How the ECB are profiting from Greek misery

No wonder the unelected head of the ECB is smiling, his team have figured
 out a way to turn a profit on the hoard of Greek bonds his predecessor
bought in an insane attempt to shore up the failing Greek economy.

One of the most infuriating things about mainstream commentaries on the Greek economic crisis is the absurd assumption that the vast bailout loans being sent over to Greece are actually designed to help the Greek economy. One barely mentioned tranche of loans to Greece was a €4.2 billion payment from the European Financial Stability Fund (EFSF) in June 2012 provides a perfect example of how the bailouts are actually being used to benefit the European financial establishment at the direct expense of the Greek economy.

In May 2010 the European Central Bank initiated a barmy policy of buying up tens of billions of euros worth of Greek government bonds in an absurd attempt to prop up their market value. The ECB were given a significant discount on the market rate (estimated at 20%), meaning that after spending €40 billion they were sitting on a paper profit of around €10 billion.

In February 2012  Greece's private creditors were forced to take large losses on their investments, effectively slashing the value of Greek government bonds. In order to avoid turning their €10 billion "paper profit" into a large loss, the ECB insulated their own Greek bond holdings by insisting that the "old devalueable" bonds be swapped for "new" bonds as part of the deal. This bond swap ensured that the ECB would not suffer the same kind of large scale losses as Greece's private creditors.

The Greek bond swap allowed the ECB to avoid losses on their Greek bond holdings, but it still left them in the tricky position of holding tens of billions worth of Greek bonds at a time when extremely high profile European political leaders (such as Angela Merkel and David Cameron) were openly scare mongering about Greece being thrown out of the Euro if they dared to vote for anti-austerity parties. The ECB solution to this problem has been to force the Greek state to borrow billions more from the EFSF in order for them to begin buying back the ECB hoard of Greek bonds. The first tranche of bond buy-backs took place in June 2012 shortly before the re-run of the first undecided Greek legislative election.

Instead of providing money to the Greek government so that they could do something to combat the shocking shortages of medical supplies or to create some kind of demand in the austerity stricken economy, the European Union have actually used this €4.2 billion EFSF loan in order to reduce the ECB's exposure to Greek debt, meaning that all of this €4.2bn loan flowed straight back out of Greece, leaving only another vast debt for the Greek people to pay off behind it.

As if using the "bailout fund" in order to serve the ECB's financial interests isn't bad enough, 
it has been reported that Greece were made to buy back their own bonds at face value, despite having sold them to the ECB at a 20% discount, meaning that of the €4.2 billion in increased debt for Greece, the Greek economy will see no benefit at all whilst the ECB make a tidy profit of €840 million. Not only did the ECB use their powerful position to avoid the "haircut" other Greek creditors experienced, they used it to actually turn a tidy profit for themselves from the economic chaos in Greece.

From this arrangement alone it is quite clear that the European Union and the ECB are far more interested in protecting their own financial interests than they are in preventing the annihilation of the Greek economy or alleviating the suffering of countless Greek people. This situation is reminiscent of the IMF's handling of the Argentine economic crisis, which prompted the late Argentine president Néstor Kirchner to say that "The IMF has transformed itself from being a lender for development to a creditor demanding privileges". This shady, virtually unreported bond buy-back deal demonstrates that the troika of the IMF, the ECB and the European Union are not the economic saviours they dress themselves up as, they are a ruthless bunch of sociopaths that are using devastating socio-economic chaos in order to enforce their favoured brand of ideologically driven neoliberal pseudo-economics under the guise of "austerity" whatever the cost to ordinary Greek civilians and to put their own financial interests first to such an extent that they are even prepared to turn a profit from the socio-economic chaos they have done so much to create.

See also

Eurozone austerity, neoliberalism rebranded

 

Squandered trillions and the Greek exit

 

The Austerity Death Cycle

 

Greek votes, German threats 

 

 

The Spanish Euro sunset

The sun sets behind one of Ibiza's many abandoned property developments.

Take a trip to Ibiza this summer and you would hardly know that Spain is in the grip of the worst socio-economic crisis since democracy returned to the country in 1975. The beaches are crowded, the Superclubs are open and still charging €40 or €50 just to get in and €10 just for a 275ml bottle of partially refrigerated beer once you're inside. The signs are there, but the casual holiday maker is unlikely to notice that dozens of partially constructed property developments around the island haven't progressed in the last year, or even since the Spanish property bubble burst in 2008.

People travel to Ibiza to relax and have a good time, they don't go to the most famously hedonistic island in Europe to assess the state of the economy or consider what the implications for the European single currency might be, should the entire Spanish banking sector submerge into the ocean of debt they created for themselves during the boom years.

The recently elected right-wing Spanish government are playing an unprecedented game of Euro brinkmanship in the desperate hope that the unelected technocrats at the European Central Bank and European Commission decide to treat Spain as a different case to other struggling Eurozone economies such as Ireland, Greece and Portugal, who were forced to accept harsh austerity measures in return for bailouts to help them avoid defaulting on their external debts.

Mariano Rajoy's Popular Party have already inflicted €27 billion in self inflicted austerity measures and drastically undermined Spanish labour laws in the hope that by inflicting voluntary austerity measures they might avoid the national humiliation of accepting bailouts and externally imposed austerity drawn up by the ECB and the IMF and might receive preferential treatment in the form of direct intervention to prevent the imminent collapse of the entire Spanish banking sector.

Adopting a different approach for Spain is likely to infuriate the populations of the three smaller Eurozone countries that have had to eat the EU "shit pie" of a vast bill to cover the cost of bailouts that flow straight back out of the country to their French, German and British financial sector creditors and the socio-economic chaos of brutal externally imposed and self defeating austerity measures. Watching Spain get preferential treatment when they themselves have already been made to suffer enormously, would almost certainly cause a dramatic rise in anti-EU sentiments in the three "periphery" states.

Even nine months ago talk of a potential Greek exit was being scorned as inconceivable scaremongering, in recent weeks high profile politicians have made calls for Greece and the Eurozone to "make up or break up" and financial experts have gone as far as calculating the potential economic damage of a Greek exit at €1 trillion. Now there is talk of a Spanish exit too. If the European authorities are unprepared to modify their bailouts and austerity prescription in Spain's case and the Spanish government are too proud to accept the same brutal treatment as Ireland, Greece and Portugal an exit looks like the only remaining option.

In the Spanish case, the Euro-technocrats will struggle to stick with the same strategy of inflicting another self-defeating cycle of austerity and bailouts because the stakes are much higher with Spain than with the previous three, meaning that Spain has a much stronger bargaining position. The Eurozone could conceivably take the exit and default of Greece, which represents only 2.65% of the Eurozone economy. The scale of the economic damage has been estimated at almost three times the size of the Greek economy, but surviving an 8% of Eurozone GDP (€1 trillion) hit seems conceivable. Irealnd and Portugal are even smaller, accounting for less than 4% of Eurozone GDP between them. Spain on the other hand is the fourth largest economy in the Eurozone accounting for over 8.4% of Eurozone GDP and using the Greek exit damage estimate as a rule of thumb (3x national GDP in economic chaos), a Spanish exit could end up creating up to 25.3% of European GDP (€3,151 trillion) in economic fallout.

The Eurozone would undoubtedly suffer enormously from a Spanish exit, however after a year or two of intensified economic chaos it is possible that Spain could actually emerge in a much healthier state following an exit and default. A return to the Peseta would allow Spain to devalue their currency providing some blessed relief for the struggling Spanish manufacturing sector, create employment, dramatically slow down the flow of capital out of the country and also create a much stronger incentive for holiday makers to choose Spanish destinations like Ibiza for their holidays.

It seems certain that mainland Spain would soon begin to experience a manufacturing boom as the Spanish exports become much cheaper in comparison to produce from countries still locked into the Euro and tourist destinations like Ibiza would benefit from a large tourism boom as visitors find their money goes much further than in Eurozone destinations. Both of these factors would create extra employment and increase aggregate demand, putting Spain on the road to recovery.

The problem for the Spanish government is that whatever happens someone is going to have to lose face. If Spain accepts the same kind of austerity and bailouts "shit pie" the previous three have been forced to eat, it will be a massive national humiliation, if the ECB back down and intervene directly to prevent the Spanish banking sector collapse, they will look like a bunch of malicious thugs that lost their vindictive streak when the stakes got too high and if neither side are prepared to lose face in the short term, they will both lose face as the Spanish are forced out of the Euro and the Euro technocrats are forced to watch the disintegration of their beloved Single European Currency project.

If Spain does bail out of the Euro, I don't suppose the hedonists holidaying in Ibiza would notice anything but the change in currency. The sun will still be blazing down, the beaches will still be packed and the superclubs will still be brazenly ripping off their customers with eye watering markups on their beer, just like the European financial sector will still be lending on their ultra-low interest ECB "giveaway loans" to create mind boggling profit margins at the expense of the "real economy".

 

See also

The Austerity Death Cycle
   

Spanish capital flight and ECB inertia

 

The Bankia bailout

 

Squandered trillions and the Greek exit

 

Argentine Recovery Economics

  

Capital Flight Explained

Capital flight is an economic term used to describe the outflow of wealth from a country when it is experiencing severe economic difficulties. The most common causes of capital flight are widespread expectations of a significant currency devaluation, and/or fear that the government would give precedence to their foreign debt obligations ahead of their domestic ones.

The fear that the value of their wealth is not secure drives people and institutions to shift it to other economic jurisdictions they consider to be safer. This kind of outflow of wealth can be either be done legitimately through strategies such as the sale of shares and bonds and the widespread withdrawal of savings funds or illegally through corruption and tax evasion strategies.

Capital flight works as a kind of self-fulfilling prophecy; as confidence in the economy drops and more people disinvest, the performance of the economy is further weakened by lack of capital reserves, creating a further drop in confidence and a downward spiral of capital flight and economic contraction until the effected nation is forced to massively devalue their currency and default on their external debts.

There are two distinct forms of capital flight, the most common form in the western world occurs in economies that lack monetary autonomy, meaning that their governments can't gradually change the value of their currency to suit their economic circumstances. When the value of the currency is directly tied to an external value, such as the Gold Standard, the US Dollar or the Euro, there is little a government can do in order to alleviate economic problems. A lack of ability to gradually reduce the value of the currency in order to prevent a strong currency from crippling their export markets for example.

When the national currency is easily convertible to the currency of other economies this increases the ease with which capital flight is achieved. An example of this can be seen in the Argentine 1:1 currency peg with the US Dollar. As the Argentine economy deteriorated in the late 1990s, people rapidly converted their Argentine Pesos into Dollars in the expectation that a breaking of the peg in order to allow devaluation of the Peso was becoming inevitable. Another example can be seen in the Eurozone crisis where Euros are flowing out of countries like Greece and Spain at astonishing rates.

A second type of capital flight is more akin to simple corruption than a socio-economic process brought about by lack of monetary autonomy and falling confidence. This second type is much more common in the developing world where international aid and the profits from the sale of valuable mineral resources are siphoned out of the economy by the establishment elite over the course of decades.

Examples

The Gold Standard: One of the most commonly cited examples of capital flight came during the British Gold Standard between 1926 and 1931. Under this economic system paper money was redeemable in the form of gold bullion. This convertibility allowed foreign speculators to redeem large amounts of gold, forcing the British government to borrow billions from French and American banks in order to restock their gold reserves. In 1931 the flow of gold across the Atlantic to America and the ever increasing cost of replenishing gold reserves forced the British to suspend the gold standard in order to allow the the Pound to devalue to a more sustainable level, which in turn allowed direct stimulation of the economy through the lowering of interest rates.

The Argentine Peso: In the 1990s the Argentine government pegged their currency directly to the US Dollar and began enacting neoliberal reforms at such a pace that they became the poster boys of the IMF. Unfortunately the attacks on financial sector regulations and capital controls, the reductions in tax rates and the fire sale of heaps of state infrastructure to foreign investors in combination with the easy convertibility with the US Dollar increased the flow of capital out of the country to an unsustainable level. The huge growth in foreign corporate ownership in Argentina meant that profits were siphoned out of the country for the benefit of foreign investors and declining tax returns meant that the Argentine government struggled to maintain the large foreign currency reserves necessary to maintain convertibility with the Dollar. As confidence diminished, even more people withdrew their wealth from Argentina in the expectation of a significant currency devaluation, eventually when the devaluation happened in 2002 it was accompanied by the biggest sovereign default in World history. Once the default happened, the Argentines rid themselves of the IMF's brand of neoliberal pseudo-economics and set themselves on the road to economic recovery by taxing capital flows out of the country and investing in fiscal multipliers such as infrastructure projects, house building, welfare provision and education.

UK tax dodging: In 2009 it was reported that hundreds of wealthy financiers had withdrawn their capital from the UK after tax rises for the super-rich. The destinations of choice for the uber-wealthy elite to stash their wealth were British dependency tax havens such as Jersey, Guernsey, the Isle of Man and the British Virgin Islands.

The Eurozone crisis has intensified the amount of capital
flowing out of Greece, Ireland, Spain, Portugal and Italy.

The Eurozone crisis: As confidence in the European Single Currency project has waned, several countries have experienced massive scales of capital flight. Following the undecided Greek election it was reported that as much as €4 billion a week was flowing out of Greek banks, meaning that their leverage ratios were becoming more and more unsustainable. In May 2012 the Spanish Central Bank released estimates that showed nearly €100 billion in capital flight (nearly 10% of Spanish annual GDP) for the first three months of the year. Despite these economic difficulties the European Central Bank flatly refused to devalue to Euro, meaning that struggling Eurozone economies were stuck with a massively over-valued currency which was easily siphoned out of the country into stronger Eurozone economies such as Germany, making the exit from the Eurozone and default on their debts seem ever more likely options for crippled European economies like Greece, Ireland and Spain.

Embezzlement flight: The second form of capital flight normally occurs in the developing world. It is less to do with lack of monetary autonomy and more to do with outright corruption. The International Monetary Fund estimated that wealthy citizens of developing countries amassed at least $250 billion worth of foreign assets between 1975 and 1985. As dictators in countries such as Argentina and their cabal of supporters were showered with money by the IMF and western economies in return for implementing fundamentalist neoliberal reforms, a large proportion of that wealth was simply siphoned straight back out of the economy and stashed in bank accounts in Switzerland, America and UK administered tax havens. One of the regions most badly effected by this kind of capital flight is sub-Saharan Africa where capital flight has been estimated at more than $700bn since 1970, which is more than triple the region's outstanding external debts of around $175bn. Common mechanisms in this "economic rape" form of capital flight include inflated procurement contracts for goods and services, kickbacks to government officials, and diversion of public funds to politically influential individuals. A smaller proportion of of Africa’s lost capital has come from other sources, such as earnings from oil and mineral exports, but foreign loans are much simpler to embezzle since there is no need to bother with the hard work and expense of extracting natural resources in order to convert them into cash.

Capital flight is an extremely destructive economic phenomenon, the long term damage of corruption funded capital flight has severely damaged many developing countries as their political leaders have pillaged their own economies in order to fill their personal bank accounts in Switzerland, The US or British administered tax havens. Even though the free flow of capital out of poor economies is severely damaging, the IMF have a history of actively lobbying against "third world" countries introducing capital controls to slow down the outward flow of capital from their own economies. 

When capital flight occurs in the West it is often a strong indicator that the effected economy is about to undergo a dramatic currency devaluation. This is what made the astonishing scale of capital flight out of Spain in the first quarter of 2012 such important news, with disastrous implications for the Eurozone project and holders of Spanish government bonds.

Read more articles in the "What is...." series

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See also

Spanish capital flight and ECB inertia

Argentine Recovery Economics

Mixed Economy vs Neoliberalism
 

3D economics: Disposable income, Demand and Debt

 

Spanish capital flight and ECB inertia

More than 10% of national GDP has flowed out of Spain
since Mariano Rajoy came to power in December 2011,
but it seems he was to busy inflicting brutal austerity
measures on his own countrymen to even notice.

Only a few days after one of Spain's biggest banking groups went cap in hand to the Spanish government to ask for a €19bn bailout, the Spanish Central Bank revealed the astonishing level of capital flight out of Spain for the first three months of the year. The figures revealed that €97bn flowed out of the country between January and March 2012, representing 9.2% of Spanish GDP (based on the 2011 figure of €1,051bn).

The data for April and May isn't even in yet, but given the absurd levels of economically destructive austerity being voluntarily inflicted by Mariano Rajoy's right-wing "Popular" Party (in order to prevent the national humiliation of accepting European Central Bank bailouts and austerity measures) and the enormous scale of the Spanish banking crisis it would come as no surprise at all if the scale of Spanish capital flight had intensified further over the last two months.

To put the mind-boggling level of wealth flowing out of Spain into perspective, is only two weeks since the Daily Telegraph described the €4 billion a week in capital flight out of Greece in the wake of the democratic uprising against austerity as a "tsunami". If the flow of €4bn a week out of the Greek economy over the course of a few weeks is being described as a "tsunami" what on Earth could be an appropriate metaphor for an average of €7.7bn a week pouring out of the Spanish economy over the course of an entire economic quarter? A "megathrust tsunami"? A "meteor impact tsunami"?

One of the most remarkable things about the Eurozone crisis is that economic difficulties in one or more of the Eurozone nations doesn't even seem to have been considered as a possibility by the ruling technocrats, hence the lack of coherent contingency planning. The traditional consequences of economic turmoil and large scale capital flight have been devaluation of the currency and depreciation of asset value, however the first consequence is not possible within the Eurozone economic area given the single currency. The ECB have repeatedly stated that they will not even consider a slight devaluation of the Euro through quantitative easing or changes in the extremely low interest rates they insist on maintaining in order to keep inflation down to the arbitrary "ideal level" of 2% they have set for themselves. Without currency devaluation, the socio-economic consequences of Spanish asset depreciation in combination for the brutal levels of self-inflicted austerity are going to be extremely severe.

A lot of economics commentators have drawn parallels between the Spanish situation and Britain and the gold standard in the 1920s, however a much more recent and apt comparison can be made with the former Spanish colony Argentina who spent the 1990s enacting neoliberal reforms at such a pace that they became the poster boys of the IMF and pegged their currency directly to the US Dollar, meaning a complete loss of monetary autonomy, which creates enormous constraints on fiscal policy.  The IMF admitted as much in their Lessons from the Argentine crisis review in which it was noted that  “A currency board [currency peg] puts much more stringent demands than other regimes on fiscal and financial policies, as well as on the flexibility of trade and the labor market.”.

Spain has undergone a similar process, the European Union is built on a foundation of "orthodox neoliberal" pseudo-economics and Spain effectively ceded their monetary autonomy to the ECB when they joined the Eurozone, meaning that their fiscal policy is heavily constrained by the monetary policy decisions of the ECB.

 Both experiments in neoliberalisation and loss of monetary and fiscal autonomy resulted in economic meltdowns. The Argentine economy tanked in 1999 leading to a vast scale of capital flight, the eventual breaking of the tie to the US Dollar and the biggest sovereign default in World history. The Spanish economy tanked in 2008 when the Spanish property crisis hit and the scale of capital flight is indicating that "the markets" are beginning to see a Spanish Eurozone exit and default as almost inevitable.

There are two positives to this comparison: Argentina managed to rebuild their economy by paying off the IMF and tearing up the IMF handbook of socially and economically destructive ideologically driven pseudo-economics they force upon recipients of their loans through neoliberal Structural adjustment conditions. Once they were rid of the toxic IMF ideology they could introduce tried and tested growth based strategies, such as taxing capital flight in order to reinvest in fiscal multipliers such as infrastructure projects, welfare payments, house building and education, resulting in a 9% of GDP per year growth rate between 2002 and 2009. The other positive is that the ECB are not a totally disinterested party like the United States Federal Reserve were in Argentina's case. There is still time for the ECB to come to their senses and adjust European economic policy to prevent the creation of a socio-economic catastrophe triggered by the economic annihilation of the fourth largest economy within their jurisdiction, resulting in the almost certain breakup of their Single European Currency dream.

Mario Draghi, head of the ECB. Who's interests is he serving
by sticking to austerity & bailouts instead of trying some
 coherent, tried and tested economic recovery strategies?

It was hardly surprising that the ECB refused to change pan-European economic policy because of the economic woes of Greece, a relatively small country (2.65% of Eurozone GDP) on the European periphery that "cheated their way in" by employing Goldman Sachs to "cook their books" in order to gain access to the Euro club in the first place. However failing to intervene to prevent a socio-economic catastrophe in Spain, the 4th largest economy in the Eurozone (almost twice the size of the Netherlands in fifth) which makes up almost 12% of Eurozone GDP and was actually outperforming Germany by many economic indicators as recently as 2007, is beginning to look like feeble minded political inertia.

Of course providing direct assistance to the Spanish when they refused to do so for smaller economies such as Ireland and Greece would be a very public u-turn which would be spectacularly unpopular with the the Irish and the Greeks who were made to suffer years of punishing austerity measures as the vast bailout funds were used almost exclusively to support the financial sector creditors of these countries. It would signal the end of the road in the careers of many an unelected European technocrat and for Angela Merkel, the most visible democratically accountable austerity pusher. On the other hand if they don't intervene directly and stick with their catastrophically unsuccessful strategy of inflicting neiliberal reforms under the guise of "austerity" and using vast bailout loans to fund payouts on what should have been losing financial sector bets (on Greek, Irish & Spanish government bonds) in order to prop up the utterly dysfunctional neoliberalised financial sector they have created, the Eurozone meltdown begins to look almost inevitable. It seems that by maintaining their policies of austerity and bailouts instead of direct investment and coherent economic growth strategies, the Eurozone technocrats may be only acting out of ideological determination to perpetuate their utterly discredited neoliberal pseudo-economic theories at the expense of everybody else in order to preserve their own short term career interests. Jobs they could hardly keep upon the admission that their entire strategy so far has been nothing more than a sequence of terrible economically destructive mistakes.

If worsening socio-economic conditions force Greece to bail out of the Euro, the scale of the economic damage has been estimated by the Institute of International Finance at a potential €1tn (or almost exactly three times the size of the entire Greek economy €329,9bn GDP). It is conceivable that the Eurozone could survive an economic catastrophe reducing the entire Eurozone GDP by over 8%, however using the same rule of thumb calculations to extrapolate the potential damage of a Spanish exit (three times Spanish GDP) gives us a ballpark figure of €3.153 trillion, or 25.3% of Eurozone GDP. Add this estimate to the estimated 8% of GDP annihilated by a Greek exit and we have a potential pan-European economic meltdown costing almost exactly one third of Eurozone GDP!

Providing direct assistance to Spain would be a massively controversial u-turn, but what does it say about the Euro tchnocrats at the ECB and European Commission if they are unwilling to intervene to protect the fourth largest economy in the Eurozone from socio-economic meltdown? It also provokes the question of who's interests they are actually serving or whether they are serving anyone's interests at all by sticking with their catastrophically broken neoliberal economic models?  If things do play out like this, resulting in the almost unimaginable socio-economic chaos of a full scale Eurozone meltdown, then the ECB's hard line stance against direct intervention is certain to be cited by future generations of economists and historians as a case study in unforgivable political inertia.

See Also

The Bankia bailout

Argentine Recovery Economics

Eurozone "austerity", neoliberalism rebranded

The Austerity Death Cycle

3D Economics

The austerity death cycle

The Eurozone experiment in austerity is failing, as many people predicted that it would. The conventional tried and tested approach at times of economic downturn has been for the state to invest in productive activities, stuff like large infrastructure projects, housebuilding and public education. This type of investment creates jobs and improves the long term economic prospects with more efficient infrastructure, better quality and more affordable housing and a more highly educated workforce. Another common component in successful economic recovery strategies has been to put more disposable income into people's pockets, by providing welfare payments (pensions, child benefits, unemployment benefits) and reducing the cost of services like public transport of health care. Creating employment and reducing the cost of living increases the amount of disposable income in the system, which in turn increases economic demand.

The neoliberal austerity experiment is to try the opposite, to dramatically reduce government expenditure on stuff like infrastructure, housebuilding and education and to slash welfare payments by undermining existing pension agreements, eliminating many benefits and making the others much more difficult to obtain. Adherence to hard line austerity measures have intensified the Greek economic meltdown, created a vast unemployment problem in Spain and driven the UK back into recession.

The problem with "austerity" is that it is exactly the same kind of discredited neoliberal dogma that created the global financial meltdown in the first place. When the establishment response to the financial sector meltdown was to prop up the debt riddled institutions with direct government funding and Central Bank ultra-low interest "giveaway" loans, it was clear that maintaining the status quo was going to be the priority. They just needed a change of narrative in order to explain away the crisis. Thus the Great Neoliberal Lie was born. Excessive state spending, not reckless financial sector gambling had caused the crisis and the "only solution" would have to be "austerity".

The reason austerity is not working is that the austerity policies are not even meant to be a solution to the crisis, they are simply a justification for the continuation of the "orthodox neoliberal" agenda. The political and financial establishment are simply continuing to do what they want to do; to lower taxes on themselves and their supporters, reduce regulations limiting themselves and their supporters, funnel ever increasing amounts of state expenditure to themselves and their supporters whilst cutting welfare entitlements and labour conditions to those who are not their supporters. Their real reason is selfishness, their actual policy is just self interest dressed up in pseudo-scientific terms in order to fool people into thinking that it is complicated, when it isn't.

Realisation that "austerity" is actually destabilising the economy and damaging the long term economic outlook wont change anything, because fixing the economy was never the actual reason for doing it in the first place. The only way that the excesses of the free-marketeers can be reduced, is when the people have had enough. It took the US nearly half a decade to begin rectifying the Wall Street Crash with the New Deal, it took the Second World War to shake Western Europe into developing the stable and highly productive social democratic mixed economy model and it took the Argentine people around four years to replace the "orthodox neoliberal" establishment with true patriots, people that put national prosperity ahead of adherence to the self-interested, self serving ideology of globalised neoliberalism.

It seems that after four years of punishing ideologically driven austerity the Greeks are on the verge of ousting the neoliberal austerity pushers. I wonder if the British people still have the backbone and solidarity to rid themselves of their sickeningly self serving, corruption riddled, austerity loving establishment?

See also

The Great Neoliberal Lie

Mixed Economy vs Neoliberalism

Eurozone Austerity, neoliberalism rebranded

Austerity and the double-dip

Squandered trillions and the Greek exit

After neither the pro nor the anti "austerity" factions of the Greek legislature could form a coalition government following the elections on 6 May 2012, the global stock markets predictably went into panic mode. The new Greek election is chalked in for the 17th of June and the predictions are that the anti-austerity parties will further increase their share of the vote. The stock markets are panicking because a victory for the diverse range of anti-austerity groups would signal an end to their favoured containment policy of huge bailouts from the European Central Bank and the IMF in return for the rapid neoliberalisation of the stricken Greek economy (via mass privatisations, welfare cuts and attacks on labour rights). If the next Greek government refuses to play ball, then the prospect of a Greek Eurozone exit and a return to the Drachma would seem like the most likely outcome.

The prospect of a Greek Euro exit has further intensified the shocking level of capital flight out of Greek banks as citizens and businesses attempt to withdraw everything they can in Euros before their savings get turned into Drachmas. Estimates put the scale of withdrawals at €75 billion over the last two years peaking at €3 billion Euros in a single week in the aftermath of the election. The idea of a Greek Eurozone exit has been floated for several years, but even when I first published a blog addressing the subject back in September 2011, the view that a Greek Eurozone exit would be desirable or even possible was still being criticised as unrealistic, speculative, stupid, dangerous and absurd. By May 2012 even heads of state and central banker bosses were openly discussing the prospect of a Greek withdrawal.

David Cameron, ever the political opportunist

The UK Prime Minister David Cameron waded into the debate by trying to blame the woeful state of the UK economy on the Eurozone crisis and the threat of a Greek exit, however he failed to draw the obvious link between the £40 billion that the Tory led Coalition government had handed over to the IMF economic blackmail fund (that could have been better used to support British industry and British jobs) and the IMF imposed economically destructive neoliberalism dressed up as "austerity" that has worsened the Eurozone crisis and triggered the Greek electoral backlash.

It is the harsh economically destructive "structural adjustments" that the IMF and ECB have set as conditions on the Greek bailout deals that have intensified the Greek economic crisis and caused the huge political backlash that is panicking the global financial markets, making Cameron's comments that the Eurozone should "make up or break up" particularly hard faced, since it is the UK backed IMF and their insistence upon harsh austerity measures that intensified the crisis to this level in the first place.

The head of the Bank of England Mervyn King also joined in with the Euro doom-mongering by claiming that the Eurozone is "tearing itself apart with no obvious solution". An economic analyst called Doug McWilliams made widely publicised claims that a disorderly Greek exit from the Euro could result in a 5% drop in Eurozone output, equivalent to a $1trillion loss. Coincidentally another chief central banker Mario Draghi of the ECB has spent even more than $1 trillion in ultra-low interest "giveaway loans" to the debt riddled European banks in the last six months alone.

If nothing else, this estimate of $1 trillion in lost productivity from a "worst case scenario" chaotic initiation of the Eurozone breakup puts the vast scale of financial "support" being poured into the black holes of debt created by the reckless gambling of the neoliberalised European financial sector into perspective. Many of these reckless bets were made in Greece, hence the need for the ECB and the IMF to provide numerous huge bailouts so that the Greek government could pay out on what should have been losing bets. The whole cycle of "worsening economic conditions - bailouts - austerity - worsening economic conditions" can be seen as an exercise in protecting European banks from the consequences of their own bad Greek bets. What has made the situation so much worse than it could have been, is the insistence from the ECB, the IMF and German Chancellor Angela Merkel that ordinary Greek citizens must suffer the consequences of socially and economically destructive ideologically driven neoliberalisation reforms in order that their government can borrow money to pay out on the bad bets of the German banks.

Given the fact that the ECB's €1,000,000,000,000 in secretive LTRO loans and €100,000,000,000s more in Greek bailouts have had no discernible effect in preventing this economic chaos, surely the European Central Bank (and the Bank of England for that matter) will have to stop squandering such vast sums on propping up the dysfunctional neoliberalised financial sector and willfully inflicting economically destructive self-defeating austerity in order to pay for it.

After handing out €1tn in ultra-low interest loans to the
 the debt riddled European financial sector in the last
 6 months alone, Mario Draghi can expect them to come
squealing again in the wake of this latest "crisis".

If the central banks are going to make these kind of Keynesian style economic interventions by providing these kind of ultra-low interest loans and vast bailouts, they must provide them directly to the "real economy" of jobs, manufacturing, industry, research, modernisation, infrastructure development, education and training instead of using them to protect the parasitic European banks from the consequences of their bad Greek bets

Had the ECB intervened with direct loans to help Greek businesses to expand and modernise and to the Greek government to improve national infrastructure (instead of intervening with bailouts and punishing austerity measures), I'm absolutely certain that the situation in Greece would not have got so badly out of hand.

Even though the pan-European anti-austerity backlash has begun, I fear we're going to be stuck with this kind of privatise the profits, nationalise the losses, bailouts for the super-rich and austerity for the masses economic rubbish for a good while longer, especially in Britain where all three of the establishment parties are wedded to the ideas of "austerity" or "austerity-lite".

See also

Eurozone austerity, neoliberalism rebranded

Austerity and the double-dip

Angela Merkel, dead woman walking

Argentine Recovery Economics
 

No new ideas, just more Tory cuts

David Cameron plans extra £25bn of welfare cuts.

David Cameron's only answer to the UK's economic woes
is even more of the same ideologically driven rubbish that
drove the country back into recession in the first place.

On 15 May 2012 the Daily Telegraph revealed secretive government plans to cut another £25 billion from welfare spending in 2014, in the hope that a spate of unemployment and disability scapegoating will prove politically popular in the run-up to the next election.

Recent electoral results in the French Presidential election, the Greek legislative election and local elections Italy and Germany show that there is a rising swell of anti-austerity sentiment in Europe. By underpinning their electoral strategy with another bout of "austerity for the poor" after their "prosperity for the rich" budget in which they handed vast income tax cuts to the millionaire class they seem to be playing an incredibly risky game. The Tories are relying on the anachronistic, repeatedly gerrymandered and grotesquely unrepresentative Parliamentary electoral system to save them from any rise in anti-austerity sentiments in the UK.

Unlike our European neighbours, it would take an absolutely huge groundswell of support for alternative anti-austerity candidates in order for any measure of political control to be wrested from any of the big three "orthodox neoliberal" parties, but people like George Galloway and Caroline Lucas have shown that it is technically possible to beat the establishment parties, even under the rules of their own game. What would be needed for anti-austerity parties to succeed in the Westminster elections would be something hugely unpopular in the lead up to the next election, something like another round of malicious ideologically driven punishments for the poorest in society at a time when they are most vulnerable (thanks to the stagflationary economic policies of the coalition). Lets say another £25 billion slashed from unemployment benefits, disability benefits and pension funds.

If we add the Tories projected £25 billion in welfare savings to the £20 billion that the Coalition have already inflicted on the NHS, that gives us just enough to cover the £40 billion Dave and Gideon have found to hand over to the IMF in order to inflict similarly brutal austerity measures on the UK's European trading partners via IMF economic blackmail loans.

The stagflationary effects of ideologically driven "austerity" here in the UK have been enough, but inflicting even more of it in order to invest heavily in an organisation that insists on the implementation of the same defunct toxic economic dogma (in the form of neoliberal structural adjustments) as conditions of their loans is insanity.

If the UK is to trade its way out of recession, driving down demand by slashing national disposable income through harsh austerity measures in order to directly fund the ideologically driven economic annihilation of some of our key trading partners is transparent economic lunacy. The only way the "austerity agenda" makes any sense is if it has nothing at all to do with economic growth and that the primary objective is actually to ensure the maximisation of the transfer of wealth from ordinary people to the super rich elite, which would make it seem like it has been a policy with a "successful" track record.

See also

Why is it only spring in Bradford?

Austerity and the double-dip

Eurozone Austerity, neoliberalism rebranded

The Tory contempt for the value of labour

The Greek revolt against neoliberal austerity

The Greek communist party and other left-wing groups
have consistently opposed "austerity".

Stock markets are once again in chaos, this time over the increased likelihood that the crazy Eurozone experiment in mass abandonment of fiscal autonomy is on the verge of collapse. The Greek voters have shown that they don't want "austerity" and the bankers and technocrats of the Eurozone have retorted by saying that they don't want Greece unless they swallow all of the toxic austerity medicine that they have been prescribed.

The important question is why have the voters of Greece comprehensively rejected "austerity"?

The problem with "austerity" is that it is just the same toxic, ideologically driven neoliberalism that caused the economic meltdown rebranded with a new name. Neoliberalism is defunct, it died of terminal hypocrisy when the deregulated financial sector had to go squealing to the state sector for the biggest state subsidies in history in order to save them from the consequences of their own reckless gambling.


Yet the unelected bankers and technocrats that run the European Union have decided that they are going to continue to prop up the debt riddled neoliberal experiment in deregulated finance with €Trillions in secretive ultra-low interest central bank loans, whilst making the ordinary working people of Europe pay the price of it through mass redundancies, wage freezes, pension attacks, the fire sale of state infrastructure, welfare destruction and the reduction of labour rights.

People from across the political spectrum are beginning to realise that the left wing anti-austerity groups were correct when they said that all of this misery is being inflicted simply in order to save the bankers from the consequences of their own stupidity. Instead of letting the banks that recklessly over-leveraged themselves go bust, re-regulating the system to prevent recurrences and allowing the responsible institutions that survived the chaos to make huge gains in market share, the Western leaders have decided to bail out the reckless gamblers to save them from the bankruptcy they deserve and paying for it by mercilessly squeezing €trillions out of the "real economy" under the guise of "austerity".

Not only is this state intervention to save the financial sector gamblers inflicting severe damage on the "real economy" of jobs, manufacturing and industry, it is also an ongoing demonstration that the neoliberal experiment in deregulated finance is fundamentally invalidated, because it is only able to continue through massive and repeated interventions of state.

Members of the right wing Greek right wing have defected
to create a new right-wing anti-austerity party that have
claimed an impressive 33 parliamentary seats at the first attempt.

In Greece it was not just the left-wing groups (Syriza & the communists) and the fascist New Dawn party that made gains due to the politic establishment's compliance with "austerity", the new centre right anti-austerity party Independent Greeks took 33 seats at their very first attempt. The party is led by Panos Kammenos, who was thrown out of the once dominant centre-right New Democracy party for opposing more bailouts and austerity. This surge in support for a centre-right anti-austerity party exposes the popular media line that "it is only "far-right" and "far-left" parties that made gains in the Greek elections" as an outright lie.

People from across the political spectrum are realising that now is the time to ditch the broken ideology of toxic corporatist fundamentalism, yet the political establishment of the west know nothing else. They are unable to conceive an alternative to the orthodox neoliberal economic model, and have neither the wit nor the will to develop an alternative strategy to repeatedly bailing out their failed experiment at the expense of the majority of ordinary working people. To admit that their experiments in ceding state power to corporate interests have been abject failures and attempting a return to the last functional model (the mixed economy) would reflect badly on their competence and also harm their vested financial interests, so they just plough on regardless of the suffering they are inflicting on millions, in order to maintain the economic status quo.

It is up to the relatively tiny European anti-austerity block to explain that it is precisely because of this weak willed and self interested adherence to transparently defunct economic dogma by the political establishments of Europe, the US and many of the other western economies that China's ascendancy as the economic global superpower looks completely assured.

Austerity and the double dip

UK chancellor George Osborne is an economic simpleton,
a malicious ideologically driven neoliberal or most likely both.

On 25 April 2012 it was announced that the UK economy had fallen back into recession after suffering a 0.2% fall in GDP in the first quarter of 2012 which followed a 0.3% contraction in the last quarter of 2011. A technical recession is defined as two or more consecutive quarters of economic decline. These figures mean that the UK is suffering the first double-dip recession since the 1970s. The first recession between 2008 and 2009 was caused by the catastrophic meltdown of the deregulated financial sector. After hundreds of billions in bailouts, quantitative easing and secretive ultra-low interest central bank loans, the economy began to recover slightly at the tail end of Gordon Brown's government showing very weak economic growth figures, however the Tories have undermined the economic recovery in their ideologically driven rush to cut state spending.

The fact that the Tory led coalition has led the UK back into recession isn't simply a case of Tory incompetence, it is a demonstration of Tory malice. Instead of coming up with a credible recovery plan, they've gone full steam ahead implementing hard line ideologically driven neoliberal reforms under the guise of "austerity", telling us that the cuts are necessary because "the national credit card is maxed out" whilst simultaneously finding £40 billion to pour into the IMF neoliberal loan shark fund to force the same kind of destructive neoliberal policies onto other countries.

The neoliberal gibberish that underpins Tory thinking is defunct, it was holed beneath the water line when the "evil state sector" had to bail out the financial sector temples of neoliberalism with the biggest subsidies in human history (the Tory supported nationalisation of debt riddled banks and 90%+ of GDP blasted in massive bailouts that are still misleadingly kept hidden away off the national debt figures) yet the Tories continue hawking exactly the same ideologically driven neoliberal clap-trap under the new name of "austerity".

Neoliberal policies such as deregulation of the financial sector and hiving off the responsibilities of the state to "extremely inefficient" (according to the treasury select committee) PFI ripoffs, crappy outsourcing deals to enrich their mates, massively subsidised and inefficient monopolies like the rail shambles and insane privatisations like selling off HMRC properties to a bunch of tax dodgers are what created the neoliberal economic meltdown and the budget deficit in the first place, but all the Tories have offered since the meltdown is more of the same ideologically driven gibberish under the new name of "austerity" whilst lying through their teeth that the crisis was caused by excessive state spending.

Andrew Lansley's NHS sell-off doesn't have any economic merit,
unless you consider diverting taxpayers' cash to parasitic private
sector health care corporations to be economically beneficial.

Their self defeating austerity drive has absolutely nothing to do with saving the economy, it is all about attacking the state from within in order to cream off even more taxpayers' cash directly into the pockets of their private sector mates and financial contributors, destroying the social safety net (attacks on health care, unemployment benefits, disability benefits, pensions, social services, legal aid, police numbers....) and wreaking as much havoc as they can in deprived traditionally Labour voting areas with their insane "regional pay schemes" which are exactly the opposite of what is needed, namely better pay and conditions as incentives for talented people to go and improve services in deprived areas.

The Tories have driven the UK back into recession by trying to use neoliberal economic dogma to cure an economic crisis which was caused by three decades of neoliberal dogma. A neoliberalisation process started by Thatcher's Tories and continued under 13 years of neo-Labour rule. The economic crisis was caused by an overdose of toxic neoliberal medicine, yet the Tories have spent the last two years prescribing greater quantities than ever of their economic arsenic quack medicine.

The fact that the Tories have stuck rigidly to their defunct neoliberal principles shows us one of two things: They either meet Einsteins definition of insanity (doing the same thing over and over again and expecting different results) or their agenda had nothing to do with economic recovery in the first place and that they are simply interested in further enriching the already wealthy at the expense of everyone else in complience with their unofficial party motto of  "steal from the poor to give to the rich".

See also

Why I blame the left for the economic crisis

The Great Neoliberal Lie

Mixed Economy vs Neoliberalism

The Lib-Dem Betrayal

Eurozone austerity; neoliberal dogma rebranded

Mario Draghi, head of the ECB and neoliberal austerity lover.

Even as IMF and European Central Bank imposed "austerity measures" cripple the European economy with low growth, falling living standards, negative equity, massive reductions in welfare standards and labour rights, mass unemployment and dramatic falls in discretionary income the orthodox neoliberals have their fingers in their ears as they repeat their pathetic anti-state, free-market incantations.
 
They keep chuntering on about how excessive welfare spending is responsible for the Eurozone crisis but state spending didn't cause the neoliberal economic meltdown, three decades of insane ideologically driven greed-is-good neoliberalism caused it, after which the state sector had to step in the financial sector and their temples of neoliberalism with the biggest state subsidies in human history (massive bailouts, secretive ultra-low interest central bank loans and the nationalisation of debt riddled banks).

Without the intervention of the state sector, the whole neoliberal economic experiment would have come crashing down, yet these orthodox neoliberals know no other economic elegies. So their mantra tells us that the blame for this crisis lies with the "excessive costs of statehood" not with the reckless financial sector gambling they enabled through neoliberal market deregulations that actually triggered the economic meltdown.

Since November 2011 the European Central Bank has handed out over one trillion euros in ultra-low interest loans to help private sector banks pay off their reckless gambling debts (a process euphemistically referred to as deleveraging) and in order to pay for this splurge of reckless lending to cover the debts incurred through reckless lending, they are insisting that the ordinary working people of Europe pay for it through "austerity measures".

These beloved "Austerity measures" of the IMF and the ECB are just the same old defunct, ideologically driven neoliberal clap-trap that caused the crisis in the first place with a new name. A decade or more of economic stagnation doesn't matter a jot to these people as long as they can keep milking the system for their disproportionate share of the wealth, they don't give a single toss that millions of decent hard working people and their families across Europe are going to be driven deep into poverty.

The ruling elite of bankers, politicians and unelected technocrats have completely lost touch with reality, they're singing from a book of defunct pseudo-scientific economic dogma, leaving the people of Europe searching for an alternative to their willfully destructive policies. Will they look to the left wing with their policies of mixed economy, state investment and regulated capitalism, selective re-nationalisations, financial sector re-regulation and clampdowns on tax fiddling? Or will they join the even-further-right wing in their traditional blame the minorities scapegoating?

See Also

Austerity and the double-dip

Argentine recovery economics

The Great Neoliberal Lie 

What is neoliberalism?