Tag / International

by Admin

The monetary policies of the ECB – Europe’s unelected government

MONETARY POLICY is a key tool for governments to use to benefit citizens, societies and economies. Central banks are empowered to determine interest rates, and to influence the exchange rate of their currency (and others’) by buying and selling reserves of foreign currencies. If a central bank sets a higher interest rate, this makes the return on this currency higher, leading to a higher demand for the currency and a resulting higher exchange rate. By lowering interest rates central banks can stimulate growth by expanding credit. With the creation of the ECB in 1998, members of the common currency transferred their power to set interest rates and other monetary policy powers to the ECB, which would set a centralised monetary policy across the Eurozone. The ECB and national central banks form the European System of Central Banks (ESCB), and the ECB can “exceptionally” provide emergency liquidity assistance (ELA) as a last resort for struggling Eurozone banks. The ECB differs from most of the other major central banks around the world in that it has a more limited mandate, and in its governance structure.

A narrow mandate

The neoliberal ideas, and the German economic ideology of ‘Ordoliberalismus’, that shaped the construction of the Eurozone can also be seen starkly in the nature of the ECB. This ideology has been dominant in Germany since the Second World War and combines a belief in a welfare safety net with the view that one of the government’s key roles is to promote market competition, stressing the importance of constitutional rules, as opposed to the use of discretionary policy. This ideology shaped the nature of the Bundesbank, which was dedicated to tightly controlling the money supply to maintain price stability. The ECB was constructed on this model, with a mandate to focus on price stability – controlling inflation. Despite the total discrediting of this ideology in the wake of the financial crisis, Berlin’s belief that if the government ensures inflation is kept low and stable, then markets will ensure growth and employment of their own accord, persists.

The ECB’s mandate is in contrast to many other major central banks, like the Federal Reserve in the US, which are tasked with the broader role of maintaining full employment and promoting growth, in addition to maintaining price stability. As a result of its narrow mandate the ECB only focuses on controlling inflation, regardless of how high the unemployment rate is. If there is low and stable inflation in the Eurozone as a whole – and in Germany in particular – then the ECB will ignore the growth needs of states experiencing high employment. In the midst of the recession and the sovereign debt crisis in 2011, the ECB actually raised interest rates twice, in April and July, contributing to the cause of the Eurozone’s double-dip recession. This caused major hardship in the crisis countries, particularly for mortgage-holders who were pushed further into arrears.

The other key difference between the ECB and other major central banks is its level of democratic accountability: for example, while the Fed is often described as “independent”, it is ultimately accountable to Congress. The ECB is unaccountable to any elected government or parliament. This feature reflects the drive by elites to “depoliticise” economic policy by outsourcing it to supposedly independent technocrats in order to weaken resistance to highly political decisions that have profound redistributive consequences for society. Bill Mitchell and Thomas Fazi write: “[T]he creation of self-imposed ‘external constraints’ allowed national politicians to reduce the political costs of the neoliberal transition – which clearly involved unpopular policies – by ‘scapegoating’ institutionalised rules and ‘independent’ or international institutions, which in turn were presented as an inevitable outcome of the new, harsh realities of globalisation, thus insulating macroeconomic policies from popular contestation”.

The decisions that the ECB has taken in response to the crisis have been extremely political, such as its decision to raise interest rates in 2008 and 2011, when the real danger to the majority of Eurozone members was deflation. The two most strikingly political acts during the crisis were the ECB’s threat to cut off emergency liquidity assistance to the Irish state unless it agreed to request a bailout, and its decision to cut off emergency liquidity to Greek banks in the middle of 2015 in a threat to Syriza that Greece would be forced out of the Eurozone if it did not submit to the conditions of the Troika that were resoundingly rejected by Greek voters in a referendum. The ability to withhold credit to elected governments gives the unaccountable ECB an enormous degree of power to impose its own policy on countries in need of assistance.

The ECB’s financing operations

In 2011 the ECB began the first of several financing operations in order to assist the economic recovery in the Eurozone. In December 2011 it announced its long-term refinancing operation (LTRO), which provided one trillion euro in credit in secured funding to troubled banks at a rate of one per cent interest. The banks often invested it into government bonds at higher rates, which helped the banks’ balance sheets but cost government budgets in debt servicing payments, and tied the banks and sovereigns even closer together.

As the Eurozone teetered on the brink of fragmenting in July 2012, ECB President Mario Draghi made his famed speech that is widely believed to have “saved” the common currency, which included the statement that, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. The speech preceded a new financing operation called Outright Monetary Transactions (OMT) in which the ECB offered to purchase sovereign bonds of the most indebted states. In 2014 Paul Krugman described the OMT programme as a “bluff” because “nobody knows what would happen if OMT were actually required”. The OMT programme has not in fact ever been used, because no member state has met all of the requirements needed to activate it. Martin Wolf and others have observed that the bluff was so successful not only due to its announcement, but also due to the tacit acceptance of the announcement by all member states including Germany, as this was perceived by markets as a signal that the risk of the Eurozone disintegrating was eliminated. But he adds that while the spreads between government bonds in crisis and core countries fell sharply in response to the OMT announcement, they remain significant. “For countries caught in a deflationary trap, these spreads might yet prove unmanageable.”

In a telling side note, it was revealed in October 2017 that the Eurosystem had made super-profits of €6.2 billion between 2012 and 2016 from Greek bonds the ECB had purchased at knock-down prices in 2012. While the Greek government and its creditors in 2012 had agreed to “haircut” Greek bonds, those purchased by the Eurosystem were conveniently excluded.

Neither the LTRO nor the OMT programmes did much to actually improve the supply of credit to the productive economy. The next financing operation was announced in 2014 – targeted longer-term refinancing operations (TLTRO) – and it was aimed at providing banks with funds on the condition that they would be used to supply credit to small and medium enterprises as opposed to being directed towards speculation. But the lack of demand in the economy has meant that the TLTRO offer was not widely taken up by firms. Despite the ultra-low and at times negative interest rates, and the billions of euros handed over to banks through its financing operations, the ECB was not able to generate recovery in the real economy and restore growth, and it has persistently missed its target of 2 per cent inflation.

In March 2015, the ECB announced a quantitative easing (QE) programme in which it would create €60 billion each month and use it to purchase corporate sector assets and government bonds. It was originally intended to last for one year but has been extended and remains in place, though economists expect the announcement of “tapering” in the near future, the phased winding-down of the programme. The Corporate Securities Purchasing Programme (CSPP), introduced in March 2016 and now valued at around €125 billion, has been widely criticised by NGOs and MEPs for the lack of transparency on how the bonds are selected, and the fact that the funds are being directed towards multinational corporations and the fossil fuel industry. Corporate Europe Observatory has examined the limited publicly available data on the bonds favoured by the CSPP and found a marked preference for climate-damaging corporations. Another report by Corporate Europe Observatory published in October 2017 found that 98 per cent of all advisors in the ECB’s advisory groups have been assigned to representatives of the finance industry. Just three financial institutions, Deutsche Bank, BNP Paribas and Citigroup, occupied 208 out of 517 total advisory seats.

The QE for People and Positive Money campaigns have developed a detailed critique of the limited impact on real economic recovery of the ECB’s “trickle-down” QE programme and have developed excellent policy alternatives. This campaign is supported by dozens of leading economists. Two examples of alternative monetary policies they propose are for the ECB to transfer newly created money to Eurozone governments directly, who can use it to increase public spending on green infrastructure and services; or for the ECB to create money that can be directly distributed to citizens of the Eurozone, which would increase their purchasing power and directly enter the real economy. The current QE programme is not only unfair and ineffective – it is also increasing financial volatility and encouraging the inflation of new speculative bubbles.

A new banking crisis?

Despite the fact that the European banking sector has received more than €1.6 trillion through taxpayer-funded bailouts since 2008 – and despite the fact that the ECB has pumped in €60-€80 billion each month through its financing operations since March 2015 amounting to an additional €2 trillion in support – another crisis is unfolding in the European banking sector.

Banks in the EU, and particularly in the Eurozone, have been experiencing a chronically low level of profitability since the global financial crisis. While profitability of US and British banks has improved somewhat post-crisis, many Eurozone banks are struggling to keep their heads above water.

ECB Vice President Vítor Constâncio noted in a speech in Brussels in February that the key measure of profitability – return on equity – for euro-area banks “has hovered at around 5 per cent”, a rate which, he pointed out, “does not cover the estimated cost of equity”. By contrast, the return on equity in the US has recovered to above 9 per cent (around the current cost of equity in the euro area banks), and the industry generally considers 10 per cent to be a good rate of return. European banks’ income from interest, which was on average 19 per cent of their equity in June 2016, is less than their operating expenses of 20.9 per cent, according to the European Banking Authority (EBA).

The crisis has been demonstrated in the failure (or near-failure) of several banks across the Eurozone this year – including Italy’s Monte dei Paschi di Siena (MPS), Veneto Banca and Banca Popolare di Vicenza, and Spain’s Banco Popular – as well as the serious ill-health of German giant Deutsche Bank. Other banks that have caused concern, largely due to the results of the 2016 banking stress tests carried out on 51 major EU banks under the authority of the EBA, include RBS, which was bailed out by the British government in 2008 in the world’s largest ever bailout, and has since posted nine straight years of losses. Irish banks Allied Irish Bank and Bank of Ireland, British bank Barclays, Switzerland’s Credit Suisse and Austrian bank Raiffeisen are all also subject to concerns about their health and viability.

In an illustration of the seriousness of the systemic risk posed by the profitability crisis, EBA chairperson Andrea Enria said last October: “The problem is European in scale: we have more than €1 trillion of gross non-performing loans in the system; even considering provisions [money set aside to cover losses], the stock of uncovered non-performing loans is at almost €600 billion — more than all the capital banks raised since 2011, more than six times the annual profits of the EU banking sector, more than twice the flow of new loans.

“For supervisors, this casts serious doubts on the long term viability of significant segments of the banking system [my emphasis]. The same concern is shared by investors and is reflected in the low valuations registered in stock markets.”

Most experts and financial commentators point to four key contributing factors to this lack of profitability – the high volume of non-performing loans on the banks’ books (loans that are in default after 90 days of non-repayment); the very low interest rate environment arising from the ECB’s recent monetary policy; the fines for misconduct banks have been required to pay since the crisis; and over-capacity in the sector, including increasing competition from FinTech.

Between 2010 and 2014, EU banks paid out around €50 billion in settlements and fines imposed by regulators for misconduct, largely due to mis-selling the risky financial products that contributed to the global crash. The EU’s largest banks, those classified as global systemically important banks (G-SIBs), were the worst culprits and paid the vast majority of the €50 billion figure. A report by the European Systemic Risk Board in 2015 found that past and looming fines would wipe out erase basically all of the new capital that had been raised by European G-SIBs over the past five years.

While misconduct fines and over-capacity dampen profits, the two most important of the four factors listed above are the NPL problem and the interest rate environment. But a key pressure on profitability that the ECB, EBA and the other EU institutions routinely fail to acknowledge is on the demand side – ie, the general economic stagnation in the Eurozone that has caused the demand for credit to fall and remain low. This stagnation has also contributed to and worsened the NPL problem. Euro-area banks held just over €1 trillion in NPLs last year, the equivalent of around 9 per cent of the Eurozone’s GDP, and amounting to around 6.4 per cent of total loans in the Eurozone. The level of NPLs differs dramatically across the euro area, with almost half bank loans in Greece and Cyprus now classified as NPLs, and Italy, Ireland, Portugal and Slovenia all holding NPLs at rates of 10-20 per cent.

There is a clear overlap between the high level of NPLs and the impact of the financial crisis on the so-called peripheral economies in the Eurozone, and a clear interaction between the austerity measures prescribed for these economies by the Troika and their inability to significantly reduce their NPL ratios. The collapse of the industrial sector in Greece and Italy in particular has been a major contributing factor to the rise of distressed loans as businesses of all sizes failed and their owners were unable to repay loans. The austerity policies enforced by the Troika in the crisis countries in return for bailout funds inevitably exacerbated the NPL problem.

Publicly funded bank bailouts are back with a vengeance

“EU forges bank bailout deal to protect taxpayers” – that was the Associated Press headline in June 2013, describing the agreement reached in Brussels on the EU Banking Union. The Banking Union is an initiative to further integrate the banking and financial sectors in the Eurozone countries, which was promoted as a response to the global financial crisis and subsequent sovereign debt crisis. It is envisioned as having three pillars based on a “single rulebook” – a system of harmonised supervision under the Single Supervisory Mechanism; a single resolution mechanism and associated fund implemented by the Bank Recovery and Resolution Directive (BRRD) at the beginning of 2016; and an as-yet to be developed third pillar of a European Deposit Insurance Scheme.

The Banking Union, European lawmakers assured the public, would call time on the “too-big-to-fail” problem and ensure taxpayer-funded bailouts – which had cost EU governments more than €1.5 trillion since 2008, including €64 billion in the Irish state – were a thing of the past. The BRRD was supposed to make sure that in case of a bank failure, the institution would be wound down in an orderly way by an early intervention by regulators, and that senior bondholders and depositors with more than €100,000 in the bank would be “bailed in”. Creditors would have to incur losses of at least 8 per cent of their liabilities before a bank would be able to receive government aid. Speaking to reporters at the summit where the deal was reached between EU Finance Ministers that day in 2013, then-Irish Finance Minister Michael Noonan said: “Bail-in is now the rule… This is a revolutionary change in the way banks are treated.” But there was an exception clause, as there usually is in EU legislation, and its name was “precautionary recapitalisation”.

Resolution Directive fails miserably in its first test

The Italian banking crisis that deepened throughout 2016 culminated in the December announcement by the Italian government of a €20 billion taxpayer-funded rescue package for the ailing MPS and other Italian banks, indicating its intention to activate the precautionary recapitalisation clause of the BRRD. The clause allows for the bail-in of creditors to be sidestepped if certain conditions are met – namely that the bank is still solvent, and its resolution would threaten financial stability. This exceptional clause is complemented by a similar “safeguard” clause in the EU’s state aid legislation on burden-sharing.

After months of negotiations between the European Central Bank (ECB) and the Commission, about both the extent of the capital shortfall and the terms of the deal, Competition Commissioner Margrethe Vestager reached an agreement in principle with the Italian Finance Minister on June 1, 2017. The Commission, and the ECB in its supervisory role, gave the green light to the precautionary recapitalisation. “State aid in this context can only be granted as a precaution (to prepare for possible capital needs of a bank that would materialise if economic conditions were to worsen) and does not trigger resolution of the bank,” Vestager said in a statement.

Conditions of a precautionary recapitalisation include that broader financial stability must be threatened by the bank’s failure; the state support cannot be used to cover previous or near-term expected losses; and the need for state support must be only temporary. But MPS already received two state-funded bailouts in 2009 and 2012, casting significant doubt on whether it meets these two latter criteria.

Back in December when the Italian government made its rescue package announcement, the ECB suddenly began to say that MPS’s capital shortfall was not €5 billion as previously estimated but actually €8.8 billion. The ECB didn’t bother to explain publicly how it arrived at this figure, but its retroactive and opaque revision of the figures raised serious concerns and questions about the health of MPS. Was the bank actually solvent when it applied for a precautionary recapitalisation? If not, it would not qualify for public assistance. The details of the Commission’s agreement in principle have not yet been made public.

There are many criticisms that can be made of the resolution aspects of the Banking Union legislation. The bail-in of creditors of only 8 per cent is, in many cases, going to raise a totally insufficient proportion of the costs of a resolution. In ordinary insolvency procedures investors would usually lose far more than 8 per cent. Bail-in also poses additional risks to ordinary taxpayers in a number of ways including through increased premiums in pensions and health insurance, and through the mis-selling of risky and inappropriate financial products that are eligible for bail-in to small retail investors.

The precautionary recapitalisation clause, however, is the glaring loophole that makes a joke out of the Banking Union’s promise to end taxpayer-funded bailouts of banks and to resolve the ‘too-big-to-fail’ problem. Under the Bank Recovery and Resolution Directive, a review of the precautionary recapitalisation clause was supposed to have taken place by now. The Commission was required to review whether “there is a continuing need for allowing the support measures” in the clause by December 2015 and report on this to the European Parliament and Council, which it has failed to do.

Now, the European Banking Authority (EBA), supported by many within the European Central Bank (ECB), is making a concerted push for the precautionary recapitalisation loophole to be invoked in order to use public funds to bail out the big bank across the EU more generally, by calling for state funds to be used to reduce the high level of non-performing loans in European banks and to restore them to profitability.

A crisis of abundance

Writing in response to the Great Depression, Keynes said, “This is not a crisis of poverty, but a crisis of abundance,” a description that is perfectly fitting for the current economic crisis. The ongoing tendency towards stagnation in the Eurozone and in the broader economy is not primarily the result of trade imbalances, which in any case, have been reduced as a result of the fall in aggregate demand. There is an unprecedented mass of money not being used in the economy, which has built up over decades of a declining labour share of income and record-high corporate profits. There is at least US$5 trillion in “idle money”, much of it resting in tax havens. Varoufakis writes: “Try to imagine the mountain of cash on which corporations in the United States and Europe are sitting, too terrorized by the prospect of insufficient consumer demand to invest in the production of things that society needs.” He notes that every crisis generates two mountains: “one of debts and losses, another of idle, fearful savings” – the only difference being the scale of this crisis.

Investment continues to stall across the Eurozone, and the Juncker Investment Plan, and its key instrument, the European Fund for Strategic Investment (EFSI), has been a dismal failure. It was announced in late 2014 as an initiative from the Commission in partnership with the European Investment Bank (EIB) in order to address the ‘investment gap’ that the Commission estimates to be 200-300 billion euros per year in the EU. The stated goal of the Juncker Plan was to “mobilise” more than €300 billion in private capital investments – by creating an initial fund of just €21 billion to secure loans for infrastructure projects. The European Trade Union Confederation immediately responded to the Juncker Plan by saying the Commission was “relying on a financial miracle like the loaves and fishes”.

There was no new money forming the EFSI – the seed capital was cut from other existing EU budgetary programmes, including the research plan Horizon 2020 and the Connecting Europe transport infrastructure programme. This €21 billion in initial capital was to be used to guarantee €60 billion of EIB borrowing to fund riskier projects than the EIB usually funds. The entire rationale of the Juncker Plan was to ensure that private investment that would otherwise not have happened took place. The investment plan stipulates that the funds must be disbursed across all EU economies according to the size of their GDP levels, meaning most of the projects that have been approved have benefited Germany and Britain instead of the smaller peripheral economies who are in greater need due to the fact that investment has largely ground to a halt. It has largely focused on public-private partnerships, which are being used across the EU to promote privatisation of public goods and services.

The Bruegel think-tank undertook a study of the first 55 EFSI-funded projects that were approved in the first year, and found that 42 would in all likelihood have proceeded anyway in the absence of the Juncker Plan. The only difference is that public money is now being used as a guarantee for private ventures.

The European Parliament admits the results of the Juncker Plan have been disappointing and that it has failed to unleash any discernible surge in investment. The most critical group, the European United Left (GUE/NGL) points out that most of the investments made under the plan would have proceeded regardless, without the EU guarantee, but now private investors can shift the risk of their investments to taxpayers. The group argues, “The EFSI induces rent seeking and asset stripping by private investors at the expense of the Union budget, via public private partnerships, the privatization of profits and the socialization of losses, while only sparely contributing to additional investment”.

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Six, above.

 

Trade unionists rally against French President Emmanuel Macron's attacks on labour rights with a banner saying "Macron, puppet of the employers" (AFP)
by Admin

Eurozone’s architects opt for ‘internal devaluation’

What conditions are required for a monetary union to work?

WHAT are the necessary requirements for a common currency to actually work effectively to the benefit of all its members? Why do the dollar-zones in the US, Canada and Australia not experience the same level of crisis, divergence and stagnation as the Eurozone has been plagued with? Simply put, the institutions in place in federal states such as these allow for the smooth, timely and effective recycling of excess profits from surplus states to those experiencing deficits. They also have central banks that have a mandate to ensure full employment, as well as price stability. In comparison, following the Bundesbank model, the ECB’s mandate is solely to maintain price stability and it is not to concern itself with employment.

When a downturn or crisis hits a common currency area, it will cause an asymmetric shock unless there has been sufficient convergence in the economies of the union. Divergent economies would be affected differently by different external and internal developments. This danger was understood by the architects of the euro, but for ideological reasons they focused only on attempting to achieve convergence in government debt and deficit levels at Maastricht and ever since, instead of looking at the more important role of divergence in balance of payments between members.

In 1961, economist Robert Mundell articulated his ‘optimum currency area’ theory on how currency unions could work to overcome asymmetrical shocks. The adjustment mechanisms identified through this theory include price and wage flexibility; mobility of labour and other factors of production; financial market integration; a high degree of economic openness; the diversification of production and consumption; similar inflation rates; fiscal integration; and finally, political integration. Some of these mechanisms can be seen to work effectively in the US. The three most important factors in place in the US economy identified by Stiglitz and others are: (1) the ease of migration across states, (2) federal spending on national programmes, and (3) the fact that the US banking system is a federal and not state-based system.

If one state in the US experiences a shock, workers can easily migrate to another state in a better economic condition in order to look for work. Technically there is freedom of movement of labour in the EU, but in practice migration within the US is far easier due to the fact states share a common language, a common culture and national identity, and the same access to federal welfare programmes. National government programmes such as social security and Medicare are available across all states, which means that if one state is experiencing a downturn, the federal government will automatically recycle surpluses towards the state in trouble in the form of, for example, increased unemployment benefits. Around one-fifth of GDP is spent at the federal level in the US. The federal government can also choose to boost investment or spending in certain federal projects at the state level in order to aid economic recovery. By comparison, in the Eurozone there is very little fiscal capacity to redirect funds towards depressed states because the European budget is around one per cent of member states’ GDP. Almost all spending occurs at the member state level. US banks are also guaranteed at the federal level by the Federal Deposit Insurance Corporation, preventing capital flight from one state to another in times of crisis.

Clearly the EU lacks similar institutions. But with the exception of a common deposit insurance scheme, the creation of such adjustment mechanisms in the Eurozone is either impossible in the short-to-medium term, or completely undesirable from a left standpoint by virtue of the fact that increased economic, fiscal and political integration require unacceptable trade-offs in the ability of people to participate in the decision-making process democratically at the local and national level.

Eurozone’s architects opt for internal devaluation

Of the various adjustment mechanisms identified by optimum currency area theorists, the Eurozone’s founders have clearly focused single-mindedly on attempting to achieve ‘flexibility’ of wages. Countries inside a common currency area cannot engage in competitive devaluations by devaluing their currency to make their exports more competitive. But they can implement policies domestically to bring about an ‘internal devaluation’ – lowering their real exchange rate vis-à-vis their neighbours. The main way this takes place is by compressing or reducing wages, which causes prices to fall. Germany has consciously implemented this policy for several decades, at the expense of German workers, millions of whom are working but living in poverty. This long-term strategy was intensified in 2003 under the then social-democrat/Green coalition government, which carried out a radical and vicious reform of the labour and welfare systems entitled Agenda 2010.

The competitiveness of prices largely determines the performance of a country’s exports, and the key factor determining prices is the nominal unit labour cost (the nominal unit labour cost is the ratio of labour cost per employee to productivity – the value added per worker). Unit labour costs in Germany stopped growing in the mid-1990s. Between 1998 and 2007, the rise in unit labour costs in Germany was zero. But in the rest of the Eurozone over the same period, average wage costs mainly increased with inflation, of around 2 per cent per year. This difference greatly increased the competitiveness of German exports and reduced it for the exports of other Eurozone members. So the success of Germany’s economic model is at the expense of the rights and living standards of its workers. The Agenda 2010 strategy has been deepened under successive governments and by 2015, more than 12.5 million Germans, out of a population of 80 million, were living in poverty in Europe’s “economic powerhouse”.

The EU’s focus on structural reform, particularly labour market reform, with a view to achieving increased “flexibility” has been a constant feature of its agenda since Maastricht. This was a major element of the Jobs Strategy of 1994, and the Lisbon 2010 Agenda adopted in 2000. The Lisbon Agenda originally set out to make the EU “the most competitive and dynamic knowledge-based economy in the world” by 2010. It included an economic pillar, a social pillar and an environmental pillar. In 2005, the Lisbon Agenda was revised by the European Council and Commission. Their verdict was that the agenda was failing to achieve its goal, and so they decided to drop the social and environmental pillars and focus on the economic pillar. In 2010 the Lisbon Agenda was relaunched as a new 10-year plan, the Europe 2020 strategy – “an agenda for new skills and jobs: to modernise labour markets by facilitating labour mobility and the development of skills throughout the lifecycle with a view to increasing labour participation and better matching labour supply and demand”.

The “progress” of member states in implementing structural reforms that will facilitate downward movement on wages is monitored through the European Semester process, a yearly cycle of policy “coordination” between member states and the Commission. In spring each year, Member States submit their plans for managing public finances – including keeping debt and deficits within the Stability and Growth Pact limits – and their National Reform Programmes to achieve “smart, sustainable and inclusive growth”. These plans are then assessed by the Commission, which proposes country-specific recommendations to member states, which are discussed and adopted by the Council. Then each autumn member state governments are graciously permitted to present their draft national budgets to their respective parliaments. The Five Presidents’ Report of EU leaders of 2015 proposed the creation of National Competitiveness Authorities to advance this agenda further.

The Eurozone elites believe (or claim to believe) that if only “wage rigidities” in the member states were overcome, both unemployment and trade imbalances would disappear. If only a country’s population could be forced to work for poverty wages, there would be a job for everyone; and the resulting stagnation in domestic demand would mean prices would fall and this country’s real exchange rate, which had become misaligned and risen too high, could regain its balance. This view underpins the repeated attacks on the rights and wages of French workers, set to intensify fiercely under President Macron, as well as underpinning the EU’s overall agenda and forcing structural reforms in the member states in order to increase productivity and competitiveness – and profit, of course. The austerity imposed by the Troika was not only designed to regain market “confidence” in peripheral governments, but also to facilitate internal devaluations in member states by a form of shock therapy. Of course, this adjustment facilitates not only the reduction of trade imbalances but also a sharp increase in the amount of wealth transferred from labour to capital.

There has certainly been an internal devaluation process in the Eurozone countries, affecting primarily the peripheral economies. But as Stiglitz points out, “this has not worked – or at least not fast enough to restore the economies to full employment. In some countries such as Finland, low inflation not been enough to even restore exports of goods and services to the levels before the crisis”. An increase in exports in these countries should have boosted growth and employment. But with the exception of the hugely distorted “globalised” data from the Irish economy, this has not been the case. The restoration of trade balance that the Eurozone has experienced since the crisis has largely been due to the fact that imports fall when demand stagnates – “one can achieve a current account balance by strangulating the economy”. For the crisis countries, the reduction in their trade deficits post-crisis largely resulted from a reduction in imports and not an increase in exports.

Crucially, internal devaluations also increase the level of debt of households, firms and governments who have borrowed in euros – as the value of their income is depressed, they owe a higher proportion of their income. High levels of debt were a major factor in causing the recession, because those in debt cut back on spending on both imports and domestic goods, causing a decline in GDP. It has also contributed greatly to the lingering problem of non-performing loans burdening Eurozone banks, particularly in the crisis countries.

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Five, above.

 

by Admin

From Bretton-Woods to Maastricht: the creation of the Eurozone

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter Two, below.

WHEN AN economic downturn affects a country, for whatever reason, a government usually has three key tools to stimulate the economy and restore full employment – lowering interest rates, devaluing the country’s currency (or allowing it to depreciate), or using macroeconomic policy (eg, lowering taxes and boosting public spending). In a currency union, the first two options are dependent on the policy choices imposed by the union’s supranational institutions instead of national bodies.

If all of the economies within the currency union are sufficiently similar in nature, this should theoretically not be a problem. But the economies of the 19 member states of the Eurozone vary widely in their characteristics. At any given moment, the value of the euro vis-à-vis other currencies may be beneficial for some states’ economies but damaging for others. Likewise, the Eurozone-wide interest rates set by the ECB may boost some economies but depress others.

An economic crisis that affects a monetary union comprised of diverse economies will affect different countries in different ways. The designers of the Eurozone were aware of this possibility of “asymmetric shocks” having a different impact on different member states, motivating their development of the so-called convergence criteria. However, for ideological reasons, they chose to focus only on the issue of budgetary divergence, controlling member states’ national debt and deficits. This singular focus on controlling fiscal policy – despite overwhelming evidence that public spending cuts have a contractionary impact during downturns, and with no corresponding focus on the external current account (trade) balance of member states – has caused an increase in inequality and contributed to divergence instead of convergence among the Eurozone’s economies since the introduction of the currency peg.

While left-wing political movements and parties in Europe have focused on campaigning against the policy choices enacted by the EU institutions since the crisis, particularly the imposition of fiscal austerity, there is an urgent need to also examine – and explain – how the very structure of the Eurozone has contributed to inequality and divergence, prolonged and deepened the financial crisis and sovereign debt crisis, and makes future sovereign debt crises inevitable.

The gold standard currency peg

The euro is a currency peg system, which lacks the institutions that have allowed a common currency to work in other parts of the world – ie, in federal states such as the United States, Canada and Australia. Under a peg system, a currency’s value is fixed relative to a commodity, or to another currency.

Before the 20th century the global monetary system was characterised by the gold standard, where the value of different countries’ currencies were pegged to the value of gold, and to each other. The reason there was widespread support for fixing a state’s currency relative to gold was so that governments would not be able to print more money in response to economic conditions to their short-term political benefit. It was intended to deliver price stability. If there was more money pumped into the economy, it would cause prices to rise – causing inflation, reducing the purchasing power of working people, and making it harder for businesses to export their goods. Governments fixed their currencies at a set exchange rate, fixed the rate for exchange of these currencies with gold, and fixed the amount of money they could print with the small and reliable amount of gold entering the economy each year due to new discoveries of the precious metal.

For many decades during the 18th and 19th centuries, the US used a fixed gold standard and at other times relied on fiat money (money backed by a government guarantee instead of being backed by gold) – at times floating, and at times fixed to gold. The scarcity of gold in the late 19th century led to falling prices, deflation and depression in the US; debt became more difficult to repay. During the First World War the Gold Exchange Standard was temporarily suspended. But in spite of these problems and temporary suspensions, the Gold Exchange Standard was still being used by the capitalist countries when the Wall Street stock market crashed in 1929.

This currency peg worsened the Great Depression for the countries that clung to it because it prevented their governments from printing more money to stop banks and businesses failing, and generally to stop a deflationary spiral developing; those who exited the currency peg earlier recovered quicker. The two central lessons of 1929 and governments’ response to it, almost universally accepted by economists today, are that both inflexible exchange rates and austerity measures in response to a sharp downturn will deepen and prolong the crisis.

When a state’s money is flexible it works as a form of shock absorber, but fixed exchange rates remove a key way that economies can adjust to shocks or trade imbalances. Instead of abandoning the gold standard in response to the Great Depression, US President Hoover raised trade tariffs, contributing to a rise in protectionism and a decline in global trade. Some countries who had walked away from the gold standard retaliated by engaging in competitive devaluations of their currencies, in an example of ‘beggar-thy-neighbour’ economic policies. These ‘currency wars’, as they were known, saw countries cause the exchange rate of their currency to fall in relation to other currencies in order to gain a trade advantage – i.e., in order to boost their exports at the expense of other economies. When Franklin Delano Roosevelt won the US presidential elections in 1932, he promptly took the US out of the gold standard, largely ending the common currency system of the era. But the damage had been done, and the slump in the global economy continued until the massive public investment into the “industrial scale carnage” brought about by the Second World War.

The golden era of Bretton-Woods, 1944-1967

The decision to create the euro in 1992 was based on different motivations among its proponents in different countries. But one of the key goals shared by all of the participants was to create a replacement for the Bretton-Woods system that had underpinned the global economy since the end of the Second World War. Bretton-Woods disintegrated in August 1971 with the ‘Nixon Shock’, the announcement by then-US President Richard Nixon that the US was abandoning its commitment to propping up the global economy with the dollar.

The post-war global financial and monetary system was devised and agreed at a three-week conference attended by representatives of 44 Allied countries in the town of Bretton-Woods, New Hampshire, in the US in July 1944 as the Second World War neared its end. It aimed to bring an end to the inter-war global financial volatility that had led to the Great Depression and the collapse of the gold standard, as well as the post-Depression rise of protectionism and competitive currency devaluations.

Bretton Woods

Delegates Mikhail Stepanovich Stepanov (USSR), John Maynard Keynes (Britain) and Vladimir Rybar (Yugoslavia) at the Bretton Woods conference in 1944

The leading figures formulating the agreement were John Maynard Keynes on behalf of the British Treasury, and his more powerful counterpart from the US, Harry Dexter White, representing President Roosevelt. In addition to creating the International Monetary Fund and the International Bank for Reconstruction and Development (which later became known as the World Bank), the agreement also included a commitment to a global fixed-exchange rate system, underpinned by the American dollar, in turn backed by gold. Restrictions were placed on international capital flows in order to prevent currency speculation. The IBRD was to act as an international investment bank with the goal of promoting economic recovery from the war.

As part of the agreement, the US committed to guaranteeing this fixed exchange rate and the convertibility between the dollar and the gold it held, at the price of $35 per ounce of gold. There was a limited option for a country’s exchange rate to be renegotiated if it was clearly impossible to maintain. Within the fixed exchange rate, governments would be required to keep fluctuations within a band of plus or minus one per cent, by buying or selling their own dollar reserves.

The main reason the pre-war gold standard had collapsed was that it was unsustainable for countries to continue to keep such a high value for their currencies when their current account, or trade account, was in a deep deficit. Then, as now, there are balance-of-payment creditor economies with a trade surplus, meaning they export more than they import, and debtor economies with a trade deficit, meaning they import more than they export. A surplus in one country must equal a deficit in another, and every deficit must be financed, usually by borrowing. Economies with a trade surplus find themselves holding large quantities of money in their banks, who lend it to the deficit countries which need to finance their imports. As money is scarce in deficit countries, the interest rate will be higher, meaning it is more profitable for banks to lend to borrowers in these debtor nations. This lending by banks recycles the surpluses – but during a downturn such lending dries up.

The role of the IMF, according to the Bretton-Woods agreement, was to (partially) address this problem for debtor countries by acting as a lender of last resort. White, representing the world’s largest creditor country, scuttled Keynes’s proposals for measures to be taken to adjust trade imbalances on the part of creditor nations, and for a new global currency, the bancor, to be created to underpin an international balance-of-payments clearing mechanism.

However, White and Roosevelt did understand that such a global fixed exchange rate would remove a shock absorber for the global economy and would have the potential to turn a future downturn in the value of the dollar into a global recession. They aimed to establish a mechanism to avoid this. They believed strong regional currencies, backed by heavy industry, needed to be developed in both Europe and Asia. Very quickly after the war was over the US turned to its former foes to act as these strong regional currencies to support the dollar. In March 1947 then-President Harry Truman made a speech calling on the US Congress to intervene in Greece’s civil war by plugging the gap left by the British in providing financial support to pro-monarchist forces fighting Greek communists. The speech marked the arrival of the Truman Doctrine, opening the Cold War era, and it also marked the beginning of a US-backed industrial revival in its former enemies-turned-protégés, West Germany and Japan.

The Marshall Plan, officially known as the European Recovery Program, was launched shortly after the Truman Doctrine was announced and saw the US pump in more than 2 per cent of its national income in aid to western European economies to assist in recovering from the war, but also to ensure their dollarisation. The final factor that ensured Germany’s revival was the role of the US at the London Debt conference of 1953, in which it pressured other European countries to write down, or even write off, Germany’s pre-war debts.

In his book on the changing role of the US in the global economy throughout the 20th century, former Greek finance minister Yanis Varoufakis writes that Keynes’s proposal for an International Currency Union was overruled by Roosevelt’s New Dealers because they had an alternative plan: “The dollar would effectively become the world currency and the US would export goods and capital to Europe and Japan in return for direct investment and political patronage”. The US would run a massive trade surplus with the rest of the world, but it would also use this surplus to directly finance its protégés through aid and investment – meaning that demand for US products would be sustained in these countries. It would also support its key regional currency partners, West Germany and Japan, in their development of trade surpluses with their neighbours at a regional level.

In other words, the US was committed to ensuring it benefited from its position of a strong trade surplus, but made a simultaneous commitment to recycle a large part of its own surplus – in order to bolster other capitalist countries during the Cold War, and to ensure the stability of the new monetary system. The Bretton Woods structure “plainly recognized the asymmetry of the world as it was”, according to US economist and former Federal Reserve chair Paul Volcker, speaking in 1978. “The US, in effect, held an umbrella over the system.”

Nixon Shock: ‘It’s our currency but it’s your problem’

The Bretton Woods era saw two decades of post-war growth and relative stability. But the US had designed this global architecture in the mistaken belief that it would always be in the position of being a trade surplus country. The growth in the industrial capacity of West Germany and Japan in the following decades, combined with a massive rise in US government debt as a result of the costs to the US Treasury of the Vietnam War, started to shake the system by the mid-to-late 1960s. The global trade balance experienced an inversion and the US entered a deficit. Only the US was allowed to print more dollars under the Bretton Woods system, but the fixed exchange rate meant that other currencies pegged to the dollar started to suffer the consequences of US monetary policies. The rising amount of dollars was causing inflation in Europe and elsewhere, and in order to keep the fixed exchange rate in place, European governments had to increase the volume of their own currencies. Currency speculators predicted that the price of gold could not be maintained at $35, and frenetically purchased stocks of gold, worsening the situation.

Germany, France and Britain in particular began to signal their displeasure at the rising quantity of dollars in global markets. From the early 1960s, the Bundesbank resisted printing more Deutschmarks to defend the currency peg. In 1967, the British government under Labour Prime Minister Harold Wilson made an extreme deviation from the one-per-cent fluctuation limit set by Bretton Woods and devalued the pound sterling by 14 per cent. And most dramatically of all, France sent a warship filled with US dollars to New York harbour in early August 1971 with instructions to claim its gold held in the US Federal Reserve and Fort Knox. Britain immediately followed suit – minus the warship – and requested that $3 billion it held in US dollars be redeemed for gold.

Within days, US President Richard Nixon announced the end of gold convertibility on 15 August 1971, in a move that became known as the Nixon Shock and which marked an abrupt collapse of the Bretton Woods system. The US was cutting the rest of the world loose from the dollar zone. The regions that had benefited most from the system, Europe and Japan, would suffer the most from this unceremonious ejection. The US Treasury Secretary, John Connally, famously told a group of European finance ministers that the dollar “is our currency, but it’s your problem”.

Richard Nixon at a news conference

Former US President Richard Nixon

The idea of suspending gold convertibility was proposed to Nixon by Paul Volcker as a kind of ‘Plan B’ in May 1971; Nixon had appointed him as undersecretary of treasury in 1970. At a speech Volcker made in 1978, he reflected: “In the end, the inherent contradictions in the system were too great. With the benefit of hindsight, it would seem that an erosion of the US competitive position was implicit in the post-war arrangements. Europe and later Japan brought its industrial capacity close to US. It took some twenty years, but eventually the US payments position was irreparably undermined.” In the same speech he also said that US policymakers in 1971 believed that “controlled disintegration” of the global economy was a “legitimate goal”. The price of gold and commodities rose drastically and the 1970s were marked by a period of so-called ‘stagflation’ where high unemployment combined with high levels of inflation.

Varoufakis offers a convincing analysis and description of the reversal in global capital flows that followed the Nixon Shock. The US now had both a government deficit and a trade deficit, which policymakers resolved to find ways of making the rest of the world finance. The surpluses generated by the former US beneficiaries, Germany and Japan, needed to be redistributed towards the US somehow. Varoufakis argues that there were “two prerequisites for the reversal of global capital flows, which would see the world’s capital stream into Wall Street for the purpose of financing the expanding US twin deficits” – a rise in the competitiveness of US firms against their competitors in Europe and Japan, and a steep rise in interest rates in the US that would attract capital flows to the US by increasing profitability, but damage other countries’ economies and its own population.

This motivation underpinned the tight constraint of average real wages in the US since the 1970s – which to this day have not regained the real purchasing power they had in 1973 – and unleashed the wave of financial deregulation that was then implemented with enthusiasm by President Ronald Reagan. Capital gravitated towards the dollar in the aftermath of the Nixon Shock, purchasing US Treasury bills and investing in Wall Street. As net capital flows reversed – flowing into the US rather than out of it – the surplus capital of other countries was recycled as the US government and consumers then bought the exports of these same countries. The US played the complete reverse role it had during Bretton Woods but its leading role in recycling trade surpluses in order to maintain a semblance of balance continued. An expansion in the access to credit as a result of capital flows into Wall Street meant working people in the US increasingly went into debt to compensate for their stagnating wages, a pattern that was soon to be replicated in Europe.

The Union is born – as a price-fixing cartel

Understanding the Bretton Woods system, and the reversal in global capital flows that followed its collapse, is crucial to understanding the structures and beliefs underpinning the Eurozone – because the creation of the Eurozone was largely an attempt to recreate the Bretton Woods system.

The European Coal and Steel Community (ECSC), created in 1951, was the first step towards a European Union (EU). In 1950, French foreign minister Robert Schuman proposed that “Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organisation open to the participation of the other countries of Europe”, which later became the ECSC with the Treaty of Paris in 1951, signed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg. This “High Authority” of 1951 became known as the European Commission.

Although the leaders of the ECSC participant countries of 1951, and the EU leaders of today, would express horror at such a characterisation, the reality is that the EU began life as a US-devised price-fixing cartel, which “openly and legally controlled prices and output by means of a multinational bureaucracy vested with legal and political powers superseding national parliaments and democratic processes”, according to Varoufakis in his book on the history of the Eurozone and the crisis. France and other countries also aimed to ensure the post-war scarcity of coal and steel did not work to Germany’s advantage. The ECSC fixed the price of coal and steel, and later moved to remove tariffs on coal and steel between members, and then on all goods.

The Treaty of Rome created the European Economic Community (EEC) in 1957. The objections of farmers, particularly in France, to the lowering or elimination of tariffs led to the creation of the Common Agricultural Policy from 1962 onwards, where part of the profits made by the heavy industry cartel were distributed to farmers as subsidies in order to gain their compliance with further economic integration and a customs union. A monetary union was first raised in the Marjolin Memorandum in 1962, authored by the European Commission. This memorandum initiated the first discussion on monetary integration in the EEC and proposed that the customs union should lead to fixed exchange rates between the currencies of its members. But as the Bretton Woods system was working reasonably well at the time to ensure exchange rate stability, there was little follow-up on the proposal in the short term. The first call for a common currency from a political leader came in 1964 – from then-French finance minister (and later President) Valéry Giscard d’Estaing.

A defining moment in the development of a common currency was the publication in 1970 of the Werner Report (to the Council and Commission of the European Communities) “on the realization by stages of economic and monetary union in the Community”. This report, produced against the backdrop of an increasingly strained, and soon to be destroyed, Bretton Woods system, proposed the main elements necessary for monetary union: full and irreversible convertibility of the currencies of the union; elimination of fluctuations in exchange rates; complete freedom of movement of capital; and the centralisation of monetary policy. National currencies could be maintained under the system, the report stated, or a single Community currency could be created, “but psychological and political factors weigh the scale in favour of adopting a single currency that would demonstrate the irreversible nature of the undertaking” (my emphasis).

A snake in a tunnel

The first practical attempt at creating a European currency peg, known as the ‘snake in the tunnel’, began in 1972. The metaphor was grim but apt – the snake was a currency’s exchange rate, and the tunnel was the narrow band in which the rate could fluctuate. Several members of the EEC, plus Britain, Ireland, Denmark and Norway, agreed to limit the margin of fluctuation between their currencies to a difference of no more than 2.25 per cent. It was a clear and open attempt to replicate the Bretton Woods fixed exchange rate regime in order to regain price stability between the European currencies after the collapse of the dollar-backed system the year before.

The Nixon Shock had caused the value of the dollar to fall but the Deutschmark to rise significantly, meaning the price of West Germany’s exports were becoming increasingly expensive. The Deutschmark’s soaring value strained the attempts to manage (or fix) the prices of Europe’s heavy industry and agricultural sectors, the raison dêtre of the EEC. The oil shock – a huge and sudden rise in energy costs – of 1973 forced the deficit countries to emerge from the tunnel. France, Italy, Britain and Ireland could not maintain these fixed exchange rates with the Deutschmark. The only way these deficit countries could maintain such an exchange rate was to increase their interest rates to attract foreign capital and to cut public spending to increase ‘confidence’ that government debt could be repaid, both of which would have significant negative effects on their own populations. By the late 1970s, only the Deutschmark, the Danish Krona and the Benelux countries’ currencies – Belgium, Luxembourg and the Netherlands – were still members of the snake in the tunnel system.

The road to Maastricht

As is the case with all major developments in the history of the EU, the creation of the European Monetary System (EMS) enacted in 1979 was the product of a political compromise between Germany and France. The German and French leaders had announced the creation of the EMS in September 1978. The EMS set a European Currency Unit (ECU) as a “basket” of currencies, and it established an Exchange Rate Mechanism (ERM), which was based on fixed exchange rate margins – but with a degree of variation possible within those margins. There was no official “anchor” currency of the EMS, which lasted for two decades until 1999. But indisputably the Deutschmark was the anchor, and the policies and approach of the system were heavily influenced by the Bundesbank’s phobia of inflation.

There were four key phases of the EMS according to an expert report carried out for the European Commission. The first phase, 1979-1985, included the retention of capital controls by several member countries. The inflation differentials, combined with fixed nominal exchange rates, required “frequent adjustment of the official parities”. The Irish state joined the EMS in 1979, and was required to break the punt’s parity with sterling in order to do so, as sterling – not in the ERM – was appreciating against the ERM currencies. Parity with sterling would have taken the punt outside of the agreed band, so it had to be broken as a condition for Irish entry into the ERM.

During the second phase, 1986-1992, the EMS was referred to by many as the “Deutschmark Area” because members of the system were forced to give up their own monetary policies in order to implement the anti-inflation policies of the Bundesbank and reduce their inflation levels to “German” levels. The so-called Mundell–Fleming trilemma (developed by Robert Mundell and Marcus Fleming, also referred to as the “impossible trinity”) holds that it is impossible for an economy to simultaneously maintain a fixed exchange rate, free movement of capital, and an independent monetary policy. The Commission report agrees: “Owing to the impossible trinity all central banks participating in the ERM had de facto renounced an independent monetary policy”.

Maastricht Treaty draft

Prime Minister Aníbal Cavaco Silva of Portugal; Prime Minister Ruud Lubbers of the Netherlands; Foreign Minister Hans-Dietrich Genscher of Germany; and Jacques Delors, the president of the European Commission toast a draft of the Maastricht Treaty in February 1992 (Jerry Lampen/Reuters)

During this second phase, the Single European Act was passed in 1986, moving towards a single market in the EEC. The then-Commission President, Jacques Delors, established a committee to examine a possible future monetary union, which produced the ‘Delors Report’ in 1989 – the document that led to the Maastricht Treaty of 1992 (endorsed by EEC governments in 1991 but ratified in referenda in Denmark and France in 1992). The Delors Report promoted the view that there was a need for national budget deficit rules, which became the Maastricht convergence criteria, and proposed a new institution, independent of member states, with responsibility for monetary policy – the European Central Bank. In 1990, following the Delors Report’s roadmap, capital controls among members of the EMS were abolished. These developments occurred against the backdrop of the disintegration of the Soviet Union and of German reunification.

From September 1992 until March 1993 the EMS experienced a severe crisis. Some of the members of the EMS were experiencing rising inflation which they were unable to reduce. Currency speculators targeted the over-valued currencies. Fears that voters would reject the Maastricht Treaty on a monetary union, proposed in 1991, contributed to the speculative currency attacks. In June 1992 the Treaty was rejected by 50.7 per cent of Danish voters in a referendum. A similar referendum was held in France, which narrowly endorsed the Maastricht Treaty in September 1992, with 51 per cent of voters supporting it. But massive speculative pressure in the lead-up to the French referendum contributed to the worst crisis in the history of the EMS, which led to the forced ejection of the pound sterling and Italian lira from the ERM, the devaluation of Spain’s peseta, and threats of forced devaluation of other currencies. The fluctuation margin of the EMS was widened to an enormous plus or minus 15 per cent in 1993 in a bid to stop other currencies, particularly the franc, from having to exit. Italy later rejoined the ERM in 1996.

The final phase of the EMS lasted from 1993 until 1999 when the Eurozone was launched by its original 11 member states – Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece joined the Eurozone in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and finally Lithuania in 2015. An ERM II is in place, supposedly to draw non-Eurozone members of the EU into an alignment of exchange rates, but only the Danish Krona is a member currently. The single market was completed in 1993, allowing the free movement of capital, labour, goods and services, becoming formalised in 1994 by the European Economic Area (EEA) agreement.

by Admin

Eurozone’s permanent austerity based on failed ideology

This is an excerpt from the economic discussion document launched by MEP Matt Carthy on October 27, entitled The Future of the Eurozone. Download the full document for a referenced version of Chapter One, below.

BACK IN 1929 when the Wall Street crash hit, the response of then-US President Herbert Hoover was to restrict government spending – an action now almost universally acknowledged as having turned the stock market crash into the Great Depression.

The free-market ideology underpinning Hoover’s austerity policies held that an economy with high unemployment could return to full employment through market forces alone. Instead of boosting public spending, the government should do the reverse. By cutting government spending and increasing taxes, the government deficit would be reduced, which would restore market “confidence”. This restoration of confidence would lead to increased private investment, and the market would adjust itself to return to full employment.

The confidence fairy

The confidence theory was demonstrated back in 1929 to be incredibly damaging and to achieve precisely the opposite effect of what it aimed to achieve. The actual effect of implementing austerity in a period of economic downturn was to cause a contraction in the economy, thus weakening the economy further, causing tax revenues and national income to fall, and the deficit to increase. The contractionary impact of austerity policies during a downturn was explained by John Maynard Keynes during the 1930s, and Keynesian models have proved to be a reliable predictor of growth (or lack thereof) in the wake of the 2007-2008 crisis.

Countless books, academic studies and articles have outlined how the programmes imposed by the Troika – the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – on the Eurozone’s “peripheral” economies since 2008 have exacerbated the crisis. In the decades before the global financial crisis, these same policies had caused the exact same devastating contractionary effects when imposed under the guise of “structural adjustment programs” by the IMF across Africa, Asia and Latin America.

But while Keynesianism was experiencing an academic and policy revival internationally following the global financial crisis, Europeans somehow managed to cling to the confidence theory, which persisted in the decades beyond the Great Depression to this day. It is the dominant theory that has shaped both the structure of the Eurozone and European Union (EU), and the EU response to the global financial crisis of 2008.

In 2011 at the height of the Eurozone crisis, Nobel Prize-winning economist Paul Krugman memorably dismissed this theory as the “confidence fairy”. Two years later, commenting on the theory’s persistence in the face of overwhelming evidence to the contrary, he added: “European leaders seem determined to learn nothing, which makes this more than a tragedy; it’s an outrage.” Fellow Nobel Prize-winning economist Joseph Stiglitz has dubbed the free-market fundamentalists’ obsession with reducing deficits as “deficit fetishism”, pointing out that “no serious macroeconomic model, not even those employed by the most neoliberal central banks, embraces this theory in the models they use to predict GDP”.

Europe’s lost decade

It is common for scholars to refer to the results of the IMF structural adjustment programmes from the 1970s-1990s in Latin America, Asia and Africa as having caused these continents “a lost decade” or “lost decades”. Europe has lost a decade but there is a danger that it may lose several more – not only because of the policy responses to the crisis but because of the actual structure of the Eurozone. The results of the European response to the crisis are damning. Three patterns are obvious: the Eurozone countries have in general fared far worse in terms in terms of recovery than countries outside of the common currency; the recovery within the Eurozone has been sharply asymmetrical, with divergence between strong and weak countries increasing; and there has been a significant rise in inequality across Europe.

Growth in the US and Britain has been weak since the crisis but it has far outpaced the Eurozone recovery. It is difficult to even use the word “recovery” to describe the Eurozone experience – only last year did Eurozone GDP reach its pre-crisis level. In June 2016, the Eurozone unemployment rate was still in the double figures at 10.1 per cent; while the EU-28 had unemployment of 7.7 per cent. But the unemployment figures in several of the crisis countries remains double the Eurozone average – in Greece by 2017 the unemployment rate was 21.7 per cent while at the same time in Spain the jobless rate was 17.8 per cent. The figures are masked by the huge levels of emigration that the crisis countries experienced as well as the fact that number of hours worked per worker has declined across the Eurozone.

Stiglitz notes that youth unemployment persists at twice the level of overall unemployment. “The persistence of high unemployment among youth will have long-lasting effects – these young people will never achieve the incomes they would have if job prospects had been better upon graduation from school.”

While the Eurozone stagnated for a full decade following 2007, countries within the EU but outside the Eurozone had a GDP 8.1 per cent higher than in 2007 by 2015. The United States had a GDP almost 10 per cent higher in 2015 than in 2007. Over the same period, the Eurozone’s GDP grew by just 0.6 per cent.

When measuring living standards it is more accurate to examine GDP per capita than GDP overall, and while in the US GDP per capita increased by more than 3 per cent from 2007-2015, while over the same period in the Eurozone it actually declined by 1.8 per cent. As living standards have declined – devastatingly in crisis countries, and especially in Greece – income inequality has also risen drastically. In its Economic Forecast last autumn, the European Commission warned of a potential “vicious circle” as expectations of long-term low growth affect investment decisions, and that “the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent”.

The declining level of growth in the British economy since the Brexit vote means a “strong downward revision of euro area foreign demand”, while the “sizeable depreciation of sterling vis-à-vis the euro is expected to have an adverse direct impact on euro area exports to the UK”. Eurozone exports were forecast to decrease slightly this year and stagnate in 2018, while possible financial crashes in China or the US and the ongoing non-performing loan banking crisis in the Eurozone pose serious risks.

Despite these sober warnings, European leaders and the financial press have raucously celebrated the anemic growth in the Eurozone’s GDP in the first two quarters of this year, of 0.5 per cent and 0.6 per cent respectively – crucially, driven by a slow increase in domestic demand as opposed to export-led growth. But this celebration ignores the fact that in normal circumstances, these figures would be viewed as abysmal, and that global economic forces pose serious threats to this fragile recovery.

Fairies and leprechauns

Predictably, these feeble shoots of growth are described as being the result of austerity policies by those who have claimed for the past 10 years that austerity will start to work any day now. A slightly recalibrated confidence theory has been proposed by a small number of economists associated with the neoliberal school of thought since the 2008 crisis – that of an “expansionary fiscal contraction”, with Harvard’s Alberto Alesina and Goldman Sachs’s Silvia Ardagna leading the charge with their joint paper in 2009. What they are actually recommending largely amounts to recovery through beggar-thy-neighbour competitive devaluations (or in the common currency, internal devaluation).

Stiglitz points out that these instances of economic recovery are actually cases where certain countries had “extraordinarily good luck” in that “just as they cut back on government spending, their neighbours started going through a boom, so increased exports to their neighbours more than filled the vacuum left by reduced government spending”. Several papers from the IMF itself have backed up this analysis.

This is largely what happened in the Irish economic recovery, which has become the EU’s poster child for austerity policies. The narrative goes that the Irish state followed the German model – it followed all of the EU rules and implemented the Troika’s structural reforms, slashed government spending to reduce the deficit, cut wages to increase competitiveness, and as a result restored market confidence, depressed domestic consumption and experienced a corresponding rise in exports.

The reality is more complex, and is based on a combination of growth in jobs in the indigenous sector, including the services sector, arising from favourable exchange rates for the Irish state; and on the illusory “growth” of GDP caused by the industrial-scale corporate tax avoidance strategies undertaken by US multinationals in the technology, pharmaceutical and aircraft-leasing sectors.

There has also been a certain level of export-led growth since 2009 but it has been hugely exaggerated and difficult to reliably quantify. But this export-led growth did not in any way fit into the German model and “expansionary austerity” narrative of an internal devaluation based on lowering wages and domestic demand. Rather than being based on manufactured exports with a competitive edge because of wage cuts, export growth took place among firms in high-wage service sectors such as technology and finance during a period in which wages in these sectors were going up.

Of course, last year’s ludicrous announcement that Irish GDP had grown by more than 26 per cent in 2015 raised an enormous red flag that all may not be what it seems in Ireland’s economic recovery. Krugman, coiner of the “confidence fairy” term, found another apt folkloric description for the occasion: “leprechaun economics”.

These figures were so detached from reality that they were cause for serious alarm but, incredibly, the Irish government welcomed them. According to the figures, per capita income apparently rose to 130,000 in 2015, and the state’s industrial base doubled in just one year. But the Net National Income grew by 6.5 per cent in 2015 while consumer spending rose by 4.5 per cent. These income and consumption figures are a far more accurate reflection of real economic activity and growth. Official GDP figures have a major and serious role to play in fiscal planning, spending and borrowing. They need to be credible and a measurement of real economic activity.

Most alarmingly, the figures reveal a glimpse at the level of dubious accountancy tricks being played by multinationals in Ireland during a period in which the Irish government claimed it was committed to playing its part in the global crackdown on tax avoidance. The Irish Central Statistics Office (CSO) identified relocations and inversions by multinational enterprises as the major contributing factors to the so-called growth. It seems as though there was a rush by multinationals to ‘turn Irish’ in 2015 in the context of global action on tax avoidance and tax havens, through inversions – where a multinational corporation changes tax domicile after it buys up a smaller Irish-registered company. The transfer of financial assets and intellectual property patents into Ireland does nothing to actually create jobs or contribute to growth in the real economy.

In response to the fantasy figures for 2015, the Central Bank of Ireland published a study stating that to measure growth or activity without the reality being skewed by the activities of multinationals, GNI* (Gross National Income, modified) should be used instead. GDP and Gross National Income differ as a result of the “net factor income from abroad” (eg, repatriated profits and dividends of multinationals). While GDP is a measurement of the income generated by the economy, GNI measures the income actually available to its residents. Irish GDP is more than 20 per cent greater than GNI, one of the largest differences among all economies globally (the two figures can usually be used interchangeably).

But even using GNI is not sufficient to get an accurate picture of real economic activity according to the CSO, which developed a measure of “modified gross national income” or GNI*. GNI* is Gross National Income “adjusted for retained earnings of re-domiciled firms and depreciation on foreign-owned domestic capital assets” – ie, modified to account for depreciation on intellectual property owned by technology and pharmaceutical firms. When GNI* is used to measure the Irish economic recovery, the picture is not so rosy. “The Irish economy is about a third smaller than expected. The country’s current account surplus is actually a deficit. And its debt level is at least a quarter higher than taxpayers have been led to believe,” the Financial Times reported on the first set of “de-globalised” data on the Irish economy in July this year.

For 2016, the value of the Irish economy according to its GDP was €275 billion, but according to its GNI* its value was €190 billion – a huge difference that indicates that not only is the Irish economy not nearly as strong as the official narrative portrays, but also that the Irish state may have facilitated multinationals in avoiding up to €85 billion in tax in one year alone. The CSO reported that in 2015, government debt was 79 per cent of GDP but 100 per cent of GNI*; and that while the state’s fiscal deficit was 1.9 per cent of GDP, it was 3.4 per cent of GNI*, well above the 3 per cent limit imposed by the EU’s fiscal rules.

There has also been growth in employment over the past three years in the Irish indigenous sector. For example, job growth took place in the agriculture and food sectors, and in accommodation and tourism. This growth was based on two related factors. The first was the depreciation of the euro against the dollar and sterling as a result of the crisis, and the second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners. The (temporary) lower value of the euro was critical to the recovery experienced in the Irish indigenous sector. The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules – borrowing in the US and Britain did not fall below 3 per cent since 2008.

But the specific circumstances of the Irish state’s trading patterns mean that this “recovery” cannot be transposed or replicated in other member states of the EU. It also poses significant risks, especially the risk of a significant fall in the value of sterling as a consequence of Brexit. A sharp depreciation of sterling against the euro – something we are already beginning to see – would likely jettison this recovery. Worrying signs of a technology bubble, a new Irish housing bubble and a massive shadow banking sector are all factors that may also influence this recovery. Crucially, the structure of the Eurozone itself, and the austerity ideology it has enshrined, make another economic slump inevitable.

The evidence shows that the Irish recovery happened in spite of, not because of, the EU austerity recipe – and it would have happened sooner, and with far less pain to the Irish people, had ideologically driven deficit fetishism been rejected.

A fiscal straitjacket

In 1992 the member states of the European Economic Community (EEC) signed up to the Maastricht Treaty, which laid the foundation for the common currency. The Maastricht Treaty enshrined the so-called convergence criteria – a set of rules members and potential members of the common currency were obliged to follow. To join the Economic and Monetary Union (EMU), states had to pledge to control inflation, and government debt and deficits, and commit to exchange rate stability and the convergence of interest rates. The blanket, one-size-fits-all fiscal rules in the criteria – that member states must keep public debt limited to 60 per cent of GDP and annual deficits to below 3 per cent of GDP – were proposed by Germany, based on its national Stability and Growth Pact.

The convergence criteria, as the term suggests, were aimed at achieving convergence among the diverse economies that were to form the Eurozone. The founders of the euro acknowledged the tendency for economic shocks to hit diverse economies asymmetrically in a monetary union. Without convergence, a common currency won’t work – for example, with diverse economies the interest rate set by the ECB for the entire Eurozone may impact positively on one country but negatively on another country with different economic characteristics. Without convergence, it would be difficult if not impossible to ensure full employment and current account (external) balance among different economies at the same time.

There are many spillover effects that one economy can have on another in a monetary union – for example trade imbalances and internal devaluations – but the only one that the Maastricht Treaty focused on was members’ fiscal policy. “Somehow they seemed to believe that, in the absence of excessive government deficits and debts, these disparities would miraculously not arise and there would be growth and stability throughout the Eurozone; somehow they believed that trade imbalances would not be a problem so long as there were not government imbalances,” Stiglitz comments.

Governments facing an economic downturn have three main ways they can aim to restore the economy to full employment: to stimulate exports by devaluing their currency; to stimulate private investment and consumption by lowering interest rates; or to use tax-and-spending policies – increase spending or lower taxes. Membership of the Eurozone automatically rules out using the first two mechanisms, and the fiscal rules largely remove the third option from governments.

(The confidence fairy is almost always accompanied by a fervent belief in “monetarism” among neoliberals – ie, that only monetary policy by an independent central bank should play any role in economic adjustment, and anything else would amount to dreaded government intervention in the economy.)

When a Eurozone member state experienced a downturn, its deficit would inevitably rise as a result of lower tax revenue and higher expenditure on social security. But when the convergence criteria kicked in, causing governments to cut spending or raise taxes, it would invariably worsen the downturn by dampening demand. Moreover, debt and deficits did not, and do not, cause economic crises. Ireland and Spain were running surpluses when they experienced a crisis, and both had low public debt.

The convergence criteria are purely ideological and economically unsound. But as the European Central Bank (ECB) was preparing to begin operating to control inflation and interest rates, Germany pushed for the adoption of an EU-wide Stability and Growth Pact in 1997, including non-Eurozone members, to enshrine the fiscal control aspects of Maastricht, and more generally to increase EU surveillance and control over member states’ national budgets.

The Stability and Growth Pact has been called a lot of names in its day – the “Stupidity Pact”, a “Suicide Pact”, the “Instability Pact”, and more. And it is deserving of each one. In 2002, then-President of the European Commission Romano Prodi told reporters the pact was “stupid”, while French Commissioner Pascal Lamy called it “crude and medieval”. In practice, the Stability and Growth Pact has proved to achieve the opposite effects it claims to aim for. Cuts to government spending have a contractionary effect and cause the economy to shrink; when the national income shrinks, spending on unemployment benefits have to rise, and the situation gets worse. This is exactly what happened in the aftermath of the recessions in Ireland, Spain, Greece and Portugal.

Early in the 2000s, both Germany and France repeatedly breached the fiscal rules. But they were not penalised, and were always provided with an extension to try to meet the targets. Almost all EU member states have breached the rules at some point – during the recession only Luxembourg did not go over the 3 per cent deficit target. Fiscal contraction will exacerbate unemployment, but it may eventually restore a current external account balance – when demand for imports becomes so low as a result of the recession that exports catch up.

University of London Professor George Irvin has described German Chancellor Angela Merkel’s insistence that government profligacy is at the root of the Eurozone crisis as betraying “near-total ignorance of how economies work”. “Budget balance for a national economy is fundamentally different from that of the household or the firm. Why? Because budgetary (or fiscal) balance is one of three interconnected savings balances for the national economy. The other two fundamental economic balances are the current external account balance… and the private sector savings-investment balance. If any one account is out of balance, an equal and opposite imbalance must exist for one or both of the remaining accounts,” he wrote.

But despite the vast evidence that the Stability and Growth Pact was counterproductive and unenforceable, Germany pushed for the fiscal rules to be tightened yet again in 2012 through the Fiscal Compact Treaty, which created the obligation for the convergence criteria targets to be inserted into the national law of the ratifying states.

The Fiscal Compact

In 2010, Germany proposed the reform of the Stability and Growth Pact to make it stricter, and “in return” pledged to support the creation of a Eurozone bailout fund that member states could draw upon if they were in dire straits – with strict fiscal conditions attached, of course. The reforms aimed at enforcing compliance of the Stability and Growth Pact known as the “Six-Pack” and “Two-Pack” of additional regulations and directives were adopted at EU level.

In 2012, an intergovernmental treaty – the Treaty on Stability, Coordination and Growth – was signed by all EU Member States with the exception of Britain and the Czech Republic. (When Croatia joined the EU in 2013, it declined to sign.) The Treaty, known as the Fiscal Compact, incorporated the Stability and Growth Pact, the Six-Pack and Two-Pack requirements, and more. Its central principle is that member states’ budgets must be in balance or in surplus, which the Treaty defines as not exceeding 3 per cent of GDP.

Critics of the Stability and Growth Pact had called on the EU to focus not on the general deficit but rather the structural deficit – what the deficit would be if the economy were at full employment. But instead of dropping the general deficit limit, the Fiscal Compact has adopted rules on both the general deficit and the structural deficit. The structural deficit limits are set by the Commission on a country-by-country basis and must not exceed 0.5 per cent of GDP for states with debt-to-GDP ratios of more than the 60 per cent limit, and must not exceed one per cent of GDP for states within the debt levels.

The “debt-brake” rule is the convergence criteria rule that government debt cannot exceed 60 per cent of GDP. The Fiscal Compact enshrines the rule that members in excess of this limit are obliged to reduce their debt level above 60 per cent at an average of at least 5 per cent per year. The structural deficit rule – called the “balanced budget rule” – must be incorporated into the national law of signatory states under the Fiscal Compact. An “automatic correction mechanism”, which is to be established at member state level and kicks in when “significant deviation” from the balanced budget rule is observed, must also be incorporated into national law.

Of all the member states who signed the intergovernmental treaty, only the Irish state put the Fiscal Compact to a referendum. The Fiscal Compact Treaty was adopted by just over 60 per cent of the voting electorate, with around 50 per cent turnout. The Fine Gael/Labour government’s decision to hold a referendum was not based on a belief in the right of the Irish people to have their say on their economic future, but rather their desire to go one step beyond simply incorporating the permanent austerity rules into legislation, and to insert them into the Constitution – despite the fact that the government’s Fiscal Advisory Council recommended the legislation option. Fine Gael, Fianna Fáil and Labour representatives urged the people to vote yes, dangling the carrot of access to the new bailout fund. The vote in favour was hailed by the government as an endorsement of its austerity policies.

The reality is that the Irish electorate was blackmailed into voting in favour of a proposal that endorsed a damaging austerity framework based on free-market fundamentalism as a result of the threat of crisis funds being withheld in future, and by the promise of the debt burden being relieved through the direct recapitalisation of the failed Irish banks by the future European Stability Mechanism. And after the approval of the Fiscal Compact Treaty and the constitutionalisation of austerity in Ireland, the Fine Gael-led government quietly dropped its call for the EU to recapitalise the Irish banks. Unbelievably, by 2015, the same Irish government representatives who had urged voters to approve the Fiscal Compact Treaty were pleading with EU authorities for more flexibility for Ireland’s implementation of the rules.

Irvin points out that Germany’s debt-brake cannot be good for other Eurozone countries, or even possible, for three reasons – that Germany’s exports to the Eurozone are by definition another member state’s imports; that there is insufficient global demand to sustain all Eurozone economies becoming net exporters like Germany; and that the public debt-brake completely ignores the problem of private debt, especially in the over-leveraged banking sector.

In a scathing critique of the Fiscal Compact, Francesco Saraceno and Gustavo Piga highlight that “no other country in the world has ever considered [such a rule], and with good reason” and say that the adoption of the Fiscal Compact has been “untimely, unfortunate and unequivocally wrong”. “Its uniquely negative effects, as the experience of Italy clearly shows, lie in the perverse features whereby, even if a government is allowed to renege year after year on the promised path toward a balanced budget, it is still required, every year, to recommit to a medium term (3-4 years) adjustment toward that balance. In so doing, business expectations are negatively affected, private investment plans are postponed, and stagnation becomes a permanent feature of the economy,” they write.

Return fiscal powers to member states

There have been repeated efforts, led by Germany, to exercise control over the budgets of member states. For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same flawed ideology.

There have been several important proposals to reform the Fiscal Compact – for example, to focus only on the structural deficit; or to exclude capital investment from the rules. But while these proposals may loosen the straitjacket a little, it would be better to just take it off. As part of the Fiscal Compact treaty, the Council is required to adopt a formal decision on the Fiscal Compact by 1 January 2018 on whether or not to insert it into the EU Treaty. Saraceno and Piga argue: “If a number of important countries were to veto that move, this could set in motion a profound rethink of the appropriate fiscal policy infrastructure supporting the euro zone in future, one consistent with recent developments in macroeconomics.”

The Fiscal Compact has already been proven to be unworkable. The European Council voted last year to adopt the Commission’s recommendation to impose no fines for excessive deficits on Spain and Portugal in a clearly politically motivated decision. The austerity lie is losing its power, with even the IMF and the Commission questioning its benefits after a decade of stagnation. Barry Eichengreen and Charles Wyplosz argue that the attempt to centralise fiscal policy at the EU level is “doomed” and should be abandoned. In a paper on minimum conditions for the survival of the Eurozone, they write: “The fiction that fiscal policy can be centralised should be abandoned, and the Eurozone should acknowledge that, having forsaken national monetary policies, national control of fiscal policy is all the more important for stabilisation.”

by Admin

Witnessing the Catalan referendum firsthand

Below is an account of the visit by an international parliamentary delegation of 33 elected representatives and a number of their advisors to Catalonia, hosted by DiploCat, during the Catalan referendum. While the delegation programme lasted for several days, this account covers only Sunday October 1, polling day. This is not a political analysis of the Catalan referendum but my personal account of what we witnessed.

I left my hotel at 7am on Sunday morning to meet up with the international parliamentary group and our DiploCat hosts. It was still completely dark and pouring rain but I knew thousands of people would have been gathered outside polling stations since 5am to defend them from police attempts to shut them down, which had been rumoured the day before to be scheduled to begin at 5am or 6am.

The international visitors were scheduled to leave in 10 small groups from a central meeting point at 7.30am. I was in a group with Sinn Féin Senator Trevor O’Clochartaigh, Swedish Green MEP Bodil Valero, Welsh member of the Westminster Parliament for Plaid Cymru, Hywel Williams, and Magni Arge, a member of the Faroe Islands and Danish Parliaments for the left pro-independence Republic party. We spent the day with our helpful DiploCat host, a young woman called Irina.

The official plan was to visit three or four polling stations in Barcelona and the surrounding towns; meet the mayor of Solsona for lunch at 1pm; then return to Barcelona by 4pm.

Sarrià-Sant Gervasi

Our first stop was a polling station at a school (Col·legi Orlandai) in the Barcelona suburb of Sarrià-Sant Gervasi, close to Gràcia, where two of the international groups, or around 10 observers altogether, arrived at 8am. It was bright by then and the rain stopped temporarily. Hundreds of people were gathered outside the school, whose entrance gates were closed. They cheered when we arrived, seeing our ‘international observer’ lanyards.

Approaching the first school at Sant Gervasi

Approaching the polling station at Sarrià-Sant Gervasi

Two uniformed members of the Mossos d’Esquadra, the Catalan autonomous police, stood at the edge of the crowd and observed.

We started to speak to some of the voters gathered, sometimes in English and sometimes having the conversation translated by Irina or by Bodil from Sweden, who has fluent Catalan. They said the Mossos had earlier informed them they had been instructed to prevent voting, but that they did not intend to, in the interests of protecting public order and public safety.

Trevor suggested we speak to the officers. I hesitated for a second, not being a big fan of police, having both experienced and witnessed police violence at peaceful public gatherings and rallies on several occasions. But we went over to introduce ourselves. Both were polite and friendly, and chatted comfortably with us in English. One of them, finding out Trevor and I were Irish, told us he had lived in Dublin for close to a year. I asked if it was okay if I took a photo of them speaking to Trevor and they replied, “Of course it is”.

mossos-talking-to-trevor.jpg

Sinn Féin Senator Trevor O’Clochartaigh chats with the two Mossos officers at Sarrià-Sant Gervasi

Some of the assembled voters told us the majority of the crowd had been there since 5am, and that the school was one of those that had been occupied since Friday afternoon. The parents of the kids who attended the school had slept inside the school building on the Friday and Saturday nights. There were three or four young women half-asleep on thin mattresses just outside the building, under the shelter of an overhanging roof. People carefully stepped over them, as did we.

Just then, at around 8.15am or so, the parents began to exit the school building into the waiting crowd, carrying their mattresses and sleeping bags, to cheers and applause.

Internet shut down

Some of the organisers then invited us to come inside the school, and we squeezed through the voters to walk through the gate. The front rooms were set up with desks for ballot papers and ballot boxes, and around a dozen volunteers were working intently on computers and laptops. Voting was due to begin at 9am but their electronic electoral system was down and the entire internet seemed to be down too.

I tried to get online on my phone when inside the school and couldn’t – sometimes my phone would say  ‘No service’ but even when it didn’t, I was still unable to use the internet. I couldn’t get online for hours that morning. It was the same for the other visitors, though some of them seemed to be able to get online for two or three minutes at a time. Outside, one of the organisers called on the voters to all switch their phones onto airplane mode in the vain hope that it was a capacity overload problem, a request everyone quickly and willingly cooperated with.

Someone told us the polling station staff were attempting to get online by using a Belgian proxy; it didn’t work though. We heard through text messages that not only the electronic voting system was down, as was expected, but the entire internet was down at a number of other voting stations too. “Do you think it’s the Spanish government that’s responsible?” I asked one of the frazzled volunteers. She looked at me as though I were a moron and said, “Of course it is.” We both had to laugh.

The voters outside were patient and cooperative, occasionally breaking into chants of “Votarem! Votarem!” (“We will vote!). We could see each other through the gates; organisers outside communicated constantly with those inside, and passed phones, coffees and mini-pastries through to the volunteers. Bodil did an interview with a Swedish journalist holding a recorder through one of the gaps in the gate.

waiting-in-the-rain.jpg

Voters wait in the rain

When it rained, the voters shared large umbrellas through the crowd. At one stage an organiser was lifted on top of someone’s shoulders to call on the voters to clear a path for the elderly, people with special needs and people who had to go to work that day to be able to come up to the front and vote first. Two older women were brought into the school building so they could sit down; an elderly, frail man refused the offer of coming inside and continued to stand outside at the front of the queue using his umbrella to help support himself.

It was at that point that texts began to come through saying there had been attacks by riot police on other polling stations in Barcelona, including some that were close-by.

Shortly before 9am, the two Mossos officers entered the school building, with voters clearing a path for them. They asked the volunteers to assemble so they could speak to them all together. The international visitors hung back but within hearing distance, and Irina and Bodil translated for us.

The Mossos informed the workers that the National Police was attempting to close several polling stations in Barcelona. They repeated what they had told us and the voters earlier; that they had been instructed to prevent the vote from proceeding, but that they were not going to, as their intention was to act in the interests of preserving peace, public safety and public order. They added that if the Spanish police arrived, they would not be able to intervene, but that they would try to act as mediators between the Spanish police and organisers.

Mossos talk to organisers inside

The Mossos officers talk to polling station workers

One of the Mossos then approached the seated older women, crouching down to ask if they were feeling okay, and offered them water. Then they left through the gates, to applause.

The first votes

The volunteers resumed working to resolve the internet problem. I remarked to one of them that the voters assembled outside were incredibly patient, waiting for hours in the rain; no-one was acting annoyed or frustrated at the fact that the polling station was still closed at 10.30, an hour and a half after it was scheduled to open. “They have been waiting their whole lives to vote,” she said. “They don’t mind waiting a little longer.” But anxiety about the possibility of a police attack was growing.

The polling station workers thought that if they had computers with older technology they may be able to connect to a wifi system – so people outside ran home to bring in two or three old laptops and an old PC, which they passed through the gates. At around 10.40am a cheer went up inside the building and we all started clapping – it had worked! They were connected.

One man inside excitedly ran to inform the others, through the gate, that they were connected to the internet and voting was about to begin. “I’m going to be the first to vote!” he yelled excitedly, to laughter. The two elderly women and a handful of others inside took up their ballot papers and voted.

Elderly woman casts her vote

One of the women who came inside to sit down casts her vote

Then the gates opened and the first round of people walked through. Everyone was cheering and applauding jubilantly – the voters outside, the workers inside, us international visitors.

 

The faces of those who came through were still calm and resolute but some became tearful after they voted. It was a really moving moment, and it’s hard to accurately put it in words. The best way I can describe it to say there was an overwhelming sense of dignity about both the moment and the people.

As the voting got underway, our DiploCat hosts organised the two groups to start moving to our next location; we had been scheduled to leave shortly after 9am but had decided to stay until the station opened. The voters lined up outside the school cheered us and said “Thank you!” in English as we left.

At Manresa

We started driving to Manresa, an industrial province of around 75,000 people in the centre of Catalonia, about 45 minutes outside of Barcelona. We had already seen a small number of videos on Twitter of police seizing ballot boxes and beating voters with batons in the brief moments where anyone could connect to the internet in the polling station at Sarrià-Sant Gervasi.

Now we spent the journey uploading our own photos, footage and observations from the morning onto social media, and passing around phones between the seats so we could all view the latest footage of the police attacks – gasping, murmuring “Oh my god,” and exclaiming “Jesus Christ!” as the snippets of film from the other polling stations showed increasingly brutal violence and rubber bullets being fired into defenceless and panicking crowds. It was not just the National Police we saw in the footage anymore but also the Guardia Civil. Hywel was uploading live videos in Welsh to Twitter, describing our visit.

When we arrived in Manresa centre around 11.30am we stopped for a coffee for a few minutes and stood at the bar with our eyes glued to the TV which was, of course, broadcasting the footage from the polling stations. The building in the square were adorned with colourful flags saying “Sí!” and “Democràcia!”, like in Barcelona, and it had stopped raining entirely. Then we walked to a polling station, a school, where the people queuing outside again cheered as we approached. There were still large crowds waiting to vote as we entered at around noon, and spoke to the polling station workers. The National Police had not arrived at the station; the queues were orderly and  the mood bright. Two Mossos stood outside.

Voters queue in Manresa

Voters queue up outside one of the polling stations in Manresa

One of the polling station volunteers offered to walk us around to the second voting station open in Manresa centre, which was nearby, and we agreed. During the walk the volunteer said worriedly to our DiploCat guide, Irina, that the route we were taking to the second site wouldn’t show us the best side of Manresa; Irina translated her concerns while laughing kindly. Relaxing, the local volunteer then joked that we were walking down “Las Ramblas” of Manresa.

This station, too, was busy, but calm and orderly, having received no visit from the National Police or Guardia Civil. Each polling station had a ‘president’ – a coordinator or presiding officer. Many of the volunteers were wearing stickers that identified them as both activists of the ANC (National Assembly of Catalonia) and also of ERC (Republican Left of Catalonia). I spoke to the president at this site in English for some time about how the day had unfolded, and he outlined the same difficulties with their voting system and internet access that we had experienced early in the morning.

I asked him if he was a member of any political party as I was curious as to whether the volunteers were all affiliated to political parties or whether there were also unaffiliated community members and activists. Almost apologetically, he said he wasn’t a political activist, but worked in IT – and that his mother, an ANC activist, had called him the night before to say they needed people with technological expertise as they anticipated hacking attacks. “So here I am,” he smiled.

Baby on shoulders Manresa

Voters wait their turn to enter the polling station in Manresa

As we left, the crowd queuing outside applauded and started chanting “Thank you! Thank you!”. By this stage we had asked Irina to teach us how to say “Good luck” in Catalan, so we replied “Bona sort!” as we left. I grinned to hear a man in the queue describe us as “briagdistas internacionales” as we walked past; he and his friends laughed and waved goodbye.

Waiting in dread at Sant Joan de Vilatorrada

Irina told us there were fears of a nearby polling station being attacked so we drove to another school at Sant Joan de Vilatorrada, just a few minutes from Manresa centre. The atmosphere was different here, subdued. People queued outside, but quietly. There was no cheering.

Inside, the volunteers told us that the polling station had been attacked violently by the Spanish police that morning, before it had even opened. Witnesses told us that the National Police had used a battering ram to enter, and smashed a man’s finger in the door four times, crushing the bone and severing the tendons. They took the ballot papers, boxes and began attacking the voters outside.

A teenage girl explained to us that her and some other voters had run up to the two Mossos present and asked them to do something; they said they couldn’t intervene but called their superior officer who arrived and had a heated argument with his counterpart in the National Police, after which the Spanish police withdrew. The injured man had left hours earlier to get medical attention so we couldn’t speak to him.

On the lookout for police at Sant Joan

Voters wait anxiously following rumours the police were planning to return to the school they had attacked that morning

The organisers and locals were anxiously expecting the National Police to return – they had received encrypted WhatsApp messages from organisers and activists at nearby stations and on nearby roads who reported they had seen around 60 Spanish police officers in the area. The locals knew they didn’t have the numbers to resist another entry attempt by police. We walked up to a perimeter fence that voters and activists had gathered by, all of us peering through warily. An enormous cheer went up as a number of uniformed firefighters walked up the hill together to the school.

Firefighters talking to us by Bodil

The firefighters who outlined the situation to us. Photo by Bodil Valero.

We spoke to the firefighters and others for around an hour, waiting for the police to arrive, but they never did. One firefighter in particular spoke to us at length, describing his view of the general situation. “I’m not very political,” he said. “But we just want to vote. It’s simple.”

Then we heard through WhatsApp messages that the Guardia Civil had attacked another polling station just a five-minute walk away. The firefighters sprinted off down the road as a handful of teenage boys sprinted off another way, obviously knowing a short-cut. Irina said we should think carefully about whether we wanted to try to catch up with the police, but we all quickly agreed we did.

‘I had my hands up’

Our driver zipped us around to the school that was under attack and we arrived to scenes of lines of around 20 Guardia Civil officers jostling voters who had their arms raised. Several Mossos and firefighters formed a line of their own in between the voters and the Guardia Civil.

The people were peaceful but angrily chanting, “No passaran!”, “Catalunya! Catalunya!”. After a tense and angry standoff of around 15 minutes, the police backed off and left.

We were on the street, and couldn’t see the school building through the crowd, so I misunderstood the situation we had walked into. I thought the Guardia Civil had arrived, realised they were heavily outnumbered, and decided to leave. But that’s not what happened – we had got there too late.

They had already smashed down the glass doors of the polling station, seized the ballot boxes and beat a 70-year-old man over the head with a baton – just because he was in the process of voting. As the Guardia Civil left, he was sitting outside being cared for by other voters.

(Below is footage from @QuicoSalles on Twitter of what happened in the moments before we arrived.)

We had all been separated, but the same teenage girl who had spoken to us at the previous school had come running up to find one of the international observers – my Sinn Féin colleague Trevor – who went and spoke to and filmed the injured man. He had had his head split by the baton. “I had my hands up,” he said. “I was voting, I had my hands up.”

We jumped back in the car based on more WhatsApp messages and tried to get to the next site we believed was going to being targeted before the police did, around five minutes away. People were gathered outside anxiously and some were clearly in shock, having arrived from the same polling station we had just come from.

I spoke in English to a teenage boy wearing a Nirvana T-shirt and told him we had just come from the school. White-faced and shaking, he said he had been inside the polling station with his grandfather when the Guardia Civil had burst in and started hitting people with batons. Every few words he would almost choke, finding it hard to speak. “I need to go home,” he said after telling us what he saw.

The firefighter who we had earlier befriended at the first school we had visited in Sant Joan de Vilatorrada came up to us and told us that the organisers had just shut the polling station voluntarily in order to try to prevent an attack. They wanted to protect people from violence and also protect the ballots they had from being seized. It was around 3.30pm. He told us of their standoff with the Guardia Civil and said that like us, the firefighters had arrived too late to do anything to prevent the attack.

“But the fact that you guys and the Mossos got there stopped them from beating the voters on the street after they had taken the ballots,” Magni, the Faroese visitor, said.

The firefighter wasn’t going to be consoled. “Now they are laughing at us,” he said, meaning it both literally – the Guardia Civil had taunted and laughed at them during the stand-off – and figuratively, as in, they had left with people’s votes. He said the words with such a sense of powerlessness and humiliation that, for me, it was the lowest point of all that we observed that day.

As people began to disperse after the closure of the polling station we got back in the car; one of the volunteers had suggested we could drive to the local Spanish police station to see it, perhaps to try to speak with some of the officers. A number of roads were closed, though, so we couldn’t get there.

We saw one of the empty roads closed off by Guardia Civil vehicles and Hywel wanted to go and speak to them and take photos. I told the others that our phones might be confiscated if we tried to take photos because of the (2015) Spanish gag law that, among many other restrictions, banned taking photos of police officers. We all left our phones in the car and walked down to around eight officers who were blocking the road with large vehicles. Bodil translated our questions for them and their responses. She asked why the road was blocked; they replied that it was because someone had been taking photos of the police, which was illegal.

“Because of the gag law,” Bodil replied, provoking protest at the phrase. They said they were “just doing their job”, but then moved one of their vehicles to clear the blockade of the road. We weren’t going that way anyway, so, to the confusion of the Guardia Civil, drove off in the opposite direction.

At Solsona

We had been due to have lunch with the mayor of the town of Solsona at 1pm and were now at least three hours late. Irina insisted that we had to eat something, so we set off further inland to Solsona, another 45 minutes or so away, though I think it’s safe to say all of us had lost our appetites. Back in the car we took turns charging our phones, and passed around the phones in use to see the latest images and footage of attacks at the polling stations. Hywel delightedly informed us that his press officer told him he was trending on Twitter in Wales due to the updates and images he had been sharing all day, which lifted our spirits a little.

festival atmosphere

Voters gather outside in tents and with music playing at Solsona

We arrived at the main polling station in Solsona, a town of around 9,000 people in the province of Lleida, at close to 5pm. The mayor, David Rodríguez, and others came out to welcome us. As well as being the mayor of Solsona, David is also a member of the Catalan Parliament for the ERC, the Republican Left of Catalonia. The polling station was striking for how well organised it was.

Two massive tractors formed the main part of a barricade at the entrance of the centre, and another tractor blocked off a smaller way in on the footpath. You could still enter, but only on foot. There were very large crowds of people gathered on a grassy area outside of the building in a sort of festival atmosphere with some music and tents, and several firefighters, who got an enthusiastic round of applause every time they waked from one place to another.

Tractor barricades

Tractors forming barricades at Solsona

The polling station itself was a large gymnasium-style building. The volunteers inside were on edge and were expecting police to arrive shortly. They were preparing to shut down the station and hide the ballot boxes at the first sign of a raid.

I spoke to one of the volunteers, a young man, at length about their high level of organisation. “We don’t think they will be able to get in,” he said. “We think the doors and walls are strong enough to keep them out, none are made from glass. The only way they could get in is if they use vehicles to smash through the walls.” He paused, realising the absurdity of it, and shook his head, saying, “It’s so strange to talk like this, of vehicles smashing through walls. It’s like a war.”

Trevor with David

Trevor O’Clochartaigh with Solsona Mayor and ERC MP in the Catalan Parliament, David Rodríguez

He explained to me that they believed there were enough hiding places in the building that they could temporarily hide the ballot boxes if the police managed to enter. They had taken the step of stuffing two ballot boxes with empty envelopes and “hiding” them in an easy-to-find spot.

I laughed at the ingenuity. Everywhere we had visited, people were dealing with the problems they faced collectively, with great creativity and even with humour.

David asked us to come and have lunch at a Japanese restaurant, a couple of minutes’ walk away. We were reluctant to leave as people were expecting the arrival of the Guardia Civil, but he assured us we would all return immediately if we heard any reports of their arrival.

He introduced us to the owner of the restaurant, who greeted us warmly and told us he had moved from Japan to Solsona 27 years ago. Then for 30 rather surreal minutes we ate sushi and talked across the table, finishing with more coffee. The owner’s son, around seven years old  and playing outside in an FC Barcelona jersey, kept running up to the window to wave excitedly at us. We grinned and waved back.

David led us back in to the polling station and on the way back I spoke to a young woman who was shortly due to sit examinations to become a judge. She thought there was a good chance that her role in assisting the local referendum process would destroy her chances of becoming a judge, and said that one of her fellow students was too scared to even vote for the same reason. “But it’s worth it,” she said. Having done countless all-nighters for law exams myself I was left in awe.

David told us the organisers were still on stand-by to shut down the polling station. One of our group remarked to him that it must be a difficult decision – to close the polling station early before everyone had had the chance to vote.

“No,” he replied firmly. “There is no question. Our responsibility is to protect these people from violence. If we have to close the voting station early, even if the votes are stolen, the people here will be safe.”

We were scheduled to meet with the rest of the international delegation at 8.30pm to prepare a joint statement about the conditions in which the referendum was held, and both Magni and Bodil needed to get back to Barcelona to do media interviews before that time, so we began the drive back. Irina asked the rest of us if we wanted to take a break or visit another voting site, and Trevor suggested we go to the Josep-Maria Jujol school in central Barcelona – which both of us had visited during the occupation the day earlier. Trevor had also visited it at around 6am that morning and wanted to see how they had survived the day.

Back in Barcelona

There was a huge number of people gathered outside the school, possibly a couple of thousand, and they cheered loudly when we entered. “Gracias, bona sort!” we called back. It was around 7.30pm and they had been undisturbed all day – in my view, because they had the numbers required to deter any police intervention. Excitement was rising that they would manage to make it to 8pm, the end of voting time, without a police attack. Two Mossos walked around the entrance and they too were cheered.

A political scientist who taught at one of the Barcelona universities was the president of the polling station and showed us how they had been dealing with the technological problems in order to ensure the highest electoral standards were maintained.

At Jujol

The polling station president (centre) and other volunteers  speak to the international guests at Escola Josep-Maria Jujol

“We had people changing our IP addresses every 30 minutes to try to stay ahead of the hackers,” he explained. “If the system was down at any particular moment, we would mark people off on the paper electoral roll but put an asterix next to their name. Then when it was up and running again we would enter their names into the electronic system. So there may have been periods of up to 20 minutes at most where the system was down, but it would be virtually impossible for a person to vote twice at different polling stations in that time due to the queues.”

Inside the polling station I ran into a number of Basque friends who were visiting Barcelona in a show of solidarity. I joked darkly to them that they must have felt the same way right then as Irish republicans did when the DUP formed a coalition with the British Conservatives earlier this year – for a brief moment the world’s media attention shone a light on problems and outrageous behaviour that we struggle constantly to draw attention to. Of course this was on an even bigger scale. They laughed in grim agreement.

The author Liz Castro was also at the school, and interviewed Trevol, Hywel and I about what we had observed as we waited for 8pm. She tried to broadcast it live on Twitter’s Periscope feature, but the internet was too patchy, so she filmed it to upload later instead. At about 7.59pm a rumour spread through the building that the police were coming to seize the ballot boxes, causing a brief moment of panic. A minute later we were assured by the tense polling station president that the rumour was false.

Celebrating keeping the polling station open

At 8pm, a huge cry of celebration went up in the crowd outside and they began to sing the Catalan national anthem. They had made it to 8pm without an attack. The school gates were closed as they sang the final bars. (You can watch my video of this here.)

Inside, photographers and media camera crews filmed the two young electoral officers who began the official count of the ballots.

Officials start the count

Electoral officers begin the count at Escola Josep-Maria Jujol

I asked the volunteers if they had heard of any plans for mobilisations in Barcelona that evening, saying we had heard that there would be demonstrations in several cities in the Spanish state against police brutality.

“I’m not a political activist,” the polling station president replied, “so I can’t tell you about the mobilisations outside. My role, and one I take very seriously, is to facilitate the vote of the people here today and to defend those votes. But I can say that as a political scientist, the mobilisation of Catalan society is something that is fascinating to see and something that will not disappear overnight. Of course we can’t keep up this level of mobilisation constantly,” he said as other exhausted volunteers gathered around him nodded in agreement, “but this movement is not going anywhere.”

As we left to get to our meeting with the rest of the international delegation, we walked out behind the electoral workers. The people who had defended the polling station all day – and all weekend in fact, for many – again applauded us. You guys are the ones who deserve the applause, we kept saying as we shook their hands. I don’t think I’ve ever made such an understatement in my life.

@emmaclancy123

 

 

by Admin

The (grim) state of the Union

Juncker’s vision is for full EU control over members’ economies

Some quick first impressions of the economic aspects of today’s State of the EU address by European Commission President Jean-Claude Juncker.

Jean-Claude Juncker’s State of the Union address was remarkable for its strident, defensive and utterly oblivious tone, but for little else.

On deepening the Economic and Monetary Union, he outlined several proposals that have already been floated several times by the Commission in recent years. The most significant of these are to introduce a euro-area budget line within the EU budget, and to create a European Monetary Fund and a European Finance Minister to take over responsibility for administering the EU’s debt and deficit criteria – the austerity agenda currently administered by the Commission.

There are two main goals evident in the Commission’s proposal. The first is to ensure that the current informal economic governance structure that exists in the Eurozone – outside of the Treaties and beyond democratic oversight – is extended across the EU as a whole in order to pressure the non-euro member states to join the common currency as soon as possible, and to give the Eurogroup the veneer of legitimacy.

The second is to implant Germany’s failed and ideologically-driven deficit fetishism ever more firmly in the structure of the EU by creating a Ministry to surveil and structurally reform the economies of Member States, and to surveil and control their spending, taxation and borrowing through budgetary control.

After the election of President Macron in France this year, Germany and France set up a working group to discuss the creation of a European Monetary Fund, or EMF, to deal with future crises. The states who may require the aid of the European Monetary Fund are those of us in the periphery of the EU – the Irish state, Greece, Spain, Portugal – who are suffering debt crises largely as a result of Germany’s massive and damaging current account surplus.

Yesterday, El País reported that Germany is proposing that a German-dominated EMF take fiscal oversight away from the Commission – but that it is attempting to win the support of France and Italy for the move by including the promise that Germany, France, and Italy can each have a veto over its decisions. This will essentially give Germany strict control over the oversight of budgets of all the EU states who require the assistance of the fund, with only France and Italy having the right to reject the EMF’s conditions.

The French side has been pushing for the EMF to also require more risk-sharing and debt-sharing, which would benefit the peripheral states more. The Commission’s final proposal regarding turning the current crisis fund, the European Stability Mechanism, into an EMF, will be published in December. It is unclear from Juncker’s speech and its accompanying documents which aspects of the German and French proposals will form the basis of the detail of the EMF proposal – but if Juncker’s other proposals are an indication of the general balance of power, it’s safe to bet on the German proposal winning the day.

For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same failed ideology.

Juncker’s speech was as significant in what it didn’t propose as what it did propose – it looks like the Commission is already walking back from, or at least stalling on, ideas it had previously floated in its ‘reflection paper’ on deepening the Economic and Monetary Union released earlier this year. These included ideas of creating a European unemployment insurance scheme and an investment protection scheme, both of which would go some way towards meeting longstanding French calls for some form of financial transfers from the core (Germany) to the small and mid-sized economies in the EU, albeit with destructive conditions attached.

There was no mention of these proposals today, and Juncker firmly told the periphery states that their hope for a common bank deposit insurance scheme (which would amount to one form of financial transfer from the core to periphery) is on ice until they start following Germany’s orders on risk-reduction. His exact words were: “To get access to a common deposit insurance scheme you first need to do your homework.”

Over decades of core vs periphery fights over debt and investment, the outcome is always the same – the so-called peripheral states surrender more and power over their spending, borrowing and taxation to German-dominated institutions in exchange for the promise of aid or financial transfers that simply never come.

So, no big surprises here: just confirmation that the brief talk of fundamental change of the structure of the EU that followed Macron’s election was just that – talk.

 

 

by Admin

Gernika: The beginning of aerial terror

Gernika Belfast

A mural of Pablo Picasso’s Guernica in Belfast

The following excerpt on the 1937 attack on the Basque village of Gernika is taken from an incomplete history piece on the Basque Country, from a chapter on the Second Republic and civil war. Tomorrow (April 26) is the 80th anniversary of the bombardment.

In early 1937, with Madrid still putting up a stiff resistance, Franco set his sights upon Bilbo with the aim of capturing the city’s iron ore and heavy industry to support his war effort. The Francoists quickly planned a northern offensive to be led by General Emilio Mola, who issued an ultimatum on 31 March in broadcast and printed leaflets dropped on Bizkaian towns saying: “If submission is not immediate, I will raze Vizcaya to the ground, beginning with the industries of war. I have the means to do so.” Most of the infantry on Franco’s side were raised from Nafarroa. The 50,000 heavily armed troops in four Nafarroan brigades were backed up by two Italian divisions, the Spanish Air Force, the Italian Aviazione Legionaria and the Condor Legion of the German Luftwaffe. Mola had 120 aircraft and 45 pieces of artillery at his disposal. The Republican Army in the North had almost as many troops but far less firepower, half the artillery and just 25 ineffective aircraft. The offensive began with an act of brutality when the village of Durango – not on the front line and undefended – was bombarded for four days by the Luftwaffe, with 248 civilians killed. Republican positions were falling fast and on 20 April 1937 a new Francoist offensive began in Bizkaia.

Gernika has long had a sacred status among Basques as the site of the ancient Basque parliament of Bizkaia, the Casa de Juntas, and of the legendary Gernikako Arbola (Tree of Gernika), an oak tree that has been a symbol of Basque sovereignty and the rights of the Basque people for close to a thousand years. In 1937 the town had a population of around 7,000 people, and Monday 26 April was a busy market day in the town centre. At 4.40pm the Luftwaffe’s Condor Legion and the Italian Aviazione Legionaria launched an aerial bombardment of the town that lasted for three hours, with waves of planes hitting the town centre every 20 minutes with high explosives and incendiary bombs of up to 1000lbs. each. Those who tried to run from the town or hide in the fields were machine-gunned. At 7.45pm, after the last planes had dropped their bombs, the centre of the town was destroyed. The assault killed 1,654 of the town’s 7,000 inhabitants. Gernika was 30 kilometres from the front. The Casa de Juntas and the Tree of Gernika had incredibly survived untouched.

A report by British journalist George Steer, war correspondent for the London Times, was published in the Times and the New York Times on 28 April. Steer had rushed to the town the evening of the attack to interview survivors and witness the devastation firsthand, and reported: “The most ancient town of the Basques and the centre of their cultural tradition, was completely destroyed yesterday afternoon by insurgent air raiders.”  His report from Gernika was all the more significant because Franco’s forces claimed the Basques had burned the town themselves as a propaganda stunt; then they claimed the Communists had bombed it. Franco denied that German forces were even participating in Spain’s Civil War. In response to the Nationalist propaganda, Basque lehendakari (president) José Antonio Aguirre made a public declaration : “I maintain firmly before God and History, who will judge us, that during three and a half hours German planes have bombarded the defenceless civilian population of the historic town of Gernika, pursuing women and children with machine-guns, and reducing the town itself to ashes. I ask the civilized world whether it can permit the extermination of a people who have always deemed it their duty to defend their liberty as well as the ideal of self-government which Gernika, with its thousand-year-old Tree, has symbolized throughout the centuries.” Franco replied: “Aguirre lies. We have respected Gernika, just as we respect all that is Spanish.” Mola was more forthright, saying: “It is necessary to destroy the capital of a perverted people who dare to oppose the irresistible cause of the national idea.”

Basque priest Father Alberto Onaindia witnessed the carnage in Gernika and wrote in desperation to the Primate of Spain, Cardinal Gomá: “I have just arrived from Bilbao with my soul destroyed after having witnessed the horrific crime that has been perpetrated against the peaceful town of Guernica… Senor Cardinal, for dignity, for the honour of the gospel, for Christ’s infinite pity, such a horrendous, unprecedented, apocalyptic, Dantesque crime cannot be committed.” He begged the Cardinal to intervene to sure the Francoists’ threat – that Bilbo was next – was not implemented. Gomá responded by insisting that Bilbo must surrender. Referring to the Basque Nationalist Party’s (PNV) loyalty to the Republic, he added: “Peoples pay for their pacts with evil and for their perverse wickedness in sticking to them.” Francoist forces viewed the scene a few days later, and a Carlist soldier reportedly asked a senior officer in Mola’s staff: “Was it necessary to do this?” The lieutenant colonel replied that it had to be done in all of Bizkaia and Catalunya. In 1970  PNV member Joseba Elosegi, one of the Basque soldiers from the Battalion Saseta which had withdrawn to Gernika for a period of recuperation and was present on the day of the bombing, carried out an act of self-immolation in a protest against Franco in Donostia, shouting “Gora Euskadi Askatuta!” (Long live the free Basque country!). Elosegi was badly burned but survived and described his protest as the desperate act of a man who had “obsessively remembered” for more than three decades the scenes he witnessed at Gernika.

Steer immediately understood the significance of the attack on Gernika, and in his Times article he wrote:  “In the form of its execution and the scale of the destruction it wrought, no less than in the selection of its objective, the raid on Guernica is unparalleled in military history. Guernica was not a military objective. A factory producing war material lay outside the town and was untouched. So were two barracks some distance from the town. The town lay far behind the lines. The object of the bombardment was seemingly the demoralization of the civil population and the destruction of the cradle of the Basque race.” His report was reprinted in the French communist newspaper L’Humanité on 29 April, where Pablo Picasso read it. The artist captured the international outrage over the attack in his world-renowned painting. He had been commissioned earlier that year by the Spanish Republican government to paint a mural for the Spanish government building at the World Fair in Paris. On 1 May 1937, he dropped his original plan and produced his most famous work, Guernica, instead.

by Admin

Erdoğan views Kurds as stepping stone to total power

A PKK checkpoint in Silvan, southeast Turkey, on August 19. (Reuters)

A PKK checkpoint in Silvan, southeast Turkey, on August 19. (Reuters)

Kurdish pro-independence activists have erected barricades, and elected representatives have declared self-government in several towns and villages across northern Kurdistan (southeast Turkey) since August 10. The declarations come in response to renewed attacks on Kurdish militants and civilians by Turkish security forces.

According to Kurdish media outlets, the towns, villages and districts that have declared self-government include Silopi, Cizre, Lice, Varto, Bağlar in Batman, Sur and Silvan in Diyarbakir, Bulanik, Yüksekova, Şemdinli, Edremit and Doğubeyazit, among others. Significantly, the Gazi neighbourhood in Istanbul declared self-government on August 18.

Mayors and elected representatives of the People’s Democratic Party (HDP) and the Democratic Regions Party (DBP), together with neighbourhood assemblies, have supported the declarations of self-government, saying the Turkish regime “did not represent them”. Four mayors in Diyarbakir were arrested on August 18.

The Turkish government, led by President Recep Tayyip Erdoğan’s Justice and Development Party (AKP), has given unlimited powers to the security forces and declared a state of emergency in the areas of resistance over the past week.

The Turkish army has backed up Special Forces and police in carrying out attacks, which have included aerial bombardment, the burning of homes, raids, and the shooting of combatants and civilians. Military curfews have been declared, and the affected districts are besieged by the army.

Kurdish protesters hold placards with Ekin Wan's face on August 19.

Kurdish protesters hold placards with Ekin Wan’s face on August 19.

One of the first towns to declare self-government on August 13 was Varto in Muş province, where Kurdish combatant Kevser Eltürk (with the nom de guerre Ekin Wan) was killed in a gun battle with Turkish Special Forces on August 10. Ekin Wan was a fighter in YJA-STAR (Free Women’s Units), the women’s military wing of the Kurdistan Workers Party (PKK).

After her death, Ekin Wan’s bloodied corpse was stripped naked and dragged through the streets by Special Forces who photographed the desecration and uploaded it onto the internet, sparking protests across Turkey.

Kurdish media reports that in the days following the declaration of self-government, Varto was attacked by tanks, helicopters and Special Forces soldiers. A PKK graveyard was bombed while military helicopters opened fire on villagers in Varto and several surrounding villages. Special Forces entered to conduct house raids and make arrests, while soldiers are reported to have set fire to houses and forests. The operations in Varto have been replicated in Kurdish towns and villages across southeast Turkey.

Turkish author and former war correspondent Cengiz Çandar described the developments of the past week as a “mass youth uprising by the PKK” that surpasses the scale of similar urban uprisings during the 1990s.

Kurdish activists too have said the security forces’ aggression is reminiscent of attacks on Kurdish communities during the 1990s, in which around three millions Kurds were displaced and thousands were killed. Since the PKK-led Kurdish insurgency began in 1984, an estimated 40,000 people have been killed in the conflict – the majority Kurdish civilians.

Erdoğan ended a two-year ceasefire on July 24 when his government resumed attacks on Kurdish communities in Turkey, as well as launching airstrikes against PKK bases across the border in southern Kurdistan (in Iraq).

By August 19, Turkish officials claimed that more than 50 security force members, around 400 PKK members and “at least seven” civilians have been killed in the recent violence. The PKK have rejected the claim regarding their casualties and say they have lost 30 members. The official figure for civilian deaths appears to be patently false, given that Amnesty International has verified that eight Kurdish civilians were killed in one Turkish airstrike alone in the village of Zergele in the Qandil mountains in Iraq on August 1.

After Suruç

The July 20 attack by an Islamic State supporter on a group of socialist youth activists in the Kurdish town of Suruç inside Turkey, near the Syrian border, was the spark for the collapse of the two-year ceasefire and peace talks between the Turkish government and the PKK.

Activists on the bus to Suruç before the bombing. (Victim Hatice Ezgi Sadet's Instagram)

Activists on the bus to Suruç before the bombing. (Victim Hatice Ezgi Sadet’s Instagram)

The activists who were killed were members of the Federation of Socialist Youth Associations (SGDF), the youth wing of the of Socialist Party of the Oppressed – a founding member of the People’s Democratic Party (HDP) coalition. The leftist, pro-Kurdish HDP won 13 per cent of the vote in general elections in Turkey in June; its co-leader, Figen Yüksekdağ, is a former chairperson of the Socialist Party of the Oppressed.

The youth activists were preparing to travel to Kobanê, the Kurdish city across the border in Syria, to build a library and playground, and assist in the general rebuilding of the town after the siege and conflict between the Kurdish People’s Protection Units (YPG) and Islamic State. In a crowd of around 300 people who had gathered for a public declaration to farewell the delegation in Amara Cultural Centre, a young Islamic State supporter blew himself up, killing 32 people; another later died from injuries.

The Islamist suicide bombing against the pro-Kurdish left has somehow been used by the Turkish government as a pretext to launch an all-out attack – against the pro-Kurdish left.

As international leaders sent their condolences to Erdoğan’s AKP government over what they referred to as “Islamic State’s attack on Turkey”, Kurds accused the government of collusion in the bombing. Specifically, they believe the Turkish National Intelligence Organisation (MIT) was directly involved.

Survivors asked the question: how was the bomber able to freely walk into the Amara Cultural Centre when there was a strong security presence surrounding it, and the activists had all been searched on their way in? Later, the funeral processions of almost all of the victims were attacked by Turkish security forces. The rapid pace of political developments in the days following the bombing appear to confirm the Kurds’ belief of government involvement.

Kurdish militants from the Patriotic Revolutionary Youth Movement (YDG-H), an armed youth movement associated with the PKK, claimed responsibility for the killings of two Turkish police officers on 22 July, who they said had collaborated with Islamic State.

Ankara-Washington deal

Three days later the bombing – after providing both tacit and practical support to various Islamist forces fighting against the Syrian regime of Bashar al-Assad during the civil war since 2011 – Erdoğan struck an agreement with the US on July 23. Under the deal the US can use Turkish air bases to launch airstrikes across the border against Syria, and Turkey has agreed to contribute directly to the war on Islamic State in Syria by carrying out its own strikes.

A “safety zone” along part of Syria’s border with Turkey is to be made free of both Islamic State and Kurdish militants, according to the terms of the agreement. This is the most significant element of the agreement as far as Erdoğan is concerned. There are three cantons in Rojava, the Kurdish area in Syria that runs along a large part of the border with Turkey. Following the recent victory of the Kurdish People’s Protection Units (YPG) over Islamic State in Tal Abyad, two of the three cantons, Kobanê and Cizere, were joined contiguously for the first time.

The precise area the “safety zone” is proposed to cover will ensure the YPG cannot join the two Kurdish cantons with the third, Afrin, as the US-Turkish joint “clear and hold” operation aims to rid the area of both Islamic State and Kurdish fighters. The absurdity of the US agreeing to limit the operations of the most effective military force fighting Islamic State in Syria in this way has been pointed out by many.

Announcing the agreement domestically, Erdoğan said his government would carry out a “synchronised war against terror” that would target both Islamic State and the PKK.

As of August 19, Turkey had launched airstrikes against just three Islamic State targets, and more than 300 against PKK bases in Iraqi Kurdistan. In the first three weeks of the campaign of repression, 1,300 “terrorism suspects” were arrested – 137 alleged to be linked to Islamic State, and 847 were accused of PKK membership. The Islamist suspects were quickly released; the Kurds were not. The total number of alleged activists now detained since July stands at more than 2,600, almost all of them Kurds.

‘Your silence is killing Kurds’

Yet most of the Western mainstream media has parroted the lines that Erdoğan has joined the war against Islamic State and the PKK are a secondary target in a broader crackdown, and the PKK has initiated the latest round of violence and caused the breakdown in peace talks.

A PKK member collects pieces of metal at a crater caused by Turkish air strikes on July 29 in the Qandil mountains, northern Iraq. (AFP)

A PKK member collects pieces of metal at a crater caused by Turkish air strikes on July 29 in the Qandil mountains, northern Iraq. (AFP)

The report by the New York Times on August 18 was typical of this coverage: “Mr Erdogan’s government decided to move more forcefully against the Islamic State last month after a suicide bombing in the southeastern district of Suruc that killed at least 34 people.”

The Wall Street Journal reported on August 3: “In parallel with its new military strikes against Islamic State, Turkey has targeted bases in northern Iraq used by the outlawed Kurdish separatist group PKK. The deadly airstrikes came in response to increased attacks by the PKK against Turkish security forces that are threatening a fragile peace process.”

The Huffington Post, however, reported on August 19 that Turkey pays US lobbyists and public relations firms around $5 million a year to win public and political favour. Among the lobbyists on the payroll is Porter Goss, who was CIA director from 2004-2006. Within days of renewing attacks on Kurds, Turkey hired the Squire Patton Boggs lobby group, which includes retired senators and White House officials, to propagate its version of the conflict.

There has been an almost-total media blackout in relation to the attacks on Kurds within Turkey and the urban warfare that has engulfed a major part of the country, prompting social media campaigns to target Western media with the hashtag, #YourSilenceIsKillingKurds.

In Turkey, where for decades the media has been prevented from reporting on PKK attacks and casualties among security forces, the media is now beaming a constant stream of “stories of those who were killed, kidnapped policemen, attacked government buildings and assets, along with bomb threats,” according to Pinar Tremblay, writing in Al-Monitor. “Turkish audiences have not seen this many funerals since the early days of the conflict in the late 1980s.”

Putting power before peace

The Turkish president has invested a significant amount of political capital in achieving a lasting peace settlement with the Kurds of Turkey, who number 15 million, around one-fifth of the total population. Before becoming president, Erdoğan served as the prime minister from 2003-2014. In 2005, he admitted the existence of a “Kurdish problem” in Turkey, and under his government secret peace talks were held between the PKK and the Turkish National Intelligence Organisation in Oslo.

The process eventually led to the declaration from jail of a ceasefire on Newroz day (Kurdish New Year) in March 2013 by PKK leader Abdullah Öcalan, imprisoned since 1999. The ceasefire proved durable, and in February this year a more comprehensive agreement was announced by HDP and AKP representatives, including the Interior Minister and the deputy prime minister. The 10-point Dolmabahçe Agreement dealt with conflict resolution issues including disarmament, human rights and constitutional reform.

Turkish President Recep Tayyip Erdoğan

Turkish President Recep Tayyip Erdoğan

On July 17 Erdoğan said: “I do not recognise the phrase ‘Dolmabahçe Agreement’… There cannot be an agreement with a political party that is being supported by a terrorist organisation.”

What changed? In general elections in June, the AKP lost its parliamentary majority for the first time in 13 years. The pro-Kurdish left-wing HDP won 13 per cent of the vote, meaning it met the 10 per cent threshold a political party must reach in order to sit in the Turkish parliament. This threshold was imposed with the aim of silencing voices of political opposition by the constitution adopted in 1982 following the 1980 military coup. It has meant Kurds have been largely excluded from the democratic process ever since, making the result in June historic.

The party, its candidates and campaign workers were harassed and physically attacked, sometimes lethally, throughout the election campaign. On June 5, its major pre-election rally in Diyarbakir was bombed. Four people were killed and dozens more were injured. Other HDP election rallies were attacked by fascists; its offices were shot at and bombed; and campaign worker Hamdullah Öğe was assassinated while driving a HDP vehicle.

Despite the violence and intimidation, voters turned out in large numbers to support the HDP – which also attracted votes from non-Kurdish communities on the basis of its secular, feminist and left-wing positions.

One the HDP's mass election rallies (Piczard)

One of the HDP’s mass election rallies. (Piczard)

The AKP required 276 seats to form a majority government in the 550-seat parliament; it won 258, dropping from around 50 per cent of the vote to just above 40 per cent. The social-democratic Republican People’s Party (CHP) won 132 seats, while the HDP and the fascist Nationalist Movement Party (MHP) each won 80 seats. Of the 80 HDP candidates elected, 32 were women, bringing the number of female MPs in the Turkish parliament to a record high of 98. All leadership positions in the HDP are co-chaired by a woman and a man.

The current government is an interim government; if no coalition is formed by August 23, Prime Minister Davutoglu must dissolve the cabinet. If this happens, an all-party ‘election government’ will be formed until the new elections – which must be within 90 days.

The HDP rejected the AKP’s overtures for a coalition government from the beginning, and AKP talks with the CHP, then the MHP, have broken down. But it’s highly likely that Erdoğan had no intention of forming a coalition government, and would prefer to hold snap elections in November in which he believes the AKP can regain its majority.

Erdoğan wants an ‘executive presidency’

The election results also blocked plans Erdoğan had made for constitutional reform that could only be made through the parliament if the AKP won a two-thirds majority, or 367 seats. After ruling as prime minister for 11 years, he is clearly dissatisfied with what he calls the “ceremonial” role of the president, and he intended after the election to create an “executive presidency” that would dramatically extend his personal power.

The president had formerly been appointed by the parliament, but a 2010 referendum allowed for direct election of the president, and the first such election was won by Erdoğan last August.

Immediately after his election, Erdoğan opened an opulent new 1,000-room presidential palace that cost Turkish taxpayers well over $600 million to construct. In May this year, the AKP-majority parliament granted Erdoğan a “discretionary fund” for “discreet intelligence and defence services” not subject to any form of judicial, administrative or parliamentary oversight – in other words, his own private army.

HDP co-leader Selahattin Demirtaş responded to the establishment of the discretionary fund by calling it a “civil coup”.

“The palace has its own special army authorised to collect intelligence, its own discretionary budget. That is, it has created a one-man, separate state,” he said.

On August 13, AKP leader and Prime Minister Ahmet Davutoğlu said he had failed to reach a coalition deal with the CHP. The following day, Erdoğan indicated that he will attempt to achieve an ‘executive presidency’ without the required two-thirds majority if the AKP wins a simple majority in snap elections – or perhaps even before then.

“There is a president with de facto power in the country, not a symbolic one,” he said. “Whether one accepts it or not, Turkey’s administrative system has changed. Now, what should be done is to update this de facto situation in the legal framework of the constitution.”

Demirtaş called for a referendum to be held on the proposed change, which the HDP opposes, saying: “The state regime cannot be changed with a fait accompli.”

CHP leader Kemal Kılıçdaroğlu described the statement as the “acknowledgement of a coup”.

New elections

The general election was held on June 7; from June 8 the AKP has been planning a new snap election and a way to rapidly diminish the HDP’s support base. If the HDP were to drop below the 10 per cent threshold and be excluded from parliament, then in all seats where a HDP candidate topped the poll the seat would go to the runner-up – in most cases, an AKP candidate.

In anticipation of a new election, Erdoğan and the AKP are making a concerted effort to link the HDP with the PKK, and to alienate conservative Kurdish voters from supporting the HDP, in the belief that this will result in the party failing to meet the 10 per cent threshold. At the same time the AKP is appealing to right-wing nationalists to reward its hardline position.

Many analysts have predicted that the move may backfire and drive the entire Kurdish population in Turkey to vote for the HDP. The head of polling company Metropoll, Özer Sencar, said on CNNTurk on August 18 that the HDP is likely to become the third-largest party in Turkey if fresh elections are held in November, and could win up to 17-18 per cent of the vote – an outcome he was at pains to explain he believed would be “extremely wrong” for Turkey.

HDP co-chairs Selahettin Demirtaş and Figen Yüksekdağ

HDP co-chairs Selahattin Demirtaş and Figen Yüksekdağ (AP)

Of course, the caretaker government led by the AKP may attempt to outlaw the HDP and prevent it from participating in fresh elections. On July 31, Turkish media reported that a criminal investigation has been opened into both HDP co-chairs, Demirtaş and Figen Yüksekdağ, for “inciting violence” and “propagandising for terrorist organisations” respectively, over speeches they have given in support of Kurds in Kobanê and the rest of Rojava. In Demirtaş’s case, if the case is prosecuted and he is found guilty, he faces up to 24 years in prison.

Eight opposition MPs from the CHP and HDP have also had an ‘investigation authorisation report’ sent to the parliament by the deputy prime minister, which provides legal authority to open an investigation into an MP’s activities.

The current indications are that the government will continue to target individuals and not attempt to outlaw the HDP itself – but this could change in response to the declarations of self-government across Kurdish districts.

Erdoğan’s renewed aggression against the PKK should not only be understood in domestic terms. It is also shaped significantly by the major advances made by Kurdish forces in Syria and Iraq. The dismal repercussions of attacking the most effective resistance to Islamic State in the region have yet to fully play out. But his decision to walk away from an historic opportunity to end decades of conflict, in a cynical and transparent grab for personal power, may have unleashed a rebellion by Kurdish youth in Turkey that he will not be able to contain.

Kurdish pro-independence forces are stronger now – better organised, with more territory and more international support – than they were in the 1990s.

A second article examining the Kurdish struggle against Islamic State in Rojava, and the impact of the US-Turkey deal to establish a “safety zone” along the Turkey-Syria border, will follow shortly.

by Admin

When free trade isn’t enough: A corporate grab for policy power

US workers protest against 'Fast Track', or the Trade Promotion Authority. Photo from AFL-CIO.

US workers protest against ‘Fast Track’, or the Trade Promotion Authority. Photo from AFL-CIO.

The new generation of free trade agreements such as the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership are less about reducing already-low tariffs, and more about providing multi-national corporations with the power to determine public policy. This is the first part in a two-part article on the politics and likely impact of this new generation of trade deals.

As the US Congress resumes sitting after the Easter break, the Obama administration’s number one priority is to convince sceptical House Democrats to approve his Trade Promotion Authority (TPA), or so-called ‘Fast-Track’ legislation. The TPA would allow for the Trans-Pacific Partnership (TPP) free trade agreement currently under negotiation to be signed and entered into by the President without Congressional approval. Implementation legislation would then be fast-tracked through Congress without amendments in a filibuster-free yes-or-no vote within 90 days.

Political commentators estimate that Obama still needs to convince between 40 and 50 members of his Democratic party to support Fast-Track in the Republican-controlled 435-seat House of Representatives. The TPA is already supported by the vast majority of House Republicans, with the exception of a group of Tea-Party types who appear to be opposing it for the sheer joy of blocking any further delegation of power to Obama.

If agreement is not reached and a TPA bill tabled before Congress goes into recess in August, it is all but certain that the US will not be able to seal the deal on TPP before 2017 – after the presidential election primaries, and the election itself in 2016. It’s also highly unlikely that TPP could get through Congress without Fast-Track.

It’s a sorry spectacle: Obama trying to drum up support from his base to implement the agenda of the massive corporations that did their utmost to prevent his election and re-election – an agenda that, if successful, will unpick his key achievements in progressive domestic policy reforms, from affordable healthcare to increased regulation of the financial sector.

Environmental groups and progressive economists and academics are backing the Congressional opposition to Fast-Track led by Massachusetts Senator Elizabeth Warren. The AFL-CIO is campaigning for Democrats to maintain their stance against TPA, and it is continuing to withhold contributions to Democratic congressional campaigns to maximise the pressure. A letter to all House representatives and Senators asking them to oppose Fast-Track was jointly signed by the leaders of every union in the country in March, representing more than 20 million workers.

The total undermining of congressional oversight in Fast-Track, though alarming, is not the chief concern of those who oppose it. It’s the content of the trans-Pacific trade deal that the TPA would fast-track that is fuelling the opposition, and with good cause.

The TPP is part of a ‘new generation’ of free trade agreements that move far beyond the lowering of tariffs and aim primarily to remove ‘non-tariff barriers to trade’ by reaching regulatory coherence or harmonisation between parties. Without a doubt, this will result in a trans-Pacific race to the bottom on labour standards and environmental protections, as well as the offshoring of jobs from industrialised countries; the prising open of access to the state-owned enterprises of poor nations for multi-national corporations; and the imposition of stricter intellectual property demands on these nations. If signed, TPP will cover 800 million people and 40 per cent of the global economy. Next on the agenda is the Trans-Atlantic Trade and Investment Partnership (TTIP) under negotiation between the US and EU.

Negotiations for the TPP began in 2010 and it now includes 12 Pacific rim countries – the US, Canada, Japan, Australia, New Zealand, Singapore, Malaysia, Vietnam, Brunei, Mexico, Chile and Peru. It is to be a ‘living agreement’ – which means other countries can join further down the track, and that the content of the TPP can be altered with agreement from the parties. The text of the proposed agreement and the negotiations have been kept secret, but key chapters have leaked.

The negotiations are reportedly nearing conclusion, with the remaining sticking points being a dispute between the US and Japan over tariffs in the US agriculture sector and in Japan’s car industry. The chief negotiators for the 12 countries met for a week in Hawaii in March and will meet again at the APEC summit in the Philippines in May. Negotiators for several countries have made it clear they are not willing to sign up to an agreement unless Obama secures Fast-Track.

The secrecy that has shrouded the talks has contributed to the hostility to the TPP among the public in the US and other countries. Then US Trade Representative Ron Kirk said in an interview with Reuters in May 2012: “There’s a practical reason, for our ability both to preserve negotiating strength and to encourage our partners to be willing to put issues on the table they may not otherwise, that we have to preserve some measure of discretion and confidentiality.”

Reuters went on to say that Kirk noted during the interview “that about a decade ago negotiators released the draft text of the proposed Free Trade Area of the Americas and were subsequently unable to reach a final agreement”. When the Bush administration released the draft text of the FTAA in 2001, an expansion of the North American Free Trade Agreement (NAFTA), the resulting public outcry across the Americas was the beginning of the end for the proposed deal.

The US has existing free trade agreements with 20 states. The bitter experience of previous agreements, particularly NAFTA, signed in 1994, has made the US labour movement deeply wary of TPP, which would cover 40 per cent of the world’s GDP. During the NAFTA negotiations between the US, Canada and Mexico, then US President Bill Clinton promised the agreement would create 20 million new export-based jobs in the US. It didn’t – instead, it led to a net loss of almost one million US jobs, according to the Economic Policy Institute. Industrial investment was off-shored to to Mexico resulting in job losses and a steady downward pressure on US wages.

The impact of NAFTA on Mexico was, of course, much harsher. More than two million small farmers and rural labourers were ruined and dislocated. The minimum wage in Mexico in 2013 was 24 per cent lower in real terms than in 1993. Growth has slowed to less than one per cent annually since 1994 and the poverty rate in 2012 was 52 percent of the population.

According to US NGO Public Citizen, of the 29 chapters of the the draft TPP agreement, only five are actually related to trade issues – the rest focus on the so-called non-tariff barriers. In November 2013, Wikileaks released the draft chapter on Intellectual Property Rights, followed by the draft Environment chapter in January 2014. Observers have gleaned further information from the few public statements made by negotiators regarding the content of the agreement.

Opponents of TPP expect many aspects of the NAFTA experience to be replicated in the trans-Pacific region. One of the most objectionable elements of TPP to the US labour movement is the chapter on government procurement, which will outlaw the ‘Buy American’ laws (some in place since 1934) that favour domestic producers in government contracts as being discriminatory to foreign firms. The major discrepancy in labour conditions and wages across the 12 TPP countries will mean further offshoring of jobs – for example, to Vietnam, where the average monthly wage is US$145.

The large proportion of services delivered in Vietnam by significant state-owned enterprises are also in the sights of the US corporations backing the trade deal, with the US Trade Representative’s office claiming that “levelling the playing field” between private firms and state-owned enterprises is a central goal of the pact.

Among the most vicious proposals in TPP is the plan pushed by major pharmaceutical companies to force impoverished Pacific countries to sign up to the US model of intellectual property rights, which go beyond the World Trade Organisation (WTO)-administered agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) made in 1994.

A map of TPP countries. Image from New York Times.

A map of TPP countries. Image from New York Times.

The leaked intellectual property chapter of TPP confirmed that the warnings of public health experts and the World Health Organisation were well-founded – that the US is pushing for stricter rules in TPP countries on medicine patents, which will restrict the availability of affordable medicines. Flexibilities within the TRIPS agreement exempt ‘least developed countries’ from having to grant pharmaceutical patents up until 2016. But so-called TRIPS-plus provisions in TPP will uniformly delay the production of generic drugs for cancer and other life-threatening illnesses, by including an “automatic monopoly period” of up to 12 years for patented drugs before generic versions can be manufactured – putting treatment out of reach for potentially millions of patients across the Pacific for a decade or more.

A May 2012 briefing paper on the impact of free trade agreements on public health by the UN Development Programme and UNAIDS said: “TRIPS flexibilities were implemented and endorsed by the global community as methods to mitigate the impact of WTO Agreements on access to affordable, quality pharmaceuticals.” The report cites a study on the impact of the US-Colombia Trade Promotion Agreement that estimates an increase of almost $1 billion being spent on medicines in Colombia by 2020, or alternatively a 40 per cent decrease in medicine consumption.

The UN paper adds that in order to keep the benefits of the TRIPS flexibilities, “countries, at minimum should avoid entering into FTAs that contain TRIPS-plus obligations that can impact on pharmaceuticals price or availability”. Economist Joeseph Stiglitz has written: “In the poorest countries, this is not just about moving money into corporate coffers: thousands would die unnecessarily.”

The intellectual property chapter has also alarmed internet freedom activists, who believe the proponents of the failed US Stop Online Piracy Act (SOPA) and the Senate’s Protect IP Act (PIPA), which were scuttled due to public opposition in 2012, are aiming to implement a similar regime under the cover of the TPP. SOPA and PIPA proposed empowering the government to block internet service providers of infringing websites and to penalise individuals who accessed copyrighted content with jail terms. The leaked chapter includes text that would expand copyright periods significantly beyond TRIPS.

Digital rights group the Electronic Frontier Foundation says the leaked proposals restrict innovation and freedom of expression online, and that provisions on trade secrets mean countries will be able to “enact harsh criminal punishments against anyone who reveals or even accesses information through a ‘computer system’ that is allegedly confidential”.

And internet privacy advocates are equally concerned by the leaked detail on data flow provisions that they believe will allow privacy protections to be challenged on the basis that they act as an unfair barrier to trade. The text includes prohibitions on countries deciding where private data is stored – ie, in onshore or offshore data centres.

The protection of investors’ rights is the most controversial of all aspects of the TPP, and it is this aspect of the pact that environmentalists are most concerned about. Regardless of domestic policies that may exist or be introduced to combat climate change and reduce carbon emissions, investment in the fossil fuel industry, including in shale, will be locked in and unassailable. The leaked Environment chapter of TPP contains soft and aspirational language in comparison to the other leaked chapters. University  of Auckland Professor Jane Kelsey, who provides an analysis of the leaked text, writes of the Environment chapter: “The obligations are weak and compliance with them is unenforceable.”

Corporate justice and socialised risk

The TPP proposes to ease restrictions on investment and boost protection for investors. The centrepiece of this protection is the ISDS or investor-to-state dispute settlement mechanism. The ISDS mechanism will allow private companies to sue national governments for compensation for loss of “expected future profits” in response to government actions that impact on the company’s activities in private offshore tribunals that comprise three lawyers with the power to award damages.

The critical Investment chapter of the TPP leaked and surfaced on Wikileaks on March 25, and was dated January 20, 2015. Activists universally responded to the leak by describing the ISDS provisions as even worse than feared. Footnote 29 of the leaked chapter states that Australia is exempt from the ISDS provisions but adds: “deletion of footnote is subject to certain conditions”.

Coordinator of the Australian Fair Trade and Investment Network Dr Patricia Ranald said that the Australian government “is using ISDS as a bargaining chip in the hope of improved access to US agricultural markets” and appears to be “about to agree to ISDS” under certain conditions. Australia has existing agreements with 28 countries that include ISDS provisions.

The former Labor government in Australia banned the inclusion of ISDS mechanisms in future trade deals. But this policy has been overturned by the conservative Abbott government, which says it will assess each trade deal on a case-by-case basis. It has already signed up to a major free trade agreement with South Korea, released in February 2014, which includes an ISDS provision.

The action by tobacco giant Philip Morris against the Australian government over its introduction of plain packaging for cigarettes in 2010 has become the most infamous and emblematic example of ISDS in action. There are three main reasons why the case, which was launched in 2011 and is ongoing, has generated a deep suspicion towards ISDS among the public internationally.

First and foremost is the fact that a major corporation peddling a deadly project is entitled to sue a national government for implementing an important and effective public health measure. Secondly, there is the fact that Philip Morris exhausted its legal avenues in Australia’s national courts, having its claim rejected in the High Court before it decided to invoke ISDS – when Australian citizens and companies are not entitled to any further recourse beyond the High Court.

Finally, there is the blatant cynicism in Philip Morris’s manoeuvring, known as ‘treaty shopping’, that allowed it to launch the ISDS action over the supposed appropriation of its trademark by the Australian government. In February 2011 Philip Morris Australia, which was then owned entirely by a Swiss company, was bought by Hong Kong-based Philip Morris Asia. Australia did not have an ISDS trade agreement with Switzerland, but it did have a 1993 trade deal with Hong Kong that included ISDS provisions.

Most commentators believe Philip Morris will lose the case, but that hasn’t prevented it from threatening other countries that have expressed their intention to introduce cigarette plain packaging legislation. It had already brought a case against Uruguay in 2010 for introducing health warnings on packaging.

In March this year, Ireland became the second state in the world to introduce plain packaging. Comedian John Oliver covered the story on his Last Week Tonight programme, quoting from a June 2013 letter to the Irish government from a subsidiary of Philip Morris International threatening legal action that included the line, “As a dance is only meaningful when danced, so a trademark is only meaningful when used”. “And you know you have a pretty weak legal argument,” Oliver commented, “if it sounds like a rejected fucking Jewel lyric”.

The investor-state dispute settlement mechanism was first introduced into trade agreements and treaties in the 1950s, ostensibly to protect investors from outright government expropriation of their land or factories in countries that lacked a robust legal system. It was rarely used until the 1990s when the US-led surge in free trade agreements made it a more readily accessible option for multi-national corporations. According to the UN Conference on Trade and Development (UNCTAD), there has been a ten-fold rise in reported cases 2000.

Obama at TPP meeting in Hawaii 2011

US president Barack Obama at the TPP Leaders meeting at the APEC summit in 2011. Photo: Reuters

An ISDS mechanism is now included in more than 3,000 trade agreements around the world, around 2,700 of which are bilateral investment agreements and the remainder of which are trade treaties. According to UNCTAD, by the end of 2014 there have been a total of 608 known ISDS cases brought against more than 100 national governments that have resulted in the payout to multi-nationals of an unknown amount that totals billions of dollars.

In 2014 alone, 42 ISDS decisions were handed down, and the awards in just three of these totalled an unprecedented $50 billion. Corporations from the US and the European Union combined have initiated 64 per cent of claims that are publicly known. But because ISDS arbitration can be kept totally private, there may be many other cases the public is unaware of.

Canada, which entered into an ISDS agreement with the US through NAFTA, expected that its investors would be enabled to sue the Mexican government but was unprepared for the series of cases brought against it by US corporations, which have led it to pay out at least $158 million in compensation or settlements. Outstanding cases against Canada include damages claims of $6 billion. The US government has never yet lost an ISDS case. Just wait until it enters an ISDS agreement with Japan under TPP, observers warn.

The mechanism has repeatedly been used to directly challenge legislation by democratic governments made in the public interest. After NAFTA, the Canadian government banned a fuel additive, MMT, due to it having been found to be a risk to human health and the environment. It was sued by US MMT manufacturer Ethyl for a loss of expected future profits and settled the case for $13 million. The settlement included not only a payout but an obligation on the Canadian government to rescind the ban and publicly declare that MMT was safe.

Argentina was sued by more than 40 corporations after it took action to devalue its currency and freeze energy and water bills in the wake of its 2001 financial crisis. Compensation orders against Argentina for these actions reached $1.15 billion by 2008. In Ecuador, after the government cancelled Occidental Petroleum contracts for illegally breaching contractual terms, the US oil company was awarded $1.77 billion. Ecuador, Bolivia and Venezuela have now withdrawn from the World Bank’s investor dispute mechanism and withdrawn from many bilateral investment treaties that contain an ISDS mechanism.

In response to the Arab Spring in 2011, the then Egyptian government conceded an increase in the minimum monthly wage from $56 to $99 – only to be sued in June 2012 for almost $100 million by French corporation Veolia, which objected to having to pay its Alexandria bus station workers more.

In an intellectual property case, US drug corporation Eli Lilly is suing Canada under NAFTA over its laws that require the patentability of a medicine to be proved before a patent is granted – a law with the public policy goal of ensuring accessibility to affordable medicines.

In another case under NAFTA, Canada is being sued by US company Lone Pine Resources for $230 million for the declaration by the Quebec government of a moratorium on oil and gas exploration in 2011. The moratorium resulted in the revocation of Lone Pine’s permit to frack gas from underneath the St Lawrence River, which was an essential source of drinking water in Quebec.

In 2011, Swedish energy corporation Vattenfall claimed €1.4 billion in damages from Germany for placing environmental restrictions on a coal-fired power plant the company was building in Hamburg. The government settled – lifting the restrictions. After the Fukishima nuclear disaster, the German government made a decision to phase out nuclear energy. The same Swedish company, Vattenfall, sued under ISDS again in 2012 – this time for €3.7 billion for the loss of profits in its two nuclear power plants.

The examples go on.

If successful, the US-led drive to include ISDS provisions in TPP and TTIP – which combined, cover more than 60 per cent of global GDP – will result in an exponential rise in ISDS claims, where taxpayers are forced to shoulder the cost of the risks associated with foreign direct investment.

In response to the Europe-wide outcry against the proposed inclusion of ISDS in TTIP, the European Commission issued a ‘fact-sheet’ on October 13, 2013 that claims US investors may not want to bring an action against an EU member state in that state’s national courts, “because it might think they are biased or lack independence”.

An Australian ISDS lawyer, Sam Luttrell, offered a similarly lame justification for why investors would be reluctant to sign trade deals with Australia without an ISDS mechanism on ABC radio in September 2014 – arguing that foreign investors would be wary because Australia has a legal system based on case law, because it’s a federation, and because there’s a “perception” that investors will be discriminated against in Australian courts on the grounds of their nationality. But Australia’s Productivity Commission, hardly a beacon of protectionism, found in a 2010 report that there is no evidence that ISDS has any significant impact on foreign direct investment into a country.

Regulatory ‘chill’

As objectionable as the socialisation of risk taken by powerful multinational corporations is, the direct power these corporations are seizing over public policy is far more disturbing.

The European Commission’s fact-sheet declares: “Including an ISDS mechanism in an investment agreement will not make it more difficult for the EU or its Member States to pass laws or regulations.” It said the EU is working to ensure that “genuine regulations and laws are consistent with investment agreements”, a statement that begs the question – what exactly is a genuine regulation or law? Does the European Commission get to decide on behalf of member states which laws passed by democratic governments can be maintained and which can be discarded in the interests of multinational investors?

In an attempt to convince EU citizens that member states will retain the right to regulate under TTIP, the fact sheet continues: “A country cannot be compelled to repeal a measure: it always has the option of paying compensation instead.”

Well – that’s reassuring.

Discussing the impact of NAFTA, a former Canadian government official was quoted in The Nation as saying: “I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years.” These included pharmaceuticals, chemicals, patents and pesticides. “Virtually all of the new initiatives were targeted and most of them never saw the light of day.”

World-leading ISDS lawyer and Essex Court Chambers barrister Toby Landau QC said that this so-called regulatory chill exists “without doubt”, adding that in his role as counsel, “on a number of occasions now I’ve actually been instructed by governments to advise on possible adverse implications or consequences of a particular policy in terms of investor-state cases”.

As to achieving ‘regulatory coherence’ in the new generation of free trade agreements, business associations believe it would save everyone time if they were allowed to just write regulations for governments. In the lead-up to the opening of TTIP negotiations in 2013, the US Chamber of Commerce and BusinessEurope demanded a seat at the table with regulators “to essentially co-write regulation” in an October 2012 joint statement.

The ISDS provisions that offer the highest success rate for multinationals are the “fair and equitable treatment” commitment and the “minimum standard treatment” guarantee. According to Public Citizen, in 74 per cent of cases where US investors were successful, the fair and equitable treatment provision was used. Both provisions would be extended in TPP according to the Investment chapter that Wikileaks released in March. The chapter shows that under the minimum standard of treatment provisions, a case could be taken against government action that consists of a higher degree of regulation or scrutiny than an investor expected based on its dealing with a previous government.

UNCTAD has calculated that of all known investor-state disputes, 42 per cent were won by the state, 31 per cent were won by the investor, and 27 per cent were settled – typically regarded as a win by the investor in terms of a financial or legislative reward. There is no limit on the amount that can be awarded to a corporation, and the average cost of running a case is $8 million.

So how do these tribunals actually work?

They are ad-hoc tribunals convened by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL) dispute mechanism. Three private lawyers are selected from a roster to arbitrate – one appointed by the investor, one by the state, and one that is agreed by both parties.

They meet in hotels or conference centres for a few days or a week, according to leading US ISDS lawyer – and fierce critic of the system – George Kahale. The proceedings are often kept secret and there are no public disclosure requirements.

Many lawyers alternate between representing major corporations in cases against governments and being ‘judges’ in ISDS tribunals. They do not earn a flat salary, as judges do in most countries, but rather earn more money the more tribunals they sit on. Incredibly, there is no requirement to follow precedent – the findings and the sum awarded are entirely at the discretion of the panel of corporate lawyers.

In its analysis of the leaked Investment chapter of TPP, Public Citizen outlines this extreme conflict of interest: “Since only foreign investors can launch cases and also select one of the three tribunalists, ISDS tribunalists have a structural incentive to concoct fanciful interpretations of foreign investors’ rights and order that they be compensated for breaches of obligations to which signatory governments never agreed.” An investor-friendly tribunalist clearly has a higher chance of being selected by corporations to sit on future tribunals.

Despite the wave of opposition to an ISDS being included in TTIP in Europe, demonstrated in the 150,000 responses received by the public consultation the European Commission was forced to undertake in 2014, the Commission appears determined to include it in the final agreement – with token added “safeguards”, no doubt.

The “safeguards” that were included in the Central America Free Trade Agreement in 2005 have been replicated in the TPP Investment chapter – but these safeguards have been ignored in practice by the tribunals, which have no appeal mechanism.

Regarded as the economic arm of his administration’s ‘Pivot to Asia’ aimed at containing the power of China, signing off on TPP is an urgent priority for Obama in the coming months, but it won’t happen unless Fast Track is approved by Congress. Enormous pressure by multinational corporations is being exerted on Democrats to delegate this authority to the President.

The Trans-Pacific Partnership will be followed by TTIP and the US-led Trade in Services Agreement. TISA is an even more secretive agreement aimed at the deregulation and ‘regulatory coherence’ of financial and other services that has been under negotiation between more than 50 countries since 2013.

The three agreements collectively, if signed, will result in a historic and unprecedented transfer of political and policy-making power to multinational corporations. This makes the stakes dizzyingly high for the fate of Fast Track, not only for the populations of TPP countries but for the vast majority of the world’s population that will be affected by this new generation of corporate trade deals.