Saturday, 19 November 2011

A Speech For the Rating Agencies

These have been a bad few weeks for democracy in Europe. Italy and Greece are now ruled by technocrats, trained in American banks, appointed to push through austerity measures that no government with a democratic mandate could manage. Even in those countries where elected administrations ostensibly rule, economic policies are being devised more according to the concerns of the international markets and the whims of the rating agencies than the needs of the electorates.

On the economic peripheries this situation is most pronounced. Most obviously the governments in Southern Europe are being forced into a programme of extreme austerity under the pretence that this will instigate growth and bring down public debt. Likewise, in Central-Eastern Europe a similar - if more subtle - game is being played out.

In Hungary investors have been awaiting proposals from the government for a deal from the IMF for a new loan. The negotiations between the IMF and the government in Budapest essentially concern the amount of economic sovereignty that the country should be allowed to have. There is a lot to be concerned about when it comes to Orban's government in Hungary. However, the IMF is most worried about reversing some of its more positive economic policies, such as passing part of the burden of mortgages taken out in Swiss Francs onto the international banks that created them and abolishing the compulsory private pension pillar.

Therefore, despite the fact that Hungary's economy is growing and its budget deficit and public debt are at comparatively low and manageable levels, the country's bond's have been put on watch for a possible downgrade to junk by both Fitch and Standard and Poor's, leading to a surge in borrowing costs in the country.

The situation is similar in Poland - a country that has grown almost twice as much as any other inside the EU over the past three years - where the representatives of the international markets are turning the screw. Poland's economy has expanded through increasing borrowing in order to drive public investment (boosted by EU funds) in the country's infrastructure. With public debt standing at a meagre 53% of GDP any rational approach to the Polish economy would be to continue and in fact deepen this economic course of development.

The international markets and agencies have other ideas. Over the past few weeks the three largest rating agencies have been making it clear that if the new Polish government does not undertake the structural reforms that it deems necessary then it too will face a downgrade, which of course would lead to soaring borrowing costs.

It was in this atmosphere that PM Donald Tusk made his opening speech to the new parliament, setting out his government's priorities for its next term in office. Tusk did not even attempt to conceal that the main purpose of his speech was to appease the financial markets, stating 'I do not hide the fact that the aim of this is to stabilise the financial situation of Poland. This is positive for the reputation of Poland and connected to the security of our bonds.'

And so Poland is embarking on a course of drastic deficit and debt reduction as it attempts to keep in line with the policies of other European economies that are undergoing economic contractions. The government predicts that public debt will reduce to 42% of GDP by the end of 2015 and that the budget deficit will stand at just 1% by the end of the government's present term in office (it currently is above 7%). Quite why this should be the aim of any government in the midst of the worst global economic crisis since the 1930s is not explained.

And how will this all be achieved? Well if Tusk is anything he is not a stupid politician and he at least understands that part of the austerity has to be shared out amongst different groups if he is to maintain political support. Yet behind these attempts at policy 'triangulation' Tusk has drawn a clear line under his first administration and opened up a period of cuts that are, on the whole, socially and economically regressive.

One of his major ideas is to move social policy away from the principle of universalism. Therefore, child benefits and tax reliefs will no longer be made available for those earning more than 85,000 złoty a year. All this is dressed up in the progressive language of supporting the poorest in society. However, the poor will be no better off from the proposals, which will further socially stigmitise those who earn benefits, increase bureaucracy in the system and decrease social solidarity.

One of the other major announcements of Tusk was that the retirement age would be successively raised for men and women from 2013 until it reaches 67 (it is presently 65 for men and 60 for women.) Although the normal demographic arguments were deployed, this is being carried out in a country where the average life expectancy is just 75 and where youth unemployment stands at around 25%. Tusk also declared that the government would be seeking to move away from the annual percentage rise in pensions and also that the early retirement privileges of certain social groups (such as uniformed workers and coal-miners) would be abolished.

Along with making some farmers pay full health insurance, employers will have to pay 2% more in social insurance contributions. The only social groups that will directly benefit from this government will be soldiers and the police, who will enjoy a salary rise of 300zł, which will possibly be repeated before the end of the government's present term.

Tusk has not laid out any programme for economic or social growth and rather pins his hope on the delusion that cuts will instigate development. Nor has he proposed any measures to tackle the serious socio-economic problems that face the country such as high unemployment, workers employed on insecure contracts with low wages and the lack of housing.

Tusk claims that he is building a force of the political centre that can push through painful but necessary reforms. He has warned about the need to counter radicalism on the right and the left. It is true that compared to many other governments in Europe his proposals are relatively modest. Yet they place Poland in line with the policy of austerity being pursued around the continent and are likely to depress economic growth and raise social divisions. It is exactly these phenomena that are increasing social discontent and unrest throughout Europe.

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