A blog on the political, economic and social causes and implications of the crisis in the Southern periphery of the Eurozone.

I'm a political scientist working on political parties and elections, social and economic policy and political corruption, with a particular focus on Italy and Spain. For more details on my work, see CV here, and LSE homepage here. For media or consultancy enquiries, please email J.R.Hopkin@lse.ac.uk.

Thursday, May 31, 2012

The Eurozone: an economy without a state

In today's FT Martin Wolf, as ever, nails it (The riddle of German self-interest - FT.com). One of the peculiar features of the crisis is that the Euro was created with the express purpose of facilitating financial and commercial integration, and yet at the first crisis the Eurozone institutions have refused to backstop the cross-border financial commitments that have been made, leading to a flight for safety which has created havoc. Didn't anyone think this could happen?

Certainly the history of financial globalization offered a few hints. Eric Helleiner's excellent book States and the Emergence of Global Finance details the myriad ways in which governments backstopped the increasing financial integration of the period after the 1970s, most notably by stepping in to halt financial crises with bailouts. These bailouts confirmed governments' commitments to the newly integrated financial order and gave investors the confidence to continue treating the global financial arena as a properly functioning market.

The saddest thing about this whole crisis is that it underlines the fatal lack of understanding on the part of policymakers, and the academics who advised them, of how markets actually work. They designed institutions which essentially, like in Alan Greenspan's 'flawed' model, relied on market participants behaving rationally (whatever that means). Rational behaviour is, of course, difficult to define and operationalize, but one thing that we know for sure is that piling money into indebted states with a history of reneging on commitments and overinflated real estate markets was obviously outside any meaningful theory of the self-regulating market. It's time to recognize that the theory was wrong, and that the Eurozone, like any other economy, needs a government.

Wednesday, May 30, 2012

Why Spain is bust and Italy is simply broke (again)

Despite a bad auction today, Italy seems overall in better shape than the rest of Southern Europe as the FT recognized today (Are Italy and Spain decoupling? | Brussels blog). It has run a primary deficit ever since the early 1990s, something way beyond the abilities of the other periphery countries at the moment. The reason for this is, ironically, the fact that Italian public debt has been at crisis levels for a couple of decades - Italy faced a huge fiscal crisis back in the early 1990s, which was resolved thanks to fiscal reforms and spending adjustments pushed through by more or less technocratic governments headed by Giuliano Amato, Carlo Azeglio Ciampi and Romano Prodi. Italy would never have qualified for the Euro had it not made this herculean effort. And although Berlusconi failed to maintain this downward pressure on the debt, his governments continued to run primary surpluses up until the crisis of 2008.

Clearly Italy has intractable structural weaknesses and the future is far from rosy. But at least it didn't delude itself with a glorious decade of debt-fuelled growth, like its Mediterranean neighbours to the East and West. This made the reckoning a lot easier to cope with, particularly since Italian banks don't seem to have abandoned their traditional caution when it comes to home loans and consumer credit. Things are bad, but not as bad as they could be, and if Italy is dragged into default, it will largely be the result of Eurozone-wide contagion, rather than its own specific weaknesses.

Anyway, the point of this post is largely to crow about the fact that I made this point a couple of years ago.

Monday, May 28, 2012

Spain heading for bailout

It's hard to imagine anything more inevitable than Spain needing a bailout, and soon. The Rajoy government's latest trick - recapitalizing a bankrupt bank, Bankia, with bonds from a near-bankrupt state, Spain, is probably the final straw for investors who are paying attention. Bankia, in turn, has been suggesting that one way to return to profitability is to reduce its tax liability: in other words, to help the Spanish government get its money back, they will endeavour to pay less money to the Spanish government.

This is what hiring the likes of de Guindos achieves. After all, employees of institutions like Lehman Brothers are essentially trained to make money through tax avoidance/arbitrage and clever accounting, rather than generating real wealth through smart investment. The Spanish government is now in the hands of people whose ignorance and arrogance led the country into this mess, in both the political and the financial institutions. Rajoy turned a blind eye whilst corrupt regional leaders like Camps and Aguirre fuelled real estate booms which paid for their vote grabbing and created the conditions for today's tragic scenario.

Now it's all down to Europe. Will they blink, or will they bail? Almost certainly they will bail, just like in Greece, but in such a way as to make recovery impossible. If they let Greece go, who will buy into Spain? The endgame approaches.

Tuesday, May 22, 2012

No democracy please, we're Europeans

So David Cameron wades in on the Greece crisis - sense of irony failure there I think.

Anyway, the Greeks are coming under pressure to vote for mainstream, pro-austerity parties, despite having voted for something else less than a month ago. This tells you everything you need to know about the role of democracy in the Eurozone.

In fact, the decline in democratic accountability is not an accident: it is the result in part of a certain demobilization of mass electorates in western countries, which has a variety of structural causes, but in part also of the determination of powerful interests to remove popular consent from a range of key economic decision making arenas. This, in turn, exacerbates the trend towards popular apathy, or at least resignation.

So currently, a set of institutions of 'governance' in the Eurozone have not only allowed a disaster to take place, but have also blocked any proper discussion of alternative ways out of the disaster. So the key actor in the management of the crisis is the ECB, an entirely unelected and unaccountable body with a tight connection to the world of finance, and largely impermeable to other interests. What makes you think that an institution like the ECB would ever be inclined to adopt policies in the interests of the non-rich majority of the Eurozone population?

The role of electorates, in the ECB/Merkel view, seems to be to elect governments that will follow policies the ECB, and by extension financial interests, want, even if this is going to lead to all of the burden of adjustment falling on the bottom 90-odd%. The Euro system was deliberately designed in this way to avoid politicians responding to popular demands for spending and low taxes. Clearly popular policies are not always in the long term interests of an economy, but surely it is the job of the democratic institutions to determine what those are?

What we have now is a technocratic approach to government which is not only democratic, it is very likely applying the wrong policies. If we have to have wrong policies, let's at least choose them through democratic means. And who knows, given the chance people might surprise the political class and the economics profession by choosing governments and policies that work in their interests.

Friday, May 18, 2012

The impossibility of austerity

One of the best pieces I've read on the Southern Europe debt crisis: EconoMonitor : EconoMonitor » Europe’s Depressing Prospects: Two Reasons Why Spain Will Leave the Euro

The following (a quote from Ambrose Evans-Pritchard) is particularly eloquent:

Berlin seems to think it can lock in a current account surplus with Club Med in perpetuity. Clearly, such as an arrangement is mathematically impossible within a currency union – unless Germany is willing to offset the surplus with flows of money for ever, either through fiscal transfers or loans or investment. These flows have been cut off.

So simple, and yet so difficult for many powerful people to grasp.

I still think Germany and the EU powers that be will blink first. But if they don't change course soon this will be a catastrophe.