Here is a piece from the daily Telegraph, recommended by Paul Mason, BBC
Newsnight's economist.
The new feudal overlords of Europe will be the bankers of the ECB
According to the economist Friedrich von Hayek, the development of welfare
socialism after the Second World War undermined freedom and would lead
Western democracies inexorably to some form of state-run serfdom.
By Peter Boone and Simon Johnson
Published: 7:02PM BST 22 May 2010
Hayek had the sign and the destination right, but was wrong about the
mechanism. Unregulated finance, the ideology of unfettered free markets,
and state capture by corporate interests are what ended up undermining
democracy both in North America and in Europe. All industrialised countries
are at risk, but it's the eurozone with its vulnerable structures that
points most clearly to our potentially unpleasant collective futures.
As a result of the continuing euro crisis, the European Central Bank (ECB)
now finds itself buying up the debt of all the weaker eurozone governments,
making it the perhaps unwittingly feudal boss of Europe. In the coming
years, the ECB and the European Union will dictate policy. The policy elite
who run these structures along with their allies in the private sector are
your new overlords.
It is arguable who exactly are the peasants, the vassals and the lords
under this model and what services will end up being exchanged, but there
is no question we are seeing a sea change in the post-war system of
property, power and prosperity across Western Europe, just as Hayek feared.
An overwhelming debt burden will bring down even the proudest people.
The ECB-EU approach will not return countries to reasonable levels of
growth the debt overhang is simply too large. The southern and western
periphery of the eurozone cannot grow out of their debts under these
arrangements and so will stumble from stabilisation programme to
stabilisation programme as did Latin America in the 1980s. This is bound to
lead to hostile politics, social unrest and more economic crises.
The International Monetary Fund will do just what the EU and ECB asks to
keep the charade in place. The old days when all member countries got
presents from the eurozone are long gone; now it is all instructions and
austere requirements. But enough resources will be provided to keep
everything rolling over.
The top three French musketeers President Nicolas Sarkozy, Jean-Claude
Trichet (ECB), and Dominique Strauss-Kahn (IMF) presumably they think they
will end up running things. More surprising is the reaction of other
European leaders, who genuinely seem convinced that what they are doing
makes sense as opposed to being a series of crazed improvisations.
The market is telling them otherwise, and the market is probably right.
Faced with the ugly reality of the loss of confidence in European finance
and institutions, the Germans and even the normally sensible Swedish
government are increasingly blaming "irrational" markets and speculators
for homegrown problems.
The messy solution of the EU leaves the world at risk of the type of shocks
we observed last week. This particular iteration may blow over, but another
will arise when there is backlash in Athens, Dublin, Lisbon, or heaven
forbid Madrid.
Meanwhile, rational market participants are selling debt of risky nations,
and getting out of the euro. The whole fiasco is now leading to a shift
away from risky assets all around the world, and the worldwide cost of such
volatility is not small. Debt peonage looms for a range of countries that
were recently thought immune to serious fiscal crisis, including the United
States and UK.
It is inappropriate for the Europeans to subject the rest of the world to
these large, chronic risks. Europe should recognize that insolvencies never
end well. The crisis in Britain in the 1970s is the model for what can go
wrong : ongoing strikes, populations disenchanted with authority and great
economic disruption. When the assets are cheap, deep-pocketed investors
from the US, China, India and, of course, Russia will swoop in for the
crown jewels.
It is time to look in the mirror and recognize the problem. Several nations
in Europe are bordering on insolvency, and it is now pretty clear that we
shouldn't just "bandage" over that for a few years with aid packages.
To deal with this insolvency we need to restructure the debts of those
nations, but in a way that does not destabilize Europe's fragile banking
system. And it needs to be credible enough so that once restructured, the
troubled nations will easily be able to finance themselves. Europe now has
the ¬750bn package of assistance in place and they should use it to fix the
problem once and for all. The ingredients for a solution include:
* Announcing an orderly restructuring of the periphery countries' debt
(Greece, Portugal and probably Ireland). This should start with a
standstill budget.
* Regulatory forbearance explicitly provided to all European banks,
with a backstop of ECB liquidity and a ¬500bn support programme to provide
capital injections as happened in the United States in 2008-09.
* The nations not restructured need to be supported via ECB liquidity
lines that guarantee the rollover of their government debt.
* The G20 needs to provide support to prevent chaotic foreign exchange
markets, but also accept a further devaluation of the euro. At some point,
the G20 will need to intervene to support the euro via central banks.
Such a comprehensive package of measures would be painful, but it is the
only realistic solution to this chaos. It would also restore some
credibility to Mr. Trichet and the ECB, who, at this stage, appear captives
of the fiscal crises in the eurozone.
Unfortunately, there is no leadership today in Europe that could take such
decisive actions, so Europe will only reform itself dragged kicking through
successive crises until the current, and many ensuing, problems are resolved.
The UK and US need to prepare themselves for more storms. The United States
will be in the pleasant position as the world's safe haven, but this will
only encourage America's profligate politicians to spend more and build
more debt.
The UK will bear much more pain from euro devaluation and financial
dislocation, all exacerbated by its own large deficit and debts. We might
well see one more invasion across the channel, this time by bond vigilantes
who question Britain's ability to rein in inflation as it builds too large
debts.
At the end of this great tumult, Europe and the UK will have sound fiscal
regimes. Debt will be defaulted on or inflated away, and nations will have
dramatically cut spending.
Hayek's predicted demise of western society as he knew it will prove
correct, but welfare socialism will prove the victim, erased by a political
and financial elite gone awry.
Peter Boone is chairman of the charity Effective Intervention, a research
associate at the London School of Economics' Centre for Economic
Performance and a principal in Salute Capital Management Ltd. Simon
Johnson, former chief economist of the IMF, is a professor at MIT Sloan and
senior fellow at the Peterson Institute.
Keith Hudson, Saltford, England
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