Austerity, Corruption, and the Long Run

If you see corruption in the upper tiers of government as a major problem for an economy’s health in the long run (and the balance of evidence suggests that it is, at least at high levels in capitalist countries), then externally imposed austerity might be the only way to root it out. Syracuse prof Glyn Morgan passes along this story from Spain:

Rato, Castellanos and others jointly own a commercial lot near Madrid that is leased to a third party, according to Ayala’s Jan. 10 statement to the court. They also controlled a company together while Rato, 64, was running Bankia, Ayala said.

At the same time, Lazard billed Bankia 9.2 million euros ($12 million) for work either assigned or executed during Rato’s 27-month tenure at the bank, court documents show.

Their relationship exemplifies how a network of leaders from the governing People’s Party helped their associates among the financial elite to profit while the country’s savings banks, known as cajas, racked up losses. That toxic combination flourished during the boom fueled by Spain’s entry into the euro in 1999 and served to deepen the crash that resulted in a 41 billion-euro bailout of Spanish lenders, according to Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

Whether harsh spending cuts are a good idea or not for countries like Spain, Italy, and Greece depends in part on how one values the long run versus the short run. Also from the story:

“The things that we need to do to make Spain work require pulling the rug out from under the core interests of everyone” in power, Ken Dubin, a political scientist who teaches in Madrid at IE business school and Carlos III University, said in a May 22 telephone interview. “This is a political racket run for the benefit of politicians who suck the marrow out of the citizenry.”

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Greece Update

My go-to guy on Greece these days is Harris Mylonas, a fellow Yalie from a few years back, now teaching at GW. Here’s his latest take on coalition negotiations in Greece. Bottom line: new elections in a few weeks are looking increasingly likely, and the result might yield something more stable. Also check out his book.

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Britain Stands Alone

For the first time in history, Britain has vetoed a new EU treaty. The purpose of the treaty was to impose tough new limits on budget deficits of member states. David Cameron argues that the new treaty would open the door to new financial regulations that would disadvantage Britain. His move is likely to prove popular in the UK, where a bare majority of voters with an opinion on the question favors leaving the EU altogether. The Europhiles at The Economist, however, are unimpressed. The remaining EU members appear headed for a new treaty technically outside the auspices of the European Union (however, there are obstacles, as Britain will likely insist that no EU resources be used for the new institutions).

From a strictly economic point of view, however, it was always unclear why Britain and other non-eurozone member states needed to be part of the treaty. Large budget deficits in Britain no more threaten the euro’s stability than do large budget deficits in Sweden or the United States. The European Central Bank has no reason to monetize British debt, and while British default – a highly unlikely prospect to begin with – would surely harm the European financial system, the ECB presumably would intervene in such an event by supporting financial institutions within Eurozone countries. As ever, the construction of new economic-policy powers for EU institutions is about politics: building a political-economic bloc with stronger economic bargaining power. Pay attention to Sarkozy.

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