1. Introduction
1. Neither economic crisis nor high government debt
are new phenomena. Both Italy and Belgium, for example, faced government
debt far exceeding annual GDP by 125% in the 1990s
(before the introduction
of the European Single Currency but already within the European
Monetary Union) without this state debt having been called a crisis.
The United States of America and Japan likewise have had deficits
for decades – the United States face a double deficit in budgetary
and international trade affairs alike – without disturbing the markets
until recently. (So the question remains why is over-indebtedness
a problem and what do we understand as being over-indebted.) We
thus have to deal with the problem of what renders the current situation
different to previous difficulties and what is the (potential) impact
on democracy and human rights, including social rights.
2. In trying to understand and to overcome the current economic
and financial crisis, which is not primarily a crisis of over-indebtedness
of states, we have to acknowledge that there is no such thing as
a simple answer or a “
Königsweg”
out. The reasons for increased sovereign debt differ widely from
country to country as do the possible remedies to solve the problem.
Put simply: Ireland saved its banks by issuing government bonds; Iceland
tried to do the same but had to face the fact that its banking sector
already far exceeded its national financial capabilities. When we
compare the current situation with historic financial crises, we
can detect parallels with the Great Depression of the 1930s, with
Latin America’s situation in the 1980s and the Asian crisis in the
1990s.
History does raise some
concern over the future possible developments in Europe after the crisis.
Austerity after a severe financial and economic crisis can potentially
lead to nationalistic governments, or a race for better resources;
not to mention violations of fundamental social rights, xenophobic
populism, and other grave societal ills. However, the success of
F. D. Roosevelt’s “New Deal” after the Great Depression shows that
good can also come of even deep economic crises if the government
response is appropriate.
3. But historical comparisons have their limits. The current
crisis in Europe and the Western World is not a cyclical one as
in former years where a crisis follows a boom and vice versa. The
situation many European states face these days with limited access
to financial market resources, increased sovereign debt, ailing banks,
a discontented population, was triggered by a near-meltdown of the
global financial sector. But the reason why this could affect national
governments in the way it did has deeper roots.
4. The cause is the exposure of these countries to the global
financial market: the main buyers of gilts are not private investors
but international banks and financial institutions. First, these
banks and financial institutions had the problem that due to the
sectorial crisis in 2008 they had to curb their risk exposure. Second, they
were aware that confidence in institutions and markets is the most
important factor in assessing risk. So, they scrutinised the risk
inherent in some of the government bonds, which brought back into
focus the overall grade of indebtedness of certain countries. Ireland
had to deal with ailing national banks and Spain faced a severe
real estate bubble which burst due to the financial crisis. It has
to be stressed that all of this would have been much less of a problem
had the countries had higher saving rates of their population, like
the one in Germany, for example. But unbalanced economic policies
over decades made any reaction to the freeze of international money
caused by now cautious investors impossible.
2. The crisis and state indebtedness
5. What is new in today’s financial crisis which triggered
increasing government debt is that it affected the advanced world
economies when everybody thought that the Great Depression could
not happen again. The Great Depression resulted in J. M. Keynes
“General Theory of Employment, Interest and Money”. He advised governments
to spend money even to the detriment of increased budget deficits,
to flood the markets with liquidity and to bring interest rates
down. Keynes did not advise them to cut spending, raise taxes and
increase interest rates – which were the remedies suggested by the
International Monetary Fund (IMF) to countries like Argentina, Brazil,
Indonesia, Mexico, Russia and Thailand, and in their 1990s economic
crises. This is also the policy followed by the United Kingdom since
the Tory victory in national elections in 2010 and the current popular
propositions for the Mediterranean European Union member countries
like Greece, Italy, Portugal and Spain. Contrary to IMF advice for
less advanced economies, the United States treasury and Federal
Reserve both acted in textbook manner according to Keynes when faced
with the 2008 subprime crisis – although only after Lehman Brothers
was left to go bust, putting the world at the brink of a complete
financial meltdown.
6. Keynes was one of the first (or even the first) economist
who stressed the importance of expectations in financial markets
and of confidence which financial players have to restore. If one
wants to have a single and simple answer for governments regarding
what to do in times of heavy public debt, it is to restore confidence within
the financial market that the country will be able to pay back its
debt entirely. But confidence is not a commodity that is evenly
spread among national economies. Financial actors may be confident
that Ireland will be able to solve its banking problem but they
might not have confidence in Greece to ever pay high wages, high
pensions,
and interest on
public debt. Unfortunately, the global financial market is not a
fair place. Rich economies can much more easily restore faith in
their economic policy, especially if they have a long and consistent
stability track record than weak governments or less advanced countries.
7. Governments that have never shown this zeal have to convince
their population and national companies that everybody will be better
off after the crisis is resolved. If these governments do not have
the necessary credibility even to convince their own people, they
need to be able to borrow this credibility from other states and
or institutions which might act as mediators. It cannot be the correct
way forward for the poor to have to carry the burden of restoring
financial sanity (as could be argued is the case now in the United
Kingdom and Greece) while the rich are left untouched. Economic
policy measures have to be balanced: capital controls can help to
avoid capital flight by the rich; corruption and cronyism have to
be curbed; and investors (including banks)
need to bear at least
part of the losses when loans go bad. Governments have to be transparent
on how they support corporates indirectly, how they distribute public
contracts, what the next measures will be, when newly introduced
taxes in order to pay public debt will be abolished again, and so
on.
3. Indebtedness and austerity measures – potentially
undemocratic and violating human rights
8. If we consider that many European states are over-indebted
– and I regret the lack of data on non-European Union and non-OECD
member countries –, we can consider that this over-indebtedness
is problematic from an economic point of view (as explained above).
However, this alone would not make it a problem the Council of Europe
should deal with. What makes over-indebtedness of states a matter
for the Council of Europe is its potential to pose a threat to democracy
and human rights.
9. It is the role and the duty of governments to govern. This
means setting down the rules and regulations within which the economy
can then develop freely. One of the main problems which led to the
current financial and economic crisis was the comparative lack of
global regulation of the international financial system – in particular,
of democratic regulation.
As
the rapporteur, Mr Omtzigt, clearly states in his report, this regulation is
still lacking. I consider that this is an unacceptable situation,
and that the Council of Europe should insist on such regulation
being adopted and implemented without further delay. Our citizens
– to speak with Icelandic President Ólafur Ragnar Grimsson – should
not have to “choose between democracy and the financial markets”,
as he considered the Icelanders had to.
Over-indebtedness of states is
a problem when it comes to the democratic regulation of the markets,
as it weakens states’ negotiating position.
10. Over-indebtedness of states can theoretically also be a threat
to human rights, in particular fundamental social rights such as
those guaranteed by the Council of Europe’s (revised) Social Charter,
if states are unable to continue to finance their welfare systems
– the cost of debt-service, in particular at the higher interest
rates imposed on some states by the financial markets, has ballooned
in recent years. However, the more immediate threat to these rights
is, in fact, not posed by the over-indebtedness of states themselves,
but rather to short-sighted “austerity” packages, which are in reality
simply budgetary cuts in the social and welfare sector. There are
numerous examples of such cuts which negatively affect the social
rights of the whole population of the countries implementing such
packages, including the most vulnerable groups of the population:
from lowering the minimum wage (to a “minimum” which no longer covers
“minimum” needs and thus no longer allows for decent living) to
cutting child and/or unemployment or other benefits, to no longer
paying for breast-cancer screening. The list is practically endless,
and as morally reprehensible as it is unacceptable from a human rights
point of view.
11. I am not saying that over-indebted states should not curb
their budget deficits, even if they have ballooned mainly due to
the bailing out of banks: I am advocating a balancing of the budget
which is respectful of citizen’s democratic and human rights. Citizens
should have a say in how and when the state debt should be cut –
governments should thus not be dictated to by financial institutions
(or other states)
in
this area, in particular since it even makes good economic sense
to make budgetary cuts in boom years rather than just following
the greatest crisis and recession of this century. But countries
should also remember their international commitments and obligations,
and governments’ decisions on where to cut should thus be fully
in line with them. Other budget cutting alternatives, which do not
directly threaten social rights and the European welfare state,
do exist: for instance in states’ military budgets, in reducing
tax breaks for the wealthy, and so on.
4. Recommendations
12. Democratic economic institutions have to be strengthened
in all Council of Europe member states: there has to be a proper
supervision of banks and other financial institutions, as called
for in
Resolution 1673
(2009) on challenges of the financial crisis for the
world economic institutions. Financial institutions from countries
that have not ratified the Basel Accord Requirements should not
be allowed to deal in the currencies and assets of those countries
who ratified and accepted the minimum requirements.
13. I agree with Mr Omtzigt’s analysis of the failures of the
rating agencies. The European countries should set up their own
public multinational rating agency supervised by parliaments, preferably
under OECD responsibility, but should this not be possible, under
European Union or Council of Europe responsibility, since sound
financial markets and open economies are a precondition for democracy
and human rights.
14. Member states should self-restrict their borrowing from foreign
capital markets. Japan can sustain a 200% of GDP deficit because
this is mainly financed by Japanese private investors – and those
parts that are not are covered by exports. So Japan is an example
of a self-sufficient economy which guarantees a certain shock-resistance
plus independence from speculative investors. It is obvious that
this cannot be achieved within a few years in Europe. But governments
should be aware of the fact that heavy international indebtedness
brings with it risks of “foreign” interference – be it by financial
markets, institutions, or states.
15. Council of Europe member states should be aware of the fact
that sound statistical measures and policy are vital for transparency
and financial engagement of international institutions and other
countries. It could be advisable to set up a multinational statistics
agency for Council of Europe member countries which either helps less
advanced countries in their statistical work or even takes over
national statistical duties. It is clear that this is not an easy
task, especially as there are always several ways to dress up statistical
figures.
But the ways to gather data,
to define the data needed, to calculate and to measure growth can
be unified in order to show where there is need for development
aid, interest rate subsidies, etc.
16. I have agreed with Mr Omtzigt not to propose a number of amendments
which would follow from the above now, and to suggest that the Social,
Health and Family Affairs Committee be seized for report on a new report
instead, which would deal with “austerity measures – a danger for
democracy and social rights”.
17. The aim of Amendment A is to streamline the text. Amendment
B
seeks to point out that
too much power has shifted towards global financial markets and
the private sector (a judgment I think I share with Mr Omtzigt). Amendment
C
removes an unnecessary
value judgment.
In Amendment
D, reference is made to the Assembly’s past
Resolution 1673 (2009) on challenges
of the financial crisis for the world economic institutions and
the recommendations made therein. Amendments E and F
seek to prohibit the nationalisation
of private debt.