If this is the Left we got, we don’t need a Right

Recently I claimed that the only ones that don’t parrot the neo-liberal nonsense in Germany were the neo-nazis: The more I read…, and I wanted to elaborate on this a bit.

The conservatives are so focused on the austerity gospel that Merkel has become synonymous with it, the liberals are part of the government and therefore back this course (and market radicalism is part of their ideology). The social democrats give lip service to the need to reduce deficits and public debt and voted for the austerity straitjacket (all while announcing that growth measures are needed in addition to the cuts in public, showing clearly that they don’t understand the macroeconomic issues), aided by the German greens who are yet another example of Neo-liberals on bikes.

“Die Linke” (“The Left”), on the other hand, voted against the fiscal pact and gave some reason for hope which they then squashed with a proposal of one of their more prominent politicians, Sarah Wagenknecht, for “solving” the euro-crisis. Spiegel Online has an English-language write-up of it.

The first line gives you a good indication that something is seriously amiss here:

Germany’s Left Party is not often associated with neo-liberalism.

Neo-liberalism goes against anything left-wing. The neo-liberal agenda consists of cutting safety nets, having the state provide as little as possible, privatizing and turning into profit-oriented enterprise public goods from utilities via public transport to education and health care, undermining workplace protections, reducing regulations of capitalist enterprises and more in this vein. Any left-wing politicians, let alone a party, that finds itself in agreement with any of those positions has either forgotten or betrayed what left-wing ideas stand for. A left-wing party therefore shouldn’t “not often” be associated with neo-liberalism, it should never be associated with it.
But maybe her ideas are being mischaracterized? So let’s examine:

First and foremost, Wagenknecht calls for a radical debt haircut. “The EU member states should resolve that all sovereign debt above a certain level will not be paid back,” she writes. Wagenknecht proposes using 60 percent of a country’s annual gross domestic product as the cutoff — meaning that even Germany, with its debt load worth some 80 percent of GDP, would have to partially default.

Well, that doesn’t sound neo-liberal. It does show that she doesn’t understand a modern monetary system: there’s no reason for EMU governments to default, the ECB could just decide to unconditionally back their bonds. A related question would of course be why 60% is supposed to be a good cutoff? Why not 100% or 0%? At least equally importantly, what would happen to the holders of those bonds on which the EMU governments default?

Such a euro-zone-wide partial default, of course, would result in the bankruptcies of several European banks and insurance companies due to the amount of European sovereign bonds they carry on their balance sheets. “The financial industry has seriously underestimated the risks associated with sovereign bonds,” Wagenknecht writes. Banks and insurance companies, she notes, provided euro-zone member states with fresh capital to the extent that their debt loads have now become unmanageable. Her plan, she adds, merely reflects that “risk and liability are linked in a market economy.”

So she really doesn’t understand how a modern monetary economy works. Government loans are usually risk-free, which is why both the UK with a debt/GDP rate higher than Spain’s and Japan with a 200% debt/GDP rate offer really low interest on their bonds and still have their auctions oversubscribed. The risk investors underestimated was not the risk of public debt rates but the risk of the ECB forcing EMU governments to default! The text is also a bit of a smoke-screen because the “financial industry” is not just overly daring banks, it’s also pension funds and investment instruments that have taken the place of government pensions in all the countries where the neo-liberal ideology has pushed the state out of supplying these. This is foremost the case in the US, of course, but this process happened in several European countries as well, Germany for instance. Such a debt default will therefore hurt those people the most whose interests left-wing parties should support. Seems Ms Wagenknecht thought of this, however (at least for Europeans):

The state would also guarantee up to €1 million ($1.2 million) per person in savings and life insurance value. “Anything beyond that would be defaulted as part of the insolvency,” Wagenknecht writes.

Let’s hope that the omission of pension funds is not just an oversight. So far she’s actually done good not going down the neo-liberal road too much. But then we get this:

Euro-zone states would be able to receive a certain amount of financing directly from the European Central Bank (ECB), but only up to a certain maximum — Wagenknecht suggests capping it at 4 percent of GDP annually.

Under her plan, the ECB would remain independent and continue to focus on controlling inflation and maintaining full control over the money supply in the euro-zone.

And this is where it all breaks down. These are clearly neo-liberal ideas. It doesn’t make any sense to talk about deficits in a vacuum, without referring to the capacity utilization of the real economy, and there’s neither theoretical nor empirical support for the 4% – a number that, by the way, is at odds both with the current EMU rules (3%), and the current deficit of Japan (almost 10% at the time of writing – source). There’s also no good argument for an “independent” central bank, as Bill Mitchell explains. Both of them are neo-liberal deceits whose purpose is to limit a government’s ability to spend, forcing the state into all the neo-liberal goals outlined above.

Given her lack of macroeconomic understanding, it shouldn’t come as a surprise that she also includes

Finally, she envisions having banks extend loans almost exclusively on the strength of the deposits of their customers.

This idea would be going back to a state of things before a modern monetary economy (as Bill Mitchell explains here), limiting private credit and therefore private spending severely, which together with her envisioned limits on public spending translates into deteriorating economic activity and therefore falling standards of living – once again hurting those first whose interests left-wing parties should have at heart.

Wagenknecht’s proposal builds on neo-liberal foundations and will have the corresponding consequences: 1) the debt default places worker’s retirement funds at risk (if only outside Europe), 2) she intends to limit government’s ability to spend, forcing them into the neo-liberal privatization corset, hurting the non-rich and 3) she intends to go back to pre-MMT times. A left-wing party should never be associated with neo-liberal ideas and that a politician of “The Left”, the party in the German parliament considered the most left-wing, produces such a proposal tells you all you need to know.

This entry was posted in austerity, deficit spending, economic policy, eurocrisis, neo-liberalism, public debt, standards of living. Bookmark the permalink.

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