The Tyranny of European Banks

PARIS -- There is a celebrated observation of the 1920s Italian radical, Antonio Gramsci, that perfectly fits the economic paralysis of today's Europe: "The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear."

A week before the final round of the French presidential election, which is very likely to propel the Socialist, Francois Hollande, to the Elysee Palace, it is hard to see how even a left government in a single European nation can defy the austerity consensus.

In France, as elsewhere, there is a pervasive popular backlash against the austerity policies being inflicted by Europe's financial and political elites. The more that European nations cut their budget deficits to reassure bankers and financial speculators, the more their economies shrink -- leading the same financiers to keep betting against their bonds.

With this medicine, Spain and Portugal have followed Greece into deep recession. In Britain, the Conservative-led government has idiotically embraced an austerity budget not because money markets have demanded it but because the Tories think it's necessary medicine. Britain has been rewarded with a double dip recession.

The European Central Bank has kept Europe's commercial banks afloat by advancing them over a trillion Euros in very cheap money -- which the banks turn around and invest mostly in government bonds. This produces a quick profit for the banks. But it only kicks the proverbial can down the road, since speculative money markets continue betting against the very same bonds.

The Maastricht Treaty of 1993, which created the Euro and the modern European Union, requires member nations to keep their deficits at no more than 3 percent of GDP. In a recession, when reduced tax revenues cause deficits to widen, that requirement is a straitjacket.

The new conservative Spanish government, which has ordered painful budget cuts, is presiding over a worsening economy and is under pressure from Brussels and Frankfurt to cut further. With unemployment at 23 percent and rising, Prime Minister Mariano Rajoy recently told the leaders of the European Union to take a flying leap.

As a perfect example of the perversity of the conventional wisdom, Standard and Poor's, the ratings agency whose complicity in subprime fakery helped bring us the crisis, acted Thursday to downgrade Spanish government bonds to a BBB+ rating. S&P said that Spain's goal, responding to EU pressure to cut its budget deficit to 5.3 percent of gross domestic product in 2012, is considered unlikely to succeed, because of Spain's deteriorating economy.

In other words, "markets," which allegedly are demanding austerity, then punish nations that pursue austerity because economic conditions (surprise!) worsen. Spain's borrowing costs have doubled in a month, and will now rise further because of the reduced credit rating.

Maybe the answer is: Let's stop trusting the verdicts of private financial markets and their corrupted rating agencies.

German Chancellor Angela Merkel, whose economy has benefited from the rest of Europe's pain, continues to insist that any debt restructuring be accompanied by perverse fiscal retrenchment. Germany profits because the more that financial markets flee from the bonds of other nations, the more money pours into German government bunds, reducing German costs of borrowing.

So, what is to be done?

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