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Welfare State System at Stake in European Austerity Measures

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In response to austerity measures, proposed as part of the bailout package offered by the IMF and European Union,  workers throughout the European Countries are increasingly joining in strike actions. Ever since the Greek debt crisis surfaced,  European governments as well as financial analysts and economists have talked and written about the need for maintaining fiscal discipline and reducing deficits and debts. The IMF has been  pressuring  European nations, particularly the countries under monitory union to implement austerity measures like spending cuts, jobs cuts and tax increases.

Greece to Hungary

When George Papandreou’s new socialist government came to power in Greece and revealed that  Greece’s budget deficit was actually 12.7 (again modified to 13.6 percent by Eurostat in April) percent of GDP, more than twice the previously published figure by the previous government, the market began to panic. Doubts rose whether Greece could meet its debt commitments in time.

French protest against austerity

The problem was aggravated with the top three credit rating agencies – Fitch, Moody’s and S&P – went on to threaten investors by downgrading the sovereign debt ratings of Greece, Portugal, Spain, Ireland and Hungary. By the end of April 2010, Greece’s government debt was downgraded to junk status. Weather the actual situation led to downgrading or downgrading prepared the ground for the so-called fiscal discipline measures remains a matter of concern.

Meanwhile a sense of urgency for fiscal consolidation was instilled through print, audio and visual media into the minds of the people. The markets and the people were so prepared by the frequent media news and analyses that everyone from common people to top investors began to believe that some drastic measures were inevitable.

Aid (Debt) Package

The run up to the announcement of the joint aid package by the EU and IMF for Greece as well as the Euro Zone was a big fiasco as dramatic as the stage plays scripted by the great “Bard of Avon.” Greek Prime Minister Papandreou repeatedly requested  a guarantee from the EU to prevent the rising sovereign debt costs. On one hand, Germany hesitated to announce any package; the reason given was that it feared it would have to bear a major part of the aid package and that it would  face severe opposition from its people. On the other hand, bond yields demanded by the investors to invest in Greek debt, peaked to more than 22 percent (on 2-year note) at one point.

At last on May 2, with pressure from France and the so-called markets, the EU under the leadership of Germany, announced a 110 billion Euro  aid package to be disbursed over three years, a third of which was agreed to be shared by the IMF. In fact, it was not an aid package but a debt package. It was a debt trap that added more debt to the debt-ridden Greece in the name of helping them resolve their fiscal burden. The IMF is already notorious for its deadly strictures to debt-ridden third world countries so as to make their economies subservient to the interests of the United States of America. The same conditions were stipulated to Greece when granting the aid package.

But, markets were not satisfied. Fresh doubts were raised whether Greece could deliver the required austerity measures along with spending cuts and tax increases. Their doubts extended to other euro zone countries. They continued to demand more profits from the sovereigns of the other highly indebted euro zone countries. Again, discussions, meetings, deliberations, conferences, analyses, pressures, statements, promises and warnings followed.

The situation reached a climax on May 10 with the announcement of 750 billion euros (nearly equal to one trillion dollars) of emergency financial safety net for the euro zone to calm financial markets and to avert contagion from the Greek crisis. With this safety net, the ECB is buying sovereign bonds whenever demand for bond yield soars.

About Sekhar

  • http://www.republicofdave.com Dave Nalle

    Methinks thou dost protest too much. The relatively modest and absolutely necessary austerity measures mentioned in the article for most of these countries will do very little to reduce the crushing burden of the welfare state on most Europeans. This may be a small step away from the Keynsian fallacy and the total state, but it will not be enough to save European economies in the long run. They need to go beyond just cuts to genuine restructuring and the complete elimination of many elements of the welfare state.

    Dave

  • http://financialpolitics.com/ Sekhar

    Dave, I can’t understand the first sentence of your comment. It seems unless I understand it I can’t take the remaining part as I understand.

  • Tim J

    Sekhar, this is a really well done article. I also agree wholeheartedly with your conclusions. I think that the death of European democratic socialism is being predicted prematurely. Some change will occur but Europe will never look like the US.

  • http://financialpolitics.com/ Sekhar

    Dave, I think I got it. It means “it seems to me you protest too much.” Is it?

    Welfare state or the total state as you mentioned, actually helped the US and the European Countries to keep at bay the rising struggles of the workers with the inspiration of success of socialist revolution in Russia and new democratic revolution in China.

    As I see, welfare state system is helpful, to some extent, to the people but definitely a burden for market economy states. The states of market economy are obedient to markets but not to people. That’s what we witnessed on the eve of global financial crisis in the west.

    Market players like investment banks, business companies (MNCs, TNCs) did cause the crisis. This is agreed by the US and EU governments as well as IMF and WB. I assume you have no contradiction with it. Instead of penalizing them, they were granted bailouts, placing more debt burden on the government. Apart from the burden of the crisis, solution of the crisis also has been burdened upon tax payers.

    Where can the tax payers earn money? They earn through work. As you see, it is not provided by private companies till now, in the US as well as the EU. Without work, people cannot spend. Spending by the people is the ultimate market for every sector from manufacturing, service, retail, to real estate. But, that market (consumers) has no jobs to spend. Private companies won’t give jobs because they are in crisis, govt. cannot provide jobs because it should not become welfare state, then who else provide jobs to people? The people chose governments for whose interests?

    If the govt is not allowed to provide livelihood for the people, who will? In free market economies providing livelihood is left to private people. But, they are causing crises again and again in cyclic form. And, they are placing burden of crisis on the governments. This is a vicious circle between the governments and private players in which, people have no part. Even then, they are asked to pay the costs of crises made by private companies.

    Can’t you see here the place of welfare state, that too, to keep the capitalists societies alive?

    Actually, Keynesian thesis was not destined to keep burden on capitalist governments, but to protect capitalism from the advance of the socialism. It succeeded in reaching its destination. Split in Keynes followers was not a big deal. It was about whether to implement Keynes thesis slowly or speedily. It was further mutated into several forms, that’s another matter.

    After the collapse of socialism in Russia and China, or to be precise, as the socialism in those countries began stepping back towards capitalism, the matured capitalist economies began to realize the needlessness of the welfare state measures. As a result, globalization policies have stepped in, as GATT agreement. It was offered cleverly in ‘accept or deny’ mode, with a plan to provide no alternatives to the third world countries.

    I see the comment’s number changed to 4 from 3. I will continue this after reading 3rd one.
    …to be continued

  • http://financialpolitics.com/ Sekhar

    Hi Tim, I’m happy to find a supporter here. I’ll be looking forward for your comments on my previous and upcoming articles.

  • http://financialpolitics.com/ Sekhar

    …Continued from #4

    (I wrote in #4 in last para…, as the socialism in those countries began stepping back… It should be, …as the communist leaders of those countries began stepping back from socialism to capitalism…)

    The rest is known. It finds no place here because it will be out of context.

    The bottom line is Keynesian theory or welfare state is only a measure to prevent people from looking towards socialism. But, it did help people. It created new middle class from the public sector. The newly created middle class formed a strong market for for matured economies until the end of the millennium.

    But, capital never satisfies with some or other amount of profit. It hunts for “more profit” after reaching profit, and, for “more and more profit,” after reaching “more profit” and so on. At the same time capital weakens its own markets (consumers’ spending capacity) for which it goes on hunting. That is the basic fallacy and contradiction of the Capitalism.

    We have seen this through past six decades and one cannot disagree with it because my construct sounds some ism. Let us agree the facts and then go for fallacies or greatness of isms.

    So the never-ending crises of the capitalist societies that occurred due to hunt for profits of likes of greedy wall street giants pushed the matured economies to identify the need for withdrawal of welfare state system, that became a burden in the face of never ending crises.

    Unless the capitalism recognizes the need for feeding its consumer market, it cannot keep itself away from crises. If capitalism recognizes such need, that will be the end of the capitalism. It is the basic contradiction.

    Dave, generally I do not incline to write this analysis, instead I prefer to write facts as I see. Every time, I observe, my facts lead to the above analysis.

    Let me make part of this comment, a post on my blog.

  • http://www.republicofdave.com Dave Nalle

    The fallacy of your last comment is the old one of believing that there is a finite market. Capitalism spins off new sources of profit as it generates growth, so looking for more profit is a positive rather than a negative.

    The problems you see with capitalism are actually problems created when the state interferes in the free market and grants special privileges or places arbitrary restrictions on the functioning of businsses in the marketplace. When that happens then you get monopolies and abusive trade practices and exploitation of the workers.

    But the key problem is government policy. An unhealthy capitalism as we have had in recent years in both America and Europe can only be fixed by ending the enabling role of government and returning to a free and open market.

    Dave