How the bond markets shackled European democracy

The bond markets are now riding roughshod over democracy in Europe, dictating policy - and personnel, writes George Irvin.

Reading the parallel columns by Jackie Ashley and Douglas Alexander in yesterday’s Guardian was not the best way to start the day.

While both are correct about the danger arising from Britain’s mindless ignorance of the implications of Eurozone collapse – and Jackie is rightly scathing about the way in which democracy was overridden last week in Greece and Italy – neither writer makes the obvious point about the political power of bond markets.

As Bill Clinton’s economic adviser James Carville famously remarked in 1992,

 “When I die I want to come back as the bond market because apparently it’s more important than the fucking Pope!” 

There is no lack of evidence about how the international financial markets have grown so powerful that they can ride roughshod over democratic decision making. (See, for example, Furman, Jason and Joseph E. Stiglitz (1998): “Economic Crises: Evidence and Insights from East Asia” – Brookings Papers on Economic Activity 2 (1998):1 {114}.)

In Clinton’s case, because his plans for extending health care reform and other social benefits were deemed ‘inflationary’, long-term bond yields rose precipitously and the reforms were duly scrapped

In Britain, the Osborne’s economic policies are essentially driven by the City of London, and in the past week, like it or not, we have seen democratically elected leaders in Greece and Italy toppled by the bond vigilantes.

Such events may be shocking for citizens of the richest OECD countries, but the machinations of international finance are well know in the world’s the poorer regions, be it Argentina, Brazil, Mexico in the 1980s and 1990s; Indonesia, Malaysia, Thailand and South Korea and Russia in the 1990s; and perhaps best known, Argentina’s default of 2001-02.

Obviously, domestic corruption and economic mismanagement figured in each of the above countries. But there is no denying the fact that the herd instinct of financial markets played a key role in their destabilisation.

The irony is not just that destabilisation in the eurozone will continue, but that politicians will allow it to continue. Mario Monti is an economist and Lucas Papedemos an ex-Central Banker, but both these allegedly neutral ‘technocrats’, a quite meaningless phrase, will attempt to push through a package of austerity measures dictated by the EU/ECB/IMF troika.

It is patently obvious that although both countries may have bought a few weeks’ time, the measures are bound to fail.

In both cases, the underlying problem is not so much indebtedness as lack of growth – Italian growth has been flat and Greek growth disastrously negative.

As first year economics students will know, a country’s public debt-to-GDP ratio grows whenever the interest rate on the debt exceeds the rate of growth. In short, ‘austerity’, far from lowering the debt ratio, will raise it – at some point in future bond markets will attack these countries even more viciously than they have in the recent past; contagion will spread, and rumours of eurozone collapse will multiply.

Need this happen? The answer is a clear ‘no’; were the ECB to use the €3trillion at its disposal to provide an unconditional guarantee for all Eurozone sovereign bonds (ie, to act as ‘lender of the last resort), permanent calm would be restored, and the ECB would in practice need to purchase very few bonds.

But the German centre-right coalition opposes such a move and has the backing of the country’s constitutional court. The centre-right coalition preaches ‘bankers’ economics’ and above all represents the interests of finance. And to put matters bluntly, the financial sector – not just in Frankfurt but in London – is making loads of ‘dosh selling credit default swaps and shorting sovereign bonds.

Robert Skidelsky might well have been speaking not just for Britain but for Europe and the USA when he told the House of Lords in March:

“As things stand, the banks are the permanent government of the country, whichever party is in power.”

See also:

Eurozone crisis update: From the analytical to the hystericalAlex Hern, November 11th 2011

Why the latest euro deal won’t workGeorge Irvin, October 28th 2011

Is the eurozone out of the woods after ‘haircut’ deal?Ben Fox, October 27th 2011

Boris’s call for Euro break-up would be disastrous for the UKBen Fox, July 29th 2011

Eurozone must pool its debt for any chance of halting the crisisBen Fox, July 15th 2011

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29 Responses to “How the bond markets shackled European democracy”

  1. Warren Puckett

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  2. The Dragon Fairy

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  3. Richard Murphy

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  4. Oliver Beatson

  5. Political Planet

    How the bond markets shackled European democracy: The bond markets are now riding roughshod over democracy in Eu… http://t.co/1RU12ZRh

  6. Viscitudonal

    There are no such things as ‘Bond vigilantes’ (as Krugman delights in reminding us). The bond market has been driven by a simple lob sided equation. Banks own it, and want to sell it. And… there are no buyers.

    It is an uncomfortable fact that the fall of Italian bonds has been driven, primarily, by French banks desperately trying to reduce their holdings, because they fear Greek-style ‘voluntary’ default.

    Tell us please, who should buy Greek (or any) bonds, if holders of those stand a chance of being forced to take a ‘voluntary’ haircut?

  7. Demetrios Perdikis

    How the bond markets shackled European democracy http://t.co/RtzbBvx0

  8. Mike gaunt

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  9. Alex Braithwaite

    RT @leftfootfwd: How the bond markets shackled European democracy http://t.co/1lkaqzP7

  10. Neil Reid

    Sorry. Did I vote for you? RT @leftfootfwd: How the bond markets shackled European democracy http://t.co/QnXXFmYs

  11. DrKMJ

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  12. George Irvin

    How the bond markets shackled European democracy: http://t.co/5n7b1wH1 by George Irvin – @gwi40 #eurozone #euro #Greece #Italy

  13. Spir.Sotiropoulou

    RT @leftfootfwd: How the bond markets shackled European democracy http://t.co/bqbP7D7J

  14. Jose Aguiar

    How the bond markets shackled European democracy http://t.co/1V4ThR18 RT @leftfootfwd

  15. George Hallam

    All very true but what are you doing about it.

    Lewisham People Before Profit is contacting community and anti-cuts groups with a view to contesting the forthcoming GLA elections on an all-London basis.

    We want to give people an alternative that people can vote for, that is comprehensive challenge to ‘the markets ’ aka bankers.

    Of course the content of any alternative programme would be the subject of discussion.

    My personal view is that an alternative means a lot more than “tighter regulation”. We have to have a complete restructuring of the financial system. Only then will it be possible to rebalance the British economy in a way that moves us towards real full employment.

    At the very least, restructuring of the financial system requires its functions to be modular.

    1. Personal accounts (‘high street banking’) must be separated from the vagaries of financial markets. The simplest way of doing this is to establish a national, Post Office-based, bank. The deposits would be guaranteed by the state. All other guarantees to banks would be withdrawn.
    2. Small and medium sized enterprises must have access to finance. This should be supplied by local investment banks set up by local councils and backed by council assets. Loans would be granted to enterprises on the basis of their contribution to the development of the local economy, i.e. in line with a local economic strategy supported by the council.
    3. The reintroduction of capital and exchange controls to prevent tax avoidance, capital flight, and economic sabotage.

    Lewisham People Before Profit (LPBP) is a grouping of local activists who have been campaigning on a range of issues for a number of years. Frustrated by the indifference of the established parties to local people we registered as a political party in early 2010. Since then we have contested the council and mayoral elections in May 2010 and subsequently two council by-elections. The votes we have gained, while insufficient to win any positions, have been over five percent mark.

    For more about Lewisham People Before Profit
    http://www.lpbp.org.uk/home

    We took the initiative to organise the Lewisham Carnival Against Cuts 19/02/11
    http://www.youtube.com/watch?v=_m_-G_eTnKk

  16. Joe Taylor

    If bankers rule the world what's to be done about it? http://t.co/ShpoNdOV

  17. David Dubost

    How the bond markets shackled European democracy http://t.co/p7rjxLrq

  18. Gareth

    Destabilization is a myth. All this chaos is doing is making the Eurozone stronger. Both Sarkozy and Merkel are shackling Italy and Greece to decades of unsustainable debt. In return these countries have sold their souls to Germany and France without a single hesitation or consultation with their people. Dangerous times for democracy!

  19. Peter Marshall

    The dictatorship of the market http://t.co/MJ5Drx0b (via @leftfootfwd)

  20. Martin Hinds

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  21. kimberley kasirowore

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  22. Nikki Patterson

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  23. Gareth Hughes

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  24. Indy Bullock

    The dictatorship of the market http://t.co/MJ5Drx0b (via @leftfootfwd)

  25. Steve Jary

    The dictatorship of the market http://t.co/MJ5Drx0b (via @leftfootfwd)

  26. Bob Collins

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  27. David Aldridge

    RT @leftfootfwd: How the bond markets shackled European democracy http://t.co/l2Lg8Iuv

  28. Nigel Gardner

    Marx 101. "financial markets [have grown so powerful that they] can ride roughshod over democracy" RT @OwenJones84 http://t.co/oL5xlyL7

  29. Zio Bastone

    Do you have a different reference for Furman & Stiglitz’s Brookings paper (which I have)? It’s the second paper (I’m not sure what your 1 refers to) and p114 is, I think, an error.

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