Is the Whole World goIng Bankrupt?Government Debt: What It Is and How It Functions

Rosa LuxembuRg Foundation

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In the 1990s, it was “globalization.” Now “government debt” is considered the central problem of the world economy. The reason: for the first time since the Second World War, it is not the so-called developing countries that are experiencing a debt crisis, but rather established industrial countries. In Europe, a few governments have become insolvent and have to be fi-nanced by other states. In the United States, government debt has grown to levels that are otherwise only reached during wars. That is why Bild, Germany’s biggest tabloid, asked: “Is the Whole World Going Bankrupt?” (July 13, 2011), while the headline of the newsweekly Der Spiegel (32/2011) asked: “Is the World Going Bust?”

In the public discourse, two things seem to be clear: first, government debt is bad. And second, there is too much of it. “Saving” is therefore the order of the day. States want to be-come “trimmer,” public property is being privatized, and nati-onal wage levels are to be lowered in order to raise the level of “competitiveness” of the nation as a location for business. Government debt thus engenders the same political measures as the specter of “globalization” a decade ago.

Now all governments of the industrial countries have resolved to save more drastically. This affects the poor primarily in the form of social cuts – in all countries. Why is that the case? Where does all this debt come from? Why do all states incur debt – even though it is generally considered to be something bad? And why not just cancel these debts, if the whole world is suffering under them? These are some of the questions that this brochure seeks to answer. It does not attempt to assert that government debt is actually not a problem. Rather, it attempts to demonstrate the purposes that government debt serves, and when it becomes a problem – and for whom. Because ultimately, questions of debt are questions of distribution: some have to pay, while others benefit.

Table of Contents

1 TheThriftyHousewifeasaRoleModel:“YouCan’tSpendMoreThanYouEarn”� 2

2 “OurGrandchildrenWillHavetoPayBackOurDebts”� 3

3 “We’veAllLivedBeyondOurMeans”� 5

4 “PoliticiansWasteMoney–AfterAll,ItIsn’tTheirs!”� 9

5 “WeHavetoSave!”� 12

6 “We’reBankrupt!”� 15

7 “TheFinancialMarketsTamethePoliticalSphere”� 18

8 “WeShouldJustCanceltheDebts!”� 22

9 “WeNeedStricterRegulations”� 24

10 Conclusion:“SoIsGovernmentDebtGoodorBad?”� 26

11 Glossary� 30

In�this�brochure,�the�terms�highlighted�in�color�are�explained�in�the�glossary�(see�pages�31–34).

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1

THe THrIFTy HouseWIFe as a role MoDel: “you Can’T spenD More THan you earn”

Ataconventionofherparty,theGermanChristianDemo-crats(CDU),inDecemberof2008inStuttgart,ChancellorAngelaMerkelinvokedtheimageofthethriftySwabianasarolemodelforstateeconomicactivity:“WeshouldhavejustaskedaSwabianhousewifehereinStuttgart,inBaden-Würt-temberg.Shewouldhaverelatedapieceofwisdomwhichisasbriefasitiscorrect:‘Inthelongrun,youcan’tlivebeyondyourmeans.’”Itseemssosimpleandtrue.

What Truth is There to That? Thecomparisonbetweengovernmentandhouseholdbudgets

isbelovedbypoliticianswhentheiraimistoexplainthestate’sdistresstothepopulation.Butthecomparisonwiththehousewifeismisleading.Agovernmentbudgetfunctionsac-cordingtodifferentrulesthanthatofahouseholdbudget.Ifaprivatehouseholdtakesoutaconsumerloan,topurchaseanewwallunitforexample,thenitisanactofanticipatorysav-ing:thehouseholddoesn’tfirstsaveupthemoneyinordertopurchasethefurniture,butrathertakesonaloan,buysthewallunit,andthenrepaystheloantothebank–includinginterest.Theloanthusmakesthehouseholdpoorer(sinceitpaysthepurchasepriceofthewallunit,plusinteresttothebank).Thestate,ontheotherhand,takesoutaloanandusesthemoneytobuildroads,schools,andtelecommunicationnetworks.Itthusimprovestheconditionsofdoingbusinessinthecountryforcompaniesandattemptstoattractinvest-mentandmakeitprofitable.Forthestate,incurringdebtisameansofstimulatingeconomicgrowth.Forexample,thestateprovidessubsidiesforyoung“growthindustries,”andusesmilitaryexpendituresasameansofsecuringtheglobalbusinessofdomesticcompanies.Furthermore,debt-financedexpenditurescanstrengthensocialdemand,sothatacrisiscanbemorequicklyovercome.Thecentralindexforthestateisthereforenottheabsolutelevelofdebtindollarsoreuros,butrathertheso-calleddebt-to-GDPratio.Thisdividesthetotalgovernmentdebtbyeconomicperformance(Gross

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DomesticProductorGDP).ThisratiomeasureswhethergrowingdebtisaccompaniedbyanincreaseinGDP–thuswhetherdebtsfunctionasaleverformoreeconomicgrowth.1Aslongasthatfunctions,governmentdebtisnobigproblemandthestateachievesitsgoal:thegrowthofnationalwealth.Incidentally,abusinessalsocannotbecomparedtoaprivatehousehold:itborrowsinordertobuildacarfactory,forexample.Itinvests,socreditiscapitalforabusiness:externalfinance.Thefactory–accordingtotheplan–yieldsaprofit.Fromthisprofit,thebusinessrepaystheprincipleandinterestonthedebt.Ifthingsgoaccordingtoplan,thebusinessisnotpoorerasaresultofthedebt,butricher.

Soofcourse,agovernmentcanspendmorethanitearnsinthelongterm,sinceitcanincreaseitsincomewiththeexpenditures.Ahousewifecannotdothat.Incontrasttoaprivatehousehold,acountrycanevenbecomericherbytak-ingondebt.Italldependsuponwhatthegovernmentusesthecreditfor.

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“our GranDCHIlDren WIll Have To pay BaCk our DeBTs”

TheGermanweeklynewspaperWelt am Sonntag(June26,2011)explainedtoSigmarGabriel,chairoftheSocialDemo-craticPartyofGermany(SPD):“We’relivingattheexpenseofourgrandchildrenandgreatgrandchildren,sincetheyhavetopayforallofthat.”Ineverytalkshowdebate,theremarkalwayscomesupatleastoncethat“we”cannotincurdebtattheexpenseofourchildrenandgrandchildren.Thatisare-quirementofthefundamentalprincipleof“intergenerationaljustice”.Thedramaticpictureisclear:debtsincurredtodayhavetobepaidbackinafewyearsordecades.Ifnewdebtsaretakenoneveryyear,thenthepileofdebtbecomeslarger.

1  TheGrossDomesticProductisnotthepropertyofthestate,butitrepresentsthewealththestatecanpotentiallydrawuponbymeansoftaxes.

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Themoredebtsaccumulate,accordingtothisargument,thelessmoneythereisforotherexpenditures,forexampleforeducation,roadconstruction,andsocialprograms.

What Truth is There to That? Thispictureisalsowrong.Firstofall,assetssuchasroadsor

schoolsthatarefinancedbycreditarealsoavailableforusebyfuturegenerations.Secondofall,withgovernmentdebt,noredistributionbetweengenerationsoccurs,butratherredistributionwithinageneration:generally,from“below”to“above”.Howdoesthatwork?“Ourgrandchildren”donotjustinheritthedebt,butalsotheclaimsuponthedebt,sotheyalsoinheritwealth.Onecanpicturethisusingtheexampleofafamily:whenthemotherlends100eurostothefather,andbothdie,thechildrendonotjustinheritthe100eurodebtofthefather,butalsothemother’sclaim.Sowhoinheritsthedebtandwhoinheritstheclaim?Whohaslentmoneyatinteresttothestate?Andaboveallelse:whopaysthisinterestandwheredoesthemoneycomefrom?

Forexample,intheyear2008,Germangovernmentdebtaloneyielded69billioneurosininterest.Thedebtinstru-mentsareheldoverwhelminglybybanks,institutionalinvestors,andthewealthy.Theylendtheirsparemoneytothestatebypurchasinggovernmentbonds,andcollectin-terestinreturn.Theinterestpaidbythestatecomesfromtaxrevenues.InGermany,asaresultofthetaxreformsofthelasttenyears,roughlytwo-thirdsoftaxesarepaidbywageworkers.Thatmeansthatthereisnoredistributionbetweengenerationsoccurring(thesumofclaimsandobligationsbalancesout).Rather,wearedealingherewithatransferofwealthfromthosewhosetaxpaymentsfinancetherepay-mentofinterestandprinciple,tothosewhopocketbillionsofeuroseveryyearasownersofgovernmentbonds.2

2 However,governmentdebtisnotthecauseoftheinterestcollectedbyownersofwealth,butrathertheirwealthitself.“Interestincomearisessolelyfromthefactthatsomehouseholdsareinapositiontoaccumulatesavings.Sothereisnoproblemofjusticearisingfromgovernmentdebtthatdidn’talreadyexistwithregardtopreexistingdisparitiesofincomeandwealth”(NorbertReuter,“Inter-generationalJusticeinEconomicPolicy”,PROKLA121/2000,p.547–556).

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Bytheway,governmentdebtisnot“paidback”;rather,itisserviced.Thatmeansthatthestate’spileofdebtisusuallynotpaidofforsettledsothatastateatsomepointagainbecomesdebt-free.Ifadebtbecomesdue,meaningthatthesumoriginallyborrowedascredithastobepaidback,thisoccursintheformofaroll over:topaybackolddebts,newcreditistakenon.Thedebtdueisreplacedbynewdebtinaquasi-permanentprocessthatishardlyeverexplicitlymentioned.Forexample,since1965theFederalRepublicofGermanyhasneverentirelypaidoffitsdebt,butalwaysrolleditoverinstead.Onlynewcreditwhichexceedstheamountrolledovercountsas“newdebt.”Thatmeansthatifnonewdebtistakenon,thepileofdebtremainsthesameasbefore.Futuregenerationswillproceedinthesamemanner.Debtswillnotbesettled,butinsteadserviced.Aslongaseconomicperformancegrows,thatisnotaproblem.Itisnot“ourgrandchildren”whohavetorepaydebtsinthefuturethat“we”incurtoday.Rather,thewageworkersoftodaypayforthefinancialinvestorsoftomorrow.Thisdistinctionbetweenwinnersandlosersofgovernmentdebtisobscuredbythenational“we.”

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“We’ve all lIveD BeyonD our Means”3

TheGermanchancellorclaimsthat“theGermans”haveincurredtoomanydebts.Bythatshemeansnotprivatebusinessesorprivatehouseholds,butratherthestate.Shenonethelesssuggeststhatthisappliestoeveryone.In1950,thegovernmentdebtoftheFederalRepublicofGermanywasstillat9.5billioneuros.In1990,itwas538billioneuros.Between2007and2010,debtgrewdrasticallyasaresultoftheeconomiccrisisbyalmost30percent,from1,550to2,000billioneuros.IntheUnitedStates,governmentdebthasrisenbyafourthto16trilliondollarssincethebeginningofthecrisis,andinJapanbyalmostafifth,to1120trillionyen.

3 AngelaMerkel(PotsdamerNeuesteNachrichten,May15,2010).

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2.500

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1.000

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1950 1960 1970 1980 1990 2000 2010

Allofthatissupposedtobe“our”debt.Afterall,“weareallthestate.”4Thisisusuallyexpressedasthepercapitashareofdebt.InGermany,thisrosebetween1950and2010from190to24,500euros.IntheUnitedStates,itisabout40,000eurosatthemoment(seepoint10).Inotherwords,wearelivingbeyondourmeans.

What Truth is There to That? Concerningthefirstpoint,itistruethatgovernment

debthasrisendrastically.Butwhatdoesthatmean,“our”debts?Inmostcountries,thefinanceministrydrawsupabudget.Itpredictsstaterevenuesandexpen-ditures.Whenexpendituresexceedrevenues,thedifferenceisfinancedbytakingonnewdebt,meaningthatthegov-ernmentborrowsmoney.Thebudgetandthenewdebtarethenusuallyapprovedbytheparliament.Thepopulationatlargedoesnotshareinthisdecision-makingprocess.Itcanfollowthebudgetdebatesinthemediaandformitsownopinion.Itcanbesatisfiedordissatisfiedwiththestate’s

4 AccordingtotheGermangovernmentonitswebpage“regierenkapieren.DiejungeSeitederBundesregierung”(“UnderstandingGovernment.TheYouthWebpageoftheFederalGovernment”)underthesection“WokommtdasGeldherundwogehteshin”(“Wheredoesmoneycomefromandwhereisitgoing”).

Germany:GrowingGovernmentDebtGross�government�debt�in�billions�of�euros

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financialconduct.Butithasnoinfluenceuponthelevelofnewdebt.

Thestate’sdebtisnotthedebtofitspopulation.Ultimately,thegovernmentdebtpercapitaincreasesregardlessofhowthriftytheindividualworkerorunemployedpersonlives.Asaprivateperson,onecannotrepaythedebt,evenifonewantedto.Andwhen,forexample,somebodygoestoabankinGermanyandwantstotakeoutaloan,nobankwillrejecttheloanapplicationwiththewords:“butyoualreadyhave24,500eurosindebtthroughthestate!”

Governmentdebtmaynotbethedebtofthepopulation.Butultimately,thepopulationisliableforgovernmentdebt.Ifdebtsaretobepaiddown,thepopulationhastopayhigher

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taxes,waitlongerforitsretirementpensions,workmore,earnless,orgetbywithlessstatebenefits.Thus,thestatemakesitsdebt“our”debt.

Concerningthesecondpoint:fromthepointofviewofsocietyasawhole,itcannotbesaidthattheindustrializedcountriesare“livingbeyondtheirmeans”–thatistosay,spendingmorethantheyaretakingin.Atleast,thatisthecaseifoneconsid-erssocietyasawhole.Thestate’sdebtisincreasing,buteveryloanthatsomebodytakesouthasacorrespondingdebtclaim.Everydebtorhasacreditor.IfMs.Alends100eurostoMr.B,thenitisnotthecasethatbothhavelivedbeyondtheirmeans.Rather,Mr.BhasadebtandMs.Ahasaclaim,afinancialassetfromwhichsheearnsinterest.Bothbalanceeachotherout(seepoint2).IftheGermangovernmentborrowsamillioneurosfromtheDeutscheBank,then“we”havenotlivedbe-yond“our”means.Rather,thegovernmenthasincurredadebtandthebankhasadebtclaimfromwhichitpocketsinterest.

Ifonetakesthe“we”seriously,andcalculatesallthedebtandfinancialassetsofeachmemberofthepopulation,thenoneisforcedtoconcludewithregardtomostindustrializedcountries:“we”havenotlivedbeyond“our”means.“We”arenothighlyindebted,butratherrich.Let’staketheexampleofGermany:thegovernmentdebtamountstoabout2,000billioneuros.Privatenetwealth5ontheotherhandwasmorethan9,000billioneuros,eveninthecrisisyearof2009.6Thatcanalsobecalculatedpercapita:foragovernmentdebtof24,500europercapita,thereisanetprivatewealthofmorethan90,000euros.7So“we”arewealthy,8atleastonaverage.Inreality,however,governmentdebtisbornebyeveryone,sinceitispublic.Wealth,ontheotherhand(andfinancialclaims

5 Inthecaseofprivatenetwealth,debtisalreadysubtractedfromthetotal. 6 SeetheDIWWochen-bericht50/2010.Ifonecalculatesonlyprivatenetwealthinastrictersense–so,subtractinginsur-anceassets,aswellaslifeinsurancepoliciesorretirementpensions,andhouseholdwealthsuchasautomobilesorpersonalbelongings–thenonestillarrivesatasumover7,370billioneuros. 7 SeeBaselInstituteofCommonsandEconomics(http://commons.ch/).Thecorrespondingvaluesforgovernmentdebt/privatewealthperresident/householdineurosfortheyear2010,roundedoff,are:Greece(24,000/56,900),Ireland(23,500/74,700),Italy(29,300/120,300),USA(32,800/49,700).However,thenumbersfortheUSAareonlymarginallycomparabletothoseofEurope. 8 Bytheway,ifoneconsidersGermany’sfinancialpositionwithregardtoothercountries,Germanyhasanet–subtractingforforeigndebt–hasapositivebalanceofmorethan1,000billioneuros.

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upongovernmentdebt,forexamplegovernmentbonds,belongtothiscategory)isinthehandsofafewprivateindividuals.In2007,60percentofthetotalwealthbelongedtotherichesttenpercentoftheGermanpopulation.Ninetypercentofthewealthbelongedtotherichest30percentofthepopulation.9Inothercountries,wealthdistributionisconsiderablymoreunequal.

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“polITICIans WasTe Money – aFTer all, IT Isn’T THeIrs!”

Politiciansaresuspectedofextravagance.Staterevenuesareconstantlyinsufficientforfinancingtheirdesiredexpendi-tures.10Theconsequenceishighgovernmentbudgetdeficits.Thisisfrequentlyexplainedintermsofthesupposedmyo-piaofpoliticians,11theirquestforgreatness,ortheirdesiretobeguiletheelectoratewithfavors.Thebillarrives–butonlyafterthegenerouspoliticianshavelongsinceretired.Forthatreason,theGermanneo-liberalthinktank“StiftungMarkwirtschaft”(MarketEconomyFoundation)demands“daringtohavemoredemocracywithoutgifts:let’shavesuccessfulpoliticswithoutstrikingSantaClausposes.”12

What Truth is There to That? Little.Sure,thereissometimeswaste,andeveryyearvarious

taxpayers’associationsandgovernmentinspectionagenciesaddupthenumbersandcomplain.Butifpoliticiansreallyexclusivelyactedextremelyshortsightedly,itwouldbeawon-deriftheydidnotincurevenmoredebtthantheyalreadydo.Ifpoliticiansactually“bought”votes,thentherewouldnotbeanydebtindictatorships,oratleastlessthanindemocracies(whichisnotthecase).Politiciansdonotjustspendmoneywithouthesitation.Whentheyincurdebts,theydonotignore

9 DIWWochenbericht50/2010. 10 “Whydoesthegovernmentincurdebt?Thefinanceministerbreaksoutinasweateveryyearwhenfacedwiththenumberofexpenditures.Revenues,althoughtheyaresohigh,arenotenoughtocoverthecosts.Weareliving,asusedtobesaidsofinely,beyondourmeans”(www.regierenkapieren.de). 11 Governments“havetofinallystartthinkingbeyondthenextelection”(Spiegel32/2011). 12 Marktwirtschaft:EhrbareStaaten?ArgumentezuMarktwirtschaftundPolitik,Dezember2011.

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thewellbeingoftheeconomy;rather,thewellbeingoftheeconomyistheirgoal(seepoint1).However,particularlyinthelastfewyears,thathasnotworked.Debthasgrownmuchfasterthaneconomicperformance.Thisisdemonstratedbythedebt-to-GDPratioinallindustrializedcountries.

Thatwaslesstheresultofahighlevelofexpendituresonthepartofthestate.Onthecontrary:stateexpendituresinGermanyevendeclinedinrealterms(adjustedforinflation)between1998andthebeginningofthecrisisin2008.Thereweretwootherreasonsfortheriseinthedebt-to-GDPratio:first,therewerehugetaxcutsinGermanysince1998.Thetaxratesforthewealthydeclined,asdidthetaxesoncapitalgainsandtaxesonbusinesses.In2010,theGermanstatewouldhavetakenin51billioneurosmoreinrevenues,iftheoldtaxlawsof1998hadstillbeenineffect.13Thesecond

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13 SeethepressreleaseofSeptember8,2011,“StaatsausgabentrotzKrisenabwehrrealkaumgestiegen”,bytheHans-Böckler-Stiftung.

reasonwastheeconomiccrisis.Wheneconomicperformancetankedattheendof2008,businessesnolongerinvestedsomuchandhouseholdsnolongerconsumedsomuch.Thestatejumpedintointerveneinallcountries.Ittookoncredit,rescuedbanks,andsubstitutedstatedemandformissingprivatedemandinordertoamelioratetheeffectsofthecrisis.14Thiswasalsosuccessful.Withouttheseinterven-tions,economicperformancewouldhavecollapsedevenmoredramatically.Nonetheless:thedebtratioincreased.However,thiswasnotasignofwastefulnessonthepartofthestate,butratherofthefactthatthestatewasusingpublicmoneytokeepthebusinessofprivateenterpriseshalfwayfunctional.Theresult:theprofitsofGermanaswellasAmericanbusinessesonceagainreachedrecordlevelsin2011.GovernmentsinGermanyaswellasinotherEuropeancountrieshaveimposedausterityprogramsinwhichlabor

Debt-to-GDPRatioGross�public�debt�as�a�percentage�of�GDP

14 ThisisevenmorethecaseforcountrieslikeIrelandorSpain.There,thedebtratiohaddeclinedconstantlyuntiltheoutbreakofthecrisis.Butthenthegovernmentshadtorescuethebanks.Asaconsequence,thedebtratioinIrelandandSpainbetween2007and2012increasedfrom28percentto113percentand42percentto80percentofGDP,respectively.Thisshowshowabsurdtheaccusationofwastefulnessis.

2005 2006 2007 2008 2009 2010 2011

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andsocialbenefitsaremostimpactedbycuts.15IntheUnitedStates,suchastepisexpectedfor2013.

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“We Have To save!”

Inlightofincreasinggovernmentdebt,politiciansandeconomistsdemandthatgovernmentssavemore.Conserva-tiveeconomistssaythatthestatehastodecreaseitsexpen-ditures.Leftisteconomistssaythatthestatehastoincreaseitsrevenues.Bothpathscanbeusedtodecreasethelevelofindebtedness.

What Truth is There to That? “Saving”isnotthateasyforastate.Astatecansimplycutits

expenditures,butthenitnolongerplaystheroleofconsumer.Thestate“buys”lessschools,roads,tanks,etc.Oritcanlayoffemployees,whothenbecomeunemployedandbuyless.Oritcutspensions,whichdecreasesthepurchasingpowerofretir-ees.Inallofthesecases,thetotalconsumerdemandofsocietydecreases.Thesituationissimilarwhenthestateraisestaxes,forexamplethevalue-addedtax.Thatmakescommoditiesmoreexpensive,andthebuyingpowerofconsumersdeclines.

AdrasticexampleofthisistheausterityprogramsofGreecesincetheyear2010:thegovernmentcutpensions,salaries,laidoffthousandsofpublicemployees,raisedtaxes,andatthesametimecutitsexpenditures.Theconsequence:consumerspendingcollapsedandwithit,economicperfor-manceasawhole.Withthat,thetaxrevenuesofthestatealsodeclined.Furthermore,thestatehadtospendmoremoneyontheunemployed.TheendeffectwasthatAthensdidnotreduceitsdebt;onthecontrary,itincreased.Radicalausteritycanalsoruinaneconomy.

15 Soingeneralonecansaythatin“normal”times,governmentdebtserveseconomicgrowth.Intimesofcrisis,itservestopreventanevenmoredrasticdeclineineconomicperformance.Warsareaspecialcase.Here,thestatenolongertakesintoconsiderationtherelationshipofGDPtogovern-mentdebt,butratherregardsitsexpendituresasabsolutelynecessary.

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Thatiswhyinmostcases“saving”doesnotmeanthatthestateonlyspendsasmuchasittakesin,orthatitspendsevenlessthanittakesin,and“saves”thedifferenceforarainyday.Thisoccursonlyintimesofcrisisorunderpres-sure,asisthecasewithGreece.Butusually,statesavingsisnotaquestionofspendingalotoralittle,butratheraquestionof“whatshouldmoneybespenton?”Whenagov-ernmentsaves,itrearrangesitsexpendituresandrevenues.Bymeansof“austerityprograms”,the“conditionsofdoingbusiness”forcompaniesissupposedtobeimproved,inordertoincreaseeconomicgrowth.Theaimisnottoreducethelevelofdebt,butratherareductioninthedebt-to-GDPratio–theratioofdebttoGDPbyincreasingGDP.

Correspondingly,austerityprogramsusuallylooklikethis:taxesonbusinesses,wealth,orcapitalarenotraised.Instead,thegovernmentcutssocialexpendituresandwages(prima-rilyinthepublicsector),andraisestaxesinthesphereofconsumption(thesalestaxorvalue-addedtax).Additionally,thestateattemptstodecreasewagelevelsbymeansoflegalregulationsinordertocreatebetterconditionsofinvestmentforbusinesses,sothateconomicperformancegrowsandthedebt-to-GDPratiodeclines.16

InEurope,theseprogramsexistundersuchnamesas“EuropeanSemester”,“Euro-PlusPact”,and“Europe2020.”TheirmodelistheGermanAgenda2010oftheformerSPD-Greengovernment,theexplicitgoalofwhichwastoliberalizethelabormarket,increasepressureontheunemployedandthusputdownwardpressureonunitlaborcosts.Withsuchprograms,Europeissupposedtobecomethemostcompeti-tiveregionoftheworld.Withtheso-calledfiscalpactanddebtbrake,theEuropeanstatesarealsosettingstrictlimitstoexpenditures.Allofthisservesonepurpose:winningbackthe“confidenceofthefinancialmarkets”;inother

16 AnexamplefromGermany:In2002,federalfinanceministerHansEichel(SPD)raisedwarn-ingsabouta“tickingtimebomb”ofgovernmentdebt(ARD-MagazinPanorama,episodeofApril18,2002).Between2003and2005,drasticlabor-marketreformswereimplementedandregula-tionsoftemporaryworkwereloosened.ThiscontributedtothefactthataveragewagesinGermanystagnatedfortenyears.

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words,makingEuropeattractiveasasphereofinvestmentorincomepropertyforfinancecapital,sothatgovernmentscanonceagainborrowmoneyatlowratesofinterest.Withasceticismandanimpoverishmentofthepopulation,theEu-ropeanstatescompeteamongandwitheachotheragainsttherestoftheworldforcredit,foraccesstoglobalmoneycapital.Thismoneycapitalinturnistobeusedtoimprovetheconditionsofthesecountriesaslocationsfordoingbusiness.Thegeneralaimisso-calleddebtsustainability,theabilityofacountrytoserviceitsdebtspermanentlyandsecurely.17

Theconsequenceofallthisisthatwageworkerspayforthecrisis.Thetaskofbusinessesandthefinancialmarketsontheotherhandistoearnalotofmoneyandthusstimulateeconomicgrowth.Soitisnotthecasethat“weall”havetosave.“Saving”isaprogramofredistribution.

Suchausterityprogramshavetobepoliticallyimplemented.Debtcanbeusefulinmakingthepopulationpreparedto“tightentheirbelts.”Politiciansareveryawareofthis.TheGermaneconomistPeterBofingerwrites:“Ifonewantstorestricttheroleofthestate,itsfinancialresourceshavetobetakenaway.[…]Asafirststep,comprehensivetaxbreaksarecarriedout.[…]Thisleadstoanincreaseofnewindebted-nessinthecaseofanunchangedlevelofexpenditure.Ifatthesametimeonenurturesagreatfearofgovernmentdebtinthepopulation,atonceahighlevelofpoliticalpressuretocutexpendituresiscreated.”18

Itshouldbenoted:ifthestatesweretoatsomepointstopincurringdebt,thefinancialmarketswouldhaveahugeproblem.Withalltheirriskyspeculationinderivatives,commoditiesmarkets,andstocks,financialinvestorsknowofone“safeharbor”:governmentbonds,thestablevalueofwhichtheycanrelyupon.Theindustrializednationsalonehaveissuedbondsamountingto33,000billionUSdollars,whicheffectivelyconstitutethefoundationofworldfinan-

17 See,Kaufman,Stephan,2011,“Sellyourislands,youbankruptGreeks”(http://www.rosalux.de/publication/37664/sell-your-islands-you-bankrupt-greeks.html). 18 WSI-Mitteilungen7/2008,p.351.

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cialmarkets.“Modernfinancialsystemsarereliantupongovernmentbonds.”19Thiswasdemonstrated,forexample,inAugustof2011:thedebtcrisisandfearsofarecessionledtoacollapseofstockmarkets.Investorsfledfor“security”inthegovernmentbondsofGermanyortheUnitedStates,forexample.Thepricesforthesegovernmentbondsreachedrecordhighs,whereastheirinterestratesfell.Andthat,inspiteofacrisisofgovernmentdebt!Thatshowsthatwithoutgovernmentbonds–thuswithoutgovernmentdebt–thewholefinancialsystemwouldfalter.

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“We’re BankrupT!”

AccordingtoapollbytheGermannewsweeklySterninMayof2012,governmentdebt,with62percent,ledthe“listofworries”ofGermans.“Isthewholeworldgoingbankrupt?”askedthetabloidBildinJulyof2011,inlightofthegrowingamountofdebtinEuropeandtheUnitedStates.Andsincethebeginningofthe2010,expertsareconstantlyassertingthatGreeceis“bankrupt”.InJulyof2011,JohnBoehner,RepublicanspeakeroftheUSHouseofRepresentatives,said,“listen,we’rebroke”.

What Truth is There to That? Onethingisclear:“thewholeworld”cannotbebankrupt

becausethesumofglobaldebtisjustashighasthesumofglobalclaimsondebt,orbettersaid,ofwealth(seepoint3).Thesituationisdifferentforsomeindividualstates.Twoquestionsarise.First:whenisastatebankrupt?Andsecond:whatdoesthatevenmean?

“Bankrupt”isadifficultconceptwhenappliedtostates.Inthecaseofabusiness,itislesscomplicated:thefirmcanno

19 Governmentbondsplay“anoutstandingroleasameansofsecurity,avehicleforpreservingsavingsforretirementandasaninstrumentforsecuringliquidityandequitymanagement[…]thecallraisedinsomequartersfordebtreliefforgovernmentswouldnotonlyconsiderablyaffectsmallinvestors[…]butthefinancialsystemasawhole”(DIWWochenbericht44/2011,p.9).

16

longerpayitsbillsorinterestonloans,andthusreceivesnomorecreditfrombanks.Insolvencyproceedingsfollow.Iftheliquidatorcomestotheconclusionthatnothingcanbesaved,thebusinessisliquidated.Whatevercanbeissoldoff,andcreditorsareservicedfromtheproceedsofthesesalesasbestaspossible.Thenthecompanynolongerexists.

Butwhenisastatebankrupt?Thiscannotbeestablishedonthebasisofthelevelofdebt,andalsonotonthebasisofthedebt-to-GDPratio.In2010,Greece’sdebtlevelwas140percentofGDP,anditwasregardedasbankrupt.Spain,withalevelof60percentofGDP,wasregardedasbeingindanger.Japan,ontheotherhand,withadebtlevelof200percentofGDP,wasconsideredrelativelysolid.

2012 (according to IMF predictions)2007

200

150

100

50

0

1. Spain 2. Germany 3. Great Britain 4. Belgium 5. USA 6. Ireland 7. Italy 8. Greece 9. Japan

1. 2. 3. 4. 5. 6. 7. 8. 9.

HigherDebtLevelsinAllCountriesPublic�debt�as�a�percentage�of�economic�performance

Theinterestburdenratio–theamounteachstatehastopayeachyearforinterest–isnotaclearindicatorofinsolvency.AsGreecewentintocrisisattheendof2009,ithadtopayinterestattheleveloffivepercentofitsGDP.Thatisalot,relativelyspeaking.Butintheyear1996,itsinterestburdenratiowasdoublethat.

Furthermore,whatdistinguishesgovernmentsfromprivatehouseholdsorbusinessesisthattheycanindependently

17

determinetheirexpendituresandrevenues.Iftheyaremiss-ingmoney,theycansimplyraisetaxesor,forexample,lowerexpendituresfortheunemployed(thatalsohasitslimits,ofcourse.Seepoint5).Or,agovernmentcanattempttoborrowmoremoneyontheinternationalfinancialmarkets.Ifthatdoesnotwork,itcansimplyforcedomesticfinancialenter-prisestolenditmoney.20Inanemergency,astatecanalsoborrowfromitself:thegovernmentissuesabond,andthecentralbankofthecountrypurchasesthebond.Inthiscase,thecentralbankprintsmoneyandlendsittothegovernment.Mostcentralbanksoftheworlddothistoagreaterorlesserextent.Intheyears2010/2011,theUSFederalReserveboughtUSgovernmentbondstothetuneof900billionUSdollars.21Asaresultoftheeurocrisis,eventheEuropeanCentralBank(ECB)temporarilyresortedtothisactuallyforbiddenmeasure.InordertolowertheinterestburdenforprimarilySouthernEuropeancountries,theECBboughtgovernmentbondsintheamountofmorethan200billioneurosthroughthemiddleof2012,andannouncedfurtherpurchases.Soagovernmenthasmanywaysofsecuringitssolvency.22Soonecouldsay,asovereigndefaultisapproaching:

– whenagovernmenthasahighlevelofdebt; – whenithastocontinuetakingonnewdebtsinorderto

financeitsexpendituresandserviceitsolddebts; – whenitonlyobtainsthisnewcreditathighratesofinterest,

sothatthedebt-to-GDPratioofthecountryincreasesmorerapidlyandanincreasingamountofstateexpendi-turesareusedtoservicedebt.

Sowhetherornotstatesareinsolventisthusdependentupontheassessmentoflendersandthefinancialmarkets.Theyarethejudges;theydetermineinterestratesforcredit(seepoint5).Ifthefinancialmarketsloseconfidenceinthe

20 Thistacticisknownas“financialrepression”(http://en.wikipedia.org/wiki/Financial_repression).21 TheFeddidnotbuythesebondsdirectlyfromthegovernment,butratherfrominvestorswhohadalreadypurchasedthem.Buttheeffectwasultimatelythesame. 22 Thisisthecaseforlargeindustrialcountries.Developingcountriesthatincurdebtinforeigncurrencieshavelessroomtomaneuver.SoifadevelopingcountryhasdebtdenominatedinUSdollarsandhastoserviceit,itcannotsimplyprintdollars.

18

solvencyofacountry,interestratesrise,whichcanleadtoadebtcrisis,likeinGreecefrom2010untilnow.

Butasopposedtoabusiness,astatecannotjustdisappearfromthefaceoftheearthinthecaseofabankruptcy.23Bankruptcythusmeansthatagovernmentnegotiatesaneas-ingofthedebtburdenwithitscreditors:debtsareextended,cancelled,orinterestratesarelowered.Ifcreditors–mostlybanks–agreetothis,thedebtleveldeclines,andthecountryisonceagainsolvent.Germanyalsoprofitedfromsuchdebtreliefinthepast:in1953,halfofitspre-warforeigndebtwaswaived.Thebankruptcyofastateisthusapoliticaldecision:thegovernmentofanoverlyindebtedcountrydeterminesthatitsdebtistoohighanditwillnolongercarryit.24Andforeigngovernmentsrefusetosupportthecountryintheformofcheapcredit.So,countrieslikeGermanyandtheUnitedStatesarefarfromgoingbankrupt.

7

“THe FInanCIal MarkeTs TaMe THe polITICal spHere”

Market-liberalintellectualsinparticulararehappythatfinancialmarketsexist.Afterall,thesemarketslendmoneytostatesandpermanentlycheckwhetherastatesolidlymanagesitsbudget,andthuswhetheritearnsthetrustofthemarkets.Themoresolidastate’sfinancesarejudgedtobe,thelowertherateofinterestthemarketsdemandforlendingitmoney.Ifastatetakesonalotofdebt,interestratesrise;servicingitsdebtsbecomesincreasinglydifficultandnewcreditmoreexpensive.ThiswasthecaseinGreece,Ireland,andPortugalintheyears2010/2011,wheninterestratesincreasedsomuchthatthesecountriescouldnolonger

23 Exceptionsprovetherule:whenNewfoundlandwasover-indebtedinthe1930s,theparliamentandgovernmentdissolvedthemselvesandtheindependentstateofNewfoundlandbecameaprov-inceofCanada. 24 Astatecanalsorefusetoserviceitsdebts.Forexample,aftertheUnitedStatesoccupiedCubaaftertheSpanish-AmericanWarin1898,itrefusedtorecognizethedebtsoftheSpanishpredecessorgovernment.SincetheUnitedStateswereverypowerful,Spainwaspowerlesstoimposedebtpayments.Sodebtisalegalrelationship:mightmakesright.

19

payfornewloansandthereforefacedbankruptcy.Thiswasthe“interestratetruncheon,”gushedtheGermandailyFrankfurter Allgemeine Zeitung.“Thisistheonlylanguagepoliticiansunderstand;onlythisforcesthemtoreact”(August16,2011),whichmeansreducingdebt.AndJensWeidman,presidentoftheGermanBundesbank,seesrisinginterestratesas“animpetustoforcepoliticianstodotheirhomeworkandtowinbacktheconfidenceofthefinancialmarketsbymeansofreforms”(Reuters,April18,2012).

What Truth is There to That? Inthefinancialmarkets–banks,investmentfunds,insur-

ancecompanies,etc.–themoneyoftheworldiscollected:themoneyoftherichandthatofthe“commonpeople”,whoforexamplesaveforretirementthroughtheirlifeinsurancepoliciesorprivatepensions.Onbehalfoftheirclients,orbytheirownaccord,financialinstitutionsinvestthismoney.Inshort:theywanttoincreasetheamountofthismoney.Toachievethistheybuy,amongotherthings,governmentbonds,debtcertificatesfromstates,fromwhichfinancialinstitutionscollectinterest.Governmentbondsarebelovedbyinvestors,sincetheyareregardedasasafebet.Afterall,thestateisareliabledebtor,sinceit–incontrasttobusi-nessesorprivatehouseholds–cansimplycollectmoneybydecreefromitspopulation.

Financialinstitutionsbuygovernmentbonds–andcanalsoselltheminstantly;namely,onthestockexchange.Theyareallowedtodothis.Governmentbondsarepermanentlytraded.Theyhaveapricethatchangesconstantly.Sogovern-mentbondsareobjectsofspeculation.Investorsinspectthestate’srevenues,itsexpenditures,itsdebts,itseconomicgrowth,itspolicies,itswagelevels,etc.Thustheychecktoseewhetherastateconstitutesaworthwhileinvestment.25Tothatextent,onecouldsaythatfinancialmarketscontrolpolitics,whichmovedJoschkaFischer,theformerforeign

25 Theratingagencieshelptheminthisendeavor.Ratingagenciesconstantlyjudgethecredit-wor-thinessofstates.Variousfactorsplayaroleinthis.Forexample,theratingagencyStandard&Poor’sloweredthecreditratingforVenezuelainAugust2011,amongotherreasonsbecausePresidentHugoChavez’sillnessfromcancermadethepoliciesofthegovernmentunpredictable.

20

ministerofGermany,tostatethat“onecannotpursueanypoliciesinoppositiontothefinancialmarkets”(BadischeZeitung,September3,2009).

However,financialmarketsarenotasingle,unifiedagentthatevaluatesthesolvencyofstates.Rather,financialmarketsarethesumtotalofallinvestors,whoallwantthehighestpossiblereturnontheirinvestment.Thatiswhyherdbehaviorandspeculationdominatethefinancialmarkets.26In2009,forex-ample,therewasdoubt–atthebeginning,justdoubt!–con-

20

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26 Here“speculation”meansthatbuyingandsellingonthefinancialmarketsisbaseduponexpectationsofthefuturevalueoffinancialassets.Soasecurityisboughtbecauseanincreaseinitspriceisexpected.Ifmanyagentsonthefinancialmarketsactinthisway,thenthegrowingdemandforsuchsecuritiesleadstoanincreaseinitsmarketprice–themarketpricerisesbecauseariseinpricewasexpected.

21

cerningGreece’ssolvency.Asaresult,someinvestorsgotridoftheirGreekbondsbecausetheywereafraidtheywouldlosevalue.ThisfearoflossesbyitselfpusheddownthepricesofGreekbonds.ThatwasthesignalformoreinvestorstogetridoftheirGreekbonds,whichcausedthevalueofthesebondstodeclineevenfurther–aclassicexampleofherdinstinct.

Thislossofvalueofgovernmentbondsinturnhasaneffect

uponthestate’sfinances.How?Hereisaverysimplifiedexample:thestatepaysafixedrateofinterestonthebond,let’ssayfivepercentonabondofoveronemillioneuros.Sotheinvestorlendsthestateamillion,andpockets50,000eurosininteresteveryyear(fivepercentofamillioneuros).Ifthepriceofthebondfallsby20percentonthefinancialmarkets,aninvestorcanonlysellitfor800,000euros.Therateofreturnonthebondhasthusrisen,sincethestatecontinuestopay50,000eurosininterest.Thenewrateofreturnis6.25percent(50,000eurosonaprincipleof800,000).Ifthegovernmentwantstofloatanewbond,theinterestrateisbaseduponthereturnontheoldbond.Sothestatenowhastopromiseinvestorsnotfivepercent,butrather6.25percent(seetheGlossaryforfurtherinforma-tion).WhenGreekbondscollapsedatthebeginningof2010,therateofreturnshotintothestratosphere,andnewloansbecameveryexpensiveforAthens.27

ThisinturnwasinterpretedonthemarketsasasignthatGreecemighthaveproblemsrepayingitsdebts.Theconse-quence:thevalueofbondsdeclinedfurther,returnsin-creased.Thisisaviciouscircleinwhichfinancialmarketsdonotneutrallyevaluatethecredit-worthinessofstates;rather,thisevaluationdamagestheircredit-worthiness.Investors,expectingGreecetohavefinancialproblems,droppedthebonds,thusprecipitatingthecrisis.Atthesametime,othercountrieswere“infected”:inordertoavoidexpectedlosses,investorsthrewPortugueseandIrishbondsontothemar-ket–withthesameconsequences.Tothatextent,itistruethat,withregardtotheirfunding,statesdependuponthe

27 Forthereasonsbehindthecollapse,seeKaufman,Stephan,2011,“Sellyourislands,youbank-ruptGreeks”(http://www.rosalux.de/publication/37664/sell-your-islands-you-bankrupt-greeks.html).

22

judgmentofthefinancialmarkets.However,itisnottruethatthemarkets“tame”thestateslikesomewildanimal–asif“wild”statesstoodopposite“rational”investors.28Firstofall,financialmarketsarenotrational.Herdinstinctsandself-fulfillingpropheciesdominatethiscircus.Secondofall,eveninnormaltimes,investorsevaluatethestatesoftheworldaccordingtoaverysimplestandard:thehighestpos-sibleandmostsecurereturns.Theytreatpeople,workplaces,countriesandentirecontinentslikemachinesforperma-nentlyaugmentingtheirmonetarywealth,andsubmitthemalltothisstandard.Thatisrationalaccordingtothelogicofmaximizingprofit,butwhatisreasonableaboutthat?

8

“We sHoulD JusT CanCel THe DeBTs!”

Ifdebtissuchaproblemfortheeconomiesofsomanystates,fortheworldeconomy,andforhundredsofmillionsofpeople,thenthisraisesthequestion:whynotjustcancelallthesedebts?Thentheproblemwouldbesolved!

What Truth is There to That? Firstofall,debtswhichputsomuchpressureonthestates

arewealthtosomebodyelse.Forcreditors(banks,invest-mentfunds,insurancecompanies),governmentbondsarecapital–moneycapital,asumofmoneythatyieldsareturn.Ifthestatesweretoberelievedbycancellationoftheirdebts,thenthiswealthwouldbedevalued.29Abankcouldquicklygobankruptinsuchasituation.

Secondly,thereistheriskofadominoeffect,aswasthecasewithGreecein2011.TheEuropeanUniondecidedtoreleaseGreecefromsomeofitsdebtorextendthematurityofitsdebt.Thatmeantlossesforcreditors,meaningbanks,

28 ButtheGermannewsweeklyDer Spiegel thinksthisisthecase:“Theominousfinancialmarketsareneithergoodnorevil.Theysimplyactrationally”(Spiegel32/2011). 29 Incidentally,thisalsohappenswhenonlytheinterestonbondsisloweredforthesakeofdebtrelief,sincethevalueofabondismeasuredbytheamountofitsreturn.Ifthatdeclines,sodoesthevalueofthebonditself.

23

andinvestmentfunds.NowmanyofthesecreditorsfearedthatPortugalorIrelandwouldalsobereleasedfromsomeoftheirdebt.Asaconsequence,theysoldtheirPortugueseandIrishbonds,whichmadethesituationinthosecountriesevenmoreacute(seepoint7).Acrisisofthefinancialmar-ketscanalsoariseinthismanner.Thirdly,ifastaterefusestoserviceitsdebtsorcancelsitsdebts,itcanbesurethatlenderswillnoticethis.Itscredit-worthinesswouldbeshot,atleastforawhile.Andeverystateknows:soonitwillneednewloans.Butacancellationofdebtsfrightensinvestorsandthusendangersthefinancingofthestate’sprograms.

Inexceptionalcases,creditorsagreetoacancellationofdebts,whichmeansareductionintheirclaims.ThiswasthecasewithGreecein2011.30Thecreditorsassumethatastate

TheRiskoftheBanks

900

800

700

600

500

400

300

200

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Claims of european banks in billions of euros against certain countries (as of 2010)

1. 2. 3. 4. 5. 6.

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30 See,Kaufman,Stephan,2011,“Sellyourislands,youbankruptGreeks”(http://www.rosalux.de/publication/37664/sell-your-islands-you-bankrupt-greeks.html).

24

issohighlyindebtedthatitcannolongerserviceitsentireaccumulateddebt.Thecancellationofapartofthedebtissupposedtoputthestateinapositiontoreliablyservicetherestofthedebt.Debtcancellationdoesnotservesimplytorelievethedebtor.Rather,thisreliefisintendedtorescuetheremainingclaimsofcreditors.Debtcancellationthereforefunctionsonlywiththeagreementandforthebenefitofcreditors.Itisthereforecorrespondinglyseldomandsmallinamount.

9

“We neeD sTrICTer reGulaTIons”

In2009,Germanyincorporatedaso-called“debtbrake”intoitsnationalconstitution.Itissupposedtolimitgovernmentdebtandbindinglyregulatethereductionofdebtfrom2011on.Newdebtcannotexceed0.35percentofGDP.Germanstates,regionalgovernmententities,cannottakeonanynewloansatall.Thereareexceptionsfornaturaldisastersoraneconomicrecession.AttheinitiativeofAngelaMerkelandFrance’sformerPresidentNicolasSarkozy,asimilardebt-brakewasadoptedforotherEuropeancountrieswithintheframeworkoftheEuropeanFiscalCompact.GermanywasabletoachievethatonlythosecountrieswouldreceivefinancialassistanceundertheEuropeanStabilityMechanismwhichhad,amongotherthings,implementedthedebtlimitationsforeseenbythecompactintotheirownrespectivenationallaws.Theideabehindthisisthatifpoliticianswon’tbudgetthriftily,theyhavetobeforcedtobylaw.

What Truth is There to That? Itisstriking:therealreadyexistvariousregulationsthatlimit

stateexpenditures,forexample,theStabilityandGrowthPactoftheEuropeanUnion.TheStabilityandGrowthPactestablishesthataeurocountrycanonlyhaveamaximumamountofnewdebtofthreepercentofGDPandamaxi-mumdebt-to-GDPratioof60percent.However,manycountrieshadalreadyviolatedthisruleinthepast–particu-larlyGermany.31Sotherealreadywereplentyofregulations

25

andinstrumentsthatweresupposedtolimitagovernment’sexpenditures.Whyaresuchregulationsunabletoguaranteeadeclineingovernmentdebt?Andwhywillnewregulationsorprohibitionsdolittletochangethat?Thereasonissimple:the“stability”ofstatefinancesisnotsomethingthatcanbeenactedbydecree.Economicdynamicsdonotproceedaccordingtodirectives,andcrisesdon’tmakeappointmentswithministriesoffinance.Sure,regulationscansimplylimitstateexpenditures(orraiserevenues).However,undercertainconditionsthisisharmful,forexamplewhenthebusinesscycletakesanosedive.Then,thestatehastotakeoncreditandspendmoneyinordertopreventthesituationfromgettingworse.Ifitdoesnot,inordernottoviolatesuchregulationsondebt,thecrisiscandeepen.Thisinturnleadstoafurtherdeclineineconomicperformance,andthedebtsituation–measuredintermsofdebt-to-GDPratio–isexacerbated,preciselybecausethestateadheredsostrictlytotherules.32

ThatiswhyattheEuropeanlevel,ifthereisenoughpoliti-calpressure,therulesareregularlymodified:France,forexample,wasabletoensurein1997thatthestabilitypactdemandedbyGermanywouldonlyberealizedasaStabil-ityandGrowthPact.AgrowthcomponentwasalsotackedontotheFiscalCompactof2012underpressurefromothercountries.Atthesametime,it’salmostcertainthattheregulationsinvolvedwillalsobeviolated.Somaybearegula-tionlimitingdebtdoesnotmaketoomuchsense.However,sucharegulationmakesiteasyforgovernmentstoimple-mentspendingcutsortaxincreases.Itcansimplyrefertotheregulationandthusjustifyitspolicies:thelawrequiresthisstep;thegovernment’shandsaretied.ThesituationissimilarwiththeEuro-PlusPactadoptedbytheEuropeanUnion,whichobligatesmemberstatestobecomemorecompetitiveandlowertheirdebtlevels.TheEUregardsunit

31 AsopposedtocountriessuchasItalyorSpain,whicharetodayregardedascrisiscoun-tries. 32 ThatiswhymanyeconomistsexpectthatGermanywillatsomepointabolishitsdebt-brakeorsoftenit.Forexample,DennisSnower,headoftheeconomicresearchinstituteIfW:“ItiscompletelyuncleartomewhyacountrylikeGermanyissubmittingitselftoaharddebt-brake,andevenwantstoexportthismodel”(BerlinerZeitung,August26,2011).

26

laborcostsasanimportantindicatorof“competitiveness”.ThePacthasprovisionsforaninspectionofwagedevelop-mentsinallmemberstates.Thegoalismoderatewageagreements(particularlyinthepublicsector),tax“relief”forthe“laborfactor”,andlabormarketreformsthatmakelabor“flexible”,thatistosay,cheap.ThroughtheEuro-PlusPact,thesewagedecreasesnolongerseemlikepoliticaldecisions(subjecttocriticism),butrathersimplylikeaconsequenceofthelegalsituation(withnoalternative).Stricterregulationsarethereforeaformof“authoritarianstabilization”:alterna-tivesaresimplyexcluded.

10

ConClusIon: “so Is GovernMenT DeBT GooD or BaD?”

Ifonelistenstopoliticians,debtappearstobesomethingbad;theirmainargumentisthatthestatehastouseanincreasinglylargeportionofitsrevenuestopayinterest.Forthatreason,thelevelofdebtshouldbereduced.“Everyfiftheuroisusedtopayoffinterest[…]onlywhennonewcreditistakenoncanthealreadyaccumulateddebtbeslowlypaidoff,thusreducinginterestpayments.Thestatewouldthusbeabletodomoresensibleandusefulthings[…]Whataniceidea.”33

Ontheonehand,debtisregardedassomethingbad.Atthesametime,thestateconstantlytakesonnewdebt.Thisapparentcontradictionisresolvedwhenoneregardsgovern-mentdebtforwhatitis,aninstrumentwithwhichthegov-ernmentattemptstoreachacertaingoal:economicgrowth.Withborrowedmoney,thestatefinancesitsexpenditures.Aboveall,itattemptstoimprovelocalconditionsfordoingbusinessandtostimulateeconomicgrowth.Concerningthe“appropriate”volumeofgovernmentdebt,howmuchdebtisallowed,onecannotsaymorethan:not“toomuch”.

33 Accordingtotheself-portrayaloftheGermanfederalgovernment(seewww.regierenkapieren.de).

27

This“toomuch”issubjectinpracticetoasinglemeasure:economicgrowth.Governmentdebtissupposedtoservegrowth,andshouldnotharmit.Thequestionofwhethergovernmentdebtisgoodorbadthereforeamountstothequestion:howgoodorbadiscapitalisteconomicgrowth?

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Thatgovernmentdebtcanincreaseeconomicgrowthisnotsubjecttodebate,butratherafact.Itdoesnotmatterwhetherthedebtispassivelyaccepted(inthecaseofalossoftaxrevenue)orintentionallytakenonasapartof“activeeco-nomicpolicy.”However,itisalsoafactthatitisaproblemwhenhigherdebtsarenotaccompaniedbyhighereconomicperformanceandhigherrevenuesforthestate,andagreaterportionofthestate’sbudgetisthereforeallocatedforservic-ingdebt.

Sogovernmentdebtis–likethedebtofbusinesses–asort

ofpre-financedgrowth.Bymeansofstateborrowing,govern-mentsandtheirlenders–thefinancialmarkets–speculate

28

thatdebtwillgenerategreatereconomicperformanceandmorerevenuesforthestate.Withitsdebt,thegovernmentmakesitspopulationliableforthesuccessorfailureofthiswager.Thisliabilityisillustratedbythestatisticalfigureof“governmentdebtpercapita.”

Itismistakentoaskwhethergovernmentdebtisaproblem“forus”orforacountry,sincepeopleareaffectedinverydifferentwaysbythisdebt,accordingtotheirpositionandfunctioninsocietyandintheeconomy.Forcreditors,gov-ernmentdebtismoneycapital,wealththatcanbeincreased.Theyprofitfromthedebtburdenintheformofinterestpayments.

Whethertheirwagersucceedsistheresponsibilityofothers.Thatisparticularlyclearwhenastatehasproblemswithservicingitsdebtandwantsto“save.”This“saving”,logi-cally,alwaysimpactsthesamegroupofpeople:recipientsofgovernmententitlements,workers,andconsumers.Ontheotherhand,“driversofgrowth,”i.e.businessesandfinancialinstitutions,aresupported.Theyaresupposedtoinvestandmakeloans,theyaresupposedtoearnmoneyfromthis,theyaresupposedto“create”jobsandthusincreaseeconomicperformance.Thatincreasesinthesalestaxanddecreasesinwagesandpensionsleadtoadeclineinthepurchasingpowerofthemasses,thusreducingsocialdemand,thusimpairinggrowth,isacontradictioninthisprogram(seetheexampleofGreeceinpoint6).Allthismakesitclearwhobearsthebruntof“saving”wheneverthereistalkabouthow“wehavetosave.”34

Itshouldalsobenoted:thereisconstantcomplainingabouthowthestatespendstoomuch,buttherevenuesideisseldomcriticized.Yettherearetwodevelopmentsworthyofcriticism.Firstofall:itisclearthatthestatecouldtaxfinancecapitalinsteadofborrowingfromitandpayinginterest.Yetitdoesnotdothis,oronlytoasmallextent.In

34 “HowcanitbethatthereishagglingovereveryadditionaleuroforrecipientsofHartzIV[collo-quialtermforlong-termunemploymentbenefitsinGermany–translator’snote],butthefailureofafewbankersisenoughtoopenthestate’scoffers?”(SüddeutscheZeitung,September30,2008).

29

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Germany,sincethegreatfinancialreformof1969,creditisaregularinstrumentforfinancingstatetasks.Secondofall,itisremarkablewhothestatetakesmoneyfrominordertopayitsdebts–whopays(theintereston)debt.Here,developmentsareunmistakable:since1977,thetaxburdeninGermany–andnotonlythere–isincreasinglybornebywageworkers(whoalsopaysalesandconsumertaxesforthemostpart).Theburdenoncapitalgainsandwealth,ontheotherhand,hasbeendeclining.Thetrendhasbeenthatthetaxratehasdeclined,whilewealthhasgrown.Soitisclear:taxpolicyisessentiallyapolicyofredistribution.Thistrendhasbeenexacerbatedbythecrisis:politicians,inordertoconsolidatestatefinances,haveincreasinglyfavoredtaxingconsumption;thevalue-addedtaxhasbeenconsiderablyincreasedinalleurocrisiscountries.

Wageworkers,ontheotherhand,whobearabouttwo-thirdsoftheentiretaxburden,paynotonlyforthegreatestshareofgovernmentdebt.Theyarealsosupposedtocurbtheirwagedemandsandatthesametimehavebeenexpectedtoaccepttheconsequencesofcutstostatesocialservicesforyears.

Sothequestionofdebtisaquestionofredistributionandnotleastaquestionofpower,astheGermansociologistsJensBeckertandWolfgangStreeckhaveformulatedit:“AstheincreasesinGDPduringthelastthirtyyearshaveben-efitedprimarilytheupperlayersofthepopulation,thedebtcrisisraisesthequestionofwhetherandwithwhatmeansthewell-to-dowillattempttodefendtheirposition,evenatthepriceofamassivesocialandpoliticalcrisis”(FrankfurterAllgemeineZeitung,August20,2011).

11

Glossary

  Bondmarketsandstockexchangesarewherefinancialinstrumentssuchasstocks(sharesintheownershipofacompany,whichpaydividends),governmentbonds,orderivativesaretraded.Largeexchangescanbefoundin

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NewYork,Chicago,London,Tokyo,orFrankfurtamMain.Bondandstockmarketsareessentiallysynonymouswithfinancialmarkets(seebelow).Here,buyersandsellersofsecuritiesmeeteachother.Thesumofmoneyforwhichabondorstockistradedisitsprice(or“course”inthecaseofastock).Investorsusuallybuysecuritiesbecausetheythinktheycansellthematahigherpriceinthefutureandthusmakeaprofit;theysellthemwhentheyexpectalossinvalue.Soexpectationsaredecisivehereandusuallybecomeself-fulfilling.Hereisoneexample:traderAbuyssecurityBbecausehethinksthatitsvaluewillrise.IfalotoftradersalsoexpectthatsecurityB’scoursewillgoup,theybuyit,too.ThehighdemandforsecurityBcausesitscoursetogoup–themerelyexpectedincreaseinitsvaluebecomesareality.Thereverseisalsothecase:iftradersexpectthatasecurity’spricewillfall,theysellitandmaketheexpectedlossafact.Butitisnotjustexpectationsthatbecomerealityonstockandbondmarkets;thesituationisevenstranger.AtraderwillonlysellsecurityBifheexpectsthatalltheothertradersexpectitscoursetogoup,becauseonlythenwillthecourseactuallygoup.Sotheexpectationsofinvestorsareconstantlyorientedtotheexpectationsofotherinvestors.Themarketsactinacircularmanner.Forthatreason,theeconomistJohnMaynardKeynescomparedsecuritiestrad-ingwithabeautycontestinwhichjudgesdonotvoteforthecandidatetheyfindthemostbeautiful,butratherfortheonethattheythinkalltheotherjudgesfindmostbeautiful.

TheDebt-to-GDPratioindicateshowhighthetotalindebted-nessofacountryisinrelationtoitseconomicperformance.Germany’stotaldebtisabout2,000billioneuros,anditsGDPisabout2,400euros.SoitsDebt-to-GDPratioisabout83percent(2,000:2,400).ThebudgetdeficitexpressesthenewdebtinayearinrelationtoGDP.InGermany,thefederalgovernment,states,andmunicipalitiesinthefirsthalfof2011hadrevenuesofover555.1billioneurosandexpendituresofover570.7billioneuros.Sothenewdebtwas15.6billion.Economicperformance(GDP)was1.274billioneuros.Thebudgetdeficitwastherefore1.2percentofGDP.Onespeaksofa“balancedbudget”whenrevenuesandexpendituresareequal.

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  Financialmarketsarethosemarketsonwhich“financialproducts”aretraded.Thetermfirstemergedinthe1970sandusuallyencompassescapitalmarkets(forsecuritieslikestocksandbonds),themoneymarket(forshort-termtrans-actionsbetweenbanksandthecentralbank),andtheforeignexchangemarketforcurrencies.Themarketinderivativesisalsousuallycountedamongthefinancialmarkets.Deriva-tivesaresecurities“derived”fromotherassets–“derived”inthesensethatwithderivatives,onecanspeculateontheriseorfallinvalueofothersecuritiessuchasstocks,bonds,in-terestrates,orcommodities.Actorsonthefinancialmarketsareprimarilybanks,investmentfunds,pensionfunds,(life-)insurancecompanies,andwealthyindividualinvestors.Incommonparlance,thefinancialmarketisusuallysynony-mouswithitsactors,forexample:“financialmarketsarelosingconfidenceinGreece.”

Agovernmentbondisasecuritywithafixedrateofinterestandthemostimportantforminwhichstatesborrowmoneyonthefinancialmarkets.BondsoftheFederalRepublicofGermanyareissuedbytheGermanFinanceAgency.TheAgencybelongstothefederalgovernmentandimplementsdebtmanagement.Abondhasa“facevalue.”Itisissuedatthisvalue,andthisisthevaluethatitsfixedrateofinterestisbasedupon.Forexample,toraisecreditofamillioneuros,theFinanceAgencyissuestenbondswithfacevaluesof100,000euroseach.SinceGermanyisregardedasasafedebtor,itdoesnothavetopaysomuchinterest–atthemoment,around2.2percent(inthefollowingexample,forthesakeofsimplification,let’ssay2percent).Thedurationofabondisusually10to30years.Duringthisperiodoftime,ownersofbondsreceiveannualinterestpayments,twopercenton100,000euros,meaning2,000euros.Aftertheendofthebond’sduration,thefacevalueofthebondisre-paid–torepaybonds,thestateusuallytakesonfreshcredit(a“rollover”).Bondsarealsotradedduringtheirduration,meaningboughtandsoldonexchanges,butnotnecessarilyattheirfacevalue.Hereisasimplifiedexample:ifthecredit-worthinessofGermanydropsandithastopayahigherrateofinterestforfreshcredit,thentheoldbondswillonlybeboughtiftheyyieldanequallyhighreturn.Otherwise,

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investorswouldbestupidtobuythelessprofitablebonds.Whatdoesthatmean?If,inthecaseofanewlyissuedbondof100,000,theinterestraterisesfromtwopercenttofourpercent,theownerofthebondreceives4,000eurosannu-ally.Thatisdoubletheolderbond,despitetheequalfacevalue.Sotheolderbondcannolongerbesoldfor100,000euros,sincenobodywouldbuyit.Ifthecurrentmarketinter-estrateisfourpercent,tradersaskhowmuchabondwouldbeworthifityieldedareturnof2000annuallyataninterestrateoffourpercent.Thosearetheconditionsinthecaseoftheolderbond.Theresult:abondwithavalueof50,000euroswouldyieldthisreturnatarateoffourpercent.Thatmeansthateventhoughtheoldbondhasafacevalueof100,000euros,itcanonlybesoldfor50,000.Thatmeansitsprofitabilitywouldbeequaltothatofthenewbond.Thismechanismisalsoineffectwheninvestorsexpectahigherinterestrateandarethereforenotwillingtopaythefullfacevalueofabond.Thathappenswhennewspapersrunheadlineslike“YieldsonGreekBondsSoar.”Conversely,thedeclineofabond’scourseisregardedasanindicationthatinterestrateshavetoincrease;thecreditornolongerexhibitsgoodcredit-worthiness.Intherealbondtrade,otherfactorsaretakenintoconsideration–thedurationofabond,forexample.

Thegovernmentbudgetisthebudgetbymeansofwhichthe“publichand”financiallyorganizesitsexpenditures.Itencompassesrevenuesandexpenditures,butisnotabal-ance,nota“profitandlossstatement”inthebusinesssense.Rather,thestatedetermineswhichservicesmustandshouldbefinanced.Increatingabudgetplan,asortof“balancedue”isdeterminedthatneedstobefinanced.Thisisplacedoppositerevenues.Ifexpendituresarehigherthanrevenues,thestatehastofinancethemwithcredit.Itcreatesabudgetdeficit.Thisbudgetdeficitcorrespondstonewdebt.

  GrossDomesticProduct(GDP)isthesumofgoodsandservicesthatareproducedwithinacountryinayear.GDPisregardedasthemostimportantindicatorofeconomicperformanceandgrowth.

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Theinterestburdenratioexpressestheshareofinterestpaymentsinrelationtototalstateexpendituresorinrelationtoeconomicperformance.In2010,theinterestpaymentsoftheGermanstateamountedtoabout2.7percentofGDP(debtpaymentsof65billioneurosdividedbyGDPintheamountof2.400billioneuros).Theinterestburdenratiomostcloselyexpresseswhatiseagerlyreferredtoasthe“limitationonthestatesroomformaneuver.”Itspecifiesthesumthatagovernmenthastopaycreditors,thesumthatthereforeisnotavailableforfundingotherexpenditures.Theinterest-to-taxratioontheotherindicateshowhightheshareoftaxrevenuesisthatgoestointerestpayments.

Theacquisitionofcapitalgoods,suchasmachinesorbuild-ings,withtheaimofofferinggoodsorservicesisreferredtoasinvestment.Themoneyexpendedforthis,however,onlycountsascapitaliftheaimofincreasingtheoriginalsumofmoneyinvestedisactuallyachieved.Thestatedoesnotinvestwiththegoalofmakingprofit.Itsinvestmentsareintendedtomakecertainuse-valuesavailable(schools,roads,etc.).However,stateinvestmentsaresupposedtoimprovetheconditionsofvalorizationforcapital.

Therateofreturnexpressestheprofitinpercentageofafinancialinvestmentandisusuallyannual.Forexample:ifaninvestorbuysasecurityfor100euros,whichheearnsfiveeuroson,thereturnisfivepercent.Therateofinterestisthemostwell-knownreturnindicator.Theinterestrateisthepricethataborrowerpaysforborrowingmoney.

Ratingagenciesareprivatebusinesses.Theyregularlyevaluatethecredit-worthinessofstates,municipalities,andbusinesses.Theyissuegradesforthiscredit-worthiness:rat-ings.Financialinvestorsorientthemselvestotheseratings:agoodgrademeanshighercredit-worthinessandthusmoresecurityfortheinvestor.Businessesandstateswithgoodratingsthereforepaylowerratesofinterestthandebtorswithbadratings.Iftheratingdeclines,theinterest-raterises.Sothejudgmentsofthethreebiggestratingagencies,Standard&Poor’s,Moody’s,andFitch,areimmenselyimportanttogovernments.

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puBlICaTIons In enGlIsH

«sell your IslanDs, you BankrupT Greeks»20 popular fallacies concerning the debt crisis

(also in greek and finnish language)

It’s that time again! Greece needs more loans and the governments in Europe are arguing about whether it’s really necessary and who should foot the bill. There is widespread opinion in Germany that Greece itself is to blame for the problems it now finds itself in. It first of all cheated its way into the Eurozone, then the govern-ment spent too much and the governed worked too little, many believe. Latently nationalistic patters of interpretation of this kind have been nourished by German politicians and the media, who have no end of proposals for how to «solve» the crisis. For examp-le, the Greeks should save more, work more and sell their public property – and if all of these measures do not help, then Greece will just have to leave the Eurozone or declare itself bankrupt. The stupid thing is, neither are the causes of the crisis that have been named actually correct, nor will the proposed ways out of the crisis achieve their goal.

Download:www.rosalux.de/publication/37664

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puBlICaTIons In enGlIsH

BeauTIFul Green WorlDon the myths of a green economy

luxemburg argumente no. 3 by Ulrich Brand

In the UN’s Rio+20 conference in Rio de Janeiro in June 2012, the green economy was about to become a new central concept of global policy. The conference took place on the 20th anniversary of the 1992 United Nations Conference on Environment and Develop-ment, where the magic formula «sustainable development» was coined. In 2012 the green economy was on everyone’s lips. For 20 years now people have been rhapsodising over the greening of capitalism. At the same time it is clear that somehow sustainable development is not faring so well. CO2 emissions are increasing. Biological diversity is contracting. Famine, impoverishment and social inequality are increasing in many countries. The much feted «conciliation of ecology and economy» is proving hard to cons-truct. The green economy is not what many want to see it as: a magical formula which will offer solutions on a silver tray for many problems.

Download:www.rosalux.de/publication/38457

Imprint

luxemburgargumenteno.1revised�4th�editionBerlin,�December�2012ISSN�2193-5831

AuthorsStephan�Kaufmann�and�Ingo�Stützle

Photoscover:�guano/Flickrback:�A.E.I.O.U.

TranslationAlexander�Locascio

PublishedbyDr.�Antonella�Muzzupappa,�Dr.�Sabine�NussRosa-Luxemburg-StiftungFranz-Mehring-Platz�1,�10243�Berlin

ContactDr.�Sabine�Nuss,�Tel.�+49�30�44310-448,�nuss@rosalux.deDr.�Antonella�Muzzupappa,�Tel.�+49�30�44310-421,muzzupappa@rosalux.de

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