Friday, 8 June 2012

Talk : The Euro Crisis

Having attended some of the Café Scientifique Nottingham events over the last year or some, and found then very interesting, BFTF was intrigued to see a link to an event from the related MeetUp Café Economique entitled, simply “Euro Crisis” which was a talk on the current Euro Crisis by Brian Davey who is aa member FEASTA, an organisation involved in developing sustainable economic solution to real world problems .

The talk was very interesting, and accompanied by a wealth of interesting data and charts. Happily, the entire presentation can be found at the Café Economique Wordpress page here.

This post contains a short and a long report on the talk. The short version is shown below:

We’re doomed.

And here is the long version.

Brian began by outlining the context for the current crisis. There were four factors he felt were important.

1) Growth constraints
-high energy, food, material costs

2) Growing Power of the Global Finance Sector
-lots of money looking for safe havens and gambling on economic outcomes, increase in FIRE economy relative to manufacturing

3) Uneven development between nations unbalancing the global economy
- e.g. China, vs USA and Crisis within Eurozone

4. Ageing society in “developed” countries
– more and more elderly people dependent on pensions from the finance sector

Brian suggested that, from 2001 to 2007, fiscal deficits in the Eurozone were not high compared to the UK and the US but that there were very large trade imbalances, with Germany being a very large net exporter. (It is worth noting that the Eurozone limit on budget deficits is 3%, and Greece has exceeded that for pretty much all of the last 10 years)

The problem was that the countries on the periphery of the Eurozone (e.g. Greece) could not devalue their currencies to regain competitiveness with the German economy - and could not print money to pay off their debts (the Maastrich treaty specifically bans this)

As credit agencies began downgrading these peripheral counties they faced higher interest rates on their debt,
which resulted in higher taxes on the population
which resulted in people spending less
which resulted in manufacturing and service companies going bust and people getting laid off
which resulted in the government getting less tax revenue
which resulted in higher taxes on the remaining population
and so on. . .

Meanwhile, banks fear bankruptcy and a domino chain of failures as state bonds are downgraded and their assets lose value.

The proposed solution
Brian explained that the current “solution” involves the European Central Bank conjuring up money out of thin air which it then lends to banks at 1% (say) interest. The banks then lend this back to the European Structural Stability Fund at 2-3% (say) interest, and it is this ESSF that bails out the countries on the periphery of the Eurozone.

The End-Game
According to Brian we could be in a position like that of Argentina in 2002, when that country defaulted on its debts. The dire situation there saw the formation of workers co-opertives and even local currencies as a means of surviving when many financial structures had simply stopped working.

And the fact that many of the struggling Eurozone countries owe a large proportion of their debt to German banks means that we may see a Europe where the national infrastructure and assets of Eurozone counties end up being owned by Germany.

Some Personal Comments
Whilst much of the talk make sense, BFTF had the constant feeling that there were alternative viewpoints to some of the data being presented. For example, oil prices shot up in 2008, but then dropped very low soon after - what’s to say the same won’t happen now? How does gas- an increasingly plentiful fuel - affect future trends? What about renewable? Or the effect of the economic down turn itself (reduced economic activity dramatically reduced oil prices due to reduced demand)

But still, it was an interesting talk and BFT certainly recommends that you read the original slides - and then do some research on your own !