Friday, July 20, 2012

20/7/2012: European Corporatism comes full circle

A very important analysis from Edmund Phelps in today's FT (link here) of the roots and core causes of the euro area crisis.

Some major points of interest:

"The difficulties of many European countries derive from their corporatism: state projects serving cronies and vast social protection programmes, both run by elites. These surged in the 1970s and 1980s. The prospect of a lifetime of such benefits – sweet contracts, soft loans, early pensions and the rest – created something new: social wealth."

On the money. And

"As increases in benefits outpaced increases in taxes, households saved some of the gains in disposable income. So households saw their private wealth rising alongside the social wealth."

Also on the money. Even more so because 1) taxes were already high so there was no room to increase them by much, and 2) lowering of taxes was used strategically to strengthen corporatist re-distribution of income & wealth from the more productive to the less productive activities (a combination of corporate and social welfare state).

"In both Italy and France, the ratio of household net private wealth to household disposable income soared, rising by one-fifth from 2000 to 2007. (The increase was one-sixth in Germany, negative in the US.)" 

Now, note: what does the European (and Irish) Left wanted and still wants? Higher income taxes. Which, of course, will mean wealth/income ratio would have been / will be even higher! This is exactly what I said during my recent appearance on TV3 Vincent Browne's show. 

The role of banks and debt in all of this charade? To cover the widening gap in wealth/income ratio and public deficits, "So it was a relief that the Basel I agreement, which went into effect in 1990, lowered to zero banks’ capital requirement on sovereign debt – no matter how risky." In other words, European sovereigns financed their corrupt corporatist regimes via leveraging private deposits to fund government bonds purchases by the banks - privatizing public waste first. 

So two lessons or questions from above are:

  1. Does transfer of private banks debts to public purses in Europe constitute the return of previously privatized public debts? And if it does, the effect is that the state has twice colluded with the banks to defraud the people of Europe - first as savers and consumers, second as taxpayers.
  2. Does the ongoing process of increasing government bonds holdings in domestic banks and investment and pensions funds actively promoted by the European and national authorities (see for example ECB LTROs and Irish NTMA latest plans) not constitute exactly the replay of the road to the crisis? 
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