Social benefits discussion revisited

Nearly one month ago I wrote a posting on our societal approach towards poverty, addressing the discussion of social benefits in German newspapers, especially a philosophical discussion in German feuilletons. Already some German right wing politicians were attacking the social consensus on welfare that had developed in Europe during decades.

Now, the German constitutional court recently delivered a judgement on the basis for calculating the social benefits. The judges reasoned that this basis is intransparent and does not take all the cost that incur in everyday life into consideration. This was not a judgement calling for a rise of social benefits, but for an overhaul of the basis for calculation. Theoretically even cuts would be possible as a reaction to the ruling, but in some areas the court deemed it obvious that benefits were too low. This especially applies to the rates for children. So far the needs of children have been calculated as a 60% of adult needs, which is obviously nonsense.

Furthering children and ensuring that they have the possibility to obtain an appropriate education can be very costly. Paying for private tutors, schoolbooks, private lessons for the piano or dancing lessons can easily add up to a monthly sum much superior to what an adult needs in the same period. And this does not even include spendings for clothes. Especially young children and teens need a lot of clothes simply due to the fact that they are growing rapidly.

But instead of triggering a discussion of how we can ensure that the poorest of our society can meet their needs and how to avoid that children growing up in poverty will automatically fail to advance in our educational system, the liberal party immediately started a discussion about the worth of labour in the German society. The discussion was spearheaded by the German foreing secretary and vice-chancellor Guido Westerwelle. After 100 days travelling across the globe and showing a reasonable diplomatic performance many Germans had already forgotten that the leader of the German liberal party was not only capable of a diplomatic demeanor but was also one of the loudest demagogues of the country. Now he has reentered the domestic political stage with a bang.

According to Westerwelle, Germany is approaching socialism and "late roman decadence" because people who do not work are leading lives in "wealth", earning more money than people who are working. Well, there is some truth in his claims. Some people work 8 to 10 hour shifts to earn a wage barely surpassing social benefit levels, but decadence is hardly the word for people struggling to get along with about 380 euros per month. Especially in times in which bankers, whose irresponsible gambling cost society a fortune, lose their jobs well endowed with a "golden parachute" or are even looking forward to record bonuses at the end of 2010. Westerwelle is demanding that the weak should be protected from the resourceful and sluggish. According to him, everybody is talking about the recipients of tax money while forgetting about those who pay taxes. 

What he does not realize is that the current asymmetry between social benefits and low wages might as well be a consequence of the increasing pressure on wages and the wage sacrifices of German workers and not following from immorally high social benefits. We do need a discussion about the worth of labour in our society, but from a completely different angle than Westerwelle is suggesting.

The Euro dilemma

Newspapers have been full of the potential bankrupcy of the Greek state lately. And financial analysts and newsmedia were quick to name the potential future candidates for state bankrupcy when the creditworthiness rating of Greece was lowered. Usually Portugal and Spain are listed first, followed by Ireland and Italy. Many commentators even go as far as seeing the whole Euro currency close to collapse. Having a closer look at the context of the latest developments on the financial markets, it becomes obvious quickly that the situation is not as severe as often suggested, but one will also soon discover the inherent flaws of the Euro system and the major dilemma that EU leaders now confront. From a Latin American perspective these developments are doubly interesting.

First and foremost because Latin America is aspiring to step into the footsteps of the European Union with it's UNASUR project. Since UNASUR is mainly driven by economical and financial integration, like the EU in it's early stages, there are valuable lessons to be learned from Eruope's approach to a common market and currency. This holds even if a common currency on the South American continent may be years or decades away or may even never come.

Secondly, it will be certainly interesting for Latin American states to see, how European states cope with rising debts and dangers of bankrupcy in comparison to, say, the Argentinian approach that tackled bankrupcy aggressively by ceasing the payment of debts in 2001. A decision that eased the pressure on the country's economy and financial system but came at the price that Argentina has still trouble to stock up on money on the world financial market.

Looking at the situation in Europe the figures in question have to be put into perspective first. Greece announced new debts summing up to 12,7 percent of the GDP for 2009, raising its total debt to 120 percent of the GDP. The old government had calculated with a 3,7 percent of new debts, a figure that was nearly quadripled when the new government stopped massaging the figures after years of 'creative' financial accounting. Portugal has debts summing up to around 77 percent of the GDP, Spain and Ireland are at about 50 percent. Spain incurs new debts of about 6 percent, Ireland 11 percent. The EU covenant for financial stability dictates a cap of 3 percent for new indebtedness and 60 percent for the total debt. At first glance these figures look dramatic, and in the case of Greece we certainly have to talk about an alarming situation since this development has been going on for years. Greece's total debt is massive and growing quickly. Speculations on the financial market concerning a possible bankrupcy and quick reactions of the other EU states are thus understandable. But the figures of the other states named as candidates for bankrupcy have to be read more carefully.

States that traditionally had a soft currency, like Spain, Portugal , Italy and also Greece, had higher debt levels and higher levels of new indebtedness in the past. For these countries higher debts have been normal for decades since they could be countered by inflation. And the high velocity with which debts are rising right now can be attributed to the world economic crisis, especially in the cases of Spain and Ireland.

But the figures hide a more fundamental dilemma. In the past the states were solely responsible for their own debts, meaning that they could also manage them with inflation. An exit now blocked by the EU criteria for financial stability. While the financial leeway has been restricted to a certain degree by the EU Commission, financial and economic policies still remain largely in the hands of the national governments. This means that EU Member States having the Euro are following different financial and economic approaches. They are profiting from the financial stability of the euro area which in some cases led to a blockade of economic reform since the need was not obvious in times of economic growth. Other states, like Germany, went through a cycle of economic reforms meanwhile, leading to wage sacrifice on a large scale. Germany thus gained a competitive edge in comparison to other EU states that experienced pay raises unheard-of in their recent history and are now paying the price in times of economic stagnation. They are not equiped to fare well on a global shrinking and increasingly competitive market. Thus, in a way, Germany is partly responsible for the debt situation in other Euro countries since it gained an edge against its European competitors.

Sharing a currency and a market without sharing financial and economic policies has led to this dicrepancy that is now endangering the finances of some member states. Should states like Greece fail to balance its budget, Europe will have to take the unpleasant decision to either help states like Greece and reward economically irresponsible behaviour or face growing doubts about the financial and economic stability of the EU and possibly even a new crisis stemming from the bankrupcy of EU Member States. There is still reasonable hope that Greece will be able to control it's problem on it's own by implementing strict savings schemes monitored by the EU Commission. The heads of the EU Member States declared their confidence in the Greek plans yesterday. But demonstrations in Greece against inevitable cutbacks show that things could become difficult. The demonstrations and the fact that Greece has an impressive record of tax evasion aliment suspicions that many Greek are not ready to pay for an efficient state but are expecting their fellow EU citizens to pay their bills.

The lesson Latin America can learn from these developments for it's own ongoing process of integration is to think twice if it is a wise move to share a currency without sharing economic and financial policies.