Europe resorts to authoritarianism to paper over banking and austerity failures - additional items in the news for Italy , Greece , Portugal and Spain....

http://www.nakedcapitalism.com/2013/07/yanis-varoufakis-europe-resorts-to-authoritarianism-to-paper-over-banking-and-austerity-failures.html

THURSDAY, JULY 11, 2013

Yanis Varoufakis: Europe Resorts to Authoritarianism to Paper Over Banking and Austerity Failures

Yves here. Because the European slow-motion train wreck is turning out to be particularly slow, it’s almost become background noise in the US, almost a lesser version of the now two lost decades in Japan. But what is happing in Europe is less benign and less likely to be able to continue anywhere near that long.

Japan, despite its economic malaise, continues to rank at or near the top of advanced economies in social wellbeing indicators. Part of that may be that the island nation exaggerated how bad things were so as to allow it to run a really cheap currency (at least until the financial crisis induced the unwind of the yen carry trade) and maintain a robust export sector. But another big element was that Japan opted for a model of shared sacrifice (particularly an even further narrowing of the gap between average worker and executive pay) in order to maintain employment levels.

By contrast, the Troika has lurched from the verge of crisis to verge of crisis so often that it’s not hard to adopt a “wake me when it’s about to be really over” posture. One can credit the Eurocrats with having perfected the art of doing the bare minimum to get them through successive emergencies without resolving any of the underlying issues. For instance, I’ve been remiss as far as commenting on the European plan, such as it is, for resolving failed banks. You might understand why after reading the money section of today’s discussion of it by Delusional Economics:

Reuters has more on this point…

…the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. In practice, this means it could be very difficult to demand any such closure.

Officials say the plan foresees tapping banks to build a war chest of 55 billion to 70 billion euros ($70 billion to $90 billion) but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.

So by 2025 there maybe a credible backstop fund. But seriously who is going to wait that long ? Spanish banks are already in serious trouble, and you’ll note that Spanish house prices continue to fall at pace, the Portuguese are also looking shaky, The Netherlands is on the beginnings of what looks to be a very slippery slope, and many other nations, Greece and Cyprus to mention just two, are still in significant economic strife.

But that’s not the truly immediate issue with this proposal. That, once again, is the German camp:

Germany has warned this may violate the EU’s basic laws by usurping national control over finances.

“We have to stick to the given legal basis, as otherwise we risk major turbulence,” German Finance Minister Wolfgang Schaeuble said yesterday in Brussels. “I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty.”

Or in other words, German banks don’t want to be saddled with the burden of allocating capital to support the banking systems in other nations. This reaction should, of course, be no surprise to anyone following the European crisis for any length of time. German EU policy has always been about protecting domestic banks. Anything that levels the playing field against Germany, including things like EU-wide deposit insurance, has always been knocked back. With Basel pushing for further reform on risk-weightings, I can only see this getting worse because the German banking system has a significantly understated capitalisation issues that it would like to keep as quiet as possible.

This one certainly isn’t over, especially with just 2 months until the German elections.

So shorter: the banking resolution plan is not only certain to be too little, way way too late, but it’s not even a credible plan because the Germans haven’t agreed to the fundamental mechanism of sharing banking risk across the Eurozone. We are way way into the Herbert Stein land of “that which is unsustainable won’t continue” but the Eurocrats have managed to defy what ought to be inevitable for an impressively long period of time.

But all this increasingly expert can-kicking is coming at a cost, and that’s the destruction of democracy in the periphery, and potentially of functioning societies. Greece is being turned into a failed state. Basic services like garbage collection and hospitals are breaking down. If there was any logic in breaking Greece on the rack, one assumes it was meant to serve as some sort of example.

But even if the Troika harshly punishes the defiant, quiet submission to its dictates isn’t looking like a much better alternative. The obedient followers of austerity are simply digging their countries into deeper and deeper holes. What happens when you have a half a generation of young people who’ve spent the early part of what would normally be their early careers not working or barely working? They’ve lost time, skills, no doubt become demoralized. And if these economies were to miraculously start showing some life again, they’d not be the first one hired. It would be new and more recent graduates.

The behavior of the putative European leaders is wildly reckless and irresponsible. It’s a fundamental renunciation of what society is supposed to be about, which is a sharing of effort and burdens for the collective good. The elites may think they can stay in their cocoon while the masses suffer, but as social decay progresses, you’ll see a breakdown in services, in public health, and more and more difficulty in maintaining security.

Varoufakis argues that the failure to address the economic problems means the Troika will rely more and more on authoritarianism.

By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog

This blog was initially established to discuss the global crisis of 2008 and, in particular, to promote our Modest Proposal for Resolving the Euro Crisis. As Version 4.0 of the Modest Proposal is being prepared (and will be published early next week), it is perhaps time to take stock of almost four years of Euro Crisis.

The Eurozone Crisis used to have three components. Now it has developed a fourth; possibly the most toxic.

As we all know, it all started with a banking crisis, which caused investment and liquidity to fall into a hole, which spawned a public debt crisis, which in turn reinforced the investment crisis, the result being more bank failures and higher public debt. In its infinite wisdom, the Eurozone decided to treat this multiple crisis as if it were just a debt problem, and to implement savage budget cuts and mammoth tax hikes. Incomes fell sharply reinforcing all three of the sub-crises: banks fell deeper into their black hole, debt to GDP ratios rose and, naturally, investment crossed into negative territory.

Our Modest Proposal, from its first version in 2010, identified these three crises and urged Europe’s leaders to deal with them in an integrated fashion; to avoid dealing with the debt problem as if it were independent of the banking malaise or of the dearth in investment; to desist from pretending that Greece’s crisis was separate from that of Ireland’s, Italy’s or indeed Germany’s. The Modest Proposal offered three simple policies, which could be implemented without Treaty changes, without fiscal transfers, even without troikas, haircuts or bank account confiscations (recall Cyprus).

Three and a half years passed and Europe remains in denial, committed to the same toxic remedy. While there has been movement along the lines of the three policies that we prescribed back then, Europe’s leadership always made sure that its baby steps in that direction would be cancelled out before there was a chance of making progress. On debt, they insisted on funding the EFSF-ESM with CDO-like eurobonds that came with the domino effect built into them. On direct bank recapitalisations, they chose to make these conditional on a banking union project which, naturally, ended up as the red herring that our leaders pretend to be chasing after; a ploy by which to avoid breaking up the cosy link between national politicians and local bankers. On investment, apartt from some interesting ideas from Mr Draghi (on how the ECB could incite the money markets to treat more kindly investment projects in the Periphery) all we have had was the re-labelling of unspent (pitiful in sum) structural funds as a ‘Growth Pact’. The only policy on which Europe has shown remarkable decisiveness is universal, self-defeating austerity.

Of course, by now, everyone sees that this policy is the century’s greatest own-goal. So, the only way of continuing with its implementation is by turning to authoritarianism; by turning nasty; by bending the rules of democracy; by persecuting the weak so that the less weak fall into line; by winking to the neo-nazis and closing down public broadcasters (re. the Greek government’s social policies and closure of ERT); by cutting the meagre support that the unemployed and the sick receive – all in the name of reform and efficiency.

In short, Europe’s governments must increasingly rely on authoritarianism in order to ‘maintain course’, both in the manner in which they treat their citizens and in the manner in which the treat each other; the Northern governments their Southern counterparts in particular. Thus we have the fourth crisis: the crisis of European democracy. And the longer Europe remains in denial about the systemic nature of its crisis the larger the democratic deficit and the more Europeans will look at Europe as the problem (rather than the solution)

Eurointelligence on Italy , Portugal and Greece......

July 11, 2013

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Grillo calls for a debt restructuring and ask Napolitano to dissolve Parliament

Beppe Grillo finally had his meeting with President Giorgio Napolitano, which he used, or rather abused, for a show of political grand-standing. As Il Corriere della Serareports, Grillo said Italy was heading towards an economic catastrophe and no one in the government, in the parties, in the public institutions had the courage to say so. As a measure to solve the crisis, Italy should restructure its debt and consider an exit from the eurozone. For this reasons, Grillo has asked Napolitano to dissolve Parliament, after forcing the parties change the electoral laws first, of course.

Grillo’s threats will never become reality, Flavio Bini writes in the Huffington Post. According to Bini, Italy is unlikely to restructure its debt, but Grillo knows how to gain votes among the Italian hit by the recession. Grillo blames Germany over austerity and prepares the Movimento 5 Stelle for future elections, both Italian and European, Bini writes. Napolitano won’t dissolve the Parliament now, but will wait for the budget law discussion, planned for the autumn. After then, he will meet Letta and other parties.

July 11, 2013

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PdL secures one-day suspension of parliament because of the Berlusconi trial

The Italian Parliament is in turmoil over Silvio Berlusconi’s final appeal in his fraud trial, scheduled for July 30. La Repubblica reports that the PdL has asked for a three-day full suspension of every parliamentary activity. According to the PdL lower house whip Renato Brunetta, the PdL needs to hold an urgent meeting on the party future’s in case of a sentence against Berlusconi. The PD rejected the PdL proposal but without the votes of Berlusconi’s party, the Parliament cannot work. So, the PD accepted a one-day stop, provoking anger of the Movimento 5 Stelle. 

According to Il Sole 24 Ore’s Stefano Folli, the risk is that the PdL may decide to cease its parliamentary activity. In that case, Enrico Letta could face the collapse of his coalition and would be forced into a new electoral round. After the S&P downgrade, the time is running out and the market pressure is expected to come back in a dramatic way, Folli said. 

July 11, 2013

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Portugal’s president rejects early elections

Portugal’s President Cavaco Silva announced his verdict last night, rejecting early elections and calling on all three parties which signed the memorandum to find a broad compromise and to ‘put the national interest above their party interest, Jornal de Negocios reports. The compromise should include elections to coincide with the end of the current bailout programme in June 2014. He called on politicians to show greater commitment to find a solution and to facilitate the dialogue between the parties. Holding early elections would be the worst case scenario, delaying the next budget to March, which would jeopardize the adjustment programme. By creating ‘‘huge’’ political and financial instability, it would push Portugal towards the need for another bailout. The sacrifices of the Portuguese would be in vain. 

July 11, 2013

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Unions announce general strike in Greece

Greece's two main labour unions announced a 24-hour general strike to protest legislation Kathimerini reports. Municipal workers — including Athens municipal police have embarked on symbolic occupations of municipal buildings and are staging 24-hour rolling strikes. It will be the first test for the two-party coalition who only has a wafer thin majority of 153 out of 300 seats. Parliament will vote within the next 10 days on the multi bill legislation, including public sector layoffs and placement in mobility scheme. There are a handful of independents who are expected to vote with the majority but some deputies may vote down controversial parts of the legislation even while supporting the overall bill. 

Greek Unemployment, Non-Performing Loans Soar To Fresh Record Highs

Submitted by Tyler Durden on 07/11/2013 - 08:07

It wouldn't be the new normal if the collapse in Q2 US GDP to sub-1% wasn't met by a new record high in the Dow Jones. And it certainly wouldn't be the new abnormal if a day of resplendent green in European bourses didn't have some "matching" economic news out of that perpetual reminder that Keynesianism in the end always fails: Greece. Luckily, validating that all is unwell and stocks can proceed to soar to record highs unbothered, on one hand the Greek Statistics Office reported that Greek unemployment in April just rose to a new all time high of 26.9%, up from 26.8% in March, and up from 23.1% a year ago, while Kathimerini reports that Non-performing loans: those perpetual thorns of insolvency in bank balance sheets, just surged to €66 billion, amounting to a whopping 29% at the end of March from a "manageable" 24.2% at end-December.

http://www.zerohedge.com/news/2013-07-10/spains-slush-fund-scandal

Spain's Slush Fund Scandal

Submitted by Tyler Durden on 07/10/2013 20:57 -0400

• Bear Market
 
• Bond
 
• Corruption
 
• ETC
 
• fixed
 
• France
• Greece
 
• Newspaper
 
• None
 
• Personal Income
 
• Real Unemployment Rate
 
• Reality
 
• Sovereign Debt
• Unemployment

Submitted by Pater Tenebrarum via Acting Man blog,

According to a recent report in the FT, the former treasurer of Spain's ruling Popular Party, Luis Bárcenas, has claimed in an interview that the party has been in breach of Spain's campaign finance laws for a minimum of 20 years. Presumably he was moved to talk because he was the one who got caught and is expected to fall on his sword. Now that he is facing a lengthy prison sentence, he no longer has a reason to clam up. Incidentally, no-one in Spain was surprised to learn what he had to say.

According to the FT:

“The former treasurer of Spain’s ruling Popular party (PP) has broken his silence over a slush fund scandal that has rocked the country for the past six months, claiming in an interview that the party had broken campaign finance laws for at least 20 years.

Luis Bárcenas, the man at the heart of the scandal, was arrested and detained late last month in connection with an inquiry into the €48m fortune he is said to have amassed in Swiss bank accounts. The investigating judge ruled that the former party treasurer will have to remain in prison until his trial, and fixed his bail at €28m.

His decision to give an interview after months of blanket denials, and to threaten further revelations, marks a potentially dramatic turn in the high-profile scandal. It suggests that Mr Bárcenas is disappointed with the lack of support he has received from PP leaders since the affair broke, and that he may be ready to implicate other senior party leaders.

According to the front page report in the Sunday edition of El Mundo newspaper, Mr Bárcenas claims to have documents and hard discs that chronicle the systematic violation of party finance laws. Their publication, he adds, would “bring down the government”. The interview – which appeared carefully worded and contained only a handful of direct quotes from the former treasurer – was conducted by the editor of El Mundo several days before Mr Bárcenas went to jail.

Though he confirmed many of the allegations that have been swirling in the Spanish media in recent months,Mr Bárcenas made clear that he was not yet willing to release all the damaging information he possessed. “In the current circumstances, the last thing that Spain needs is this government to fall,” he was quoted as saying.

However, the interview is likely to deal a heavy blow to the center-right PP all the same, and not just because it contains the threat of further revelations. Mr Bárcenas described in detail how donors used to arrive at party headquarters with bags and suitcases full of cash, some of which would be channeled into the official party bank account, while some would be used to cover election expenses outside the official campaign fund. Another portion of the money would go into a safe, and contribute to a party slush fund.”

(emphasis added)

The reason why Barcenas is not making everything public just yet is probably that he hopes that the material could yet provide him with a ticket to freedom. Essentially, he is telling the Rajoy government: 'Think of something to help me, or else'. At this stage we believe the 'or else' option has become nigh unavoidable, short of Mr. Barcenas suffering an unfortunate accident. Too much has already been revealed, and he is by now in too deeply already.

What we are seeing here is actually a strong parallel to Greece. The EU has been complaining about the Greek government's inability to collect taxes, without considering that Greek tax payers may have very good reason to pay as little as possible to the corrupt apparatus installed by the ruling class. As a Greek shipowner told a journalist when asked why he thought it was fine that rich shipowners are tax-exempt in Greece: “Would you want to pay money to Al Capone?”  Pause. “Me neither.”

The same attitude is pervasive in Spain. In fact, we would argue that both Greeks and Spaniards are among the few people in the industrialized world who have correctly identified the ruling class for what it really is: a form of organized crime. It obtains its income not by serving its fellow men, i.e., not by the economic means of production and exchange, but by political means, i.e., the expropriation of producers by coercion and the threat of violence. It is a monopolist of security and justice in the territory it rules, and hence nigh unassailable. The occasional cases where members of the ruling class are made to a pay a price (such as Mr. Barcena's case, or the recent scandal in France, where none other that thecountry's 'tax czar' was caught evading taxes) are really exceptions to the rule. Either there is a scandal so big that it is feared that the population may reject exploitation by the ruling class altogether unless a few heads roll, or it is a case where someone was so stupid in getting caught that it is decided to make an example of him in order to limit the damage and warn others to be more careful, or it is a rare case of internal strife among the members of the ruling elite that breaks into the open. Other than that, they have usually nothing to fear (just observe what happens to politicians who say that they are 'accepting full responsibility' for something that has happened on their watch. How often do they actually end up paying a tangible price?). 

In most European countries the corruption is more subtle and not as pervasive as in Spain and in Greece, and as a consequence the class of wealth producers, while grumbling, is for the most part quietly accepting the exploitative arrangement. One must not forget, citizens are subject to incessant statist propaganda, beginning already in school (it is no coincidence that governments have obtained near monopolist control over education). This mainly consists of hammering home that the 'State is needed', because without it, there would be utter chaos. As Hans-Hermann Hoppe writes in “The Economics and Ethics of Private Property” in the context of comparing Austrian and Marxist class analysis about the Orwellian features of this propaganda exercise:

“[...] the state is indeed [...] the great center of ideological propaganda and mystification: Exploitation is really freedom; taxes are really voluntary contributions; non-contractual relations are really “conceptually” contractual ones; no one is ruled by anyone but we all rule ourselves; without the state neither law nor security would exist; and the poor would perish, etc. All of this is part of the ideological superstructure designed to legitimize an underlying basis of economic exploitation.”

(emphasis added)

Usually the cost of resistance is extremely high for an individual acting on his own, and as a result it is mainly low key. Spain and Greece are slightly different in that the corruption of the ruling bureaucratic-political apparatus is so glaringly obvious that resistance is almost regarded as a duty.

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Former PP treasurer Luis Barcenas, greeting his former colleagues: I have tales to tell

(Photo credit: Dani Duch)

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Widespread Fraud

In a recent missive in the wake of Moody's most recent rather sobering credit rating report on Spanish banks, Exane's bank analyst Santiago López Díaz (a.k.a. 'Santi'), summarizes the situation as follows:

“Another of the paramount problems facing Spain is widespread fraud (not to mention widespread political corruption). Some of the Spanish cheerleaders argue that, in reality, the unemployment is not 27% because of the huge size of the black economy. We don’t disagree with that statement. Is the unemployment rate in Andalucía really 37%, as officially reported?However, none of the cheerleaders mentions that if we assume the real unemployment rate is much lower, we should also assume a much higher cost of capital for a country in which fraud is common and only a very few pay taxes.

When we analyze the personal income tax statistics recently released by the Spanish IRS, it is clear that Spain has a problem with a very difficult solution. Fewer than 6,000 people in Spain make more than EUR600k per year (???…nope, we are not kidding); just 73,000 (0.4% of all taxpayers) make more than EUR150k. And 40% of all tax payers declare a monthly income below EUR1,000 per month. 62% of all personal income taxes are paid by 6m people (in a country with 47m people).”

(emphasis added)

Although Santi doesn't mention it, the reason why tax evasion is such a widespread popular sport in places like Spain and Greece is precisely what we have pointed out above: people regard the class that obtains its income by political means as a criminal gang. They are evidently entirely correct with this assessment.

Of course one cannot issue a blanket condemnation of the character of people employed by Spain's government – undoubtedly there are a great many honest people active in the administrative apparatus – but as the campaign finance scandal shows, there is enormous corruption at the very top. It is a good bet that it extends downward from there.

In Greece it has e.g. been noted that any people working at a ministry who turn out not to be corrupt are standing out like sore thumbs. As a rule they are mobbed by their colleagues if they refuse to adapt. It seems likely that things are not quite as bad in Spain.

On the other hand, the data Santi relates above are highlighting a major problem with regard to dealing with the governments cumulative public debt as well as its unfunded liabilities (including the cost of future bailouts of the still floundering banks): a tiny minority of tax payers is ultimately expected to pay for all or most of it. They are unlikely to be very happy with their sacrificial lamb status. There is therefore a good chance that they will eventually 'go Galt'.

The sheer size of the so-called 'informal' or 'shadow' economy in Spain – without which there would probably be a famine by now considering the official unemployment rate – actually provides proof that people are perfectly capable of living peaceful and productive lives without the State. After all, the only interaction between people employed in the shadow economy and the State consists of stratagems by the former to avoid and evade the attention of the latter.

Conclusion:

As the sovereign debt and banking crisis in Europe continues to evolve, we may yet get to see a number of very interesting developments in terms of the social and political arrangements in Europe. One is that a few regions are liable to attempt to secede from the territories they currently belong to. Catalonia in Spain is actually a prime candidate for eventual secession and judging from the strong support secession has in the population,  one should not underestimate the probability that it will actually happen one day.

As we have argued in 'Secession, An Alternative View', a decentralization of political power, this is to say, the very opposite of what the EU is trying to achieve, would actually be a very favorable development for productive citizens and individuals. By contrast, the EU's goal of ever more political centralization and 'harmonization' only helps the ruling classes to exploit the producers of wealth more effectively by taking away their ability to 'vote with their feet'.

Finally, as the bankruptcy of the Western welfare/warfare states becomes more glaringly evident, even stronger growth of the informal economy seems likely to ensue.Eventually the State may not only become unable to live up to its financial promises, but may become unable to enforce its various monopolies and edicts as well, i.e., it may cease to be a viable entity. Just as the Marxists once predicted, it could then simply 'wither away' – but in its wake it would not leave a socialist Utopia, but actually a free society. In that sense, this latest scandal is actually a boon in disguise, in that it undermines the legitimacy of the State further.