EURO, A TIME-BOMB (Part 1) - THE REAL REASONS FOR RECESSION
In a recent article here in the algarvedailynews, 'Real Economy vs Faked Finances' I wrote about the mess Econometrics is in. For instance, monetarism says that financing brings wellbeing, but it ignores the fact that welfare is not only measured in material wealth. Some expenditures in public accounting are bad, like avoidable hospital expenses in dealing with obesity. Instead of using GNP, which also has some avoidable expenses, the UNDP for decades has been using GINI, where wellbeing is added to the pure financial accounting.
The Centre for Global Development at the King’s College, London, has recently checked out a new measure developed at the Danish Institute of International Studies called the Palma Ratio for comparisons of welfare between different countries and how disparities of income distribution is almost exclusively a result of what happens to the top 10% and the bottom 40% of their populations. This also affects a country’s economic development and its welfare.
The richest 10% getting more, means more money leaveing the country both as investment abroad and as imports of luxury consumption or capital goods such as caviar, champagne, BMWs and Ferraris.
More income to the bottom 40% raises consumption of local production which means more jobs and SMEs investing in their own communities or regions thus generating a second wave of higher employment. The Nordic countries have this policy.
Another way to limit imports and capital outflow is to lower the exchange rate which makes goods and services in a country in crisis competitive and attractive for industrial investment. This is not possible within the Eurozone. In 2011, while all the EU nations were stricken by the recession, four countries showed a growth in the GNP: the Czech Republic 2.2%, Estonia 5.5%, Poland 4% and Sweden 4.8% - all of them are in the EU but none are in the 17 states of the Eurozone.
In 2009-2011 while most enterprises lost money and the population of the EU got lower real incomes, most banks had increased profits and used legal ways to pay less taxes in their home countries. This same situation occurred in Sweden in the 80s when a worldwide speculative crisis hit. Instead of cutting unemployment subsidies and lowering pensions, extremely important for local consumption and the survival of SMEs, Sweden’s parliament approved a bill to take a one-off extra tax of half of all their banks’ gross profits as it was difficult to understand these banks making huge profits while the rest of the country suffered.
THE FUTURE OF THE EURO
A recent paper by the Oxford Martin School, University of Oxford, on 'Future Generations' focussed on 2030. The think tank had as members, among others, Pascal Lamy the former Director General of the World Trade Organization, Michelle Bachelet the former President of Chile, and from the Oxford Martin School, Ian Goldin, Amartya Sen and Jean-Claude Trichet.
The paper explains the huge difference in competitiveness of enterprises in different countries and the inequity of opportunities in the EU and in globalisation. It suggests, among other points:
“Open Institutions: Institutions and processes should be renewed for modern operations:
- Decades, not Days: invest in independent, accountable institutions able to operate across longer-term horizons.
- Fit for Purpose: incorporate sunset clauses into publicly funded international institutions to ensure regular review of accomplishments and mandates.
- Open up Politics: build on initiatives such as the Open Government Platform to optimise new forms of participation and transparency.
- Make the Numbers Count: establish Worldstat to improve the reliability and availability of statistics.
- Transparent Taxation: address tax abuse and avoidance through a Voluntary Taxation and Regulatory Exchange.
- Revalue the Future: existing incentives should be rebalanced to reduce bias against the future:
- Focus Business on the Long Term: ensure companies and financial systems give greater priority to long term ‘health’ and look beyond daily or quarterly reporting cycles.
- Discounting: future generations should not be discounted simply because they are to be born tomorrow.
- Invest in People: remove perverse subsidies on hydrocarbons and agriculture, and redirect support to the poor.
- Measure Long-term Impact: create an index to track the effectiveness of countries, companies and international institutions on longer term issues.
As the ECB represents the banks, not the people, would it allow these changes affect its profits?
to be continued...
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*Jack Soifer is the author of ‘Como Sair da Crise’ (How to Beat the Crisis), ‘Portugal Rural’ and the bilingual ‘Algarve/Alentejo, My Love’
