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While the German government presents the Euro crisis as a problem of debt overload like in Greece Heiner Flassbeck, senior economist of UNCTAD says that the root causes for the problem lies in the unresolved financial crisis. Like Greece Portugal is now facing similar destructive austerity measures. In Ireland one can see a severe banking crisis. But EU and the German government are bailing out the the indepted banks and shift the costs of this crisis to the population.


Heiner Flassbeck: Senior Economist at the United Nations Conference on Trade and Development (UNCTAD), Geneva


Fabian Scheidler: The German governemt likes to present Germany as a model boy who has acted perfectedly in the crisis and as a consquence is now growing again. But elsewhere in Europe, criticism of Germany’s role is rising. Wage dumping and ruthless striving for export domination would push other countries to the wall. We talked to Heiner Flassbeck, senior economist at the United Nations Conference on Trade and Development in Geneva, about the root causes of the crisis and the responsibility of the German government. Mr. Flassbeck, since the financial crises of 2008 we are now experiencing a crisis in the state finances of various European countries including Greece, Ireland, Portugal and Spain. How are these two crisis related?”

Heiner Flassbeck: “Well, it is wrong to say we are experiencing a state crisis, some say a state crisis, some are saying state dept crisis, one has to be very careful. What we have is in fact a crisis, a crisis that has resulted from the financial crisis; countries like Greece and others that are now in great difficulty, had before the crisis, before the financial crisis, and one should not forget, had successfully reduced their national dept, and were in a relatively good position. In Greece we saw this stupid cheating, but on the whole it is similar in many countries, all south European countries had in absolute terms reduced their national dept, which was a remarkable achievement; and in so far, one cannot simply go from a financial crisis to a state dept crisis, it is still a financial crisis, the states have intervened, in many markets around the world they have rescued the banks and the speculators, and so it does not automatically become a state crisis. Some would like to see it that way, and that’s why it is viewed that way, because then they can say: ‘Look, the markets are not at fault it’s the state that’s the problem again.’ One shouldn’t be detoured by this.

David Goeßmann: How large are the total rescue packages that the governments of the western countries have given out to the banks?”

Heiner Flassbeck: I don’t know that exactly, and one can’t say that exactly, because one has to wait and see how much is returned, but it certainly goes into the hundreds of billions, somewhere in the order of half of a trillion, that’s really hard to imagine; and that has increased the national dept in the western countries, that is, in the industrial countries, by as much as 15 to 20, in some countries by as much as 25 percent in relation to their gross national product. That is an enormous unheard of increase within a very short period of time; and remember, we mustn’t forget who’s responsible for all this, namely, an unaccountable financial system, which continues to go on as if nothing has happened, and hasn’t at all changed; and if, for example, you look at Germany, that is considerably more than was spent, over such a short period of time, than on the unification of Germany.

Fabian Scheidler: It is alleged that banks and hedge funds have contributed to the crisis by speculating against states like Greece with so-called credit default swaps. In your opinion, what roll have the banks and other financial actors played?

Heiner Flassbeck: Yes, there can be no question about it, of course, it is all speculation, one shouldn’t think that an interest rate which appears in the daily papers, say, for a 10-year Greek bond at 20 percent has anything objective about it, it is pure speculation, it is a purely speculative price, a totally exorbitant price that has nothing to do with reality, just as for example the price of oil, many commodity prices, and many other prices; and of course currencies are traded in highly speculative markets today, and therefore, this has nothing to do with real values or so, or with actual supply and demand. No these are all highly speculative prices that are totally false, for years on end totally false, where the market in no way comes up with a correct result; insofar one needs to qualify this; but first the other point: that what your asking is naturally correct, of course many have in the last two years earned massive amounts of money, the more panic created, the more one can earn from a so-called credit default swap from a Greek government bond, because then the probability increases one will find an idiot who will end up buying the thing. It is here that political policy is a fault, because policy should insure that this speculation stops, and not just goes on and on; with rumours and new rumours and rumours about state bankruptcy and the like. When things are done this way in Europe, one shouldn’t wonder that it gets misused.

David Goeßmann: “In Germany mismanagement of the south European economies, such as in Greece is often sighted as the cause for the crisis. The German tabloid newspaper BILD, for example, ran a campaign against the allegedly lazy Greeks and rambled: ‘Sell your islands, you bankrupt Greeks!’ What in your opinion are the structural causes of the Greek crisis, and other state crises in the European Union?

Heiner Flassbeck: It’s not a matter of a Greek crisis, or of one of the smaller south European countries, it’s a crisis in the system of the euro zone, that’s what very few have understood so far. There is a crisis in the euro zone which is caused by the fact that some countries have lived way beyond their means, and that one large country has lived below its means (5:18 inaudible noise). All that went against the rules of the European Monetary Union, because the Monetary Union set a target as to how one should live; and that target stated that an inflation rate of two percent should be reached, not zero percent, but two percent. And that means, above all, that wages need to rise two percent above national productivity; so in every country nominal wages have to be adjusted by two percent above national productivity. In Greece they have risen 2.6 percent, in Germany they have risen 0.3 percent above productivity; so Germany has done more to undermine this mutually agreed upon goal than the south European countries have. In so far it is absolute demagoguery to say that only the Greeks and the south European countries are at fault and that Germany has nothing to do with this problem. The consequences thereof are clear; the consequences are that we have a massive political shift, a shift in many European countries towards nationalism. The one side becomes nationalistic because it feels as if it has been deceived, and the other side becomes nationalistic because it feels misused by those in the north who are trying to dictate to them their living standards, this is an unbelievably dangerous development. I see Europe in grave danger, and German policy makers have not even begun to try to explain to the German people the nature of the problem which resides within the system itself.

Fabian Scheidler: Perhaps you can again explain to our viewers the relationship between wage restraint in Germany and the problems in other countries. Who ends up paying for the fact that Germany is the world’s export champion?

Heiner Flassbeck: Well, that’s actually quite simple, when you enter into a monetary union, a union in which there is no national currency, then you have too, as I’ve said, agree upon the goal of a common inflation rate that is mutually strives towards, that all countries thrive towards, and not just at a particular point in time, but practically forever, for as long as one wishes to maintain a common currency. Only then can the monetary union work, when one doesn’t do what Germany does, when in Germany you have only an increase of 0.3 percent in unit labour costs, in Greece of 2.6, in Portugal 2.8 and so on, that than means that over a period of 10 years, production costs in Germany became extremely low in comparison to the south European countries. Prices sink because corporations are able to factor this into their production, and so, naturally, German corporations are able to massively gain in market share, they can totally dominate markets, they are able to crowd out the producers in the other countries. And, in this example, one clearly sees that this has nothing to do with national productivity, or with competitiveness, as is claimed in Germany, or with our proficiency, no, this is only a result of the fact that in Germany, as a result of political policy in tandem with the unions, but also because of pressure on the unions, wages have not been able to rise.

David Goeßmann: The International Monetary Fund and the European Union have levied upon Greece, in the form of its rescue packages, rigorous austerity measures. How do you view these austerity measures and what are their results?

Heiner Flassbeck: “Well, one can clearly see that it is not working in Greece. Greece is still in recession, in a very deep recession; the last estimates say minus 3 percent, after minus 4 point something percent last year; it’s is a catastrophe. In Germany, one should try to imagine Germany having a minus 5.6 percent recession, and was now happy, yes, euphoric that it was only minus 3.5 percent in recession; if we in Germany had to deal with another year in recession the world would go under. But this is what we expect from the Greeks and say to them: ‘This has to be, there is no alternative, you have to do this, only this way will you get out of your malaise’. But this is not the way out of their misery, if the strong country, the surplus country, Germany, doesn’t give these countries a chance at their markets; and that means that wages in Germany would have to rise substantially, at least substantially higher than in the last 10 years. In Greece wages should rise by somewhat less, but shouldn’t, like now, be radically cut. And then we would have a chance, in 10 or 15 years or so, to get out of this malaise and save the European Monetary Union. Since, this is not being done, the most likely result will be that the whole European Monetary Union will end in a deflation, because everyone will cut wages and Germany will not significantly raise them; everywhere unit labour costs will sink, and that will mean that we will sooner or later end up in a deflation. At the present time this is being overlapped by the speculation in commodities, but that won’t last long.

Fabian Scheidler: Portugal is also receiving money from the rescue packages and is facing similar pressure to economize. What will the Portuguese have to deal with?

Heiner Flassbeck: Well, with pretty much the same thing, and they’re already doing it, they can see in Portugal, how we are expecting countries to accept the unacceptable; how we are asking in the middle of the crisis for them to save, to cut government spending, to further cut wages, and this leads of course to extreme political instability. And one should keep this in mind; we do not live in a vacuum where one does not have to be conscious of the political environment. One can’t force these countries to accept economic things that are bound to fail politically. Like I’ve said, this will end up like it did in Finland; on the one side you have those in the north who are pretentious and do not want to continue to pay for the lazy ones in the south, and the lazy ones in the south are saying, the crazy ones to the north have wrecked our economy. This is the way to ruin, not only the currency union, but the entire European Union, to have it fall apart into its constituent parts. And then we will see that this will set us back economically by 20, 30 or 40 years.

David Goeßmann: For a long time Ireland was seen as a model neoliberal country. Since the crisis, however, that country has virtually imploded. Since 2007 economic output has shrunk by more than 11 percent and unemployment has risen from 4 to 13 percent. What differences are there with the crisis in Greece?

Heiner Flassbeck: Ireland in many ways has a different kind of crisis. Ireland has also a crisis in competitiveness because wages have too strongly risen, but that’s not what has been decisive. In Ireland you had something like the Anglo-American housing bubble, a housing bubble where enormous speculation in rising prices in land and housing took place. There was an insane banking system which supported these speculations, and from my point of view, the government made the mistake of right from the beginning of the crisis to guarantee these bloated up banks in Ireland their existence, that was certainly a big mistake. The state should at all times protect the deposits in the banks of its citizens, but there is no reason why it should have to protect the highly speculating banks themselves. That’s valid for us and that’s valid for all countries. This is why in the future we need to separate bank activity into ‘normal banks’ and ‘gambler banks’. And ‘gambler banks’ should never be bailed out. But all this came together in Ireland, they really over did it, in addition to the speculation bubble that we all had, they had this land and housing price bubble, and that this would eventually have to collapse, was really quite obvious. But this crisis, like I’ve said, has a somewhat different character than to those in southern Europe.  

Fabian Scheidler: Ireland has received aid loans from the EU; however, under pressure from the Merkel government, with the condition that the creditors of the ailing Irish banks, which include many German banks, be fully paid out. In addition, the Irish have to pay high penalty interests of 5.8 percent for these aid loans. Will Ireland be able to get out of the crisis this way?

Heiner Flassbeck: No, if one doesn’t fix the banking system there will be no way out of the crisis. And I don’t really know, no one really knows, how many bad securities are still in these bank balances. At the moment it looks like a bottomless pit, but like I’ve said, there is no reason to have to save these banks; the deposits of the citizens, sure, but all the rest that are tied to these banks, no. That’s why we have a market economy, where the market players have to accept a certain amount of risk and deal with the possible collapse of a bank. And in the European area one could readily deal with the consequences of such a banking crises. The astonishing thing is, and here you can see the ambivalence or the one sided evaluation of many politicians; on the one side many speak readily, without hesitation, about bankruptcy for Greece, a state, an entire state, which of course is of an entirely different quality than the bankruptcy of a bank. But very little is said about bank failure in Greece, it is totally the other way around, and one should be speaking about bank failure in Ireland, whereas a national bankruptcy, in the true sense of the word, in the Euro zone, would in my opinion be a catastrophe with unforeseeable consequences.