Harald Hau: Eurozone Bailout – Tax Transfer to the Wealthy?

Yves here. In comments, a reader recently expressed skepticism that bank bailout represented a massive looting of the public purse. Since the bank PR efforts have been more successful than I realized, it’s important to keep shining a bright light on this issue.

This post by business school professor Harald Hau not only discusses how this transfer from the many to the few works in the Eurozone rescue context, but also illustrates that the banksters have improved their game. And his observation that this bailout favors bondholders, and those constitute the top 5% of the population, is a generous estimate. Remember that the prime objective of this exercise is to spare big Eurobanks any pain, which means the highly paid professionals and executives in their employ are the biggest beneficiaries.

By Harald Hau, Associate Professor of Finance, INSEAD. Cross posted from VoxEU

Last week, the European heads of government added €109 billion to the existing €110 billion rescue plan for Greece. As Europe’s financial sector would have otherwise taken a huge hit, this column address the question: How did the financial sector manage to negotiate such a gigantic wealth transfer from the Eurozone taxpayer and the IMF to the richest 5% of people in the world?

When the deal was announced, German Chancellor Merkel highlighted the private-sector involvement. She stressed that this was the result of German intransigence. According to the spin, private creditors have to accept a 21% write-down on their claims. This amounts to a €37 billion private-sector contribution. They also provide €12.8 billion in new loans for debt buyback. This buyback, however, should not count as a private-sector contribution as it amounts to an exchange of one debt for another.

The private creditors’ contribution is therefore extremely modest compared to the €109 billion in new public commitments. Especially given that private creditors had the most to lose. Given that the market discount was already 50% for Greek debt, giving up 21% could be viewed as a gain. This has to be qualified as a very bad negotiation outcome for the Eurozone taxpayer.

A closer look shows the deal is much worse for taxpayers

The new plan foresees so-called credit enhancement for the new debt, which means that the new Greek debt is mostly guaranteed by the European Financial Stability Facility (EFSF) – and thus by the taxpayers. Now, in the financial world, a guarantee is worth hard cash – it’s like getting automobile insurance for free.

This is no small concession given that a successful turnaround for Greece is highly uncertain. The economy still is burdened with an excessive debt of around 132% of GDP; large structural policy reforms have not yet begun and may well fail. Most creditors can foresee this and are happy to accept the public guarantees for their debt before the next and much bigger haircut comes.
We can therefore expect that they take up the debt exchange offer “voluntarily”, since it is effectively a gift to sovereign creditors and not a bailout contribution.

What about Egalité? Tax for wealth, or on wealth?

More surprising is Sarkozy’s spin on these events. He interpreted the new deal as an important step towards Europe’s economic governance. But before taking too much pride, Sarkozy should remember that a €200 billion subsidy to sovereign creditors is a gigantic wealth transfer from the taxpayer to essentially the richest 5% of the world. In the US, the 5% richest households control roughly 70% of all financial wealth, and this percentage is not much different in the rest of the world. Ultimate ownership of bank capital and sovereign debt is so concentrated among high-wealth individuals that we should characterise the bailout subsidy as an “impôt pour la fortune” (“a tax for wealth”) – a wealth tax supporting the rich.

This should be problematic in a country like France which has been fighting bitterly over the so-called “impôt sur la fortune” (a wealth tax on the rich). This latter wealth tax amounts to a mere €4 billion annually in state revenue.

Why are the French not at the barricades over the structure of the Greek bailout?

This is a difficult question. Self-censorship by the mainstream French media might play a role, which – mostly left-leaning – does not want to provide ammunition to Eurosceptics like Marine le Pen before next year’s presidential elections. But even in France it will not remain unnoticed that almost all of the public funds go to creditors and hardly benefit the ordinary Greek citizen.

Why did taxpayers get such a bad deal?

In principle, governments should have been in a very strong position. Private default can end in the liquidation of a company, but a country cannot be liquidated. This puts private creditors in a very weak position when it comes to negotiating with a government and empowers the latter. But why was this not the case in the current debt crisis?

Bankers and many journalists convey the impression that we face a choice between a full sovereign bailout and a catastrophic banking crisis.

ECB executive board member Lorenzo Bin Smaghi even suggested that any talk about private bail-ins would increase the costs for the taxpayer.

Such assertions confuse more than they clarify, because they (falsely) suggest that there was no alternative.

The banking sector is the weak spot of any restructuring plan involving sovereign default. Here, direct bank support through bank recapitalisation is a much more effective and cheaper solution than a full guarantee of sovereign debt.

The taxpayers could get bank equity in exchange for their money. If this crisis is like others, there is a chance that share values recover and taxpayers break even in the long run. The 2007-2009 crisis has shown that governments are indeed able to contain a banking crisis by resolute action like forced recapitalisation and temporary nationalisation of banks.

The better prepared we are for such an event the smaller will be the impact on the economy. Europe’s governments have had plenty of time to prepare over the last year, so why was such a solution not even considered?

The reasons are political. Such a solution would have upset powerful vested banker interests, even though it would have imposed the costs on those most responsible for the massive credit misallocation.

A strong negotiating position of politicians confronts two important obstacles:

First, the finance ministry and banking authority typically lack competence and information in order to prepare contingency plans for bank recapitalisation.

There is an acute skill shortage in the finance ministry and what talent there is meets a wall of secrecy put up by an uncooperative banking sector.

Secondly, the strong lobbying power of the banking sector deters politicians from preparing in advance and taking risks in favour of the taxpayer.

Conflicts of interest between the politicians and the bankers are rampant.

After the disastrous risk-management performance of many bankers revealed in the 2007-2009 banking crisis, it is surprising that the same people still enjoy great influence in the policy process. The consequences are predictable.

If you ask a frog to come up with a plan for draining a swamp, you are like to end up with a proposal for more flooding.

Bankers were asked to come up with a plan for private-sector involvement under the leadership of Ackermann and the Institute for International Finance; what they came up with was a plan for more support.

We would never ask the tobacco industry to work out a new public health policy.

A further problem is the fragmentation of political power in Europe. This prevents the political authority from taking a strong negotiating position against the sovereign-debt creditors. In 1982, when the US faced a sovereign-debt crisis brought about by US banks’ lending to Latin American nations, US finance minister Baker rejected private-sector demands that the US taxpayer bail out of creditors. While this seems similar to the position of German Chancellor Merkel, her position is much weaker.

Lastly, the ECB played a very obstructive role in preventing any effective bail-in of private creditors. This strengthened the “hostage taking” of the political authorities. At times, ECB board members gave the impression of being themselves captured by the financial elite of their home country. The ECB severely damaged its own reputation by siding so strongly with creditors and bankers rather than defending Europe’s taxpayers and citizens.

And the future?

If the recent Greek bailout foreshadows the future of Eurozone “economic governance”, the real question is “how much of this governance can the euro survive?”

The political economy of these European bailouts is unlikely to improve before the next sovereign-debt crisis hits. This would require that politicians take on the powerful banking lobby by forcing much higher capital standards on Europe’s undercapitalised banks. There is no sign of this happening. The real peril for the euro may come from a taxpayer revolt against a financial elite that has betrayed the interests of the majority of citizens.

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  1. okie farmer

    This discussion advances the notion that our worst fears are true – the international banking cartel has captured the entire western world’s governments.

  2. psychohistorian

    We can hope that the EU public will not succumb to the same propaganda that has disintegrated the US public but I am not optimistic.

    The inherited rich of the world have put together a world Shock Doctrine event and it seems that things are going according to their plan. Where is the concerted effort to provide understanding and focus on the inherited rich as the folks behind the curtains of world politics and economy? It won’t work for these folk to be controlled within any one country because they now have the ability to move funds around the world in seconds to effect pressure and damage to anyone and any government that stands in their way.

    We are all the humanity of the world now and if we don’t stand up to the inherited rich many more will suffer needlessly.

  3. attempter

    Why are the French not at the barricades over the structure of the Greek bailout?

    Part of the reason is that they went to the barricades last year against their own domestic austerity assaults, and let themselves be sold out by their pro-capitalist unions.

    Maybe they’re now demoralized.

    The real peril for the euro may come from a taxpayer revolt against a financial elite that has betrayed the interests of the majority of citizens.

    If people who work won’t fight as workers, then we’ll have to look to the more dubious course of taxpayer revolt. (Dubious not in principle; under kleptocracy all taxes on the non-rich are regressive and should be flouted and abolished. But dubious politically, as crypto-fascism can creep in that way.)

    1. No Know

      There will no doubt need to be a taxpayers revolt both in Europe and the U.S the problem does not appear to able to fix itself. What I have wondered is if Obama (and others) can raise millions of $$ via the internet, when is someone going to use this business model to make change. Here is my plan. Mr. (or Ms.) Imforchange sets up a campaign which will rely principally on internet contributions from regular folks. But instead of running for office, he or she runs for the position of Lobbyist For the People. Look at the beauty of this. We folks become capitalists and hire our own government. (Everyone seems in agreement that lobbyists really call the shots). I have an Italian friend who says he knows some people who really know how to be convincing so our lobbyist would probably be better than the Kleptos et al. Give it some thought.

      1. Yves Smith Post author

        Even though Obama made a lot of noise about his Internet donations, the overwhelming majority of his funding came from the usual suspects.

        1. Maju

          Indeed. In fact, before a proposal by McCain about restricting each other’s electoral expenditures/donations (I can’t recall the details), it was Obama who rejected that (because he obviously expected much more funding from private donors than his rival).

    1. psychohistorain

      I think the author may have used the 5% number to include the deluded wannabe’s that help keep the insanity from collapsing.

    2. Cedric Regula

      I’ll bet dollars to donuts they have increased their weekly work hours, on salary of course.

      Also, I remember that during recessions managers used to bring there kids to work (only the cute ones) and introduce them to the Big Boss.

  4. Hugh

    I would just reiterate that the three great forces at work not just in our country but around the world are

    1) Wealth inequality
    2) Class War
    3) Kleptocracy

    Until recently mentioning any of these was taboo. But we see crisis after crisis where conventional explanations simply fail. Problems are not being fixed. Those who are responsible for them are not punished but instead both their power and wealth are increased at public expense. Even those not especially tuned in can see economics and politics have turned, with regard to them, into a “Heads I win, tails you lose” proposition. If you follow events more closely, it is example after example of “privatizing gains and socializing losses,” which when it becomes systemic is just another way of saying kleptocracy.

    The three forces I mentioned provide a compelling analysis. They explain who is doing what to whom and for whose benefit, why what are inexplicable actions and policies in other frameworks make perfect sense if we use this analysis. And it is predictive. I don’t know how many times I have read if only the PTB would do x,y, or z meaningful progress could be made. Yet the solutions that actually work are always those that aren’t even on the table. The kleptocratic/class war/wealth inequality analysis tells you why they weren’t on the table and will never be on the table.

    A final note, in 2008 we saw the kleptocrats come out of a meltdown of their own creation even richer and more powerful relative to the rest of us. That is crucial to understand. Kleptocrats have no incentive to avoid crashes, indeed quite the opposite. Our kleptocratic elites will loot up to a crash and then loot the crash. While their nominal wealth may decrease initially their real wealth, that is their possession and control of society’s resources increase. We see a crash as a disaster. They see it as an opportunity. If you want to understand why our elites pursue what are on the surface such crazy and destructive policies, understand this.

    1. attempter

      The three forces I mentioned provide a compelling analysis. They explain who is doing what to whom and for whose benefit, why what are inexplicable actions and policies in other frameworks make perfect sense if we use this analysis.

      It’s the scientific method, Occam’s Razor. You go with whatever theory most economically explains the evidence. The Corpernican way of looking at things.

      Any other explanation requires Ptolemaic epicycles to even pretend to account for the evidence.

      The difference between the class war consciousness and any other is like the difference between the heliocentric and geocentric world views.

    2. A Good Bankster

      Hugh said:

      “I would just reiterate that the three great forces at work not just in our country but around the world are
      1) Wealth inequality
      2) Class War
      3) Kleptocracy

      …..Problems are not being fixed….”

      Good Bankster here:

      I have some good news: MMT has the solution to all these problems.

      If only the PTB would do x,y or z.

      That gosh darn PTB. It will bite you in the ass every time!

      1. lambert strether

        Er, no, it doesn’t and doesn’t claim to. Think of the operations of taxing and spending as plumbing. MMT explains the “real operations” of the plumbing system by actually examining the flow of water and other matter through the pipes. (This is in great contrast to academic plumbers and the plumbers you see on the teebee, who do no such thing.) Now, as it happens, code enforcement is deeply corrupt, and so the permitting operation for plumbing is deeply screwed up. But that has nothing to do with whether the real operations of plumbing should or should not be described. And if a plumber has views on whether code enforcement should be reformed, or abolished, or whatever, that has nothing whatever to do with the real nature of plumbing.

        Another way of putting this is that I view the idea that (a) money is the creation of the state and (b) therefore to be used for public purpose as A Good Thing, and greatly to be preferred to the current ideology that (a) money is the creation of the banks and (b) to be used for the private benefit of the rich. (No, I’m not an anarchist; that’s a separate discussion.)

        So, if you want to bash the policy proposals or prescriptions of individual MMTers — MMT, as such, has no policy proposals, and MMTers span a right/left spectrum — have at it. But the snark isn’t even wrong.

        1. No Know

          I like your plumbing analogy. As John W. Gardner once observed: “The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy: neither its pipes nor its theories will hold water.” Sounds a lot like our current situation to me.

  5. Externality

    “In 1982, when the US faced a sovereign-debt crisis brought about by US banks’ lending to Latin American nations, US finance minister Baker rejected private-sector demands that the US taxpayer bail out of creditors.”

    In 1982, Donald T. Regan was Reagan’s Secretary of the Treasury; James Baker was Reagan’s chief of staff. In 1985, they swapped positions. http://en.wikipedia.org/wiki/James_Baker#Bush_administration

    The author may be referring to the 1985 Baker plan, which he proposed as a response to that year’s debt crisis. http://en.wikipedia.org/wiki/Baker_Plan_(debt_relief) The plan eventually resulted in the Brady Plan, named after Bush the Elder’s Secretary of the Treasury. http://en.wikipedia.org/wiki/Brady_Plan

  6. Externality

    “In 1982, when the US faced a sovereign-debt crisis brought about by US banks’ lending to Latin American nations, US finance minister Baker rejected private-sector demands that the US taxpayer bail out of creditors.”

    During the 1994 Mexican Peso Crisis, the Clinton administration (along with the IMF, the Bank of Canada, and the Bank of International Settlements) bailed out Goldman Sachs, Citigroup, and other creditors of Mexico. The US role was to issue currency swaps and loan guarantees that allowed investors to buy, from Wall Street, rapidly devaluing Mexican bonds without fear of losing money. Goldman, Citigroup, and (the rest of) Wall Street all made a nice profit off the deal; Goldman and Citi had bought poorly-regarded Mexican bonds and then were able to resell them as bonds whose principal, interest payments, and dollar value were all backed by the full faith and credit of the US. The IMF, BIS, and Bank of Canada all offered short-term financing and other assistance.

    Treasury Secretary Robert Rubin, who had bought large quantities of the bonds for Goldman Sachs when he was a senior manager there, had desperately tried to convince Congress to bailout his former employer. When Congress refused, Rubin and President Clinton did it anyway. When he left office, Rubin accepted a sinecure at another major beneficiary of the bailout: Citigroup. http://en.wikipedia.org/wiki/Robert_Rubin#Post-political_career

    The Mexican “bailout” attracted criticism in Congress and the press for the central role of the former Co-Chairman of Goldman Sachs, U.S. Treasury Secretary Robert Rubin. Rubin used a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key holder.[4] In late 1995, “[n]ewly installed President Ernesto Zedillo said he needed the cash to pay off bonds held by Citibank and Goldman Sachs, lest the New World Order come crashing down around the ears of its panicked acolytes.”[5] According to Hannibal Travis,[6] Associate Professor of Law at Florida International University College of Law, the “former manager of $5 billion in Mexican investments at Goldman Sachs became U.S. Secretary of the Treasury and lobbied for legislation that forced U.S. taxpayers to contribute in excess of $20 billion to bail out investors in Mexican securities, in a form of ‘corporate socialism'”.[7]

    The United States’ assistance was provided via the treasury’s Exchange Stabilization Fund. This was slightly controversial, as President Clinton tried and failed to pass the Mexican Stabilization Act through Congress. However, use of the ESF allowed the provision of funds without the approval of the legislative branch.


    1. Cedric Regula

      Technical point here, but I read somewhere Morgan-Stanley was the biggest player in propping up Mexico with gangsta loans. Like for every million we find you, we keep a quarter mill in fees.

      One of my tennis Amigos gave some color on 1994 Mexico. He lived in a fishing town then and fishermen were having their boats repossessed – to sit on the dock doing nothing ala Otis Redding – there was a loophole in Mexican life insurance policies at the time that they didn’t exclude payout on suicides. They quickly changed that because it was getting expensive.

      Then of of they devalued and that made Mexico the economic powerhouse it is today.

      1. Cedric Regula

        “Then of course….”

        Fracking typos. No one is ever gonna understand what I say if I keep making these fracking typos!

        1. LeeAnne

          there was a ‘preview’ feature for editing comments before the final ‘submit.’ I miss it.

        1. Cedric Regula

          Why do bad things happen to good governments?

          I don’t doubt the events in this chapter, but the slant of the story makes it sound like the Mexican government was some sort of helpless pinata strung up for a few decades and anyone that wants can come by and whack it with a bat and make candy fall out of it.

          I think there is more to the story than that.

          But at any rate, the part I was remembering was MS was one of the major ones loaning dollars to Mexico(and pocketing something like 25% upfront fee, then selling off the loans somehow, no doubt)in order that Mexico could keep pegging to the dollar. I guess MS was shrewd enough to know that wasn’t sustainable, so they came back for a second helping and shorted pesos. The time is right when capital flight starts. Third helping – “re-capitalize, re-industrialize, and show these third world dummies how banks should be run!”

    2. financial matters

      “””Treasury Secretary Robert Rubin, who had bought large quantities of the bonds for Goldman Sachs when he was a senior manager there, had desperately tried to convince Congress to bailout his former employer. When Congress refused, Rubin and President Clinton did it anyway. When he left office, Rubin accepted a sinecure at another major beneficiary of the bailout: Citigroup. “””

      A crucial point in understanding Rubin and fellow Rubinites such as Geithner. Also an important point in predatory globalization.


      “”The foreign creditors were protected; the debtor developing nations lost what little they had gained in the previous decade and then some, with no prospect of ever escaping from the tyranny of foreign debt in the foreseeable future. Neo-liberal economists cited Shakespeare: ‘Better to have loved and lost, then not to have loved at all’, while their paying clients laughed all the way to the bank. “”

  7. Maju

    The big question is: who are they going to tax tomorrow, because without a live economy there are no (or very few and very burdened) taxpayers.

    A similar situation happened in 1789 in France, when the most impacting revolution of all times happened almost overnight because the oligarchs refused to be taxed. Then they were said “aristocrats”, now we call them “plutocrats”, “capitalists” or “banksters” but it is the same thing, the same problem of leech infestation of society.

    1. curlydan

      need they be taxed? Or should the size of govt be reduced to the size where it can, as Grover Nordquist desires, be drowned in the bathtub? No taxation needed.

      Cut govt funding, blame govt for all the problems. Repeat as needed.

      1. Maju

        No state is what Anarchists (Libertarian Communists) have proposed since always but that is because they know that the state is the guaranteer of private property and all what floats around it. Read Kropotkin.

        Property deeds only mean anything as long as there is a state with sufficient force to guarantee them. Similarly money is worthless printed paper without a solid state backing it.

        The best example of no state without communism we know today is Somalia. They still use money but it’s money from outside guaranteed by other states. They still have property but it’s guaranteed only by private bands of thugs who are more bandits than policemen. Piracy and civil war thrive, not to mention famine and that the people is so scared of the social chaos that the Islamists look like a good option (Islamic state).

        But seriously, read Kropotkin: state and capital are two sides of the same coin. While there can be states without capitalism, there can be no capitalism without state.

  8. Linus Huber

    This is an excellent essay. When will this moral hazard stop? Well, I think once the core countries’ credit rating starts to be questionable and as a result of it, their interest rates suddenly start to rise. This will force real solutions to indebtness, namely real restructuring as the populace will not and cannot accept further debt to be accumulated on their behalf. In my eyes it is only a question of time.
    The manipulators will be seen for what they are and taken to account.

    1. John B

      As the moral hazard makes the next financial crisis inevitable I would hope someone is drawing up contingency plans for what a good resolution would look like. But who? In the US at least, both parties embrace the existing model. Would there be any way for popular rebellion to make itself felt, until a new generation of (presumably Democratic) politicians become viable presidential candidates? And at the moment these do not seem even to be governors, and perhaps have not yet graduated from high school.

  9. Norman

    With all due respect, the hand writing on the walls, it’s time to man the barricades, be it in Europe &/or the U,S.A. Perhaps the public can short “O” becoming a man with brass balls giving up for the moment of his being reelected, telling the Banksters that they don’t get bailed out again, as that’s the reason for the debt increase anyway, isn’t it? Give the plutocracy another 2 Trillion $$$$! “O” could then become perhaps the greatest P.O.T.U.S. ever! He! He! Wishful thinking, right?

  10. ella

    It is always about the banks all of the time. Once individuals are forced to substitute debt for income because the cost of living outstrips the ability to earn (ie Corps keeping wages, cost of health care soars) and governments substitute debt for income as revenues fail to keep pace with the cost of government (ie low revenues, socialization of private debts, wars, tax entitlements to the rich, no bid contracts, central banks actions protecting the banks at a cost to their countries) then the banks are in control.

    Debt then becomes the staff of life. Debt is so dangerous that laws from antiquity mandate debt forgiveness every 7 years. Debt is so risky that JP Morgan invented CDS’ to theoretically protect bond holder. (Now it is the CDS’ that threaten us with their 100’s of trillions in size. This is yet another consequence of banks and Wall Street running wild with debt.) Those who have profited the most from debt must now pay for their folly. How, with taxes on financial transactions, the elimination of tax havens and loopholes, the discharge of the debts and the elimination of all off book transactions. It is absurd to enslave a nation for the profit of bankers.

    Behind every bailout you will find bankers and investors in debt. Continue to bail them out and they will continue to gamble with debt. Since they cannot be responsible with their issuance and purchase of debt the law must constrain them because they are a danger to all of with their WMD’s. We need to return to sound banking think Glass-Steagall and reinstitute policy and laws that rebalance the rights between debtors and creditors instead of doing everything possible to protect creditors.

  11. financial matters

    “”The real peril for the euro may come from a taxpayer revolt against a financial elite that has betrayed the interests of the majority of citizens.””

    Iceland and Finland seem to be taking the lead here. The US taxpayer also needs to take notice.

  12. PaulArt

    There is a comforting thought in all this – cold comfort though but still something to cling to: Remember ‘Death and Taxes’? The idle rich may fill their coffers today but where do they think they are taking it? One day we will tax them and take it back. Unfortunately it may cost wasted lives and penury and poverty for many but we will still take it back. As once there was 90% taxation that day will return, for sure.

    1. Mikhail Kropotkin

      That kind of talk is sounding a bit internationalist / Trotskyist. A new shade for ’round hear, but nice to hear a multinational approach to the issue. No snark, it is well overdue!

      1. Mikhail Kropotkin

        Damn!! That reply was meant for Mickey. Please read in response to the comment below, my bad!

  13. Mickey Marzick in Akron, Ohio

    We know we’re getting fleeced by the “debt crisis” that transfers more family silver to the banking “families”. But just as much as it provides an opportunity for them it provides an opportunity for us as well. Let me give you one example.

    I work with Joe – a 65 year old, self-proclaimed Republican who attended the TEA Party protest/rally/convention in Washington this past fall. We have had some heated discussions/disagreements over the years but since 2008 we’ve begun to find common ground on the issue of globalization. Being the patriotic nationalist that he is, when I laid out the contradiction between globalization and national sovereignty posited by the TRILEMMA he understood immediately. There was a palpable “meeting of the minds”.

    We also agreed that this manufactured “debt crisis/ceiling” is the prelude to the waning of the US$ as the global reserve currency. It follows logically that the “GAIA” or basket of currencies that replaces it will require all nations to surrender some of the prerogatives of sovereignty – printing money – to function. Unilateral action will now have to be tempered by “global social responsibilty”. Isn’t the latter how the Chinese put it a few days back when they chided US over the debt ceiling theatrics? But is this looming supranational entity in the collective interests of working people worldwide if it plays us off one against the other in a global race to the bottom?

    Now comes the real kicker. We both agree that jobs are the key to recovery but that the prospects for employment are bleak and will remain so – at least in this country and Western Europe. Anything that can be manufactured here can quickly be relocated to China or elsewhere [labor arbitrage]. Thus a resurgence in manufacturing employment is patent nonsense [Joe is adamant about this.] because what manufacturing there is has reduced the amount of labor required to the minimum. CAD/CAM, robotization/automation, etc. will likely increase this disparity, making labor even more superfluous.

    My point should be obvious. The contradictions of globalization, once deemed the exclusive preserve of the Left, have spilled over onto the Right. Small businesspersons do not have the same interests as those managing multinational corporations or banks and this tension has long been a fault line within the Republican Party. This larger contradiction has fostered the more recent emergence of the racist, nationalist, zenophobic political parties dotting the landscape of Europe. But what is the driving, underlying force? If it isn’t the adverse effects of globalization – decline of manufacturing, structural unemployment, immigration [legal or illegal], and debt mountains, what is it?

    If ever there was an opportunity to find common ground from below – the grassroots – this is it. I have no doubt that there are still “fundamental differences” between the Left and the Right but the potential for dialogue is there! The consciousness of globalization is a “class consciousness” that transcends national boundaries even though it manifests itself in a more nationalist flavor on the right. In any case, much like with people of faith, it would be foolish to stereotype all Tea Baggers as “untouchables” with whom we cannot build alliances to achieve common goals. Religion can be either revolutionary or reactionary. Does the same analogy apply to individual Tea Party members? If the answer is yes, then we would be foolish not to reach out to them because not all of them are the right-wing nut cases the mainstream media portrays them to be.

    Ask yourselves, who stands to benefit the most from keeping us apart, from finding common ground? We must be attentive to the opportunities this debt crisis provides us in exposing the shortcomings of globalization in the hopes of forging the critical mass to eliminate the looting once and for all.

    Anyone else had a similar experience lately?

    1. psychohistorain

      While I agree with the sentiments, our reality makes strong nationalism and trade wars counter productive to solving our underlying problem.

      IMO, our biggest problem is that our wold is controlled by the international inherited rich. They would love to see trade wars and are actively stirring nationalistic fervor. But where does that get us except a race to the bottom with all the attendant pain and suffering. Even if the world were to agree to consume at US levels there are not enough jobs making worthless crap to go around. This is the reality that is never discussed. And that is not even beginning to talk about the resource constraints that loom ahead of us which are going to reduce global consumption even more.

      One more jab at what our sick consumptive society has become.
      I regularly use a toaster made in 1928 and have had multiple refrigerators over my lifetime that lasted 40+ years. I drive a car that I have put 300 K on since it was new in 1986 and put 350K over 17 years on one before that. I am not bragging but simply stating that I think that it is immoral to build throw away products and to brainwash people into what I call Jones’n consumption…..and this is sure not a bottom up evolution of consumption patterns.

      Whatever. Nothing to see here. Just some more textual white noise……

  14. Valissa

    Interesting and educational post, thanks!

    However, I wonder if something important is missing from it.

    “The new plan foresees so-called credit enhancement for the new debt, which means that the new Greek debt is mostly guaranteed by the European Financial Stability Facility (EFSF) – and thus by the taxpayers.”

    While the issue of taxpayer funding is important I think that glosses over the real elite power play going on here.

    The EFSF has been discussed quite a bit over at STRATFOR Global Intelligence, and they have a different take on it since their viewpoint is geopolitics and there power first and money second.

    In particular they have been talking about rising German power within the EU since their economy is the strongest. Basically Germany is heading towards ruling the EU from behind the scenes without the bother of another world war. This follows along the theme Prof Hudson has been discussing about economic warfare replacing the more pyshcialy violent kind.

    This video/article is behind their tight subscription firewall, so I’ll try to excerpt the key info (the crux of which I have highlighted in bold).

    Portfolio: Eurozone’s Future To Rely Heavily On Germany http://www.stratfor.com/analysis/20110727-portfolio-eurozones-future-rely-heavily-germany

    But on July 21 the Germans made a decision that they were going to back the eurozone to the hilt. It all comes down to the way they changed the way that the ESFS works. Two major shifts: First, the ESFS no longer has to go back the Council of Ministers to get permission for a bailout; it can act on its own. Second, the ESFS can really take any action it deems fit. It can indirectly support a state by buying bonds directly off the market, it can pour money directly into a state’s coffers, it can even go through and help a state that is arranging for a bank bailout. In essence, the Germans have committed themselves to permit bailouts of the weaker states and not just in terms of government but banking sectors too.

    From STRATFOR’s point of view, Germany’s commitment to this new program means that for us, the eurozone crisis is over. But there are two things you must keep in mind. First is why did Germany change its mind? Well, they got more or less what they wanted while the ESFS still exists and will basically be subsidizing all the poor European states and maybe even some of the richer ones; this is no longer something that is the province of the EU institutions in any way shape or form. The ESFS is not a branch of a European institution or the European Central Bank. It is a fully private institution, a private bank headquartered in Luxembourg, Europe’s bank secrecy capital, and it’s managed by a German, which means that while these bailout programs don’t need any sort of European approval, they still need German approval. And Germany can impose whatever conditions it would like, financial or otherwise.

    I have not seen much of this aspect of it discussed anywhere else, or at least not this bluntly.

    Here is one piece I found that corroborates:

    EFSF’s Regling: euro zone no transfer union – paper http://www.reuters.com/article/2011/07/28/eurozone-regling-idUSLDE76R0AP20110728

    Euro zone leaders agreed on a 109 billion euro package for debt-stricken Greece last week and gave the EFSF the power to buy government bonds from private bondholders and provide lifelines to troubled euro zone banks and governments.

    After the agreement, the head of Germany’s Bundesbank, Jens Weidmann, criticised the euro zone, saying it had taken “a big step toward collectivisation of risks”, with countries that have maintained solid finances having to take risks on behalf of others.

    Regling said the latest bailout package was not about transferring debt, but about providing credit under clear conditions.

    “No country accepts euro aid lightly. Because in return, the people of that country have to save rigorously for years and the government has to hand over some of its authority to the EU and the International Monetary Fund,” he said.

    Regling added that so far no taxpayers’ money had been lost.

    “And also in future, the EFSF will not act without the consent of the European Central Bank and the national governments — Germany has a veto at all times,” he was quoted as saying.

    1. Kraken

      Great point Valissa. As per Hudson, democracy is done. Sovreignity is over. Economies will be run by the diktats of unaccountable technocrats.

  15. sean

    ”Self-censorship by the mainstream French media might play a role, which – mostly left-leaning – does not want to provide ammunition to Eurosceptics like Marine le Pen before next year’s presidential elections…”

    So the left are afraid the so called ‘far right’ might have more appeal to its constituents and therefore better able to represent their interests.
    The world ‘turned upside down’!

  16. AGK

    I sill don’t understand why are you /Yves included ;)/ complaining guys. The ‘western’ civilization is in suicidal mode. With so many stupid monkeys and psychopaths on top positions the story will end relatively quickly. Rome did agonise for centuries but it did cost everything to many others nearby the empire. This time it will happen faster.. It is fine for many in Africa, Asia and South America. I mean, without the support of the failed pseudo-democratic ‘states’, the old international institutions designed to help corporations and patrons loot and rape countries and peoples will not survive for long. What is the point of extending the pain for everybody but few?

    1. Maju

      “The ‘western’ civilization is in suicidal mode”.

      That’s precisely what we are complaining about. Not just the “Western civilization” but all Humanity is in suicidal mode unless we put the economy at the service of society. We are already risking a lot, and suffering a lot without any real need, just because the oligarchs manage to keep manipulating and bullying us, because we have no organization nor clear ideas.

      I do not think you realize the huge dangers that an end of civilization, suicidal or otherwise, poses to Humankind nowadays: extreme climate changes, nuclear and biological wars… are just the tip of the iceberg of the catastrophic possibilities that happen to be before us, in our immediate life paths and those of our children and grandchildren.

      Someone said that revolutions are the emergency brakes of societies heading towards catastrophes. We need one or several of those and we need them soon.

      1. AGK

        The Humanity will somehow survive, Maju. The stupid, centuries old social order, designed to reward monkeys for their loudness and willingness to suppress change will not. The idiots who spent last few decade dragging us back to 19th century may get a revolution or two. Not a brake but nice well targeted kick at reactionary, arrogant, self-serving arseholes is more plausible explanation, at least for those not staged by powerful groups. You know who is writhing the history I guess..

        1. Maju

          I somewhat envy your optimism, AGK, but it’s completely irrational: you think that because Humankind has survived in the past, it will in the future. But in truth we have never experienced a civilization crisis with nukes everywhere, nor have we experienced such a dramatic climate change coupled with mass extinctions in the seas and elsewhere because of overexploitation and mismanagement of our resources. We are truly in the brink of extinction and it has two horrible aspects to it: (1) that it’s a self-inflicted extinction and that (2) many humans like you prefer to deny reality.

          Denial is no solution: it only delays solution, maybe too much. The first step, in radioactive Japan or anywhere else is to acknowledge we have a problem – or actually a whole load of complex and grave problems in mutual positive feedback.

          Junkies, alcoholics and gamblers also walk to their tombs without acknowledging they have any problem… or acknowledging them too late.

          1. carping demon

            Unless you’re selling Salvation here, the fact that nukes, dramatic climate change, mass extinctions and drug addiction have all been caused to a greater or lesser degree by our own actions is irrelevant. Problems exist, now as always, and it is almost certain that some of us will persist through them. How they will do that and what their predicament will be is worth considerable thought and preparation. Something other than “Nya Nya Nya,” is called for.

  17. Mikhail Kropotkin

    “which means that the new Greek debt is mostly guaranteed by the European Financial Stability Facility (EFSF) – and thus by the taxpayers. Now, in the financial world, a guarantee is worth hard cash – it’s like getting automobile insurance for free.”

    Anybody know what the value of the equivalent CDS’ (assuming they are the correct equivalent instrument) are to match the debt guarantee? At least then we will have an idea what the market value is so we can mention it while talking to our Euro buddies. I guess the quote needs to be specified by date and supplier, ’cause that stuff is a moving feast.

    Oh, we could also use that for the next guarantee that gets floated in the US as well…

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