Coronavirus and the World-Economy: The Old is Dead, the New Can’t be Born

March 27, 2020 at 1:31 pm | Posted in Uncategorized | Leave a comment
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“The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a variety of morbid symptoms appear.”

–       Antonio Gramsci, Selections from Prison Notebooks.

 

The novel coronavirus pandemic has struck the world-economy in a way no other crisis had done before. Earlier pandemics—like the Spanish flu of 1918—struck a world which was far less integrated than today and supply-chains did not then span the planet. Nor was there then the volume of long-distance travel that could transport the virus all over. Since the SARS epidemic in 2002, airline data indicates that air traffic from China alone has increased ten-fold. The Great Depression of 1929-33 settled in over time: now, as countries close their borders and order all non-essential businesses to shutter their stores and offices, economic activity has ground to a halt without parallel. At that time, manufacturing commanded a large share of the economic output, and inventories that piled up could be sold as conditions eased up. Today, services account for the bulk of economic activity and a haircut, an Uber ride, or a dinner at a restaurant foregone cannot be made up. The global financial crisis of 2008-09 may have plunged economies on both sides of the North Atlantic into a recession but not China, India, Brazil and other ‘emerging market economies.’ This time it is different: it affects the entire planet even though its impact is conditioned by how this virus mutates and scythes through populations with different immunities and age, class, gender, and ethnic compositions.

 

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The very distinctiveness of the current situation makes past experience a poor guide even though past experiences can provide some clues. Social distancing as a means to mitigate the spread of the virus will have little effect in densely populated, low-income states. The last major pandemic was the Spanish flu of 1918 which may have come out of Kansas and is estimated to have killed 1 to 2 percent of the world population. But its impact across the world varied widely: 60 percent of its fatalities came from western India where a major drought did not prevent grain exports to Britain and the more malnourished population was more vulnerable.

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The greater vulnerability of the poor to the novel coronavirus, Covid-19, will tragically be repeated once again. Social distancing as a means to mitigate its spread will have little effect in densely populated, low-income states. How do people in slums or informal settlements practice what is misleadingly called social (rather than physical) distancing? In Johannesburg’s Alexandria township, 700,000 people live on 1.9 square miles; the same number of people are crowded into Dharavi’s 0.81 square miles in Mumbai; and Rio de Janeiro’s Rocinha is as large as Dharavi but with only 200,000 people. Daily laborers, and people who sell used clothing or vegetables don’t have the luxury of working from home. Nor do people in slums and favelas have easy access to clean water to practice the hygiene recommended to prevent contagion.

 

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Ethnic and racial minorities in wealthier countries are also less able to practice physical distancing. A study by the Economic Policy Institute in Washington, D.C., found that less that 30 percent of the people in the United States have jobs that can be done from home in 2018. Even if new telework technologies like online schooling are included, only 16.2 percent of Hispanic workers and 19.7 percent of African Americans are able to work from home compared to 30 percent of Whites and 37 percent of Asian Americans.

Taxi owners in New York city who took out large loans to buy the medallions to drive yellow cabs are facing ruin as air traffic virtually ceases and the city shuts down. People supplying essential commodities—fruits, vegetables, and other agricultural products—have no option than to work if they are to feed themselves and their families. And in the United States, they and the workers in abattoirs are poorly-paid migrants.

 

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It should be blindingly obvious that policies implemented in wealthier North American and European countries cannot be blithely applied in the Global South—and yet that is precisely what the Narendra Modi government has done in India. It imposed a virtual ban on movement within the country for 21 days with just 4 hours’ notice—leaving migrant workers stranded and making no provision for wages in a country where upwards of 90 percent of the working population are in the informal sector and the density of population is almost 400 per square mile. Conversely, Jair Bolsonaro of Brazil and Andrés Manuel López Obrador of Mexico have dismissed the pandemic as a minor aberration.

 

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Low income countries also do not have the infrastructure to deal with a major pandemic: Bangladesh has 170 million people but only 500 ICU beds. The worst affected country in Europe, Italy, has only 4 doctors per 1000 people; India has less than 1 and other countries fare even worse. Populations of low income states are also more vulnerable to environmental pollution  which reduces their immunities. One third of coronary respiratory diseases in the world in 2018 were in India which also has the largest number of tuberculosis patients in the world—and the latter are especially at risk for Covid-19. One estimate suggests that 300 million Indians could be infected by the virus by July and fatalities could be anywhere from 2 to 3.5 million.

 

Much of the clothing sold by big brand name corporations in the Global North are made by workers in China, Bangladesh, Laos, Cambodia, and elsewhere. With lockdowns being imposed in Europe and North America, companies are cancelling orders and since manufacturers are only paid once their products are shipped while they have to pay their workers and material suppliers beforehand, they are now stuck with large inventories of clothes that have shelf-lives determined by the season. Their governments do not have the ability to bail out manufacturers in the ways contemplated by governments in high-income states. Unlike the United States, they cannot simply print more currency, especially when the currencies of states in the Global South are plunging relative to the dollar: the Indian rupee is now at a historic low as is the South African rand to take just two examples. It is clear, then, that the impact of the virus will be felt disproportionately by the poor, especially in low income countries.

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If the disproportionate impact on the poor is similar to prior pandemics and crises, it is not at all clear how the world-economy will emerge out of it. Responding to the collapse of stock markets, governments are pumping money into the economy but when people are ordered to stay home, the circulation of money slows down as well—especially for small businesses. The Amazons and the Walmarts may advertise for tens of thousands of more workers, but that will barely make a dent in the number of employees shed by small businesses.

 

Broadening our aperture, the scale and suddenness of economic and social disruption is such that there can be no return to the pre-pandemic situation. Supply-chains within and between states have been severed, perhaps irretrievably. The range and severity of these disruptions would depend on how the Covid-19 impacts populations—depending on the virus’ mutations and age, class, ethnic, and gender distributions of specific population groups with their different disease experience and immunities. Given the expansion of robotics and numerically-controlled machines, the ongoing disruption of supply chains may well lead to a further replacement of workers by these technologies, especially if the virus scythes through low-income economies disparately.

 

Again, while the stock market collapse and the rise of unemployment may recall the Great Depression, conditions today are very different. During the 1920s and 1930s, the industrial working class was a key component of the recovery. Solidarities formed in factories and mines were the basis of organizing against deprivation—to the New Deal in the United States and to the beginning of  the modern welfare state in Europe. Widespread de-industrialization and the destruction of unions in the contemporary world have cut the ground from under the trade unions. In these conditions, as the electoral appeals of Trump, Boris Johnson, Matteo Salvini and others indicate, the atomized successors to historically advantaged middle and working classes have turned against ethnic minorities and migrants; against globalization and towards a reactionary nationalism. This is true not only in Europe and North America but even in South Africa where migrants from other African states face xenophobic attacks.

 

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Keynesian policies adopted in the Great Depression to increase demand did reduce unemployment but not by nearly enough: in the US, it fell from a peak of 25% in early 1933 to 14% in 1940. It was the Second World War which transformed the US into the breadbasket and factory for the Allied war effort and military mobilization which eventually solved it. And after the hostilities, when de-mobilization raised the prospect of surging unemployment again, Pax Americana led to a new burst of economic prosperity that lasted for a little over two decades—the ‘Golden Age of Capitalism.’

 

The Cold War was the essential component of this age: military mobilization and aid to European allies, and domestically a pact between Big Government, Big Business, and Big Labor led to an era of consumerism at home and abroad; the Soviet Union which assumed responsibility to maintain the peace from East Germany to the 38th parallel similarly implemented relatively successful reconstruction in its zone; and independence brought modest rewards to former colonies in Asia, the Middle East, Africa, the Caribbean and elsewhere.

 

Today, the United States exercises no intellectual leadership: indeed, its president with, what Peter Baker and Maggie Haberman characterized in the New York Times as, his “profound need for personal praise, the propensity to blame others, the lack of human empathy, the disregard for expertise, the distortion of facts, the impatience with scrutiny or criticism” has proved singularly inadequate to the task. His attempts to buy exclusive rights to a vaccine being developed by Curevac, a German company funded by the German government has offended and exasperated not only the Germans but all thinking citizens everywhere. This is hardly the type of leadership one expects from the leading power. Even worse, the US prevented a G7 declaration on the virus because of the Trump Administration’s insistence on calling it the ‘Wuhan virus’ instead of the ‘coronavirus’!

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In contrast, China is stepping up to aid countries: sending doctors and medical supplies to countries from Peru to the Philippines, Japan to Spain. Cuba is dispatching its doctors to Europe and elsewhere. The United States, after having failed to secure exclusive rights to a potential vaccine, is now scouring Eastern Europe and Central Asia for medical supplies and refusing to implement its Defense Production Act to compel its domestic industries to produce these vital goods in a critical time.  Rather that demonstrating leadership, seeking to procure essential medical supplies from these poorer states harkens back to Britain’s policies of requisitioning food from its colonies even when they were suffering droughts.

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Meanwhile, Trump’s allies in the U.S. Congress are pushing through a bill to provide about $1,200 dollars (for those with an annual salary of $75,000 or less) and $500 per child: not even enough for a month’s rent in a major metropolitan center. Strong opposition from Democrats overcame objections to increase some contributions to the poor like extending unemployment benefits but these still remain very inadequate and short term. In contrast, the government of Denmark is guaranteeing 75 percent of salaries (upto $3288 a month) of those with annual salaries of $52,400: amounting to almost 13 percent of GDP. It is the provision of cash to the employees and workers whose spending generates multiplier effects that can at least partially revive economies though that also depends on how supply chains are reconstituted.

 

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The Democratic Party seems equally rudderless. Its presumptive presidential nominee, former Vice-President Joseph Biden has hunkered down at his home and has not been seen making policy statements. Though the Democrat-controlled House of Representatives passed an early bill, it didn’t address fundamental problems and they are now likely to adopt the Senate version of the stimulus package, with minor revisions at best. Given the urgency of the situation and the strength of industry lobbies, much of the relief will in any case go to companies that have long avoided taxes including cruise lines that fly the flags of other nations than to the lower classes and to ethnic and racial minorities in the country.

 

The Second World War and the Cold War reconstituted the world-economy on a new basis because the concentration of economic and political power in the United States enabled it to exercise intellectual leadership when most other industrial economies had been devastated, hegemony in the Gramscian sense. The United States no longer has a similar dominance. Nor does any other state or group of states.

 

What the pandemic makes clear though is that we need a fundamental change in institutional structures of the world-economy. Wealth inequality has escalated everywhere in the world and is no longer sustainable. The emergence of a precariat, now subject to extraordinary deprivations by the shutdown of economic activities, is not the result of the pandemic or of low oil prices. State institutions have become increasingly privatized. Distinctions between center-right and center-left parties have been erased and neither one shows any inclination to compel Big Pharma to invest in research to preserve public health and prevent the spread of infectious diseases. Indeed, fifteen of the eighteen major pharmaceutical companies have stopped research on antibiotics and antivirals to focus in medicines that generate large profits: to treat male impotence, addiction from tranquilizers, and heart disease. Viruses jump more easily from animals to humans as nature is being destroyed and as cheap meat is dependent on factory farming which also has disastrous ecological consequences. It is imperative to reduce meat consumption..

 

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How we address these issues—and the issue of global warming and climate change—will be key to a new, sustainable, and more equitable pattern of life. With the old dying, and the new being unable to be born, we are condemned to an unstable and volatile future.

Imperial Hubris: European Subservience to the United States

July 3, 2013 at 10:53 pm | Posted in Capitalism, democracy, Human Rights, International Relations, Political Economy, World Politics | 1 Comment
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Rarely in modern history has a statesman’s words been so at odds with his actions as those of French President Francois Hollande in dealing with US spying on its allies. When Mr Edward Snowden, the former US National Security Agency (NSA) infrastructure analyst, revealed that the NSA had bugged the European Union’s offices and embassies of several EU member states, tapped into communications cables, and bugged the 2009 meeting of the G20 leaders in the UK, the French president thundered that this was “unacceptable behaviour” among friends and allies. Yet, on suspicion that Mr Snowden may have been on board the Bolivian President Evo Morales’ plane, Paris took the unprecedented step of refusing the plane permission to fly over its territory on Tuesday.

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Actions speak louder than words and while European leaders have feigned outrage about the US eavesdropping on the communications of its citizens and bugging of their embassies, they did not want the man who revealed the extent of US espionage to seek asylum in their countries. If Mr Snowden were on the Bolivian president’s plane and if he were to ask for asylum during a refuelling stop, it would have placed the government of a European state in an impossible situation. Since EU-wide laws prohibit the extradition of persons to countries with capital punishment, it would be politically suicidal for any government to deliver him to Washington. Yet, while European leaders were vociferous in denouncing US espionage, none were willing to defy the US on the issue.

What do you think of national security leaker edward snowden pollHence, France, Portugal and Spain took the unprecedented step of revoking pre-arranged flight permissions for President Morales’ plane—an action in which they were subsequently joined by Italy.  When the plane, running low on fuel, finally landed in Vienna’s Schwechat airport, President Morales was prevented from leaving for 13 hours while the Austrians satisfied themselves that Mr. Snowden was not on the plane.

Let us be clear: Mr Snowden is not a spy. He did not steal US secrets at the behest of a foreign power. He did not publish the contents of the espionage. He merely revealed its massive reach, and its sheer illegality and violation of human rights on a planetary scale by tracking the communications of citizens the world over. He is a whistleblower. The UN defines a whistleblowers “as individuals releasing confidential or secret information although they are under an official or other obligation to maintain confidentiality of secrecy.”

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The special UN rapporteur for the freedom of expression in 2004, along with his counterparts in the Organization for Security and Cooperation in Europe and the Organization of American states, the Guardian newspaper reports, enjoined all governments to protect whistleblowers from all “legal, administrative or employment-related sanctions if they act in ‘good faith’”. By revealing the magnitude of US espionage against their citizens and governments, Mr Snowden clearly acted in public interest.

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Indeed, before Mr Snowden’s revelations, the Director of US National Intelligence, Mr James Clapper had testified to the US Senate Intelligence Committee that in March that the NSA did not collect data indiscriminately on millions of Americans—a testimony he was compelled to retract this week on the scarcely credible ground that he had “simply did not think” of the relevant provision in the Patriot Act that permitted the collection of such data. Likewise, President Barack Obama had claimed several times that the NSA was not eavesdropping on phone calls domestically without warrants—a claim that is proven wrong by Mr Snowden’s revelations.

Jean Asselborn, the foreign minister of Luxembourg, observed that “Americans justify everything by terrorism. The EU and its diplomats are not terrorists.”

Let us also recall that these very same European governments—especially Spain and Portugal—allowed the use of their “airspace and airports for flights associated with CIA secret detention and extraordinary rendition [torture] operations” as the Open Society’s Globalizing Torture: CIA Secret Detention and Extraordinary Rendition investigation uncovered in a report published earlier this year. An ongoing investigation in France is examining whether the government permitted similar CIA flights. Victims can be carried over their airspace to be tortured but whistleblowers who reveal breaches of their citizens’ privacy and of their own sovereignty cannot! And this from member states of the EU that won the 2012 Nobel Peace Prize for the “advancement of peace and reconciliation, democracy and human rights in Europe”!

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Speaking out against US actions while surreptitiously aiding Washington is, of course, not a novel practice for its European allies. Ten years ago, the then French president Jacques Chirac loudly proclaimed that an assault against Saddam Hussein’s Iraq was unacceptable to Paris but when the US assault started Chirac opened French airspace to US military flights—something he had not done as premier for Reagan’s attack on Libya in 1986. Though Germany also opposed the Iraq war, once it had begun, its foreign minister prayed for the ‘rapid collapse’ of the resistance. Even Russian president Vladimir Putin for a decisive victory for the US ‘for economic and political reasons,’ just as he offered asylum to Mr Snowden on conditions that he knew would be unacceptable.

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The current generation of European leaders have not known a time in their lives when the United States did not dominate their countries—in the economic, political, and perhaps even cultural arenas. For them to symbolically challenge the US is one thing, to challenge it substantively is another thing altogether. Hence, even when their sovereignty was violated with the bugging of their diplomatic missions and EU offices, and when the privacy of their citizens was infringed by the tapping of their phones and digital communications, all they could do was to do all they could to see that Mr Snowden does not seek asylum in their countries even if that meant endangering the lives of President Morales and his entourage. Would they have done that if President Morales was of European descent?

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What Difference Will Hollande’s Victory in France Make for Europe, for the World?

May 6, 2012 at 4:25 pm | Posted in Capitalism, democracy, International Relations, Labor, Political Economy, World Politics | 6 Comments
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Francois Hollande has defeated Nicolas Sarkozy to become the first Socialist president of France in 17 years. He campaigned on a platform to renegotiate the austerity package that the German Chancellor Angela Merkel and Sarkozy had championed, with the support of the British Prime Minister David Cameron and other ‘center-right’ politicians in Europe. The victorious Hollande argued that the way out of the fiscal crisis enveloping the Eurozone is to focus on growth rather than to reduce deficits. The austerity packages, by sharply curbing government expenditures not only leads to unemployment but also reduced payments to the elderly, the young, and the unemployed. They can therefore no longer consume at their previous levels leading to further unemployment as businesses curtail production and the economy continues its tailspin–as has already happened in Greece, Portugal, Italy, Spain, and Ireland.

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But will Hollande be successful in reviving the Eurozone economies? Will this ‘marshmallow’ man (so-called because he hates fights) be strong enough to stand up to Merkel? His potential choice as prime minister, Jean-Marc Ayrault. has suggested that rather than reopening the draft fiscal treaty driven by Sarkozy and Merkel., Hollande will seek to incorporate a minor amendment on growth. This would not be surprising as Hollande’s previous experience in government was as an aide to the last Socialist president of France, Francous Mitterand, who in his second term initiated a wave of neo-liberal reforms that de-regulated much of the French economy.

Socialist and Labor parties in Europe, as political expressions of trade unions since the late nineteenth-century, have floundered as manufacturing has shifted to lower-waged countries and trade unions have suffered a tremendous erosion of memberships. After Margareth Thatcher defeated the miners strike in 1984, European unions have steadily declined in political and social significance.

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What, too, is a ‘growth’ strategy has never been addressed except to say that it should not be based on austerity measures. As manufacturing is becoming increasingly automated–labor costs amounted to only $7.10 of a total production cost of $178.40 for Apple’s iPhone 4–high-paying jobs in industry are simply disappearing. In large, vertically-integrated industrial operations, workers going on strike in a singe shop can disrupt the entire assembly line and hence undermine corporate profits. If workers in a gear-box plant down their tools, the entire auto assembly line will soon grind to a halt. Workers in the service sector–in the fast food industry or tellers in banks–simply do not have this structural power and hence their ability to bargain for better wages are far more limited. And as industrial production relocates overseas, more and more workers enter the service industries.

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With lower incomes, their ability to consume is more limited. And this makes it less profitable to produce more goods and so industrial production continues to plummet as capital is increasingly allocated to financial speculation. This has the strange effect that whenever an election is held, the first question asked by the talking heads on TV is what would be the reaction of the markets to the results–because after the de-regulation of capital controls, the flows of capital into and out of a country are crucial to its economy and there is not government mechanism to regulate these flows.

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In these conditions, governments are compelled to maintain market-friendly conditions and this is not something Hollande is likely to change. So what does growth-oriented policies mean? This needs to be spelt out beyond saying that it is the opposite of austerity programs, How is the economy going to add well-paying jobs in a situation when manufacturing is being steadily downgraded in the hierarchy of economic activities?

Will Barack Obama be the first American president to invade Africa?

April 21, 2011 at 9:29 pm | Posted in Arms Control, democracy, Human Rights, International Relations, Political Economy, World Politics | 1 Comment
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One month into the bombing of Libya by NATO forces, if anything the situation is worse than before. After an initial assault, the United States withdrew to a supporting role but those of its NATO allies that chose to participate in the military attack against Colonel Muammer Gaddafi’s forces–mainly France and the UK, with some support from Spain, Denmark, Canada, and Belgium–have discovered that they do not have the military force required to roll back the Libyan government troops. Without anti-tank planes, they were unable to stop the pro-Gaddafi forces’ advance against the rebels in the east or to relieve the siege of Misurata. President Barack Obama has now authorized the use of US Predator drones and is gradually being drawn out of the supporting role he had sought. Will the NATO allies and the US have to commit ground troops to resolve the impossible situation they have got themselves into? Will Barack Obama go down in history as the first American president to invade an African state?

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Despite the aerial bombardment of Colonel Gaddafi’s forces, the ragtag militia of the rebels do not have the training or the weaponry to withstand his forces which have now adapted measures to blunt the effectiveness of air raids–using human shields, riding in pickup trucks, using camouflage. About the rebels, a New York Times correspondent wrote:

… by almost all measures by which a military might be assessed, they are a hapless bunch. They have almost no communication equipment. There is no visible officer or noncommissioned officer corps. Their weapons are a mishmash of hastily acquired arms, which few of them know how to use.

Military chiefs on both sides of the Altantic had urged caution but France’s Nicholas Sarkozy to boost his domestic poll ratings and Britain’s David Cameron seeking some of the glory that Margaret Thatcher reaped from her victory over Argentina in the Malvinas conflict urged President Obama to support their ‘humanitarian intervention’ in Libya. Yet, there was never any clarity as to who the rebels were–as General Carter Ham, commander of the US Africa Command, told Congressional leaders and it appears that they represent coastal tribes of Cyrenaica while the tribes of the interior and the west continue their allegiance to Colonel Gaddafi.

Most notably, the objectives of the NATO mission in Libya are unclear or cannot be achieved merely by an air campaign. Its efforts have certainly postponed the defeat of the insurgents but without ground troops, it cannot oust the Colonel from power even though Sarkozy, Brown, and Obama have all called for his departure as the only acceptable solution. Note that this was not mandated by the UN Security Council resolution 1973 which sanctions the NATO operation and the resolution had explicitly forbidden ‘foreign occupation troops of any form.’ Yet, Britain, France, and Italy have all said they would send ‘unarmed military advisors‘–a prospect almost certain to involve deeper involvement: what would happen if these ‘unarmed’ advisors were targeted by the Libyan government forces as they surely are a legitimate military target?

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Insistence of the removal of Colonel Gaddafi from power rules out a negotiated settlement. A more likely prospect is that Libya will be partitioned into an eastern part which will effectively become a NATO protectorate with the bulk of Libya’s oil supplies. Neither France nor Britain has sufficient forces to keep pro-Gaddafi forces from attacking the Benghazi enclave–and it would require US boots on the ground–making the first African-American president of the US to be the first American president to invade and occupy an African state! After all, Khalifa Haftar who has been claiming to be the field commander of the rebel forces had been living near the CIA headquarters in Langley, Virginia for 20 years and they had provided him with a training camp.

The whole of Libya–east and west–would require massive reconstruction assistance given the damage done to its infrastructure by civil war and aerial bombardment. Who is going to fund this reconstruction? Is it ‘humanitarian to bomb the hell out of a country and then leave it in shambles? After all, the neo-conversatives claim that Iraq–which has far greater oil reserves–can pay for its own reconstruction remains hollow eight years after the US invasion.

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Even if the Gaddafi regime were to implode due to economic sanctions and the loss of the bulk of its oil revenues, his boast of arming every Libyan is likely to plunge the country into a prolonged phase of violent disruptions.

Eurozone’s Woes

December 4, 2010 at 5:47 pm | Posted in International Relations, Political Economy, world politics | Leave a comment
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The Euro–the single currency adopted by 16 states–has been under siege for over a year beginning with the election of a new government in Greece in September 2009 which sharply revised the country’s public deficit from 6 percent of GDP to 12.7 percent. This led to a loss of confidence in the government’s ability to repay loans and raised the cost of borrowing, creating greater difficulties for the government to repay the 300 billion euro debt bequeathed to it by its predecessor in office. Normally, a government faced with high debts could devalue its currency and thereby increase the competitiveness of its exports and attract both foreign investments and tourists but the adoption of the common currency ruled out this option.

Eventually, the European Central Bank (ECB) and the International Monetary Fund (IMF) cobbled together a rescue package of €110 billion ($146 billion) in May 2010 in return for Greece implementing very severe austerity measures. European policy makers also set up a European Financial Stability Facility (EFSF) to create a safety net of upto €750 billion to preserve financial stability among member states of the common currency.

These floodgates came under renewed threat when German Chancellor Angela Merkel made a statement that in future financial crises, creditors must also share in the losses rather than only the tax-payers. As Ireland was the most indebted economy within the Eurozone, this caused interest rates on Irish bonds to spike causing a further crisis in confidence. Unlike the Greek crisis which was caused by high public deficits, the Irish crisis was caused by a collapse of its housing bubble.

Soon after the introduction of the single currency, weak economic demand in the main Eurozone economies–Germany’s real domestic demand in 2008 was only 5 percent higher than in 1999–fueled an asset price inflation-especially in Ireland and Spain. As the former taoiseach (Prime Minister) Garret Fitzgerald noted, the house construction rate in the Celtic Tiger in the last two decades was six times that of Britain–leading to an extraordinary housing bubble stimulated by the Anglo Irish bank and a host of overseas banks. When the bubble burst, instead of the banks’ creditors sharing the losses, the government assumed their payment obligations, nationalizing the Anglo-irish Bank and creating the National Asset Management Agency to take over large loans from other banks, effectively transforming private debt into public debt.

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The ECB and IMF have once again cobbled together a rescue package of €85 billion ($115 billion) but this has not stopped a massive gap in the bond spreads (an increase in the cost of borrowing for the weaker members of the Eurozone, especially Greece, Ireland, Portugal, Spain, and Italy) and the fear is that if the crisis spreads to Spain and Italy, two of the largest economies, the EFSF would be inadequate and it would cause an enormous political conundrum: citizens of the stronger states will become increasingly unwilling to bail out the more ‘profligate’ states, and citizens of the latter would be unwilling to put up with increasingly stringent long-term austerity measures.

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Spain is fortunate because a large amount of its government debt is owed to its own banks rather than to overseas banks. At the beginning of 2010, Spain’s public debt was only 53 percent of GDP, about 20 percentage points below that of the Eurozone average and half that of Italy’s. Last year, when the budget deficit stood at 11.1 percent of GDP, Prime Minister Jose Luis Rodriguez Zapatero also pushed through an austerity package that led to the government’s deficit falling by 47 percent in the first ten months of 2010. The problem for Spain is its high private debt–especially the heavy borrowing from overseas banks to fund home construction in the years up to 2008, Before the start of the recession, Gilles Moec of the Deutsche Bank estimated that private sector debt was 210 percent of GDP compared to 130 percent for Germany, France, and Italy.

If the extent of the impending crisis have left many to wonder about the future of the euro, the problem surely is not in the common currency. As Philippe Legrain wrote in the Financial Times there is a lot to be said for

enabling capital to flow from one member country to another without exchange-rate risk is a key advantage of the euro. If this were possible globally, emerging economies would not feel compelled to amass huge reserves to protect against crises and could be net recipients of investment instead.

What was the problem was that capital from the stronger members of the Eurozone was channeled to fund asset bubbles in Ireland, Spain, and elsewhere. Tighter regulations of cross-border investments can mitigate this problem. But more importantly, why are lenders coddled in cotton wool while taxpayers are burdened with huge debts they had done nothing to incur? Ordinary Irish citizens, as Paul Krugman, has underlined are:

bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

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Earlier when Iceland and Kazakhstan faced financial crises, creditors shared in the pain. The external debt of Kazakhstan’s banking sector which had stood at 26 percent of GDP when the crisis struck in February 2009 had been cut almost in half by September 2010 by making creditors share in the losses and accepting various combinations of senior and subordinated debt. There is no reason to let banks off the hook. In Iceland, the crisis caused the election of a left-leaning government which also were able to get better terms.

If the current crisis enveloping the Eurozone leads to the election of more left leaning governments, and to a refusal to nationalize private debt and to greater regulations over the economy, it may be the final nail in the neoliberal coffin!

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