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Economic Policy, the Schwabian Housewife and Francois Hollande

"What is rational for individuals leads collectively into a cul-de-sac.. The fundamental error is that economic policy believes the crisis can be fought with the logic of a family budget. For that reason, the collapse of the euro zone threatens. Measures that restore trust in the future of the euro zone are necessary now.."
ECONOMIC POLICY AND THE SCHWABIAN HOUSEWIFE

The Battle against Debts

By Gustav Horn

[This article published in: Spiegel Online, June 5, 2012 is translated from the German on the Internet,  http://www.spiegel.de.]

The Schwabian housewife is regarded as an ideal of economic policy: thrifty and cautious. The continent is mired in crisis because this mentality prevails among consumers everywhere in Europe. What is rational for individuals leads collectively into a cul-de-sac.

In economic policy debates, the fiction of the Schwabian housewife is invoked whose conduct is a model of native economic reason. The Schwabian housewife is held to be the example in which economic policy should be oriented. The thriftiness and caution imputed to her are recommended to politicians as a shining example.

The Schwabian housewife now has a sister in Spain. In Spain, Catalonians are considered as frugal and cautious as Schwabians in Germany. She likes to save and is careful with her money.

Despite its Catalonian housewives, Spain is not well respected now on its financial markets. In return for high-risk charges, private financial investors are ready to lend money to the Spanish state. Counseling the Spanish state to save more seems obvious. The Spanish state saves. Spending is cut significantly and taxes are increased. Is the Catalonian housewife satisfied?

The Senora reacts and saves. The business where her husband works may now obtain fewer contracts from the state. He is threatened with losing his employment and may already have lost it. At the same time the higher taxes reduced the family budget. The Senora reacts and saves. Her expenditures are the revenue of another, for example the revenue of the baker or the retailer. These also lose income and must now save on their part by terminating their co-workers for example. The savings wave runs faster and faster thanks to the Catalonian housewife. The race leads the Spanish economy into a deep recession.

Then a phone call comes from another sister who lives in Greece. She knows the problems of her Spanish sister only too well from her own country. In the meantime her situation is so desperate that hardly anyone still believes in a bailout. She fears that Greece within a short time could lose membership in the euro zone. She hears that German economists and research institutes are already circulating exodus scenarios and saying it isn't so bad if the Greeks lose their Euro.

The Greek housewife doesn't believe this because her savings will lose enormous value with the new currency. She advises her Spanish sister to do what she has done, to put her savings in security. But where should she put them?

The Greek sister has a recommendation: Germany. Germany will either keep the Euro or receive a new D-mark. In both cases, the value of her savings will be preserved. Thus the Catalonian housewife transfers her savings as quickly as possible to her Schwabian sister who deposits them in a German bank.

This has consequences. Shaken by bad investments in the real estate sector, the Spanish banks massively lose liquidity through the flight of savings and threaten to go bankrupt. This is called a bank run and as a rule is the final phase before the economic collapse of the banks and the whole national economy.

JUSTIFIED ANXIETY OVER THE FAMILY BUDGET

This is happening before our eyes in the euro zone. But blaming the Catalonian, Greek, Schwabian or other housewives would be wrong. Subjectively they act completely rationally in reacting to the justified anxiety over their family budget. The aggregate economic consequences are disastrous.

The fundamental error is that economic policy believes the crisis can be fought with the logic of a family budget. For that reason, the collapse of the euro zone threatens. Measures that restore trust in the future of the euro zone are necessary now. Unfortunately, it is now too late for growth impulses and well-meaning Marshall Plans. For too long, the disintegration was allowed so any significant effects cannot be produced.

Only measures demonstrating that governments will all their strength will preserve the euro zone in its past composition are helpful now.

First of all, the European Central Bank should publically declare - after confidential coordination with the governments - that it ill buy up government bonds until the stability of currency transactions within the euro zone is guaranteed again.

At the same time, the austerity programs must be stretched so national economies can breathe.


Thirdly, the heads of government should declare that they will build a new institutional structure to prevent such crises in the future.

In the long term, no ways leads past the democratically controlled construction of a European financial policy that serves the overall economic needs of the European monetary zone. In such a changed institutional structure, the Catalonian, Schwabian and other housewives and men will gain trust again to leave their savings in their own country.









FRANCE INTRODUCES PARTIAL PENSIONS AT 60

By Reuters

[This article published in: Frankfurter Rundschau, 6/5/2012 is translated from the German on the Internet.]

France's new president Francois Hollande fulfills his election pledge and lowers the retirement age to 60

While a later retirement age is discussed all over Europe, France goes the opposite way and grants retirement at 60 to parts of its population. Moreover time outs for motherhood or unemployment are credited in the contributing years.

On Wednesday, the new socialist government in France resolved an earlier pension at 60 for parts of the population. Approximately 110,000 persons who paid in at least 41 years should profit. According to social minister Marisol Touraine, time outs for motherhood or unemployment should be taken into account.

The earlier retirement age was one of the most important election pledges of France's socialist president Francois Hollande. It will be enacted by decree and take effect in November. Hollande's predecessor, the conservative Nicolas Sarkozy, had raised the initial retirement age to 62.

In the future, an after-tax annual income of 7000 Euros will be enough to be credited as a full contribution year. The reform will cost around 1.1 billion Euros in 2013 and will increase annually up to 2017 when it will cost three billion Euros annually. The pension amount should rise 0.2 percent. The private associations that give pensions to managerial employees will also probably raise their amounts.

France is the only country in Europe where the initial retirement age is lowered. The French even have a higher pension than the Germans: 1400 Euros a month on average. In Germany, the legally insured only receive on average 1000 Euros.

FRANCE WILL MAKE JOB CUTS UNPROFITABLE

With unusual measures, the new Hollande government seeks to lower the high unemployment rate. In the future, terminations will be expensive for businesses.

By Philippe Wojazer/ Reuters

[This article published in the Hamburg weekly DIE ZEIT, 6/7/2012 is translated from the German on the Internet, www.zeit.de.]

According to a government plan, firms in France will soon have to pay considerably when they cut jobs. "The concept intends to make terminations so expensive for firms that they won't be rewarding," labor minister Michel Sapin told the radio station France Info.

With the initiative, the minister reacted to a higher unemployment rate and threatening waves of terminations. "This is not punishment. Rather employers must give a real compensation."

The government will not be idle when businesses eliminate jobs to raise their profitability and increase dividends for their shareholders, Sapin said. France goes a different way than Italy and Spain which liberalized their labor markets under pressure of the economic- and debt-crisis.

Parallel to Sapin, the minister of industry Arnaud Montebourg is working on a law to prevent plant closures. Instead businesses should be forced to sell the plants at a market price. The government will thereby fulfill another election pledge of the new president Francois Hollande.

UNEMPLOYMENT RATE OVER 10 PERCENT

The socialist government and unions feared a wave of terminations after the parliamentary elections on June 10 and 17. They presume businesses will delay their planned job cuts until after the two elections...

The unemployment rate rose to 10.0 percent in the first quarter, the highest level since the summer of 1999, the statistical office Insee announced. Unemployment was not so high even during the worldwide financial crisis in 2008/09. The second largest national economy of the euro zone is mired in a slack period. At the beginning of 2012, the gross domestic product stagnated while it rose 0.5 percent in neighboring Germany.

On Wednesday, the new French government fulfilled another election pledge. It revised a part of the pension reform introduced under the dethroned president Nicolas Sarkozy. The pension age is lowered to 60 for those who worked from their youthful years.

The measure will cost France 1.1 billion Euros annually up to 2017 and afterwards three billion Euros per year, social minister Marisol Touraine announced. The Sarkozy government had raised the initial pension age to 62 in its austerity plan.

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