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**Sir X** · June 16, 2013, 09:09 AM

The U.S. and the Euro Crisis: Lessons From a Comparison
By Mark Weisbrot | June 11, 2013Last Updated: June 11, 2013 5:20 am

People wait in line at a government employment office in Madrid on June 4, 2013. (Sebastien Berda/AFP/Getty Images)

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The eurozone recession is now the longest on record for the single currency area, according to official statistics released last week, as the economy shrank again in the first quarter of this year. A comparison with the U.S. economy may shed some light on how such a profound economic failure can occur in high-income, highly educated countries in the 21st century.

While the U.S. economy is still weak and vulnerable, the record 12.1 percent unemployment in the eurozone is still a lot worse than our 7.5 percent here. The most victimized countries like Spain and Greece have unemployment of about 27 percent.

The contrast between the United States and Europe is all the more striking because Europe has much stronger labor unions, social democratic parties, and a more developed welfare state. Yet the eurozone has implemented policies far to the right of the U.S. government, causing needless suffering for millions more people. How does this happen?

The answers have little to do with a debt crisis but everything to do with macroeconomic policy, ideology, and—perhaps most importantly—democracy. As such these questions are relevant not only to the populations of both of these economic superpowers, but to most of the world.

Democracy Factor
Let’s start with democracy: most of the eurozone countries have little to no control over the most important policies that the government can use to increase employment and income, including monetary, exchange rate, and increasingly, fiscal policy. They have ceded this control to eurozone authorities—most importantly the European Central Bank (ECB). The decision makers for the more victimized countries—including Spain, Greece, Ireland, Portugal, and Italy—are now the Troika: the ECB, the European Commission, and the International Monetary Fund (IMF). They have their own agenda, and their priority is not restoring employment or even bringing about a speedy economic recovery.

Before returning to that agenda, let’s contrast the economic decision makers of the eurozone with those of the United States. Our central bank, the Federal Reserve, is officially independent of the government. Like the ECB, it has often acted against the interests of the majority, favoring powerful financial interests—most recently in its enabling of the $8 trillion housing bubble that caused the Great Recession. But the Fed is still accountable in some ways. Fed Chair Ben Bernanke has to report regularly to Congress, and the Fed has some fear that Congress might reduce its autonomy if it were to ignore the public interest too flagrantly. (They were not pleased about legislation approved by the U.S. House last year that required, for the first time, an audit of the Fed’s books; it remains blocked in the Senate.)

The ECB, by contrast, has no such constraints. In fact, for most of the last three years, the Troika has actually used the recurrent financial crises in the eurozone to pursue a political agenda: rolling back, as much as possible in a European context, the welfare state. The ECB could have avoided most and possibly all of these crises by simply stabilizing interest rates on Spanish and Italian government bonds.

But as was evident in numerous press reports, the ECB and its allies feared that to end the threat of a full-blown financial crisis would “remove the pressure” on governments to make the reforms that they wanted: cutting pensions and unemployment insurance, weakening unions’ collective bargaining rights (as in Spain), and shrinking government generally.

Finally in the fall of last year, ECB President Mario Draghi made some statements indicating that the ECB would stabilize Spanish and Italian bonds. He got tired of near-death experiences, apparently and after more than a dozen European governments (including Sarkozy’s in France) had fallen, the ECB and its allies were running up against some political limits.

This change in policy, which put an end to the most severe, recurring financial crises in Europe, can be partly attributed to the very slow impact of a severely limited form of democratic input. That included of course massive street protests and electoral events such as the surge of the Greek left party Syriza.

But this “democracy” is far too restricted and slow-moving to save the millions of unemployed whose lives are being wasted. Most importantly, it only ended the acute crises and not the continuing recession caused by the austerity measures enforced by the Troika. This has an important lesson for any country: don’t give away your economic sovereignty, on the most important macroeconomic policies that most of your nation’s livelihood depends upon—unless it is transferred to a set of institutions that you can really trust. Which of course is the opposite of what was created with the eurozone, with its built-in bias toward austerity in recession, and a central bank that was religiously committed to not caring about employment.

Again, the contrast with the United States is worth noting. Even if Mitt Romney had been elected, he would not have dared to implement the kind of austerity that would push the United States back into recession. He would want to get re-elected. That is not to say that eurozone officials have a monopoly on macroeconomic stupidity: the sequester in the United States is currently slowing the U.S. economy and causing unnecessary harm. But it was not as easy to get this result here, it is not as severe, and it will be easier to reverse than in Europe.

Future Hope
What then is the hope for Europe? Another political lesson, which most union leaders know, is that it’s difficult to win any concessions without bargaining power. So far, almost none of the political leaders in the most victimized countries, including Spain and Greece, are willing to simply refuse the Troika’s conditions, for fear that it would lead to their exit from the euro.

So the Troika doesn’t see much reason to let up on the austerity. In that sense the most promising recent development has been the meteoric rise of the populist Beppe Grillo and his Five Star Movement in Italy. He has been willing to talk about a referendum on leaving the euro, and his movement got the largest number of parliamentary seats of any single political party in the February Italian elections.

The case needs to be made, and explained to the public—as economist Paul Krugman recently did for Cyprus—that years of mass unemployment are too high a price to pay for keeping the euro. Politicians do not need to propose leaving the euro, as that remains taboo. But a refusal to accept recessionary conditions would shift the burden to the European authorities as to whether they want to kick any country out of the currency union.

Most likely they would not. But without a willingness to simply refuse the Troika’s recessionary conditions, it’s going to be a long, slow slog to reverse the continued infliction of needless suffering in what used to be one of the most democratic regions of the world.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is also president of Just Foreign Policy. Originally published in Al-Jazeera.

**Sir X** · June 16, 2013, 05:58 PM

ECLAC - Economic Commission for Latin America and : ECLAC Proposes Strengthening Latin America-East Asia Cooperation
06/14/2013| 02:43pm US/EasternRecommend:
0
(14 June 2013)ECLAC proposed a series of recommendations for strengthening Latin America-East Asia cooperation and taking advantage of the growing South-South trade potential, in one of the Commission's most recent studies presented at a ministerial meeting that ended on Friday in Indonesia.

The 6th Ministerial Meeting of the Forum for East Asia and Latin American Cooperation (FEALAC), which took place in Bali on 13 and 14 June, brought together government authorities from 36 Latin American and East Asian countries in a region-to-region dialogue.

According to a speech by Antonio Prado, Deputy Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), "The growing prominence of developing countries in the world economy shows not only their economic buoyancy but also stronger links thanks to better trade, investment and cooperation".

Prado went on to say "Both regions should adjust their strategies and policies to make use of the growing South-South trade potential".

In the document Strengthening biregional cooperation between Latin America and Asia-Pacific: the role of FEALAC, drafted by the ECLAC Division for International Trade and Integration as instructed by the Government of Korea, the Commission states that East Asian economies have remained buoyant while industrialized countries continue to post low levels of growth.

This region is expected to represent 60% of world growth between 2012 and 2022, while Latin America's share could overtake that of the Middle East, Africa or even Europe.

Asia is currently an untapped market for many Latin American countries. Chile and Peru have free trade agreements with China, Japan and South Korea, while Mexico has only signed one with Japan. The same three countries are taking part in negotiations through the Trans-Pacifi*c Partnership Agreement (TPP), whereas MERCOSUR only has a potential agreement with India (and is not negotiating with any other Asian partner).

However, concluding free trade agreements with Asia is not the only way to strengthen ties, nor does it guarantee that they will be used by economic agents. Utilization rates of such agreements are still low when compared with those signed by the United States. For example, the North American Free Trade Agreement (NAFTA), which entered into force 17 years ago, still boasts a stable utilization rate of around 50% every year. The reasons for the low impact of agreements with Asia are the lack of information on procedures, low export volumes and high costs.

ECLAC suggests regular exchanges of information on market opportunities and access conditions, as well as a public policy review in areas such as trade facilitation, internationalization of small and medium-sized enterprises and the development of production networks and value chains.

Business participation is essential to strengthening ties between the two regions. There is therefore a proposal to make a permanent institution of the FEALAC Business Summit, which was first held inColombia in 2012, to provide a space for discussion and generate business opportunities for the two regions.

The ECLAC document also states that innovation and competitiveness can only be achieved by training human resources, and this requires using long-term strategies and plans to strengthen the links between the education system and the production system. In this field, Latin America has much to learn from East Asian experiences in terms of adopting new technologies, distance learning and so on.

Another limitation of the Latin American economy is its infrastructure, which has serious shortcomings in terms of quality and quantity. According to a recent ECLAC study, the region would have to invest around 5.2% of its GDP annually just to meet expected levels of economic infrastructure demand during the period 2006-2020. If the target were to match the per capita infrastructure stock of a group of East Asian economies in 2005, the required annual spending in infrastructure would increase to 7.9% of GDP over the same period (2006-2020).

ECLAC thus proposes the creation of biregional working groups to analyse the experiences of public-private partnerships for infrastructure projects, in order to learn lessons and present new initiatives.

In the face of sustainable development challenges, East Asia has good recent experience that can be used to support the efforts of Latin American countries to move towards a green economy. Business and technology partnerships, as well as closer cooperation between the governments of both continents, will be instrumental in achieving this.

**Sir X** · June 16, 2013, 05:59 PM

James Chen, managing director of Jamaica Macaroni, liaises with workers during a factory tour in March. Unlike other Caribbean countries which have seen rising productivity rates, Jamaica's has remained stagnant. - Rudolph Brown/Photographer
Claude Clarke, Guest Columnist

The hand-wringing has begun. Given our dismal economic performance, the Jamaican dollar has eventually done what was inevitable: it sank below one US cent in value.

Predictably, the event has been marked by expressions of doom and distress. But these have focused on the fear of price increases and its effect on consumption. Questions about the underlying reasons for the unending decline in the value of our currency have hardly been raised. This is typical of the high emotion-low cerebral responses that characterise discussions on matters of national economic importance in Jamaica.

Despite this observation, it is of some significance that the International Monetary Fund (IMF) report for Jamaica's arrangement under the extended fund facility recognises the serious and continuing overvaluation of the Jamaican dollar and the uncompetitiveness of Jamaican production.

Also, as should be obvious, if the goods and services produced in the economy are to be priced to compete in today's liberalised global environment, the unwarranted cost that an overvalued currency adds must be removed. This is the only way in which there can be demand for Jamaican production, jobs can be created, and a dynamic business sector developed.

Without bringing the price of the Jamaican dollar into alignment with its real competitive value, none of this will be possible. This is called devaluation: a word for which today's politicians have a mortal fear. Devaluation, however, is a necessary reality they will be forced to accept if there is to be any credibility to their stated goal of rescuing people from growing poverty and social decay.

Drip-drip-drip depreciation

But it doesn't seem as if the Government has any intention of doing what realism and prudence would dictate. The sanguineness of its reaction to the drip-drip-drip depreciation of the currency that has been taking place since 1990 suggests that the uncompetitiveness of the dollar will continue.

The unplanned crawling nature of the depreciation does not have the same effect as a planned devaluation, combined with complementary policies, as it allows too much opportunity for domestic prices to adjust and erode any potential competitive gains. The drip depreciation system brings nothing but economic uncertainty and continuing currency uncompetitiveness.

On the other hand, if the devaluation is sharper and the Government is prepared to use the tools at its disposal to restrain increasing domestic prices, the hard-currency cost of local productive inputs will fall and the competitiveness of our production will improve.

In the 1980s, Trinidad used sharp devaluations in fairly quick succession to move its dollar from 2.42 to 5.70 to the US dollar. Jamaica took similar steps, devaluing from 1.78 to 5.50. With these actions each country approached what marketers refer to as 'competitive parity' for its currency. The two economies were put on a solid competitive platform. The productivity of the factors the countries put into production improved. Their production increased. And their economies were better placed to create opportunities for their people to be lifted out of poverty.

But even with a competitively priced currency, if the Jamaican Government applies taxes and fees to productive inputs while removing the possibility of compensation through duty waivers, manufacturers will never be able to compete with their overseas counterparts, who bear no such cost burdens. The sector will continue to decline as it has been doing since the 1980s. Yet it appears that this is precisely the Government's commitment to the IMF under its programme.

The prospect of further declines in manufacturing will probably cause no discomfort to many in positions of leadership who subscribe to the view that Jamaica's future lies principally in agriculture, along with a few low-level services. The country's US$1-billion food import bill is interpreted purely as an opportunity for agriculture. It certainly provides an opportunity to boost our agricultural output. But it is an even greater opportunity to develop our manufacturing.

The preposterousness of the idea that the US$1 billion of food products imported into Jamaica consists of raw agricultural produce is borne out by a proper analysis of STATIN data which shows that more than 80% of these food imports are not farm produce but manufactured, processed goods.

No doubt, these facts will do nothing to affect the views of those who continue to diminish the critical role that manufacturing must play in Jamaica's economic future. They are quick to see the economic benefit of replacing US$100 million of raw agricultural imports with local farm produce but find it extremely difficult to recognise that there is far more to be gained in replacing the over US$800 million of manufactured food imports, or the over $1 billion of other manufactured imports (not including transport equipment and chemicals), with locally manufactured goods.

Nor do they even suspect the existence of boundless opportunities for finished-goods exports, given the ongoing boom in the international trade of manufactured goods.

Special role

Manufacturing must play a very special role if Jamaica is to have the means to take our people out of poverty. The relatively high value-added content of manufactured goods increases the scope for the creation of jobs at comparatively high wages. And manufacturing's use of complementary backward, lateral and forward linkages within the economy acts as a stimulant to other economic activities, which is unmatched by any other sector.

In circumstances in which Jamaica desperately needs economic growth, it would seem that adding cost burdens to the means of production would be the last thing a government would want to do. But that is exactly what the Government has included in its proposal to the IMF. Rather than promoting the development of manufacturing, we see the Government targeting the sector as a source of revenue to solve its fiscal problems.

This is happening at a time when Jamaica is failing to produce goods and services capable of competing in today's world of liberalised trade. The low level of productivity to which these extraneous costs contribute has made much of our manufactured output uncompetitive and the sector incapable of creating new jobs that can compete with the rising lure of crime as an economic response to poverty.

Poverty results when inflated economic input costs make the goods and export services produced too expensive to attract consumer demand. When consumer demand declines, production is cut back, reducing the ability to employ labour. This is how the cycle of poverty is set in motion.

This has been the story of Jamaica for more than two decades. The pall of poverty that has been left hanging over our people has denied them the opportunity to lead productive, law-abiding lives.

This depressing economic smog can only be removed if Government creates a policy environment in which high value-added productive activities are given the opportunity to succeed, not one that adds to their cost.

The growth agenda contained in the IMF programme, while recognising the need for improved productivity and competitiveness, does not provide details of how these will be achieved. The reliance for growth seems to be squarely placed on the prospect of super projects promised by foreign interests. The commitment to local high-value large, medium and small productive activities is absent.

The Portia Simpson Miller administration has stood firmly on a platform of care and concern for the poor. It has the duty and the opportunity to bring life and substance to that commitment by building an economy that is increasingly engaged in producing high-value goods and services capable of creating the increments of wealth that can offer economic mobility and uplift to the poor.

Initiative

The quest for production is not the responsibility of any single ministry; it spans many portfolios. Where the execution of any initiative is so divided, it is the prime minister's office that must drive it.

This is particularly relevant in Jamaica's case as production represents the only hope for the poor to whom our prime minister is so strongly committed. Mrs Simpson Miller would greatly advance her commitment if she were to create the capacity within her office to shape macroeconomic and microeconomic policies and organise the institutional and administrative structures capable of achieving growth in production.

The prime minister's office must be able to coordinate the Government's economic actions to ensure that they lead to improving our productivity and increasing our production. Her office must be on top of the effort to increase the value of the country's economic output, increasing employment and reducing poverty.

Although she has assigned ministers to specific areas of responsibility, no one but the prime minister is accountable for the outcomes of their actions. In the end, the extent to which she will be able to inspire the people's confidence in the Government's policies is to convince them that the policies are hers and that she is in charge of the effort to achieve their objectives.

Her choice is simple: Will it be production or poverty?

Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com

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