The west's crisis is one of democracy as much as finance

The spirit of dictators like Ceausescu is finding new life in the response of the European elite to pressures in the eurozone

• 
• • Slavoj Žižek
  • The Guardian, Wednesday 16 January 2013 18.22 GMT

Nicolae Ceausescu addresses Romania's Communist party congress in November 1989, shortly before he was deposed and executed. Photograph: Gerard Fouet/AFP

 

In one of the last interviews before his fall, Nicolae Ceausescu was asked by a western journalist how he justified the fact that Romanian citizens could not travel freely abroad although freedom of movement was guaranteed by the constitution. His answer was in the best tradition of Stalinist sophistry: true, the constitution guarantees freedom of movement, but it also guarantees the right to a safe, prosperous home. So we have here a potential conflict of rights: if Romanian citizens were to be allowed to leave the country, the prosperity of their homeland would be threatened. In this conflict, one has to make a choice, and the right to a prosperous, safe homeland enjoys clear priority …

It seems that this same spirit is alive and well in Slovenia today. Last month the constitutional court found that a referendum on legislation to set up a "bad bank" and a sovereign holding would be unconstitutional – in effect banning a popular vote on the matter. The referendum was proposed by trade unions challenging the government's neoliberal economic politics, and the proposal got enough signatures to make it obligatory.

The idea of the "bad bank" was of a place to transfer all bad credit from main banks, which would then be salvaged by state money (ie at taxpayers' expense), so preventing any serious inquiry into who was responsible for this bad credit in the first place. This measure, debated for months, was far from being generally accepted, even by financial specialists. So why prohibit the referendum? In 2011, when George Papandreou's government in Greece proposed a referendum on austerity measures, there was panic in Brussels, but even there no one dared to directly prohibit it.

According to the Slovenian constitutional court, the referendum "would have caused unconstitutional consequences". How? The court conceded a constitutional right to a referendum, but claimed that its execution would endanger other constitutional values that should be given priority in an economic crisis: the efficient functioning of the state apparatus, especially in creating conditions for economic growth; the realisation of human rights, especially the rights to social security and to free economic initiative.

In short, in assessing the consequences of the referendum, the court simply accepted as fact that failing to obey the dictates of international financial institutions (or to meet their expectations) can lead to political and economic crisis, and is thus unconstitutional. To put it bluntly: since meeting these dictates and expectations is the condition of maintaining the constitutional order, they have priority over the constitution (and eo ipso state sovereignty).

Slovenia may be a small country, but this decision is a symptom of a global tendency towards the limitation of democracy. The idea is that, in a complex economic situation like today's, the majority of the people are not qualified to decide – they are unaware of the catastrophic consequences that would ensue if their demands were to be met. This line of argument is not new. In a TV interview a couple of years ago, the sociologist Ralf Dahrendorf linked the growing distrust for democracy to the fact that, after every revolutionary change, the road to new prosperity leads through a "valley of tears". After the breakdown of socialism, one cannot directly pass to the abundance of a successful market economy: limited, but real, socialist welfare and security have to be dismantled, and these first steps are necessarily painful. The same goes for western Europe, where the passage from the post-second world war welfare state to new global economy involves painful renunciations, less security, less guaranteed social care. For Dahrendorf, the problem is encapsulated by the simple fact that this painful passage through the "valley of tears" lasts longer than the average period between elections, so that the temptation is great to postpone the difficult changes for the short-term electoral gains.

For him, the paradigm here is the disappointment of the large strata of post-communist nations with the economic results of the new democratic order: in the glorious days of 1989, they equated democracy with the abundance of western consumerist societies; and 20 years later, with the abundance still missing, they now blame democracy itself.

Unfortunately, Dahrendorf focuses much less on the opposite temptation: if the majority resist the necessary structural changes in the economy, would one of the logical conclusions not be that, for a decade or so, an enlightened elite should take power, even by non-democratic means, to enforce the necessary measures and thus lay the foundations for truly stable democracy?

Along these lines, the journalist Fareed Zakaria pointed out how democracy can only "catch on" in economically developed countries. If developing countries are "prematurely democratised", the result is a populism that ends in economic catastrophe and political despotism – no wonder that today's economically most successful third world countries (Taiwan, South Korea, Chile) embraced full democracy only after a period of authoritarian rule. And, furthermore, does this line of thinking not provide the best argument for the authoritarian regime in China?

What is new today is that, with the financial crisis that began in 2008, this same distrust of democracy – once constrained to the third world or post-communist developing countries – is gaining ground in the developed west itself: what was a decade or two ago patronising advice to others now concerns ourselves.

The least one can say is that this crisis offers proof that it is not the people but experts themselves who do not know what they are doing. In western Europe we are effectively witnessing a growing inability of the ruling elite – they know less and less how to rule. Look at how Europe is dealing with the Greek crisis: putting pressure on Greece to repay debts, but at the same time ruining its economy through imposed austerity measures and thereby making sure that the Greek debt will never be repaid.

At the end of October last year, the IMF itself released research showing that the economic damage from aggressive austerity measures may be as much as three times larger than previously assumed, thereby nullifying its own advice on austerity in the eurozone crisis. Now the IMF admits that forcing Greece and other debt-burdened countries to reduce their deficits too quickly would be counterproductive, but only after hundreds of thousands of jobs have been lost because of such "miscalculations".

And therein resides the true message of the "irrational" popular protests all around Europe: the protesters know very well what they don't know; they don't pretend to have fast and easy answers; but what their instinct is telling them is nonetheless true – that those in power also don't know it. In Europe today, the blind are leading the blind.

Hockey - The untold story of how India lost world supremacy

by Minhaz Merchant in the Times of India

Pakistan’s hockey stars have been forced out of the lucrative new Hockey India League, patterned on the cash-rich IPL. I will leave debate on the rights and wrongs of this to a later post as a sequel to Make Pakistan pay. For the moment, let’s stick to hockey – how India lost its global supremacy and how we can regain it.

One afternoon, as I watched the late Tiger Pataudi, India’s former Test cricket captain, playing a hockey match at Bombay Gymkhana, I realized that few were aware how good a hockey player Tiger was. He had long retired from Test cricket but played a brilliant game for the club that afternoon.

Later, chatting casually, he remarked, pointing to the lush green field: “The tragedy of Indian hockey is that we no longer play on grass like this.” Tiger was appalled that the international game had switched to astroturf, putting Indian players at such a disadvantage.

Between 1928 and 1980, India won 8 Olympic gold medals in hockey. After 1980, we have not won a single hockey gold. At the 2012 London Olympics, India’s hockey team finished last in a field of 12.

The reasons for this are complex. But a principal cause is the betrayal of the country’s national sport by those elected to guard it and the ruthless duplicity of European and Australasian hockey authorities.

Till the early-1970s, hockey globally was played on grass. Indian players, bred on the fields of Punjab, Kerala and Goa, were unbeatable. Only Pakistan, with a similar lineage, offered competition.

All that changed in the mid-1970s. The International Hockey Federation (FIH) altered the rules to make synthetic astroturf the mandatory playing surface for international hockey tournaments.

The 1976 Olympics in Montreal was the first Games in which astroturf was used in hockey. For the first time since it began playing hockey in the 1928 Games in Amsterdam, India did not win even a bronze medal. The Indian Hockey Federation (IHF) should have objected. Whether through collusion or apathy, it did not. All Olympic Games henceforth were played on hard astroturf.

India has few astroturf grounds. They are expensive to lay (over Rs. 8 crore) and difficult to play on. While grass, on which hockey had been played internationally for nearly a century, allowed skilled Indian and Pakistani players to trap the ball, dribble and pass, astroturf suits the physicality of European and Australian hockey players based on raw power rather than technical skill.

Affluent Western countries like Holland, Germany and Australia have hundreds of astroturf grounds. The advantage is palpable. Not surprisingly, since 1980, Europe and Australia have dominated world hockey. India and Pakistan have slipped out of the world’s top five hockey-playing nations.

Indian sports administrators must share the blame. Not only were they complicit in allowing the change in playing surface from grass to synthetic astroturf, they were slow to adapt to it once the rules had been changed. Astroturf grounds were not laid. Local tournaments continued to be played on grass. When India played abroad, it started with a huge handicap.

As Sardara Singh, currently India’s best hockey international, said in a television interview, “Hockey players in India play on astroturf for the first time at the age of 19 or 20 and find it hard to adapt.”

What is the way forward? While astroturf cannot now be wished away, India can use its growing commercial influence to host a separate annual field hockey tournament. The game would be transformed. Just as tennis is played on different surfaces (grass at Wimbledon, clay at the French Open and hard courts at the US and Australian Opens), there is no reason why hockey can’t have two optional surfaces: astroturf and grass.

Like tennis players adapt to grass, clay and hard courts within a span of months (between the French Open in May, Wimbledon in July and the US Open in September), so can professional hockey players. Grass is hockey’s natural surface. It tests skill not just strength.

India’s hockey authorities, fractured by internecine rivalries, have little global clout. It is India’s corporate sector, with an interest in future Olympic gold medals, which must lead the campaign to restore natural turf as one of two alternative playing surfaces of choice in future international hockey tournaments. The new Hockey India League could set the example in its next edition. Sponsorships for field hockey tournaments would follow.

India has begun winning Olympic medals in individual sports since the Beijing Games but none in team sports like hockey. That must change. In India less than 0.1% of the population (around one million) has access to the facilities, nutrition and training athletes from Western countries and China do. In “sports-access” terms, our population is equivalent to New Zealand’s. It is no shame to win fewer medals than smaller, richer countries. But it is a shame not to give our national sport, hockey, a level playing field.

European Gypsies have Indian Genes

Gypsies arrived in Europe 1,500 years ago, genetic study says

Migrants from India came to continent much earlier than previously thought, analysis suggests, and arrived in the Balkans

• Giles Tremlett in Madrid
• guardian.co.uk, Friday 7 December 2012 18.09 GMT

Gypsies in a shanty town in Madrid, Spain. Photograph: Navia/Cover/Getty Images

In parts of Europe they are still shunned as disruptive outsiders or patronised as little more than an exotic source of music and dance, but Gypsies have ancient roots that stretch back more than a millennium, scientists have proved.

A genetic analysis of 13 Gypsy groups around Europe, published in Current Biologyjournal, has revealed that the arrival on the continent of their forebears from northern India happened far earlier than was thought, about 1,500 years ago.

The earliest population reached the Balkans, while the spread outwards from there came nine centuries ago, according to researchers at Spain's Institute of Evolutionary Biology and elsewhere.

"There were already some linguistic studies that gave clues pointing to India and genetic studies too, though without being precise about the where or when," said David Comas, who led the research group.

"Now we can see that they arrived in one single wave from the north-west of India around 1,500 years ago."

Gypsies were originally thought to have come from Egypt and some of the earliest references to them in English, dating back to the 16th century, call them "Egyptians".

Early European references describe wandering, nomadic communities who were known for their music and skill with horses.

They arrived in Spain in the 15th century or earlier – with records of groups of up to a hundred Gypsies travelling together, often led by someone who termed himself a "count" or "duke" – and held on despite attempts to expel them or imprison those who refused to give up their language and culture.

They were accompanied by a legend that they had been expelled from Egypt for trying to hide Jesus.

The new study now sets their arrival in Europe in the sixth century – a time when Britain was still in its early post-Roman era.

Gypsies, often referred to as Roma, are found across all of Europe and make up the continent's largest ethnic minority. There are about 11 million of Gypsies in Europe.

Centuries of discrimination, including systematic extermination by some 20th-century fascist regimes, have helped keep many of them marginalised.

"There is still widespread discrimination and this is the most marginalised minority in Europe," said Robert Kushen of the European Roma Rights Centre in Hungary.

Both France, during Nicolas Sarkozy's presidency, and Italy, under Silvio Berlusconi, targeted Gypsy communities with populist eviction policies, while long-running discrimination continues in much of eastern Europe.

Sarkozy's Socialist successor, François Hollande, has done little to change policies in France.

"They suffer from forced evictions – and have been targeted recently in both France and Italy," Kushen said. "And it seems that in some places, like Romania and Bulgaria, the laws applying to free movement within the European Union don't quite apply to them in the same way that they apply to other people."

But the stereotypical wandering Gypsy in a mule-drawn caravan belongs to the distant past. The vast majority of Europe's Gypsies have long been settled. "There is still the myth of the nomad, which drives bad policy in places like Italy, where the government maintains they are nomads when in fact they are not," said Kushen.

His group has called on the European Union to bypass national governments, many of whom ignore EU rules on the treatment of Gypsies and Roma, in order to enforce policies.

And Comas's study shows not only that they share common ancestry from north-west India, but also that they have mixed extensively with other Europeans.

"That is more pronounced in northern and western Europe," he said. "They conserve the genetic footprint from India, but their ancestors are both European and Indian."

Colonised and coloniser, empire's poison infects us all

Ideas that underpinned Britain's imperial project led not only to torture in Kenya, but war and catastrophe in Europe

• 
• • George Monbiot
  • The Guardian, Monday 8 October 2012 20.30 BST

'The ideology that led to Hitler's war and the Holocaust was developed by the colonial powers.' Illustration by Daniel Pudles

Over the gates of Auschwitz were the words "Work Makes You Free". Over the gates of the Solovetsky camp in Lenin's gulag: "Through Labour – Freedom!". Over the gates of the Ngenya detention camp, run by the British in Kenya: "Labour and Freedom". Dehumanisation appears to follow an almost inexorable course.

Last week three elderly Kenyans established the right to sue the British government for the torture that they suffered – castration, beating and rape – in the Kikuyu detention camps it ran in the 1950s.

Many tens of thousands were detained and tortured in the camps. I won't spare you the details: we have been sparing ourselves the details for far too long. Large numbers of men were castrated with pliers. Others were raped, sometimes with the use of knives, broken bottles, rifle barrels and scorpions. Women had similar instruments forced into their vaginas. The guards and officials sliced off ears and fingers, gouged out eyes, mutilated women's breasts with pliers, poured paraffin over people and set them alight. Untold thousands died.

The government's secret archive, revealed this April, shows that the attorney general, the colonial governor and the colonial secretary knew what was happening. The governor ensured that the perpetrators had legal immunity: including the British officers reported to him for roasting prisoners to death. In public the colonial secretary lied and kept lying.

Little distinguishes the British imperial project from any other. In all cases the purpose of empire was loot, land and labour. When people resisted (as some of the Kikuyu did during the Mau Mau rebellion), the response everywhere was the same: extreme and indiscriminate brutality, hidden from public view by distance and official lies.

Successive governments have sought to deny the Kikuyu justice: destroying most of the paperwork, lying about the existence of the rest, seeking to have the case dismissed on technicalities. Their handling of this issue, and the widespread British disavowal of what happened in Kenya, reflects the way this country has been brutalised by its colonial history. Empire did almost as much harm to the imperial nations as it did to their subject peoples.

In his book Exterminate All the Brutes, Sven Lindqvist shows how the ideology that led to Hitler's war and the Holocaust was developed by the colonial powers. Imperialism required an exculpatory myth. It was supplied, primarily, by British theorists.

In 1799 Charles White began the process of identifying Europeans as inherently superior to other peoples. By 1850 the disgraced anatomist Robert Knox had developed the theme into fully fledged racism. His book The Races of Man asserted that dark-skinned people were destined to be enslaved and then annihilated by the "lighter races". Dark meant almost everyone: "What a field of extermination lies before the Saxon, Celtic and Sarmatian races!"

Remarkable as it may sound, this view soon came to dominate British thought. In common with most of the political class, W Winwood Reade, Alfred Russell Wallace,Herbert Spencer, Frederick Farrar, Francis Galton, Benjamin Kidd and even Charles Darwin saw the extermination of dark-skinned people as an inevitable law of nature. Some of them argued that Europeans had a duty to speed it up: both to save the integrity of the species and to put the inferior "races" out of their misery.

These themes were picked up by German theorists. In 1893 Alexander Tille, drawing on British writers, claimed that "it is the right of the stronger race to annihilate the lower". In 1901 Friedrich Ratzel argued in Der Lebensraum that Germany had a right and duty, like Europeans in the Americas, to displace "primitive peoples". In Mein Kampf, Hitler explained that the German empire's eastward expansion would mirror the western and southern extension of British interests. He systematised and industrialised what imperial nations had been doing for five centuries. The scale was greater, the location different, the ideology broadly the same.

I believe that the brutalisation of empire also made the pointless slaughter of the first world war possible. A ruling class that had shut down its feelings to the extent that it could engineer a famine in India in the 1870s in which between 12 million and 29 million people died was capable of almost anything. Empire had tested not only the long-range weaponry that would be deployed in northern France, but also the ideas.

Nor have we wholly abandoned them. Commenting on the Kikuyu case in the Daily Mail, Max Hastings charged that the plaintiffs had come to London "to exploit our feeble-minded justice system". Hearing them "represents an exercise in state masochism". I suspect that if members of Hastings' club had been treated like the Kikuyu, he would be shouting from the rooftops for redress. But Kenyans remain, as colonial logic demanded, the other, bereft of the features and feelings that establish our common humanity.

So, in the eyes of much of the elite, do welfare recipients, "problem families", Muslims and asylum seekers. The process of dehumanisation, so necessary to the colonial project, turns inwards. Until this nation is prepared to recognise what happened and how it was justified, Britain, like the countries it occupied, will remain blighted by imperialism.

The root of Europe's riots

No wonder the protesters are back. They are angry at the backdoor rewriting of the social contract

• 
• • Ha-Joon Chang
  • The Guardian, Friday 28 September 2012 21.15 BST

Rioters beat a policeman during a rally against government austerity measures in Athens. Photograph: John Kolesidis/REUTERS

Throughout the 1980s and 90s, when many developing countries were in crisis and borrowing money from the International Monetary Fund, waves of protests in those countries became known as the "IMF riots". They were so called because they were sparked by the fund's structural adjustment programmes, which imposed austerity, privatisation and deregulation.

The IMF complained that calling these riots thus was unfair, as it had not caused the crises and was only prescribing a medicine, but this was largely self-serving. Many of the crises had actually been caused by the asset bubbles built up following IMF-recommended financial deregulation. Moreover, those rioters were not just expressing general discontent but reacting against the austerity measures that directly threatened their livelihoods, such as cuts in subsidies to basic commodities such as food and water, and cuts in already meagre welfare payments.

The IMF programme, in other words, met such resistance because its designers had forgotten that behind the numbers they were crunching were real people. These criticisms, as well as the ineffectiveness of its economic programme, became so damaging that the IMF has made a lot of changes in the past decade or so. It has become more cautious in pushing for financial deregulation and austerity programmes, renamed its structural adjustment programmes as poverty reduction programmes, and has even (marginally) increased the voting shares of the developing countries in its decision-making.

Given these recent changes in the IMF, it is ironic to see the European governments inflicting an old-IMF-style programme on their own populations. It is one thing to tell the citizens of some faraway country to go to hell but it is another to do the same to your own citizens, who are supposedly your ultimate sovereigns. Indeed, the European governments are out-IMF-ing the IMF in its austerity drive so much that now the fund itself frequently issues the warning that Europe is going too far, too fast.

The threat to livelihoods has reached such a dimension that renewed bouts of rioting are now rocking Greece, Spain and even the usually quieter Portugal. In the case of Spain, its national integrity is threatened by the separatist demand made by the Catalannationalists, who think the austerity policy is unfairly reducing the region's autonomy.

Even if these and other European countries (for other countries have not been free of protests against austerity programmes, such as Britain's university fees riot and the protests by Italy's "recession widows") survive this social unrest through a mixture of heavy-handed policing and political delaying tactics, recent events raise a very serious question about the nature of European politics.

What has been happening in Europe – and indeed the US in a more muted and dispersed form – is nothing short of a complete rewriting of the implicit social contracts that have existed since the end of the second world war. In these contracts, renewed legitimacy was bestowed on the capitalist system, once totally discredited following the great depression. In return it provided a welfare state that guarantees minimum provision for all those burdens that most citizens have to contend with throughout their lives – childcare, education, health, unemployment, disability and old age.

Of course there is nothing sacrosanct about any of the details of these social contracts. Indeed, the contracts have been modified on the margins all the time. However, the rewriting in many European countries is an unprecedented one. It is not simply that the scope and the speed of the cuts are unusually large. It is more that the rewriting is being done through the back door.

Instead of it being explicitly cast as a rewriting of the social contract, changing people's entitlements and changing the way the society establishes its legitimacy, the dismembering of the welfare state is presented as a technocratic exercise of "balancing the books". Democracy is neutered in the process and the protests against the cuts are dismissed. The description of the externally imposed Greek and Italian governments as "technocratic" is the ultimate proof of the attempt to make the radical rewriting of the social contract more acceptable by pretending that it isn't really a political change.

The danger is not only that these austerity measures are killing the European economies but also that they threaten the very legitimacy of European democracies – not just directly by threatening the livelihoods of so many people and pushing the economy into a downward spiral, but also indirectly by undermining the legitimacy of the political system through this backdoor rewriting of the social contract. Especially if they are going to have to go through long tunnels of economic difficulties in coming years, and in the context of global shifts in economic power balance and of severe environmental challenges, European countries can ill afford to have the legitimacy of their political systems damaged in this way.

Europe will thrive. But we could be doomed to a life on the fringes

There is a Little England-ism that would have us leave the EU fold. It would be a disaster

• 
• • Will Hutton
  • The Observer, Sunday 10 June 2012
  •  

Santander: familiar on our high streets and part of the Spanish banking system that needs bailing out Photograph: Kumar Sriskandan / Alamy/Alamy

Taxi drivers and eminent commentators are agreed. The euro is an unmitigated disaster. It should never have been launched. Europe's elites over-reached themselves, locking the proud peoples of Europe in a disastrous straitjacket without any democratic mandate or ongoing accountability. This is payback time. Its collapse won't be pleasant, but the sooner the whole experiment is ended and Europe becomes no more than a loose association of free-trading nations with freely floating exchange rates the better. Eurosceptics have been vindicated.

This has become a settled British media and political consensus and now hardly seems the moment to challenge it. After all, Spain needs a massive bailout of its tottering banking system, including Santander, so familiar on every British high street, before the Greek election next Sunday. This appears to have been agreed yesterday. If Greece were to leave the euro before the bailout is complete, the bank run would overwhelm Spain and spread elsewhere. The EU and the IMF have only days to avoid a calamity. Southern Europe would confront run-away inflation and slump.
Nobody knows what will happen. Now Spain has got its bailout, Germany will agree to a fully fledged European banking union before the end of June, in which all eurozone countries guarantee each other's bank deposits and bank debt, agree common banking supervision and joint means to ensure every eurozone bank has sufficient capital. This should cut the poisonous link between the banking crisis and the public debt crisis. I also bet that the next Greek government will cut a deal to allow it to stay in the euro with less austerity.

In addition, a combination of ultra-cheap money and big infrastructure spending, again agreed reluctantly by Germany, across the continent will start to lift the European economy. The EU will have muddled through and the system held, because in the end the costs of break-up or for any one country exiting were just too prohibitive.

But the situation is dangerously volatile and the Germans may be too slow to act. It may be that we face months of bank runs and pandemonium and that the euro is reduced in essence to a north European euro bloc, including France and Germany but not most of southern Europe. But the big point is that one way or another the euro will have survived in some form because the member countries will have pulled together. And what will remain will be immeasurably stronger and more integrated – a euro area with a banking union, common governance of fiscal policy and political structures to match. Not a federal superstate but a new amalgam of nation states within a new international architecture – and with a newly forged European identity.

One of the byproducts of the crisis is that every European has become aware of the continent's interdependence. What happens in Greece, Spain, Ireland, France or Germany affects everyone else. Like it or not, we have to co-exist. In which case, this becomes a moment of existential choice for Britain. Eurozone members are not only fighting for the euro because the costs of collapse are so awesome. Europe must have a monetary order to underpin its ambitions to be a single market.

Devaluation, touted as a panacea across the British economic and political spectrum, certainly works for an individual country if it can devalue against others that hold their currencies stable. But as Keynes argued so effectively, if devaluation becomes the default policy for the entire system – the temptation in a world of floating exchange rates – then the consequence is disaster. It is an invitation for everyone to engage in beggar-my-neighbour economic policies by trying to rig their currency to boost their exports and minimise their imports, just as China has been doing for 30 years. A single market needs an accompanying monetary order – a heartland Keynesian proposition. This is not a doctrine of euro elites. It is how a single market can be made to work for all its peoples.

Which is why post-crisis Europe will be so tough for Britain. The EU that survives with its euro will be the centre of the European order. It will set interest rates and fiscal policy that will become the benchmark for every other European country. It will be the biggest and most desirable market in Europe and it will set the rules for how trade is conducted within its jurisdiction. Already it is happening. Senior ministers and officials have recognised that Britain had to agree to the banking union – with incalculable consequences for the City – but could do little or nothing to shape it. Financial regulation will be organised in Brussels for the benefit of euro member states. If we don't like, we can lump it. It will be across the board, from economics to climate change.

There is general delight that we are not part of this emerging superstate – a language that misrepresents what Europe is becoming. A referendum will cement our detachment or even lead to exit. Sceptics say the model for us to follow is Switzerland. The truth is that we would be a sort of Greater Guernsey, suffering an accelerated economic rundown. We will proudly float the pound, despite evidence that what floating means in practice – for a country with a huge international financial sector such as ours that sucks in capital from abroad – is systemic overvaluation and the evisceration of our traded goods sector: an economic doomsday machine.

Our foreign-owned car industry, dependent upon exports to the EU single market, will gradually migrate back to Europe or low-cost Asia. On a range of key strategic interests – finance, agriculture, fishing, transport, energy, IT and data security – benchmark policy will be made in Brussels, Paris and Berlin. They will have brought the EU through the crisis; their debts will be to each other, not us.

For the British Eurosceptic none of this counts. The vision is of endless austerity, prioritising deficit reduction above all else and evisceration of the social contract at home, and a refusal to recognise interdependence abroad or that there is any need constructively to create rules and an international order, especially in Europe. We should all resolutely tighten our belts and export our unemployment to others in a world of floating exchange rates and nonexistent international rules. It is a doctrine of arid meanness and nationalistic jingoism, an appropriate editorial line for populist centre-right newspapers, but nonsensical for a state with real interests to protect and advance. Britain stood aside from the euro crisis. It will stand even more aside from what follows, leaving us not just economically diminished but culturally shrunken.

Britain can’t afford to fall for the charms of the false economics Messiah Paul Krugman Superstar economist Paul Krugman wants us to change course, but his solutions are simplistic.

Jeremy Warner in the Telegraph

What does the future hold as Europe slides, ever more hopelessly, towards the abyss? As David Cameron has pointed out, there have been 18 EU summits since he became Prime Minister little more than two years ago, and none of them has produced anything remotely resembling a solution.

The stand-off got a whole lot worse this week. France and Germany are now in open conflict over the way forward, if indeed there is one. For the UK, already bleeding badly from the after-effects of the financial crisis, the situation could scarcely look more threatening.

The fiscal consolidation chosen by the Coalition was always likely to have a negative impact on output, at least in the short term. To make it work, the Government needed the following wind of decent growth elsewhere in the world economy. Instead, it’s facing a hurricane. We look set to be broken by the storm.

But fear not – salvation is at hand. Next week, there comes to these shores a Messiah, a prophet of great wisdom and understanding whose teachings promise to vanquish despair and “end this depression”. He is Prof Paul Krugman, a superstar polemicist who has been described by The Economist as “the most celebrated economist of his generation”. Actually, “celebrated” is not exactly the right word, for Krugman divides opinion like no other. To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

I’ve been a little misleading here. He’s not really coming to Britain to save us, but rather to promote his latest book, End This Depression Now! Krugman is an economist with attitude, and he thinks Britain is in the midst of a “massive blunder” in economic policy. The UK is the very worst example of austerity economics, he believes, for unlike the poor beleaguered nations of the eurozone periphery, we’ve not had this misery forced on us by the ghastly euro, but have opted for it as an unnecessary penance for the sins of the boom. If only we could be persuaded to forsake “Osbornomics” and tread the path originally set out by our dearly beloved former leader, Gordon Brown – that of spending our way back to growth – then all would be well again.

Put like that, of course, it sounds ridiculous, but the fact that Krugman is a Nobel prize-winning economist gives Labour’s calls for a U-turn on the economy an intellectual credibility they would otherwise struggle to attain.

All the great economists – from Adam Smith to John Maynard Keynes – were as much moral philosophers as dispassionate analysts of events, and Krugman is no exception, preaching his message with all the passion of the religious zealot. He feels our pain and begs us to let him help. “The road out of depression and back to full employment is still wide open,” he insists. “We don’t have to suffer like this.”

Krugman may appear loud and radical, but he follows a fairly standard Keynesian text. By his own admission, the social cost of the present downturn doesn’t come anywhere close to the Great Depression of the interwar years, or not yet. None the less, there are parallels, and we already meet Keynes’s classic definition of a depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”.

In such circumstances, monetary policy can help, but only up to a point. In a depression, even those with the balance sheet strength to spend and invest won’t do so, whatever the encouragement offered through ultra-low interest rates. It follows that governments should step into the breach and do the job instead, as a kind of spender of last resort. They can worry about the accumulated debt later, once output has picked up again.

To Krugman, it’s understandable that policymakers screwed up so monumentally in the Great Depression; they didn’t understand what was going on and there was no template for the circumstances they found themselves in. To his mind, there is no excuse this time around; it’s textbook stuff, which is being wilfully ignored.

But haven’t we already tried borrowing to stimulate? And what did it deliver other than fiscal ruin, which in the eurozone periphery is so serious that markets have stopped lending altogether? Krugman has an answer for these questions, too. It’s not the policy that was wrong, merely that the stimulus wasn’t big and sustained enough. As for the eurozone, again, it wasn’t the policy, but the euro. Countries with their own currencies and central banks won’t run into this kind of problem. In extremis, they can always print the money.

Easy peasy, then. What’s not to like? Well, I’m sorry, but I just don’t buy it. It may or may not be possible for a vast, largely internalised economy such as the US, with its reserve currency status, to run double-digit deficits into the indefinite future without adverse consequences, but for the UK it is a much more questionable policy.

True, Britain has lived with much higher debts relative to GDP in the past, but this has nearly always coincided with major wars. With demilitarisation, much of this borrowing to spend falls away and domestic consumption comes roaring back. No such get-out-of-jail-free card exists this time around. Further, the demographic is completely different from that of the post-war baby boom generation, where growth and therefore debt erosion were more or less guaranteed. Today, the unfunded liabilities of an ageing population stretch menacingly into the long-term future.

As it is, government spending in the UK is already approaching 50 per cent of GDP. Just how high does Prof Krugman propose it should go? It’s all very well to say “jobs first” and worry about the deficit later, but once government spending becomes entrenched, it’s very difficult to get rid of it. Even Reagan and Thatcher struggled to make significant inroads.

In any case, the picture Krugman presents of wrong-headed British austerity is a caricature of the reality, though one admittedly encouraged by the Coalition’s rhetoric. Yesterday’s revised GDP figures, showing that the country is even deeper in recession than we thought, would appear to support the mocking tone in which Krugman condemns the idea of “expansionary austerity”. But where is this austerity? In fact, one of the few positive contributors to output in the last quarter was government spending, which grew by 1.6 per cent. Krugman seems to have forgotten the automatic stabilisers, which because of our welfare state are considerably bigger than in the US. In America, much current UK spending would count as a discretionary fiscal stimulus of the sort End This Depression Now! advocates.

As Raghuram Rajan, a former IMF chief economist, has argued, today’s troubles are not simply the result of inadequate demand, but of major changes in the world economy brought about by globalisation. The old monopoly of knowledge and expertise once enjoyed by advanced economies has been swept away. For decades, we compensated for the jobs and income lost to technology and cheaper foreign competition with unaffordable government spending and easy credit. Much of the growth enjoyed in these pre-crisis years was simply unsustainable.

Paul Krugman’s message is seductive, but it’s also unrealistic. If only the solutions to our plight were as simple as he thinks.

The Crisis of European Democracy

by Amartya Sen

IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion. 

There are two reasons for this.

First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe’s monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity. Second, an intention that is fine on its own can conflict with a more urgent priority — in this case, the preservation of a democratic Europe that is concerned about societal well-being. These are values for which Europe has fought, over many decades.

Certainly, some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial; reform on a well-thought-out timetable must be distinguished from reform done in extreme haste. Greece, for all of its accountability problems, was not in an economic crisis before the global recession in 2008. (In fact, its economy grew by 4.6 percent in 2006 and 3 percent in 2007 before beginning its continuing shrinkage.)

The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news.

There is, in fact, plenty of historical evidence that the most effective way to cut deficits is to combine deficit reduction with rapid economic growth, which generates more revenue. The huge deficits after World War II largely disappeared with fast economic growth, and something similar happened during Bill Clinton’s presidency. The much praised reduction of the Swedish budget deficit from 1994 to 1998 occurred alongside fairly rapid growth. In contrast, European countries today are being asked to cut their deficits while remaining trapped in zero or negative economic growth.

There are surely lessons here from John Maynard Keynes, who understood that the state and the market are interdependent. But Keynes had little to say about social justice, including the political commitments with which Europe emerged after World War II. These led to the birth of the modern welfare state and national health services — not to support a market economy but to protect human well-being.

Though these social issues did not engage Keynes deeply, there is an old tradition in economics of combining efficient markets with the provision of public services that the market may not be able to deliver. As Adam Smith (often seen simplistically as the first guru of free-market economics) wrote in “The Wealth of Nations,” there are “two distinct objects” of an economy: “first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”

Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound. 

 

Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

Amartya Sen, a Nobel laureate and a professor of economics and philosophy at Harvard, is the author, most recently, of “The Idea of Justice.”

Chávez's economics lesson for Europe

Hugo Chávez's rejection of the neoliberal policies dragging Europe down sets a hopeful example to Greece and beyond

• 
• • Richard Gott
  • guardian.co.uk, Wednesday 16 May 2012 09.00 BST

'Hugo Chávez and his co-religionaries have called for 21st-century socialism, not a return to Soviet-style economics.' Photograph: Handout/Reuters

 

Some years ago, travelling on the presidential plane of Hugo Chávez of Venezuela with a French friend from Le Monde Diplomatique, we were asked what we thought was happening in Europe. Was there any chance of a move to the left? We replied in the depressed and pessimistic tones typical of the early years of the 21st century. Neither in Britain nor France, nor anywhere in the eurozone, did we see much chance of a political breakthrough.

Then maybe, said Chávez with a twinkle, we could come to your assistance, and he recalled the time in 1830 when revolutionary crowds in the streets of Paris had come out waving the cap of Simón Bolívar, the South American liberator from Venezuela who was to die at the end of that year. Fighting for liberty, Latin American style, was held up as the path for Europe to follow.

At the time, I was encouraged but not persuaded by Chávez's optimism. Yet now I think that he was right; it was good to be reminded that Alexis Tsipras, the leader of Greece's radical left party, Syriza, had visited Caracas in 2007 and inquired about the future possibility of receiving cheap Venezuelan oil, much as Cuba and other Caribbean and Central America countries do. There was a brief moment when Ken Livingstone and Chávez conjured up an oil deal between London and Caracas which looked promising until it was rejected by Boris Johnson.

More important than the prospect of cheap oil is the power of example. Chávez has been engaged since the turn of the century, even before, on a project that rejects the neoliberal economics that afflicts Europe and much of the western world. He has been opposed to the recipes of the World Bank and the International Monetary Fund, and has fought hard against the policies of privatisation that harmed the social and economic fabric of Latin America and with which the European Union is now threatening to destroy the economy of Greece. Chávez has renationalised the many industries, including oil and gas, that were privatised in the 1990s.

The words and inspiration of Chávez have had an effect beyond Venezuela. They have encouraged Argentina to default on its debt; to reorganise its economy thereafter and to renationalise its oil industry. Chávez has helped Evo Morales of Bolivia to run its oil and gas industry for the benefit of the country rather than its foreign shareholders, and more recently to halt the robbery by Spain of the profits of its electricity company. Above all, he has shown the countries of Latin America that there is an alternative to the single neoliberal message that has been endlessly broadcast for decades, by governments and the media in hock to an outdated ideology.

Now is the time for that alternative message to be heard further afield, to be listened to by voters in Europe. In Latin America, governments following an alternative strategy have been re-elected time and time again, suggesting that it is effective and popular. In Europe, governments of whatever hue that follow the standard neoliberal template seem to fall at the first fence, suggesting that the will of the people is not engaged.

Chávez and his co-religionaries in the new "Bolivarian revolution" have called for "21st-century socialism", not a return to Soviet-style economics or the continuation of the mundane social democratic adaptation of capitalism, but, as the Ecuadorean president Rafael Correa has described it, the re-establishment of national planning by the state "for the development of the majority of the people". Greece has a wonderful chance to change the history of Europe and to throw their caps of Bolívar into the air, as once the Italian carbonari did in Paris all those years ago. Lord Byron, who planned to settle in Bolívar's Venezuela before sailing off to help liberate Greece, named his yacht Bolívar; he would certainly have been pleased with contemporary developments.

Some History of Monetary Unions

Making friends the shared currency way

Greece is falling out with its neighbours over their common currency - just as it did about a century ago. But forging closer bonds through shared currencies rarely works for long, says historian David Cannadine.

The continuing travails of the Greek economy and the threat they represent to European Monetary Union may both seem novel and unprecedented, but in several significant ways, we've been there before.

Far from being a recent innovation, there have been monetary unions for almost as long as there has been money. But across two and a half millennia, and whatever varied forms they may have taken, few of them have endured, which helps explain why they've been so easily and so largely forgotten.

On earlier occasions, too, the part played by Greece has been pivotal - sometimes positive but sometimes negative. And history has recently been repeating itself in other ways, for the present single currency is not the first such European scheme from which Britain has held aloof.

It's no exaggeration to say that European history is littered with the ruins of earlier endeavours. The most immediate predecessor to the EMU was the 19th Century Latin Monetary Union, which attempted to unify several European currencies at a time when most circulating coins were still made of gold or silver.

It came into being in August 1866; its initial members were France, Belgium, Italy and Switzerland, and they agreed that their national currencies should be standardised and interchangeable. There was no shared, single legal tender, but the currencies of the member countries were pegged at a fixed rate with each other.

Two years later, the four founding nations were joined by Spain and Greece and in 1889 the union was further enlarged by admitting Romania, Bulgaria, Venezuela, Serbia and San Marino. Thus the enlarged Latin Monetary Union lasted until World War I, which abruptly brought to an end the global financial system based on the gold standard. The result was that the LMU effectively came to an end in 1914, although it lingered on as a legal entity until its formal dissolution in 1927.

Negotiations to bring such a union into being had started in 1865, and Britain had initially been part of them. But two proposals were made, which proved to be a major stumbling block: the first was that the UK must reduce the amount of gold in its sovereigns, albeit by only a tiny amount, to make one pound sterling the exact equivalent of 25 French francs.

The second was that Britain must give up shillings and pence and decimalise its coinage to bring it into line with the other European currencies. Neither of these proposals was deemed acceptable, and so then, as in 1999, Britain stayed out, and left the continentals to their own devices. It also showed no interest in another and even more grandiose scheme floated by the French in 1867, for what was termed a "universal currency", which would have been based on equivalent gold coins to be issued by France, Britain and the United States.

Here were signs and portents aplenty of recent British attitudes and behaviour.

As Walter Bagehot, the essayist and editor of The Economist, put it in the late 1860s, there seemed to be a real danger that, "Before long, all Europe, save England, will have one money, and England will be left outstanding with another money."

If this happened, Bagehot went on, "We shall, to use the vulgar expression, 'be left out in the cold'. If we could adopt this coinage ourselves without material inconvenience, I confess I, for one, should urge our doing so."

But Bagehot believed that the practical difficulties of such a step were "simply insurmountable". He feared more generally that "the attempt to found a universal money is not possible now", and the unhappy fate of the Latin Monetary Union would later bear him out. Yet with the establishment of the late 20th Century European Monetary Union, it did seem as if the state of affairs, which Bagehot one day envisaged - and feared - had come very close to realisation.

But in 2001, Greece joined the European Monetary Union, and the rest, as they say, is history - but a history that is not yet anything like being over.

Ever since it gained its hard-fought independence from the Ottoman Empire in 1832, Greece has been plagued by recurrent budget crises, frequent state defaults and long periods during which it's effectively been cut off from the international capital markets.

So while it was one of the earliest nations to join the Latin Monetary Union, its membership soon became more a cause of concern than celebration, for its chronically weak economy meant successive Greek governments responded by decreasing the amount of gold in their coins, thereby debasing their currency in relation to those of other nations in the union and in violation of the original agreement.
So irresponsible and unacceptable did Greece's behaviour become that it was formally expelled from the Latin Monetary Union in 1908. As a result, some effort was made to readjust the nation's
monetary policy and Greece was readmitted to the Union two years later. But by then, the whole enterprise was increasingly fragile, its future looked increasingly uncertain, and the outbreak of WWI was only four years off.

The Latin Monetary Union was not the only one of its kind in Europe during the 19th Century. A German monetary union was created in 1857, which replaced the many different currencies of the many different German states with a dual system based on the north German thaler and the south German gulden. It proved to be a rare success story among such ventures, surviving until German unification in 1870, when political union was effectively aligned with monetary union and five years later the two separate currencies were replaced by the reichsmark.

Less successful was the Scandinavian Monetary Union, established between Denmark and Sweden in 1873, which was joined by Norway two years later. The aim was to do for Scandinavia what the Latin Monetary Union was attempting more broadly for Europe as a whole but it, too, effectively ceased to function on the outbreak of WWI and it was formally brought to an end in 1924.

Such efforts to create common currencies during the 19th and 20th Centuries are only the most recent examples of a process that's been going on for almost as long as coinage itself has existed. It's an intriguing historical irony that among the pioneers of these endeavours seem to have been none other than the ancient Greeks.

One of the earliest examples of such a union occurred sometime about 400BC, along the western coast of Asia Minor, where seven Greek states allied themselves and produced a coinage that directly foreshadowed later European monetary unions. On the front of the coins was a common design of the baby Heracles strangling a snake, and the first three letters of the Greek word for alliance. On the reverse, each state placed its own particular image. All these coins were minted to the same weight and formed a unified currency, which was the tangible symbol of the seven members' economic alliance.

No-one quite knows why or when this early effort at a monetary union collapsed but 200 years later, the ancient Greeks had another try, organised through what was known as the Achaean League, an alliance of territories and city states covering the whole of the Peloponnese that had been formed about 280BC.

Once again, their shared currency had a common obverse design, in this case the head of Zeus, and reverse patterns that were specific to the individual issuing authority.

The result, according to the historian Polybius, was that the Greeks "had not only formed an allied and friendly community but they have the same laws, weights, measures and coinage, as well as the same officials, council and courts of justice". Here was a level of integration, which the most ardent and ambitious Eurocrat of today might envy and this may help explain why, unlike the Latin or the Scandinavian monetary unions, the Achaean League lasted for well over 100 years.

Its eventual dissolution, in 146BC, was not because the members of the league fell out with each other, over the currency or anything else but was the result of an external shock in the form of a crushing military defeat by the Romans at the Battle of Corinth. Which leaves us with the following paradox: the ancient Greeks were pioneers of monetary unions and were quite eager to keep them in being.

Modern Greece, by contrast, has been a threat and a danger to any monetary union that it has ever joined.

Don't blame the ratings agencies for the eurozone turmoil

Europe and the eurozone are strangling themselves with a toxic mixture of austerity and a structurally flawed financial system

• 
• • Ha-Joon Chang
  • guardian.co.uk, Sunday 15 January 2012 21.16 GMT

Standard & Poor's has decided to downgrade France's top-notch credit rating. Photograph: Philippe Huguen/AFP/Getty Images

 

Even the most rational Europeans must now feel that Friday the 13th is an unlucky day after all. On that day last week, the Greek debt restructuring negotiation broke down, with many bondholders refusing to join the voluntary 50% "haircut" – that is, debt write-off – scheme, agreed last summer. While the negotiation may resume, this has dramatically increased the chance of disorderly Greek default.

Later in the day, Standard & Poor's, one of the big three credit ratings agencies, downgraded nine of the 17 eurozone economies. As a result, Portugal pulled off the hat-trick of getting a "junk" rating by all of the big three, while France was deprived of its coveted AAA rating. With Germany left as the only AAA-rated large economy backing the eurozone rescue fund (the Dutch economy, the second biggest AAA economy left, is much smaller than the French economy) the eurozone crisis looks that much more difficult to handle.

The eurozone countries criticise S&P, and other ratings agencies, for unjustly downgrading their economies. France is particularly upset that it was downgraded while Britain has kept its AAA status, hinting at an Anglo-American conspiracy against France. But this does not wash, as one of the big three, Fitch, is 80% owned by a French company.

Nevertheless, France has some grounds to be aggrieved, as it is doing better on many economic indicators, including budget deficit, than Britain. And given the incompetence and cynicism of the big three exposed by the 1997 Asian financial crisis and more dramatically by the 2008 global financial crisis, there are good grounds for doubting their judgments.

However, the eurozone countries need to realise that its Friday-the-13th misfortune was in no small part their own doing.

First of all, the downgrading owes a lot to the austerity-driven downward adjustments that the core eurozone countries, especially Germany, have imposed upon the periphery economies. As the ratings agencies themselves have often – albeit inconsistently – pointed out, austerity reduces economic growth, which then diminishes the growth of tax revenue, making the budget deficit problem more intractable. The resulting financial turmoil drags even the healthier economies down, which is what we have just seen.

Even the breakdown in the Greek debt negotiation is partly due to past eurozone policy action. In the euro crisis talks last autumn, France took the lead in shooting down the German proposal that the holders of sovereign debts be forced to accept haircuts in a crisis. Having thus delegitimised the very idea of compulsory debt restructuring, the eurozone countries should not be surprised that many holders of Greek government papers are refusing to join a voluntary one.

On top of that, the eurozone countries need to understand why the ratings agencies keep returning to haunt them. Last autumn's EU proposal to strengthen regulation on the ratings industry shows that the eurozone policymakers think the main problem with the ratings industry is lack of competition and transparency. However, the undue influence of the agencies owes a lot more to the very nature of the financial system that the European (and other) policymakers have let evolve in the last couple of decades.

First, over this period they have installed a financial regulatory structure that is highly dependent on the credit ratings agencies. So we measure the capital bases of financial institutions, which determine their abilities to lend, by weighting the assets they own by their respective credit ratings. We also demand that certain financial institutions (eg pension funds, insurance companies) cannot own assets with below a certain minimum credit rating. All well intentioned, but it is no big surprise that such regulatory structure makes the ratings agencies highly influential.

The Americans have actually cottoned on this problem and made the regulatory system less dependent on credit ratings in the Dodd-Frank Act, but the European regulators have failed to do the same. It is no good complaining that ratings agencies are too powerful while keeping in place all those regulations that make them so.

Most fundamentally, and this is what the Americans as well as the Europeans fail to see, the increasingly long-distance and complex nature of our financial system has increased our dependence on ratings agencies.

In the old days, few bothered to engage a credit ratings agency because they dealt with what they knew. Banks lent to companies that they knew or to local households, whose behaviours they could easily understand, even if they did not know them individually. Most people bought financial products from companies and governments of their own countries in their own currencies. However, with greater deregulation of finance, people are increasingly buying and selling financial products issued by companies and countries that they do not really understand. To make it worse, those products are often complex, composite ones created through financial engineering. As a result, we have become increasingly dependent on someone else – that is, the ratings agencies – to tell us how risky our financial actions are.

This means that, unless we simplify the system and structurally reduce the need for the ratings agencies, our dependence on them will persist – if somewhat reduced – even if we make financial regulation less dependent on credit ratings.

The eurozone, and more broadly Europe, is slowly strangling itself with a toxic mixture of austerity and a structurally flawed financial system. Without a radical rethink on the issues of budget deficit, sovereign bankruptcy and financial reform, the continent is doomed to a prolonged period of turmoil and stagnation.

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