Guest post. Translated from the French by Tim Gupwell
The magic word growth only needs to be pronounced in order for everything to become just like it was before. At least that is what the four European leaders gathered yesterday at Rome seemed to believe when they announced the figure of 120 to 130 billion Euros to stimulate growth, an amount which would have been colossal even a short while ago, but which, unfortunately, seems somewhat laughable these days.
It was the only subject, incidentally, on which they were able to agree, that plus a tax on financial transactions which sounded good in the press-releases but is less good in the pocket. The principal European financial centre, the City of London has refused to apply it, a refusal which they did nothing more than confirm.
Undoubtedly, now we have seen and heard it all. The utmost has been done to emphasize matters which are of only minor interest, so as to be able to brush aside what is truly important. In Europe, it is the competitive imbalances that need to be addressed, and the member states which need to find the path of virtue once again. In the United States, it is another sort of imbalance – as a result of the under-valued Chinese currency, the Yuan. So many causes that would need to be fought to solve all the problems…….. And all that without even attacking the most fundamental one of all: the imbalance in the financial system itself.
During the course of a process of debt-reduction which started without warning for those it was affecting, the priority was initially placed on the States. Not without reason: it was necessary for the consolidation of the financial system, with sovereign debt constituting its central pillar. Next, with this sovereign debt no longer being considered zero-risk and suffering from severe market tensions due to the ups and – above all – the downs of the debt reduction strategy, it became necessary to reinforce the financial institutions once again, something which had been previously considered to be avoidable. This includes not only the banks, but also the insurance companies which have so far been spared. A strategic shift in balance is now needed, which will not without pain, as we can see.
On Thursday, Moody’s downgraded fifteen global megabanks, including Bank of America and Citigroup, but also BNP Paribas, Crédit Agricole, and Société Générale. Three British banks, two Swiss and one German one are in the group. Each one is being read the riot act, depending on which minor flaws were listed by the notation agency. The international regulators are now aware that they have set their standards too high – having been helped to understand this by the banking representatives who were laying them siege – and they are now envisaging the relaxation of the Basel III regulatory framework, notably in respect of the liquidity requirements, which were supposed to enable the banks, in a worst case scenario, to withstand a shock lasting thirty days. The list of assets that the banks may hold for this purpose is going to be lengthened.
But this will not be enough. This is why the IMF has just called for the Europeans to immediately create a ‘banking union’ in the Eurozone. This project which has sparked debate, to say the least, aims to create a fund which would enable defaulting banks to be bailed-out by means of a pooling together of all their efforts. The fact that the figures don’t add up has not been mentioned, meaning that the amiable participation of the central banks – those saviours from on high- will be required in order to top it up. In the immediate future, the ECB will be entrusted with the supervision of the banks, at the expense of the EBA (the European Banking Authority), the secret will be closely guarded, and the central bank will get ready to begin its work.
The debt reduction strategy which is being pursued with some difficulty – as we see it – is based on a major paradox: in order to bring about a reduction in the debt, even more debt needs to be taken on. This leads, without it ever being expressed in this way, to a soft restructuring, one which draws out the timescale without ever touching on what is essential, the capital.
Or in other words, in a world whose financial reserves are huge but not where they are needed, the recommendation and expectation is to create more, with the central banks being asked to do whatever is necessary. This is taking a path which is the exact opposite of the one that should be taken – a recognition that not only can the financial sector no longer continue to grow as it has done so impetuously over the last few decades, but that, on the contrary, it is going to have to undergo a major downsizing. And this will not be in the form of the hoped-for, controlled reduction of the debt, which consists of taxing the system and the economic agents once again, and ultimately the employees. Income-streams are to be protected.
Using the central banks as a last resort constitutes another way of side-stepping the issue. Once again, it makes it possible to deny the now well-established malfunctions in a system whose economic model –to speak in modern terms – has ground to a halt and has to be changed. Karl called economic systems “modes of production” and did not think that “capitalism” was the ultimate stage in the line…….
Surviving and buying time are the watch words of a world gone mad, hoping that the equilibrium will come back by itself – thanks to the magic of growth which is once again invoked. Since the only possible alternative is not only to find ourselves on the edge of the void, but also having to face up to the unknown. Indeed, with what economic model or model of society could this one – which has reached the end of the road – be replaced? This insidious question is beginning to seep into peoples’ minds as events unfold, thanks to the increasing uncertainties and the challenging of all those accepted discourses and ready-made assumptions which are in the process of unraveling. All this takes time, as for a long time now they have been imprinted in our minds and regarded as untouchable. Nevertheless, ideas can become material forces, as the great pariah of economic science also said.