More on Hungarian Populism

My friend the Hungarian economist Yudit Kiss (Geneva) contributes this comment:

Dear Mario,

You are very right about the parallels between Berlusconi and Orban – Viktor Orban is clearly inspired by Berlusconi but there are several points where he goes much further then any of the populist leaders today.

Since last April the Fidesz-MPP Party, that won a 2/3 majority of the Parliamentary seats in Hungary, started to dismantle systematically the democratic institutional system that was built during the last 20 years. The process started with the drastic curtailment of the powers of the Constitutional Court, then those of the Budget Council, the rights of the media, an attack on the independence of the National Bank, the introduction of a whole series of new laws and regulations, crowned with the hasty introduction of a new Constitution, all written to suit the values and interests of the governing party.

The new Constitution will be followed by the introduction of 39 "fundamental laws" (that need the approval of 2/3 of MPs) that regulate such basic dimensions of life as labour, voting rights, the pension system, party financing or the regional administrative system. These laws will be created within a year, probably by the same method as the Constitution and the other new laws that have been accepted by the completely docile Parliament since last April, i.e. with the exclusion of independent experts, social partners and the political opposition.

According to Fidesz, last April a Revolution took place at the ballot box and this gives them the right to change radically key dimensions of public and private life in Hungary – from the tax system to social welfare, from street names to education, from film-making to the right to vote. Since the new Constitution declared that Hungary is a Christian country and life is sacred since the moment of conception, the prohibition of abortion and the introduction of compulsory religious education might be just a question of time. Another measure with long-term consequences is the increased tenure of key public functions, so that even if it lost the next elections, Fidesz' interests would be represented at the highest levels under future governments. The new Constitution limits further the independence of judges (and abruptly lowers their retirement age, so that a large-scale renewal of the profession's staff and its leaders) making it even more difficult for everyday citizens to fight for their rights. The President of the Supreme Court was not consulted or informed about this measure previously; neither were the Director of the 1956 Institute or the Rector of the Corvinus University, who learnt about the end (the planned dissolution, in the case of the latter) of their institutions from the media.

With the signing of the Constitution by the President, who faithfully follows the governing party's directions, Hungary ceased to be a Republic and became “the country of the Hungarians". Fidesz claims to act on behalf of the "nation" and the nation includes Hungarians living abroad. One of Fidesz's first steps was that of offering citizenship to ethnic Hungarians living outside the country, promising them voting rights for the next elections. If the EU cannot prevent this, Fidesz will indeed reign for 20 years (as its leaders promised before the elections) and a very dangerous precedent would be created inside the Union.

According to the canon of the populist-nationalist rhetoric, Ministries and several public institutions became "National" and the government is in permanent fight against external and internal enemies. In the Prime minister's speeches Hungary is portrayed as an exceptional country that is not acknowledged by the world at its true value. The country's external enemies are international capital, the IMF and the World Bank, and according to Orban's speech pronounced at the 15th of March national holiday, Brussels that intends to "dictate Hungarians what to do from outside" but is doomed to fail. Internal enemies are the representatives of the previous governments, many of whom are subject to criminal charges, including former PM Ferenc Gyurcsany, or those who occupied leading positions under the previous government. (Corruption is undoubtedly a very grave and generalized problem of Hungarian society and there were some very corrupt Socialist politicians active during the last two cycles - together with corrupt politicians from other parties, including Fidesz – but the criminalization of the whole previous political leadership is more a political manoeuvre then an exercise in transparency.) The critics of the system, particularly if they raise their voice publicly abroad, are also labelled "enemies of the country", as shown by the current witch-hunt against the best of Hungarian philosophers.

Fidesz is on its way to build a genuine party-state – changing the management of state and public institutions and extending its control over spheres that enjoyed a considerable autonomy before, like regional or local governments or independent institutions, partially financed by the state. According to a decision taken in December, 35 prestigious independent public foundations, including the world-famous Institute Peto for handicapped children, several foundations defending minority rights or the 1956 Research Institute, have been dismantled. The directors of public media, theatres, academic institutions, schools, many public companies and institutions have been changed, when the institution itself is not closed down. Those who occupied leading positions under the former governments, including school headmasters, hospital directors or elected leaders of independent organizations have to reapply for their jobs and many of them are replaced. Party affiliation often overrules professional competence and, if arbitrary decisions are not accepted meekly, sometimes a whole professional team pays for it. In a recent, utterly Ubuesque episode the President of an intergovernmental committee in charge of deciding about geographical names was sacked, because he disagreed with the government's proposed new name for Budapest Airport that left out "Ferihegy", the traditional name that was used for decades. 20 out of 21 members of the professional committee had the same view, but the government's proposal went through and later the whole committee was dissolved.

In his first speech after the elections last year Mr Orban promised to put in order the economy, strengthen public order and then start work on a new Constitution. The economy was "put in order" in a way Janos Kornai describes in the NÉPSZABADSÁG article you quoted in a comment to your post on Populism. Many of the country's best economists criticise sharply the government's economic policy, including experts with such diverse backgrounds as Laszlo Csaba, Tamas Bauer, Gabor Oblath, Andras Inotai or Tamas Mellar. Public order was "restored" by a revision of the penal code and the introduction of severe punishments even for minor offences, like speeding, or smoking in certain public places, like bus stops. There are plans to lower the age of legal responsibility to 14.

Beyond the populist rhetoric, however, actual measures do not serve the interests of ordinary people. The new tax system favours the better-off sections of the population, welfare services are being and will be radically cut back, prices of public services are raised, while the new Constitution curtails seriously labour rights.

One of the first conflicts between the government and the Constitutional court broke out due to a new regulation that makes it possible to dismiss public employees without justification. In his pre-election speeches Orban promised 1 million new jobs in 10 years. According to the latest report of the Hungarian Statistical Office, in one year 13,000 new jobs were created, but at least 50,000 jobs were lost. Unemployment stagnated at 11.6%, but was 26.8% among first job seekers (between age 15-24) and reached 10.8% in the age group of 25-54. Average unemployment lasts 18 month, an increase of 1.8 month. The new regulations are also very harsh on the poor, jobless, homeless, marginalised, handicapped, including those on invalidity pensions. Some of these measures are utterly grotesque, but given the general context, one does not feel like laughing; homeless people can be fined for "using public spaces for living" and in some districts of Budapest those who are caught scavenging in the garbage bins also have to pay fines.

The new power's way of dealing with dissent is also very disturbing. After the first months' startled silence, public protests started with a small group of University students who took to the the streets in December with a slogan: "We are the first generation born in a state of law, we don’t want to be the last one." Demonstrations and meetings have multiplied since, including an approximately 30,000 strong gathering in defence of press freedom on the 15th of March national holiday, organized by a small team of civil society activists and a joint, Hungarian and international trade union protest that gathered about 50,000 participants in April. The government usually ignores these massive expressions of dissent, clearly stating that it does not consider necessary to follow a dialogue with its political adversaries, potential social partners or its people. If there is a dialogue it takes the form of choosing one privileged interlocutor – e.g. one particular trade union or one Roma organization – as the only legitimate representative of a certain constituency, with which the government carries out exclusive discussions. Another form is a practically ex-post and formal "popular consultation" that was used in the case of the Constitution; approximately 2 weeks before the final text was presented to Parliament, every citizen received a personal letter with 12 questions about the future text that did not touch any of the crucial points of the document. According to government sources approximately 920,000 persons responded, so the Constitution could be said to have been publicly and democratically discussed and accepted by the people.

In other cases, however, the government's reaction to criticism is harsher. Following recent demonstrations of public order organisations, including firemen, who protested against new measures that take away some of their social gains and worsen their working conditions, the changing rooms were searched and prosecutions were started against several participants, because they marched in their uniform that is not permitted by the current regulations. For this week-end's planned demonstration the firemen plan to borrow uniforms from their Austrian colleagues and hopefully no one will be persecuted. International solidarity helps…

In another, very telling case, the independent mayor of Esztergom, a city some 45 kms away from Budapest, revolted against the Fidesz majority city council that has been obstructing her work ever since her election in the municipal elections in last October. Following the mismanagement of the previous Fidesz leadership, the town is on the verge of bankruptcy and the new mayor wanted to put things into order. Backed by the inhabitants of the town, she asked for help from the government, but had no reply. Finally, she decided to walk to the Parliament, accompanied by a delegation from the city's civil society representatives and sympathizers all along the road. She was not received by any government representative and could only hand over her protest letter addressed to Viktor Orban to a MP at the gate of Parliament. In her absence the city council met, headed by a senior official and passed some new measures without consulting her.

The case of Hungary also demonstrates one of the most serious dangers of the recent breakthrough of the extreme-right; the adaptation of their language, arguments and objectives by mainstream political currents. The Hungarian extreme-right party Jobbik entered Parliament at the last elections. Jobbik is not a coalition partner and Fidesz and Jobbik often display their differences publicly; however, Jobbik's language has entered the public discourse, its arguments are taken up by mainstream politicians and it has been implementing its policy with increasing self-assurance and tacit support. One of the leit-motifs of Jobbik's political agenda is the "fight against Gypsie criminality" and this Spring they started to put into practice their agenda. Since early March Jobbik activists and uniformed members of the "Civil Guard Association for a Nicer Future" (successor of an outlawed, openly racist paramilitary organization, the Hungarian Guard) marched up and down in the village of Gyongyospata, "maintaining order", terrorizing, humiliating and harassing the entire Gypsy population, as a retaliation after a Roma youth was caught stealing wood in the nearby forest. The police stood by, having the order only to intervene if atrocities were committed on either side. Violence broke out in late April, after a stormy Easter weekend that most Roma families spent separately; women and children were evacuated to a youth camp near Budapest, because "Nicer Future" had scheduled a "training weekend" next to the Gypsy settlement. This led to a country-wide scandal (government officials stating that the Roma just left for a holiday and accusing the opposition of wipping up a scandal to discredit the country), and, finally the arrest of some of the leaders of the paramilitary organisation. When they were released a couple of days later and "shared their joy" with the embattled Gypsy community, a massive fight broke out (fortunately nobody was killed) and the government hastily took a measure to forbid "uniformed violence".

I could go on and on. There are some good sites that cover developments in English, see e.g. http://esbalogh.typepad.com/hungarianspectrum/,
http://hungarianwatch.wordpress.com/. A site summarising events in Gyongyospata http://gyongyospatasolidarity.wordpress.com/ .

You are also right about proposals for solutions. Unfortunately we live in a time of crisis, and the solutions that are being used to tackle this crisis are actually making it worse. People all over the world express their frustration with politics and the present state of affairs, but are not able to offer genuine solutions. New economic and social models are urgently needed!

The Spectre of Populism

The spectre haunting Europe in the spring of 2011 is Populism. The search for political support, from votes in democratic elections to acceptance of policies between elections, through appealing to the self-interest of large and vocal groups by unscrupulous, even immoral means, has become a mainspring of political activity. Such means consist mostly of promises that are either: 1) impossible to deliver, or 2) temporarily feasible but non-sustainable on the proposed scale in the longer run, or 3) feasible and sustainable only at the very heavy cost of compromising an overriding public interest, including the rule of law. An example of the first is a manifesto commitment to stopping immigration altogether (by border controls or building walls), or making it illegal and repatriating immigrants; the second, an overambitious programme of large-scale public works, or a commitment to overgenerous welfare provisions and inter-regional transfers; the third encompasses criminality in government activities such as condoning and encouraging illegal buildings or tax evasion. It follows that, of necessity, a populist leader must be an inveterate and shameless liar, sometimes a rigid ideologue, often a criminal.

Paradoxically it is the nature of liberal democracy that generates populist politicians. The requirement to submit to the vote at regular, relatively short intervals makes for the need to try and fool all of the people at least some of the democratically critical time; or fool a majority of supporters for some of the time, until it becomes absolutely obvious to that majority that you cannot deliver at all, or can only do it for a short time, or that the costs of keeping promises are immense and make everybody worse-off. And when the opposition to populism is divided or gormless, populism can thrive even without commanding a majority.

In a representative democracy the purchase of the people’s representatives directly, and very cheaply with respect to the value of what you can obtain in exchange, including immunity from prosecution and blanket impunity, can be even cheaper than taking over a derelict but branded party or founding your own afresh (though this can also be a very profitable business). And once you have built temporary power, you do not even have to buy the people’s representatives out of your own pocket, for you can reward them at public expense. These long-standing techniques are greatly facilitated by the modern possibilities of building up monopolistic or quasi-monopolistic control of the media, in the absence of legislation against the conflicts of interest that are bound to arise.

United States pork barrel politics currently displays its populist public face in the Tea Party but while the Obama government is in power populism is held under some restraint. In Europe we already have the real thing. Clearly Italy with its inordinately disreputable and discredited Premier on trial for a remarkably broad array of criminal activities, backed by his populist ally and accomplice the Northern League, ideologically committed to undeliverable economic, fiscal and cultural policies (yet making fast progress beyond its current 8.3% of the seats), is what I had in mind in characterizing populism. But European populism, or populist-like policies, is widespread and gaining support elsewhere. The map reproduced below is from SPIEGEL ONLINE, 15 April 2011 (just before the Finnish elections, therefore putting True Finns at only 4% of the seats. Spiegel – quite rightly in the circumstances – uses indifferently “right wing”, “right wing populist” and “populist” tout court.)

In Finland, on 17 April half a million voters (19%) endorsed the racist, xenophobic and eurosceptic, anti-abortion “True Finns” party, catapulting it into third position, neck and neck with the first two parties. Its leader Timo Soini holds the balance of power in the formation of a new government. There may be dangerous repercussions on the measures to rescue the Euro agreed by the European Council on 24-25 March, including the additional billions for the euro bailout fund, the planned reform of the fund, and the rescue package for Portugal which is still to be finalized. True Finns are opposed to assisting "wasteful countries" (like Greece, Ireland and Portugal). "We were too soft on Europe," says Soini; Finland should not be made to "pay for the mistakes of others."

Recently right-wing populist parties have impacted government formation in Belgium, the Netherlands and, more recently, in Sweden. The SD (Sweridge Democraterna) cleared the minimum 4% threshold to enter the Riksdag where it obtained 5.7% of the seats, enough to deprive the incumbent center-right coalition of an absolute majority. Last year the anti-Islam anti-EU Dutch Freedom Party gained third position with 15.5% of the seats, making Premier Mark Rutte dependent on the goodwill of its populist leader Geert Wilders. In Belgium the Flemish Interest/Vlaams Belang obtained 7.8% of the seats. In Norway the so-called Progress Party holds 22.9% of the seats. In Denmark the anti-immigration, anti-Islamic Danish People's Party, that supported a center-right minority government for almost ten years, is now the third party in Parliament with 13.9% of the seats. In Switzerland the right-wing People’s Party (PV) is the largest group in the Federal Assembly with 31% of the seats. In Austria the Freedom Party (FPO), founded by Jorg Haider, and the Alliance for the Future of Austria hold 17.5% and 9.2% of the seats respectively. In Romania in the European elections of 2009 the Great Romania Party obtained 8.7% of the votes. Populist representation in Parliament is also present in Latvia (Fatherland and Freedom LNNK 5%), Lithuania (Order and Justice IT 12.7%), Slovakia (Slovak National Party, 5.4%), Bulgaria (Ataka 10.1%), Greece (Popular Orthodox Rally LAOS 5.6%). In France, the Front National of Marine Le Pen is not represented in Parliament but gained 15% of the vote in the first round of administrative elections, and 12% in the second round; the latest opinion polls give her the top position in the first round of the forthcoming presidential elections. The only other country in continental Europe without populist representation in Parliament is Germany.

These are depressing results for any progressive of left or right but insofar as they are expressions of voter-support for divergent, non-progressive policies, are still within the aegis of representative democracy; unlike what is happening in Italy, where the state itself is under assault from criminal and sectional interests, and is classically undefended by a fragmented and incompetent opposition.

It is Hungary, however, that can be defined as a laboratory for the new, national, populist Europe, with mounting aspirations to ethnic identity and zero tolerance of social diversity, with the Hungarian national-conservative Fidesz party rising to power last year behind populist calls for law, order and more police. (Soon after he was sworn in, Prime Minister Viktor Orbán promised a "noticeable increase in public security within two weeks.") Furthermore, “The ruling Fidesz party of Hungarian Prime Minister Viktor Orbán used its two-thirds majority to whip a new constitution through parliament on Monday [18 April 2011], and critics across Europe are in uproar. The move, they fear, will convert the party's conservative, nationalist ideology into a state doctrine, cement its power well beyond the end of its term and upset the democratic system of checks and balances” (SPIEGEL ONLINE, 19 April). The new Constitution reduces the powers of the constitutional court and broadens government powers over the magistrature, over budgetary and fiscal matters and over the media – extending it, through government nominees, beyond the current government tenure that is expected to end in 2014. The new authority controlling the media since the beginning of the year, Nmhh, already exercises censorship with orwellian efficiency. This is the very essence of Berlusconi’s project.

On the night the new Hungarian constitution was approved the German public TV network ARD commented: “The constitutional state has largely been abolished, future elections are effectively meaningless, the media are being whipped into line, as are theaters and museums and everything else that could shape the nation's culture." … "Barely a trace remains of pluralism, of variety, of the basic features of a free society. If you talk to people in Hungary about politics these days, you're confronted with fear, like in the days of East Germany. In this state, Hungary no longer belongs in the EU. It is a disgrace for Europe. But Europe is saying nothing."

The Süddeutsche Zeitung commented: "The constitution enshrines a spirit of ideological, ethnic intolerance, both externally and domestically. Some are being reminded of the fascist rhetoric in Europe between the world wars. Neighboring countries are getting unpleasant memories of the cultural arrogance and power of the Hungary of old, whose Magyarization programs they were subjected to. The new constitution claims that the state of Hungary represents all other Magyars, meaning the three million living in neighboring countries." (the quotes from both sources are taken from SPIEGEL ONLINE, 19 April).

In the 2010 Hungarian elections the extreme right party Jobbik also entered Parliament with 16.7% of the vote. In 2009 the Jobbik-backed para-military Hungarian Guard was banned, but new private militias have been re-created and have been harassing Roma villages over Easter, forcing the Roma population to evacuate, and have been involved in beatings and clashes (SPIEGEL ONLINE, 28 April; see also their Photo Gallery). “The police and the judiciary have lost control over the growing right-extremist citizen groups and paramilitary-style gangs. In recent months, extremists have repeatedly staged marches, primarily in eastern Hungary, against "Gypsy criminality." And police in the villages which have been targeted have shown a preference for standing aside.” The Hungarian state appears to have retreated from certain regions and left them to the right-wing vigilantes. So much for the promise of a noticeable increase in public security.

In Hungary the populist Executive has succeeded in identifying itself and its values with the state and has permanently altered what was a representative democracy, and by which it came to power, so that its populist policies cannot be removed by democratic vote. It is here, in the embodiment of populist values in place of democratic values within the modern state, rather than as policies on offer to the electorate in party manifestos, that the threat to the entire post-war social democratic settlement lies.

Voters are faced with: the global economic crisis, and the associated mass unemployment; enhanced international competition and protectionist temptations; rampant inequalities and the challenge of migrations, concentrated in a few areas and sectors; the euro crisis and the prospect of all having to share the cost of bailing out countries perceived as non-deserving; the exploitation and resulting demise of the welfare state. In short, they have strong objections both to re-distribution and to lack of re-distribution of income and wealth, i.e. ultimately to the re-distribution processes such as they are. In these conditions, voters will abandon nebulously felt democratic powers in return for equally nebulously-offered protection of their living standards and their way of life.

There is, too, a knock-on effect in other EU countries, including those up to now relatively unaffected by populism (whether as a result of their voting system or the maturity of their democratic values) but vulnerable to the wave of North African refugees connected with participation in the Libya mission, causing bickering and conflict, and leading to a waning of solidarity among these countries in their determination to rid Europe of a rogue state on its Mediterranean borders.

What can we do? Re-value political participation and activism. Never accept that "politics is dirty" or that "all politicians are corrupt", this is false. Fight indifference in all its forms. Forge political alliances by looking for common ground rather than indulging in unaffordable splits and unacceptable assaults upon people’s aspirations and self-sufficiency. Avoid dogmatism. Defend the democratic state and the rule of law. Speak up; those with access to media or academic outlets should use it to argue for representative democracy and refute the frightened selfishness of populist policies. And be counted. Never fail to vote whenever you have the opportunity.

Gaddafi’s Pseudo-Socialism

On 1 September 1969 a group of Libyan army officers belonging to the Movement of Free Officers, Unionists, and Socialists led by Colonel Muammar Al-Gaddafi overthrew King Idris and proclaimed the Libyan Arab Republic (LAR). One of the main goals of the revolution was the building of a form of Islamic socialism to be achieved through "social justice, high levels of production, the elimination of all forms of exploitation and the equitable distribution of national wealth." In 1972 Gaddafi took the title of "Brotherly Leader and Guide of the First of September Great Revolution of the Socialist People's Libyan Arab Jamahiriya". At around that time the late Jozef Wilczynski, a prolific Polish specialist in comparative and socialist economics (then teaching at the Royal Military College, University of New South Wales, Canberra) invited me to join a research project lavishly funded by the Brotherly Leader for the development of the Libyan brand of socialism. I declined the invitation, thus missing my chance perhaps to influence the course of Libyan history but saving my soul – and I have never regretted it, least of all now.

In 1975-79 Gaddafi published in instalments his political-economic philosophy, The Green Book, a slim volume apparently styled after Mao’s Little Red Book and intended to be required reading for all Libyans. It was composed of three parts; Part One: The Solution of the Problem of Democracy - Power to the People; Part Two: The solution of the Economic Problem – Socialism; Part Three: The social Basis of the Third Universal Theory. This is also known as the Third International Theory, but should not be confused with the Third Socialist International or Comintern; it is a reference to a Third Way alternative to both capitalism and communism, aimed at solving the contradictions inherent in both, in order to promote a worldwide political, economic and social revolution, and liberate oppressed peoples everywhere.

There is however a connection with the Third Way of Tony Blair & Co. “Britain’s best known sociologist, Anthony Giddens, … [played] the part of intellectual emissary for the Third Way. Giddens is helping the Libyan dictator Gaddafi, whose son [Saif] studied at the LSE where Giddens is based, to be rehabilitated back into the orbit of Western acceptability”, see “Telling the Truth”, The 2006 Socialist Register Edited by Leo Panitch and Colin Leys. In 2006 Giddens went to Tripoli to interview Gaddafi for The New Statesman, where he wrote that Libya had been transformed: "Gaddafi's 'conversion' may have been driven partly by the wish to escape sanctions, but I get the strong sense it is authentic and there is a lot of motive power behind it. Saif Gaddafi is a driving force behind the rehabilitation and potential modernisation of Libya. Gaddafi Sr, however, is authorising these processes." Lord Giddens persisted in his visits in 2007. In 2003-2008 Saif al-Islam Gaddafi obtained from LSE an MSc and a PhD, supervised by Ed Miliband’s advisor and co-author Professor David Held and examined by Professor the Lord Meghnad Desai. The PhD dissertation is now alleged to be largely plagiarized (Lord Wolf is conducting an enquiry) and Meghnad Desai says no-one told him it had been copied so how was he to know? LSE’s Global Governance Unit founded in 1992 and formerly directed by Lord Desai, obtained from the Gaddafi International Charity and Development Foundation a £1.5 million grant, which forced an “embarrassed” LSE Director Sir Howard Davies to resign on 4 March 2011. The planned visit by Professor Mary Kaldor – Co-Director of the Centre – as a guest of the Gaddafi family this year may have had to be put off due to current events.

In the recent uprisings lots of copies of The Green Book have been burned by demonstrators, and monuments to it set in concrete have been pushed over and smashed to pieces by Libyans, often under our very eyes on TV screens. Andrew Roberts, in The Daily Beast of 2 March lists his best 10 quotes from the book, and claims that those demonstrators “are in fact not performing acts of vandalism so much as of perceptive literary criticism” – of a book that is “a mélange of banalities, non-sequiturs, nuttiness, Socialism, Islamicism and pseudo-intellectualism”. (Apart from the Islamicism much the same could be said of Giddens’ contributions to New Labour’s Third Way).

The theory of Gaddafi’s economic-political system is reminiscent of Josip Broz Tito’s Yugoslavia: a one-party system (ACC the Arab Socialist Union being the sole legal political organization in the country), an “associationist” structure of various levels of self-management institutions, workers’ participation in enterprise management and results, “social” appropriation of reinvested surplus, market institutions in domestic and international economic relations. Yugoslav reality suffered from more central planning than was apparent, mostly via monetary policy and direct controls, and from the inefficiencies of an ambiguous property-rights regime in which – as stated in the 1975 Yugoslav Constitution –“nobody was the owner”. Gaddafi’s system parroted Yugoslavia but politically was a military dictatorship and economically an oil-driven system, exceptionally healthy though vulnerable, where oil represented 90% of exports, while economic control and surplus appropriation were firmly established in the Gaddafi family.

The IMF – which Libya joined in 1958 – happened to conclude its 2010 routine yearly “Art. IV Consultations” just before the recent uprisings, and reported on 15 February “a strong macroeconomic performance”. In 2009 “solid growth” in non-hydrocarbon output at 9% had been matched by a decline of hydrocarbon output following OPEC policies and resulting in a GDP modest contraction of 1.6%. “Overall growth increased markedly by [they mean to, DMN] an estimated 10 percent in 2010 reflecting a sharp increase in oil production. Non-hydrocarbon growth also strengthened (to about 7 percent) as a result of large public expenditures. However, unemployment has remained high, particularly among the youth. Inflation is estimated to have picked up to about 4.5 percent in 2010 as higher oil revenue increased domestic liquidity and international commodity prices increased.” Per capita GDP peaked at 14.3 thousand US dollars, fell to 9.5 thousand in 2009 but recovered to 12.1 thousand in 2010. A budgetary surplus of “only” 7% in 2009 (due to the decline in oil revenue) rose again in 2010, when the external current account surplus also increased to an estimated 20% of GDP, from 16% in 2009. The exchange rate of the dinar, which is pegged to the Special Drawing Rights, remained stable and was judged to be “broadly aligned with fundamentals”. “Net foreign assets of the Central Bank of Libya (CBL) and the LIA [Libyan Investment Authority] are estimated to have reached $150 billion at end-2010 (the equivalent of almost 160 percent of GDP)”. And to counter the impact of higher global food prices, that unleashed the uprising in Egypt and Tunisia, the Libyan government abolished, on 16 January, taxes and custom duties on locally-produced and imported food products.

The Green Book, Part One rejects modern liberal democracy. “All political systems in the world today are a product of the struggle for power between alternative instruments of government. This struggle may be peaceful or armed, as is evidenced among classes, sects, tribes, parties or individuals. The outcome is always the victory of a particular governing structure - be it that of an individual, group, party or class - and the defeat of the people; the defeat of genuine democracy.” … “Parliaments are the backbone of that conventional democracy prevailing in the world today. … The mere existence of a parliament means the absence of the people. True democracy exists only through the direct participation of the people, and not through the activity of their representatives.” “The party is a contemporary form of dictatorship. It is the modern instrument of dictatorial government. The party is the rule of a part over the whole.” Plebiscites are “a fraud against democracy”. Democracy in Libya is based instead on direct democracy, in the form of various layers of popular conferences and people’s committees under which "management becomes popular, control becomes popular, and the old definition of democracy as 'control of people over the government' is replaced by its new definition as 'the people's control over itself'”.

The implementation of this project has been the object of a slow, gradual and troubled transition. In 2004 Gaddafi admitted that "popular participation in government was not complete". But reality is much worse: Gaddafi himself appoints a cabinet and departmental ministers, manipulates unelected revolutionary committees, draws an arbitrary line between state assets and his own (just like Saddam used to do) and runs a police state. Private ownership of the media is regarded as undemocratic, but in practice state ownership of all book publishers, newspapers, television and radio stations, silences any dissenting voice more effectively than a private near-monopoly like that of his ex-buddy Berlusconi. “Any ruling system must be made subservient to natural laws, not the reverse [i.e. to conventional laws]” – but Gaddafi’s will is law, period. This is candidly admitted at the very end of Book One: “Theoretically, this is genuine democracy but, realistically, the strong always rules, i.e., the stronger party in the society is the one that rules”, which is how Gaddafi and his ‘socialist’ élite of apparatchiks, spies and mercenaries ruled in GDR-style for the last 41 years over Libyan citizens, now criminally intimidated in Tripoli, and massacred in Misurata.

The Green Book, Part Two, outlines the desired economic system. Wage labour is abolished and forbidden; all employees must be "partners not wage-workers", and have a right to the products which they manufacture. “Wage-earners, however improved their wages may be, are a type of slave. They are temporary slaves, and their slavery lasts as long as they work for wages from employers, be they individuals or the state.”… “ The ultimate solution lies in abolishing the wage-system, emancipating people from its bondage and reverting to the natural laws which defined relationships before the emergence of classes, forms of governments and man-made laws. These natural rules are the only measures that ought to govern human relations.”

“These natural rules have produced natural socialism based on equality among the components of economic production…“. “The exploitation of man by man and the possession by some individuals of more of the general wealth than their needs required is a manifest departure from the natural rule and the beginning of distortion and corruption in the life of the human community. It heralds the start of the exploitative society.” In March 1977 the "Declaration of Sabha" transformed Libya into a Jamahiriya (a neo-logism meaning “the state of the masses”), more precisely the Socialist People's Libyan Arab Jamahiriya. Foreign capital had been taken over soon after the 1969 coup and still has a limited presence; large and medium industrial enterprises are owned by the state. “Exploitative” forms of private ownership were abolished, whereas private family businesses in the service sector were preserved.

However, the IMF report of last February indicates and endorses trends in the opposite direction to the implementation of the Green Book: “An ambitious program to privatize banks and develop the nascent financial sector is underway. Banks have been partially privatized, interest rates decontrolled, and competition encouraged. Ongoing efforts to restructure and modernize the CBL are underway with assistance from the Fund. Capital and financial markets, however, are still underdeveloped with a very limited role in the economy. There are no markets for government or private debt and the foreign exchange market is small.”

“Structural reforms in other areas have progressed. The passing in early 2010 of a number of far- reaching laws bodes well for fostering private sector development and attracting foreign direct investment. The success of the new laws, however, hinges on promoting inter-agency coordination and open consultation with the legal and business communities, and establishing permanent bodies to monitor, assess, and oversee implementation. A comprehensive civil service reform is needed to facilitate more effective wage and employment policies that would address the needs of a young and growing labor force.” [so wage employment is still there after all?].

According to the Green Book, Part Two, “Housing is an essential need for both the individual and the family and should not be owned by others. Living in another's house, whether paying rent or not, compromises freedom.” This principle was made law in 1978. Last January the government announced the creation of a large multi-billion dollar investment fund that will focus on providing housing for the growing population.

“Transportation is also a necessity both to the individual and to the family. It should not be owned by others. In a socialist society, no person or authority has the right to own a means of transportation for the purpose of renting it, for this also means controlling the needs of others.”

“Land is the private property of no-one. Rather, everyone has the right to beneficially utilize it by working, farming or pasturing as long as he and his heirs live on it - to satisfy their needs, but without employing others with or without a wage.”

“If economic activity is allowed to extend beyond the satisfaction of needs, some will acquire more than required for their needs while others will be deprived. The savings which are in excess of one's needs are another person's share of the wealth of society. Allowing private economic activity to amass wealth beyond the satisfaction of one's needs and employing others to satisfy one's needs or beyond, or to secure savings, is the very essence of exploitation.”

“Disparity in the wealth of individuals in the new socialist society is not tolerated, save for those rendering certain services to the society for which they are accorded an amount congruent with their services. Individual shares only differ relative to the amount of production or public service rendered in excess“. In other words, some people are more equal than others.

“The antagonistic force of the trade unions in the capitalist world is capable of replacing capitalistic wage societies by a society of partnerships. The possibility of a socialist revolution starts by producers taking over their share of the production. Consequently, the aims of the producers' strikes will change from demanding increases in wages to controlling their share in production.”

“The Green Book thus defines the path of liberation to masses of wage-earners and domestic servants in order that human beings may achieve freedom”.

The Green Book, Part Three, is supposed to lay the foundations of the Libyan Third Way but is a collection of trite, often meaningless slogans, that do not deserve attention more than the samples given here for illustration: “The social factor, the national factor, is the dynamic force of human history. The social bond, which binds together human communities from the family through the tribe to the nation, is the basis for the movement of history.” “The national factor, the social bond, works automatically to impel a nation towards survival, in the same way that the gravity of an object works to keep it as one mass surrounding its centre.” “A tribe is a family which has grown as a result of procreation. It follows that a tribe is an enlarged family. Similarly, a nation is a tribe which has grown through procreation. The nation, then, is an enlarged tribe. The world is a nation which has been diversified into various nations. The world, then, is an enlarged nation. The relationship which binds the family also binds the tribe, the nation, and the world. … Since the tribe is a large family, it provides its members with much the same material benefits and social advantages that the family provides for its members, for the tribe is a secondary family… The tribe is a natural social "umbrella" for social security.” "The world will be ruled by the black people."

There is, however, a worthwhile, even an enlightening quote from the Green Book, Part One: “Society is composed of many individuals and entities. Therefore, if an individual is insane, that does not mean that the rest of society are mad, too.” And if the insane individual actually rules the country, in that case society would be mad not to throw him out at any cost.

The Banks are Made of Marble

I've traveled round this country
From shore to shining shore
It really made me wonder
The things I heard and saw.

I saw the weary farmer
Plowing sod and loam
l heard the auction hammer
A knocking down his home

But the banks are made of marble
With a guard at every door
And the vaults are stuffed with silver
That the farmer sweated for

l saw the seaman standing
Idly by the shore
l heard the bosses saying
Got no work for you no more

But the banks are made of marble
With a guard at every door
And the vaults are stuffed with silver
That the seaman sweated for

I saw the weary miner
Scrubbing coal dust from his back
I heard his children cryin
Got no coal to heat the shack

But the banks are made of marble
With a guard at every door
And the vaults are stuffed with silver
That the miner sweated for

I've seen my brothers working
Throughout this mighty land
l prayed we'd get together
And together make a stand

Final Chorus
Then we'd own those banks of marble
With a guard at every door
And we'd share those vaults of silver
That we have sweated for

This song is taken from the Union Songs website. Banks of Marble sounds like a “depression song” from the 1930s but was composed around 1948-1949 by Les Rice, “a New York State apple farmer and one-time president of the Ulster County chapter of the Farmers Union. His songs have made him well-known to farmers throughout the northeast. … his most well-known composition … achieved great popularity among union members throughout the country and even in Canada”.

The website adds the comment “The song has gained new resonance since the 2008-2009 financial meltdown!”. What a terrible misunderstanding; the song today has lost whatever resonance may have had before 2008. For while banks are still of marble, with a guard at every door, their vaults are stuffed with toxic assets, not silver. Their depositors - when they have not been swindled by the banks themselves or other financial intermediaries - often have had to queue in the street to recover their own money, which they got back only to the extent that governments took on banks liabilities, including those towards bank bondholders and perhaps even shareholders. Over the last three years government rescue of banks and financial institutions has added to government debt and lowered bond prices raising their yield and the cost of rolling over debt. Ireland, for instance, spent about 20% of GDP in the rescue of a single bank, Anglo-Irish. The fall in value of the government bonds in their vaults, in turn, added to the problems of banks. The entire banking system of some countries, like Ireland, is regarded as largely insolvent.

In Europe, in 2010 banks' balance sheets were white-washed by perfunctory “stress tests” that gave a clean bill of health even to Anglo-Irish and the Bank of Ireland, that a few months later required €113bn public money for their rescue. The newly-born EBA European Banking Authority (1 January 2011, London) is about to subject European banks to another round of stress tests; their severity is still partly unknown but the danger of another white-washing exercise is not negligible. The discussion of tests is made opaque by technicalities involving capitalisation requirements dictated by Basel 2 versus Basel 3 (Bank of International Settlements, applicable from 2013), tier 1 versus core tier 1 primary assets, RWA (risk-weighted-assets), differential treatment for troubled government bonds marked to market or held to maturity in banking books at their face value. The bottom line is that the re-capitalisation needed by European banks, estimated to be of the order of €7.5bn in the 2010 round of stress tests, has now reached the order of magnitude of €100bn (on top of the re-capitalisation occurred in the meantime, like the €113bn mentioned above). The provision of this additional capital may well slow down economic recovery.

The chances of working brothers making a stand - and taking over those banks that are still worth owing thus making them their own - are zero, as they are made completely powerless by worldwide competition in the global labour market – through de-localisation, globalization of trade and investment, migrations – and the resulting mass unemployment. Their brotherhood is in question, and they have to contend with the overwhelming, almost complete dominance of conservative governments in Europe. Sad, and bad enough, but to pretend otherwise is outright tragic.

Inequality and the Global Crisis

This is a Guest Post contributed by Branko Milanovic, a Lead economist in the World Bank's research department. Branko - at present a Visiting Fellow of All Souls College, Oxford - spent over a quarter century working on poverty and inequality and made original, pioneering contributions to this subject, including: Worlds Apart. Measuring International and Global Inequality, 2005, Princeton/Oxford; The Haves and the Have-Nots: A Short and Idiosyncratic History of Global Inequality, 2011, Basic Books (DMN)


The current financial crisis is generally blamed on feckless bankers, financial deregulation, crony capitalism and the like. While all of these elements may be true, this purely financial explanation of the crisis overlooks its fundamental reasons. They lie in the real sector, and more exactly in the distribution of income across individuals and social classes. Deregulation, by helping irresponsible behavior, just exacerbated the crisis; it did not create it.

To go to the origins of the crisis, one needs to go to rising income inequality within practically all countries in the world, and the United States in particular, over the last thirty years. In the United States, the top 1 percent of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s. That eerily replicated the situation that existed just prior to the crash of 1929, when the top 1 percent share reached its previous high watermark American income inequality over the last hundred years thus basically charted a gigantic U, going down from its 1929 peak all the way to the late 1970s, and then rising again for thirty years.

What did the increase mean? Such enormous wealth could not be used for consumption only. There is a limit to the number of Dom Pérignons and Armani suits one can drink or wear. And, of course, it was not reasonable either to “invest” solely in conspicuous consumption when wealth could be further increased by judicious investment. So, a huge pool of available financial capital—the product of increased income inequality—went in search of profitable opportunities into which to invest.

But the richest people and the hundreds of thousands somewhat less rich, could not invest the money themselves. They needed intermediaries, the financial sector. Overwhelmed with such an amount of funds, and short of good opportunities to invest the capital as well as enticed by large fees attending each transaction, the financial sector became more and more reckless, basically throwing money at anyone who would take it. While one cannot prove that investible resources eventually exceeded the number of safe and profitable investment opportunities (since nobody knows a priori how many and where there are good investment opportunities), this is strongly suggested by the increasing riskiness of investments that the financiers had to undertake.

But this is only one part of the equation: how and why large amounts of investable money went in a search of a return on that money. The second part of the equation explains who borrowed that money. There again we go back to the rising inequality. The increased wealth at the top was combined with an absence of real economic growth in the middle. Real median wage in the United States has been stagnant for twenty five years, despite an almost doubling of GDP per capita. About one-half of all real income gains between 1976 and 2006 accrued to the richest 5 percent of households. The new “gilded age” was understandably not very popular among the middle classes that saw their purchasing power not budge for years. Middle class income stagnation became a recurrent theme in the American political life, and an insoluble political problem for both Democrats and Republicans. Politicians obviously had an interest to make their constituents happy for otherwise they may not vote for them. Yet they could not just raise their wages. A way to make it seem that the middle class was earning more than it did was to increase its purchasing power through broader and more accessible credit. People began to live by accumulating ever rising debts on their credit cards, taking on more car debts or higher mortgages. President George W. Bush famously promised that every American family, implicitly regardless of its income, will be able to own a home. Thus was born the great American consumption binge which saw the household debt increase from 48 percent of GDP in the early 1980s to 100 percent of GDP before the crisis.

The interests of several large groups of people became closely aligned. High net-worth individuals and the financial sector were, as we have seen, keen to find new lending opportunities. Politicians were eager to “solve” the irritable problem of middle class income stagnation. The middle class and those poorer than them were happy to see their tight budget constraint removed as if by magic wand, consume all the fine things purchased by the rich, and partake in the longest US post World War II economic expansion. Suddenly, the middle class too felt like the winners.

This is what more than two centuries ago, the great French philosopher Montesquieu mocked when he described the mechanism used by the creators of paper money in France (an experiment that eventually crumbled with a thud): ‘People of Baetica”, wrote Montesquieu, “do you want to be rich? Imagine that I am very much so, and that you are very rich also; every morning tell yourself that your fortune has doubled during the night; and if you have creditors, go pay them with what you have imagined, and tell them to imagine it in their turn”.

The credit-fueled system was further helped by the ability of the US to run large current account deficits; that is, to have several percentage points of its consumption financed by foreigners. The consumption binge also took the edge off class conflict and maintained the American dream of a rising tide that lifts all the boats. But it was not sustainable. Once the middle class began defaulting on its debts, it collapsed.

We should not focus on the superficial aspects of the crisis, on the arcane of how “derivatives” work. If “derivatives” they were, they were the “derivatives” of the model of growth pursued over the last quarter a century. The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed (and for which economists used to praise them). The real cause of the crisis lies in huge inequalities in income distribution which generated much larger investable funds than could be profitably employed. The political problem of insufficient economic growth of the middle class was then “solved” by opening the floodgates of the cheap credit. And the opening of the credit floodgates, to placate the middle class, was needed because in a democratic system, an excessively unequal model of development cannot coexist with political stability.

Could it have worked out differently? Yes, without thirty years of rising inequality, and with the same overall national income, income of the middle class would have been greater. People with middling incomes have many more priority needs to satisfy before they become preoccupied with the best investment opportunities for their excess money. Thus, the structure of consumption would have been different: probably more money would have been spent on home-cooked meals than on restaurants, on near-home vacations than on exotic destinations, on kids’ clothes than on designer apparel. More equitable development would have removed the need for the politicians to look around in order to find palliatives with which to assuage the anger of the middle-class constituents. In other words, there would have been more equitable and stable development which would have spared the United States, and increasingly the world, an unnecessary crisis.

Euro-zone collapse? Most unlikely

“It would be technically possible for a member state to leave the euro zone, but politically it is about as likely as a meteorite hitting the Eurotower in Frankfurt” – as Barry Eichengreen nicely put it.

Partly there are significant costs from monetary disintegration. These were massive in the post-socialist transition of the early 1990s, when COMECON and its transferable rouble disintegrated, the USSR and the rouble area split into 15 countries and currencies, Czech and Slovak members of the CSFR split together with the Czecho-Slovak crown and Yugoslavia splintered into more pieces and currencies than its former membership of five. A devastating deep and protracted recession followed, though in fairness this was due not only to such processes of economic and monetary disintegration but to the general move by these countries from planned trade transactions to their sudden exposure to market transactions at world prices and payment in foreign currencies.

Partly, the advantages from dividing the Euro-area would be highly questionable. The weaker countries leaving the Euro-zone and re-introducing a national currency would not lighten the burden of their national debt which would continue to be denominated and serviced in euro or other foreign currencies. They may or may not improve their trade competitiveness via devaluation of their re-introduced national currency – apart from the fact that competitiveness could be improved in many other ways if this is what a country wanted (“domestic devaluation” via wage restraint, investment in productivity increases, greater competition etcetera). Nor would there be any advantage for such stronger member countries as Germany.

In an article for the German Council on Foreign Relations Adam Posen argues that Germany has an intrinsic and direct interest in the prosperity of the eurozone. Germany benefits in terms of seigniorage, transaction cost savings, lower real interest rates available to its companies, a strengthened global influence, and improved shock absorption. These advantages increase with the size and the diversity of the Eurozone, and the German Chancellor Angela Merkel should not make a “competitiveness pact” for eurozone countries the condition for German continued support for the Euro.

All the same, over the last year, the prospect of Euro-area split has been a frequent though intermittent object of discussion. The title of a 2010 book by Hans-Olaf Henkel, formerly of IBM and ex-euro-enthusiast, expresses a widespread feeling in Germany today: Rettet Unser Geld! (Return our money!). Marshall Auerback also explores this possibility in a recent paper, “What happens if Germany exits the Euro?”, Levy Economics Institute of Bard College, 2011/1, though ending with a cautionary assessment not a recommendation.

“On the plus side, given Germany’s historic reputation for sound finances, the country would likely emerge with a strong Deutschmark, a global “safe haven” currency for currency speculators keen to find a true store of value.

But this would likely come at a huge cost: Germany would probably save its banking system at the expense of destroying its export base. The newly reconfigured DM would soar against the euro and become the ultimate safe-haven currency. This would mitigate the write-down impact of the inevitable haircuts on euro-denominated debt, because the euro (assuming it is retained by the remaining eurozone countries) would fall dramatically. Even if the euro itself vaporized, the Germans would simply pay back debt in the old currencies, likely at a fraction of their former value.

But Germany’s external sector would be wiped out. The resultant appreciation of the new Deutschmark, along with the inevitable banking crises in the periphery (which would exert significant deflationary pressures in those countries and therefore reduce consumer demand in the eurozone ex Germany), would engender a huge trade shock: Germany’s growth would slow dramatically, as exports compose such a large proportion of its GDP.

Another interesting byproduct: by accounting identity, a fall in Germany’s external surplus would mean an increase in its budget deficit (unless the private sector began to expand rapidly, which is doubtful under the scenario described above), so Germany would find itself experiencing much larger [public] deficits.”

This accounting identity is a centerpiece of Keynesian macroeconomics as popularized for instance by the late Wynne Godley, but it is or rather should be part of any macroeconomist’s education. Auerback divides the economy into three main sectors: domestic government, domestic non-government (or private), and the foreign sector. “By accounting identity, the deficits and surpluses across these three sectors must sum to zero; that is, one sector can run a deficit so long as at least one other sector runs a surplus.”

Looking at GDP accounting from the “sources” perspective, we get the identity:

(1) GDP = C + I + G + (X – M), i.e. national income must equal the sum of private consumption and investment, plus government expenditure plus net exports.

From the “uses” perspective, GDP must be taken up by private consumption plus savings plus taxation, i.e.:

(2) GDP = C + S + T. Therefore

(3) C + S + T = GDP = C + I + G + (X – M), or

(4) (I – S) + (G – T) + (X – M) = 0

As a simple matter of double-entry book-keeping, the three balances must add up to zero.

At present Germany is running a large positive external balance (X-M), matched by an even larger excess private savings over investment (S-I) minus a modest public deficit (G-T). If, as a result of the reintroduction of an overvalued DM, German external balance were to be substantially reduced or vanish, Germany would have to either contract private savings relatively to investment or run substantial public deficits or both. An abrupt change of gear, which is at odds with the wishes of the German people and leadership. Something for Chancellor Merkel to ponder.

(This is also, incidentally, why the size of a country’s government deficit does not lend itself to be targeted directly, independently of what else happens to the balance of private savings and investment as well as the external balance of the country).

189 German Economists

Usually economists are inclined to differ among themselves. As Winston Churchill is reported to have said: “If you put two economists in a room, you get two opinions – unless one of them is Lord Keynes, in which case you get three opinions”.

Yet on 24 February 2011 no fewer than 189 German economists signed a letter, published in Frankfurter Allgemeine Zeitung, in which they expressed an exceptional degree of consensus. They “called on the German government to refuse any extension of the EFSF [European Financial Stability Facility], and to force highly indebted countries into an insolvency procedure. They include some of the best known German economists – Hans Werner Sinn, Jürgen von Hagen, Manfred Neumann, Michael Burda and Volker Wieland.” (Eurointelligence.com, 25 February). What is the collective noun for economists? A pride, or a flock, or a swarm? A basket, a case, a basket-case? Let’s call them an assumption of economists, to cover such an uncommon coincidence of views.

The unusually firm (single-handed) recommendation by the 189 German economists is based on the following six points:

“1. A permanent credit guarantee for insolvent countries would provide massive incentives to repeat the mistakes of the past. The reforms of the stability pact, and the newly discussed Pact for Competitiveness, are too weak to counteract this;

2. A long-term strategy against debt crises requires the possibility of a sovereign insolvency;

3. Credits to countries should be possible, but only after debt restructuring;

4. The fact of state insolvency should be determined not by the country itself, but by an international institution, such as the IMF;

5. The ECB must not provide unlimited support of insolvent countries through bond purchases;

6. Of the three solutions to a national debt crisis – debt reduction through growth, insolvency, and bailout – the latter would imply higher taxes, and/or higher inflation.”

“Holger Stelzner, the openly anti-European editorialist of Frankfurter Allgemeine Zeitung, writes that the eurozone is drowning in its debt, which has turned the ECB into a bad bank. The approach of policy makers everywhere is to solve a debt crisis through more debt. The increase in the ECB’s balance sheet from €900bn to €1800bn of mostly low quality debt was immensely risky. The ECB is no longer an independent institution, but an interested party.” (Eurointelligence.com, Ibidem).

Since its publication the letter has been criticized in the financial press, mostly for some inaccuracies – such as the failure to recognize that the lending capacity of the EFSF is much lower than its nominal €440 mn due to the need to over-collateralize its bonds in order to obtain an AAA credit rating in spite of the less-than-AAA-rating of several of its guarantors (Wolfgang Munchau in FT Deutschland, Eurointelligence.com, 2-3-2011, who also criticizes their failure to take into account the externalities associated with various alternative options, such as debt restructuring).

Nevertheless, it is exceedingly difficult to take issue with the substance of the arguments put forward by the 189, other than by conjuring up the unlikely and implausible prospects of Euro-area dis-integration, of a split into a Nordic strong-euro-area and a Southern weak-euro-area, or worse, the prospect of Greece going back to the drachma and Germany restoring the DM. The real question is the extent of collateral damage that a Euroarea-member’s default – in the form of debt restructuring – would cause, in view of the interdependence between banks and “sovereigns” both within countries at risk and across the entire area.

As it happens, a reasoned answer to this question has been provided recently by a Policy Brief (2011/02) of the Bruegel Think-tank, “A comprehensive approach to the euro-area debt crisis” by Zsolt Darvas, Jean Pisany-Ferry and André Sapir. They note the ineffectiveness of measures taken to date to tackle the euro crisis, seeing that sovereign debt spreads are higher today than they were in April 2010 in spite of EFSF, and the EU European Financial Stability Mechanism, the ECB debt purchase programme, on top of national austerity and structural reform programmes.

European policies have been insufficient, Darvas et al. say, because 1) they have failed to recognize the possibility of insolvency, treating crises as pure liquidity crises; 2) they have failed to address systemically the interdependence between sovereign and banking crises, and cross-country interdependence; 3) they have been re-active rather than proactive, squandering their credibility in partial, inadequate and belated responses. Their recommendations include a plan to restore banking-sector soundness; promoting budgetary consolidation and competitiveness through domestic reforms in peripheral countries; revising EU assistance facilities and – hear, hear – the restructuring of public debt where needed.

The Bruegel paper provides a detailed analysis of alternative scenarios in the “high-spread” countries (usually euphemistically labelled “peripheral”, or aggressively PIGS – where I stands for Ireland; Italy for once flies, or rather crawls, low enough not to appear on the radar screens). The starting point in Greece is a debt/GDP ratio scheduled to reach 150 % in 2011, mostly due to the mismanagement of public finances, and poised to continue rising in subsequent years. By contrast, in Spain and Ireland, “a major reason for solvency concerns arises from the public finance consequences of private-sector debt accumulation, not least because of the cost of rescuing insolvent banks. Furthermore, public debt levels in these two countries and in Portugal are more manageable (with levels in 2011 remaining below 70, 90 and 110 % of GDP”).

Alternatives hypothesis are considered involving growth and interest rates, in order to evaluate fiscal sustainability in the four countries. In 2010 primary balances were -3.7% in Greece, -9.6% in Ireland (excluding bank support), -4.4% in Portugal and -7.3% in Spain. Their evolution to 2014 is taken from EU and IMF programmes and reports; on these assumptions the persistent primary balance needed from 2015 onwards is calculated, in order to (a) stabilise the debt/GDP ratio at its 2015 level, (b) reduce the debt/GDP ratio from its simulated 2014 level to 60 percent of GDP (the Maastricht criterion) by 2034. Consensus Economics forecasts of nominal GDP growth and an optimistic evolution of market interest rates (in the case of Greece, a reduction of spreads vis‐a‐vis Germany from 970 basis points today to 350 in 2014) provide the optimistic baseline, set against a more cautious alternative. (See Figure below; detailed calculations are provided in Zsolt Darvas, Christophe Gouardo, Jean Pisani-Ferry and André Sapir, “A Comprehensive Approach to the Euro-Area, Bruegel, forthcoming 2011).

The stabilised levels of debts in the case of the adjustment indicated by the blue part of the bars are: 160% in Greece, 123% in Ireland, 98% in Portugal and 84% in Spain. “The adjustment needs are of frightening magnitude, not only in Greece but also in Ireland. This is even truer under more cautious assumptions for growth and interest rates”.

“Even under the optimistic scenario, the primary surplus required to reduce the debt ratio to 60 per cent of GDP in twenty years would be 8.4 per cent of GDP. It would reach 14.5 per cent of GDP under the cautious scenario. This would imply devoting between one/fifth and one/third of tax revenues to interest payments on the public debt. Over the last 50 years, no country in the OECD (except Norway, thanks to oil surpluses) has ever sustained a primary surplus above 6 per cent of GDP. Even less ambitious targets would require politically unrealistic surpluses”.

The paper thus argues that Greece is insolvent, inevitably heading for default. “The various “soft options” (lowering of interest rate on EFSF, extension of maturity of EU/IMF loans, debt buybacks) might prove useful for other periphery countries, but are not enough for Greece.” They provide a simplified map of interdependence between banks and sovereigns in the periphery countries, and between periphery banks and those in the rest of the euro area. On that basis they can evaluate the spillover effects of debt restructuring, which in the case of Greece would be limited and manageable (the real threat coming from Irish and Spanish banks). Their conclusion is that a 30% haircut on Greek debt, in top of the “soft options” might prove a viable exit.

Markets have been expecting a “grand bargain” to be agreed and unveiled at the Eurozone March summit, resolving the sovereign debt crisis once and for all. The toughening of the German position now makes it unlikely. The hard facts of likely insolvency, if faced in earnest instead of denied against all evidence, might provide a springboard for a new approach. As Barry Eichengreen declared to Der Spiegel on 2 March, it is necessary “That at their summit in March, the member states face up to some unpleasant truths. Plan A has failed. Now they have to switch to Plan B. They must stop attempting to combat the crisis in Greece and Ireland by forcing these countries to pile more debt onto their existing debts by saddling them with overpriced loans.” … ”The present bailout attempts have never made sense. Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. Now people are beginning to realize that there is no way around rescheduling Greece's debt - and that will also involve the banks. For this to happen, there is only one solution: Europe needs to strengthen its banks! Greece lived beyond its means, but in Ireland and Spain it is the banks that are the problem. The euro crisis is first and foremost a banking crisis.”