisis" this past summer and "More on the political economy of the European sovereign debt crisis" from last month.
My conclusion in June was this:
The point for policy makers is to socialise enough of the bank losses onto taxpayers in order to recapitalise the banks, survive the crisis and maintain the status quo. Taxpayers will accept this if the economy is robust enough. As an investor, you should see this as an uncertain political situation. more than most. That means avoiding periphery sovereign debt until the situation stabilizes.
Will the current fix now being implemented stabilise things? I believe they will to a point, as I indicated when discussing more on what I think will happen in Europe last week. Willem Buiter thinks so and seems to suggest buying peripheral debt is now a go in a piece from earlier this week. However, Buiter also believes there is no politically feasible route to sustained growth for many years to come in the euro area, the US or Japan. And I agree with him on that point. Commenting on his view, earlier in the week, I concluded writing "over the medium-term, absent debt deflation dynamics, cuts will yield results if they are politically sustainable. This is a big if."
That brings us back to Michael’s view of eroding democracy to repay creditors in full, which is what we are now seeing.
Here’s another view that Tyler Cowen frames for us as the German view:
When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word.
2. When it comes to debt, the periphery countries simply don’t want to pay up. Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece. It’s amazing how many people won’t come out and utter or recognize this simple truth. Italy for instance doesn’t have to make a huge fiscal adjustment.
3. It is a privilege for a poorer country to be in an economic union with Germany, France, the Netherlands, and other wealthy EU countries, just as you might feel privileged to co-author a piece with a great scholar. If the poorer countries have to engage in some economic sacrifice to stay on good terms in such a union, so be it. There is also such a thing as catch-up growth, and it is robust in the broader world today, at least if a country is willing, like the East Asian countries have been, or for that matter Turkey and Brazil these days. The sacrifices being asked from the periphery countries are quite small in comparison.
4. We did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory. It even included an overvalued currency for the poorer region and a long period of adjustment. Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise. This transition, for all of its short-term flaws, will go down in the history books as a great long-run success. In part it succeeded because it was all done on the terms of the values of the successful nations of northwestern Europe. (I am surprised that this angle is not discussed more in the press, given Merkel’s own story.)
5. Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.
6. If it wasn’t for us, would Greece, Spain, and Italy (plus Ireland and Belgium) all currently have technocratic, reform-oriented governments as they do?
7. If you are trying to estimate the future economic fate of a country, shouldn’t you put aside a bit gdp drops and the like, and instead look at what do people in that country esteem and which values are transmitted by their system of education? Do read the Estonia story at the previous link.
8. The German emphasis on rules, and the attachment to the idea of an abstract order, worthy of loyalty in its own right, above and beyond any immediate personal connection or loyalty, is exactly what makes them able to run such a successful economy and successful social welfare state. When it says “Don’t Walk,” they don’t cross the street, even if no cars are coming. An economic union should be set up to support those principles, not tear them down, and social democrats should value this most of all.
Even if you disagree with these perspectives, they shape real world behavior. And might you still bet on a country which stuck to them? Be honest now.
This last part is the key: these are indeed the views shaping real world behavior and that’s why we are seeing this erosion of democracy to promote a creditor-centric policy. Remember, "the debtor is the one breaking the agreement and breaking his word".
I anticipate this policy orientation will continue until it either succeeds or something breaks. Over the short-term, things have and will continue to stabilise. Over the medium-term, debt deflation dynamics will be a factor. Likely, something will break as I believe the current policy direction in Europe is unsustainable politically.
So that’s my piece. Here’s the video.
P.S. – Also see Jack Straw’s recent piece from the Telegraph on the same issue: The arrogance of eurozone elites could kill the European Union