THE EURO CRISIS AND THE FUTURE OF THE EURO

Austrian National Bank, Vienna, completed in 1925 by Ferdinand Glaser and Rudolf Eisler

The Euro was a grand experiment in real time much observed by economists. If you create a single currency you take away the two most important tools of governments to steer the economy, namely the exchange rate and the interest rate. In the first years the single currency system was working well, but that was no real test because there were no economic shocks. The first big shock was 2008 and all the fears of economists came true. Europe was not able to respond adequately.

Before the euro was created the question had to be posed: What are the conditions for a single currency? And unfortunately Europe did not satisfy any of those criteria. First, if there is a shock where regions are differently affected, is there true free labour mobility? In the US people move if there is not enough work in one region or state; there is no real identification with those places. That is totally different in Europe. Greece does not want an “empty” country with all the young moving to other parts of Europe. Second, there should not be too many economic differences for a single currency to work, but the idea was that the European countries would move more closely together with the euro and unfortunately that was a wrong assumption. The Maastricht criteria of 60% stock of debt and 3% flow of deficit should have moved the economies closer together, but there is no economic theory on these figures; they are completely arbitrary. On the contrary, there is evidence that even above 90% debt-GDP ratio there is no negative effect on growth. In the post-World War II years the US had 130% debt-GDP ratio and GB 250% and the Eisenhower administration reacted with an investment programme instead of an austerity programme, e.g. the GI bill which offered free higher education for everyone who needed it or the Highway bill with extensive investment in infrastructure or the R&D bill with government investment in scientific research. With these measures the debt GDP ratio went down to around 50% in a few years due to these governmental investments in human capital, infrastructure and science. Due to high economic growth rates these two countries got rid of their debt without any crisis.…

THE SOVEREIGN DEBT CRISIS AND REFORMS IN EUROPE AFTER THE FINANCIAL CRASH OF 2008

Austrian National Bank, Vienna

Is growth normal and are the recessions of the 1970s/80s and since 2008 just the exceptions to the rule? Calls for reform always follow economic crises. Here are two examples of reforms that were introduced in Europe and can certainly not be seen as meaningful: Due to the serious sovereign debt crisis starting in Greece in 2010 the Greek government was obliged to carry out a multitude of reform measures, called “The Long March to Recovery”, among them laws on household insolvency, bankruptcy, foreclosures and pension reform. In how far were those really reforms and how could they benefit the Greek society? The second example is taken from Latvia: When the country emerged from the USSR it was without debt and mortgages. Then mostly Scandinavian banks moved in and gave extensive loans to the Latvians which finally could not be paid back and the Latvians faced the threat of foreclosures. “Reforms” were carried out that the duty to pay back the loans could be extended to family members, which ended in foreclosures anyway. In which way are these two examples meaningful reforms?…

THE CRISIS OF DEMOCRATIC CAPITALISM IN THE 21st CENTURY

Vienna Federal Court Building, completed in 1839 (architect: Johann Fischer)

Levying hefty taxes on the top one per cent of a society ought to be the most natural thing for politicians seeking to please the masses. Yet most of today’s populist governments are more concerned with immigration and nationalist pride than with the top rate of income tax. This is a sign of the corrupting influence of inequality on democracy. It might be supposed that the more democratic a country’s institutions, the less inequality it should support. Rising inequality means that resources are concentrated in the hands of few and these should be ever more easily outvoted by the majority who are left with a shrinking share of national income. But studies of the relation between democracy and levels of inequality point in conflicting directions. They conclude that democracies raise more taxes than non-democracies, but this does not translate into lower levels of inequality necessarily. One possible reason for this disconnect is that people do not care much about inequality and therefore do not expect their politicians to do something about it. Yet when asked in surveys two thirds of Europeans express concern about current levels of inequality. Nevertheless, it is a fact that political agendas in Europe have become less focused on redistribution even as inequality has risen. Though both inequality and public concern about it are increasing, politicians seem less interested in tackling the problem. On the contrary, instead of increasing pressure on politicians to remedy unfair income distributions, rising inequality boosts the power of the rich, thus enabling them to counter the popular will. Research in political science shows that today’s rich wield outsize influence in Western democracies. The relation between concentrated wealth and political power of the rich is scarcely limited to political campaign spending or to the USA. The rich have many means to shape public opinion: financing nominally apolitical think-tanks or buying media outlets, for example. Although their power may sometimes be used to influence the result of a particular vote, it is often deployed more subtly to shape public narratives about which problems deserve attention. Matters related to “social order”, such as crime and immigration, are found in bills brought before European parliaments and issues such as economic justice are crowded out. This can be attributed to the “negative agenda power” of the rich. As their wealth increases, they have a greater ability to press politicians to emphasise some topics and ignore others. The evidence that concentrated wealth contributes to concentrated power is troubling. It suggests that reducing inequality becomes less likely even as it becomes more urgent. It implies that a vicious cycle of rising inequality is developing together with a loss of democratic accountability. From a historical perspective inequality inevitably rises until checked by disasters like wars or revolutions. Let’s hope that Europe’s one per cent is not all-powerful and uniform in its determination to keep distributional policies off the agenda. In functioning Western democracies political leaders might well find that redistribution can be a winner at the ballot box.

FINANCIAL MARKET REGULATION AFTER 2008

“Sparkasse” Karlovy Vary, Czech Republic

Only feeble attempts at regulating financial markets have been made in the US, the Dodd-Frank Act, and in the EU, the European Systemic Risk Board, since the outbreak of the financial crisis in 2008. The Dodd-Frank Wall Street Reform Act of 2010 was the most comprehensive US financial reform since the Glass-Steagall Act of 1933. Banks were deregulated in 1999 by the Gramm-Leach- Bliley Act, which repealed the Glass-Steagall Act. The Dodd-Frank Act sought to regulate the financial markets and make another economic crisis less likely, just as the Glass-Steagall Act did after the economic crisis of 1929. …

THE FINANCIAL CRISIS & POST-DEMOCRACY

Trieste,”Generali Insurance Company”

In his book „Post-Democracy“ Colin Crouch analysed the state of democracy in Europe. Democracy thrives when there are major opportunities for the mass of ordinary people to actively participate through discussion and autonomous organisations in shaping public life and when they are actively taking up these opportunities. Societies probably come closest to this democratic ideal in the early years of achieving democracy or after a great regime crisis, when enthusiasm for democracy is wide-spread. Most of Western Europe had its democratic moment after World War II. For the first time in the history of capitalism, the general health of the economy was seen as depending on the prosperity of the mass of wage-earners. A certain social compromise was reached between capitalist business interests and the working population. Business interests learned to accept certain limitations on their capacity to use their power. The democratic political capacity concentrated at the level of the nation state, which could guarantee those limitations because firms were largely subordinate to the authority of nation states then.…

THE CAVEATS OF THE FINANCIAL CRISIS IN 2008

Vienna, Town Hall, opened 1883 (architect: Friedrich von Schmidt)

In the US the crisis broke first. It is important to look at the economic background and the warning signals. Between 1995 and 2005 sociologists identified the baby boomer generation peak earning years, a massive group of people, which drove excessive demand in the US. The internet bubble in 2000 broke exactly in the middle of their peak earning years. Furthermore internet trading enabled the access of many more people to the stock market by making trading cheaper and easier.

 

Structural changes in the world of the 1990s influenced the economy of the US, such as the collapse of the Soviet Union, the rise of China and south-east Asia, low oil prices – in 1999 a barrel cost $21-, the terror attacks of September 11, 2001 and the collapse of Enron. The US was already in recession. Uncertainty leads to panic and panic leads to reaction, not pro-action. Reactions tend to focus on today, not on the future. That was the situation when Alan Greenspan, the chairman of the FED in those years reacted with a specific monetary policy. It was based on three assumptions: First, markets are fragile, second, markets infer signs from Greenspan’s behaviour and third, he saw himself as the promoter of free markets. After September 11 US citizens did not go on holidays, did not fly, bought DIY stuff, renovated their homes and stayed at home; they reverted to “cocooning”. Greenspan’s drop of the FED Funds Rate after the burst of the internet bubble to 1% in 2004 should have stimulated the US economy.…

THE GREAT DEPRESSION 1929 vs. THE FINANCIAL CRISIS 2008

Österreichische Postsparkasse, architect Otto Wagner, finished 1906

 

In both cases the crisis originated in the USA. But for the Great Depression starting in 1929 in the US, there would probably have been no rise of Hitler, no Roosevelt and the Soviet System would not have been regarded as a serious economic rival and alternative to capitalism. The US which had so far been a safe haven in a world of break downs and revolutions was the epicentre of the largest global economic earthquake until then.

 

Operations of a capitalist economy are never smooth, fluctuations are an integral part of it. A trade cycle of boom and slump was already characteristic of the 19th century capitalist economies. In the 1920s the Russian economist Kondratiev, who later became a victim of Stalin, discerned a pattern of economic development since the end of the 18th century through a series of “long waves” of 50-60 years. He concluded that the wave of world economy was due for its downturn. The last severe downturn had been in the 1870s. Minor trade cycles had been accepted by economists, but the world economy was expected to go on growing and advancing except for sudden short-lived slumps. Only the socialists (Marx) believed that cycles could put the capitalist system at risk. The history of the world economy since the Industrial Revolution had been characterised by accelerating technological progress, continuous economic growth and increasing “globalisation”, namely an elaborate worldwide division of labour. Even between 1929 and 1933 world economic growth did not cease completely, but slowed down. Yet the globalisation of the economy stopped advancing in the inter-war years.…

THE VIENNA STOCK EXCHANGE

The Vienna Stock Exchange. Architect: Theophil Hansen, 1874-1877

The Vienna Stock Exchange was founded in 1771 by Empress Maria Theresia as one of the first stock exchanges in the world. Gradually the Vienna Stock Exchange developed into the central capital market of the Habsburg Empire. Originally only government bonds and currencies were traded and the building was open to the public. On some days up to 2,000 people were present. In 1818 The Austrian central bank was the first public limited company that was quoted on the Vienna Stock Exchange. Due to the industrialisation and economic boom in the Habsburg Empire in the course of the 19th century the stock exchange gradually gained international reputation. Consequently a host of companies issued shares there. Due to the empire’s liberal economic policies in the second half of the 19th century unfortunately several unstable businesses were financed via a share issue there, which led to a wave of speculation that culminated in the stock exchange crash of 9th May 1873. In the course of this stock exchange break down nearly half of the public limited companies quoted there disappeared. The recovery took a long time and in the meantime trade was mainly in government bonds. That was the return of the big banks as the main financiers of enterprises. These banks also dominated the capital market and stock exchange trading. Trade on the Vienna Stock Exchange started to pick up once more so that new regulation was needed to. In 1875 the third Stock Exchange Law was passed that guaranteed the complete independence of the Vienna Stock Exchange. Finally in 1877 the new building for the Vienna Stock Exchange was opened, designed by one of the famous architects of the “Ringstrasse”, Theophil Hansen. During this time of consolidation rich financiers dominated the trade in shares there and the bond market was the “playground” of the “privatiers”, the well-to-do upper middle class. During the First World War the Vienna Stock Exchange was closed. At the end of 1919 the trading floors were opened to the public again and immediately experienced a boom which ended in a crash in March 1924. In the following years the shocks of the Great Depression of 1929 greatly hampered trading there. The bankruptcy of banks and the plunge of share prices affected the trade on the Vienna Stock Exchange and the number of visitors declined drastically. Interestingly enough, the New York Stock Exchange crash in October 1929, in fact, had no direct consequences for Vienna.…

A COMPARISON OF THE TRANSFORMATION OF BANKING AND INDUSTRIAL DEVELOPMENT IN CEE IN THE 1890s & THE 1990s

Trieste, maritime trading centre of the Habsburg Empire

Close ties of banks with the industry of the Austro-Hungarian Empire can be identified, yet a leading role of banks in the industrialisation process cannot be seen. On the contrary, Austrian banks were for years averse to industrial promotion in the 19th century. The caution which pervaded the banking circles in Austria and the Czech Lands was evident in the general lack of risk capital, and in the preference for participating in or granting extended credit to only the booming enterprises. The caution and the lack of entrepreneurial spirit of the banks can be seen from the fact that in the periods of economic expansion the banks lagged behind with their investments. So industrial development was not triggered by investments of banks, but was preceded by private investment or an expansion of government programmes such as railroads. This was not only true for Austrian and Czech, but also for Hungarian banks. Yet despite the fact that economic development was not bank-led in the Austro-Hungarian Monarchy, the banks did fulfil the important role of providing financial intermediation services. The widespread development of banking services, such as credit on current account, open book advances, and discount of bills, were the main contribution of banks to industrial development. They were very efficient in mobilising capital.…

THE EXPANSION OF AUSTRIAN BANKS INTO CEE AFTER 1989

 

Branch office of the Austrian S-Bausparkasse (Erste Bank) in Romania

Since the collapse of communism, foreign banks bought up roughly 80 per cent of all the banking business in the new Central European member countries of the European Union. The most successful banks were those that bought early. The markets were still relatively small, but growth rates were high, and so were profit margins. To many foreign financial experts it was a surprise who got in first. Germany was the region’s biggest trading partner, but German banks were busy at home with the shocks and costs of the unification of Germany. Somehow they left Eastern Europe to their small neighbour, Austria. Raiffeisen, a co-operative banking group, which had already expanded into Hungary before the coming down of the Iron Curtain in 1987, was in seven more countries by 1998. Even a little earlier, the banks making up Creditanstalt and Bank Austria, which merged in 1997 (BA-CA), first entered the market. BA-CA was bought by HVB of Germany in 2000, which was in turn bought by UniCredit of Italy in 2005. In both acquisitions the BA-CA’s business divisions in Central and Eastern Europe were the big prey the predators were after. The third Austrian bank to join in the rush was Erste Bank with its purchase of Ceska Sporitelna, a Czech bank, in 2000.…