We Need New Political Formations

Today's Economic Scene column by Eduardo Porter, "From Mexico, Some Lessons for Europe," looks at Europe's allegiance to austerity and compares it to Mexico's attempt to deal with its sovereign debt problems in the 1980s. Porter was a college student in Mexico City at the time. 

Tweak a few of the details and Mexico in the 1980s looks a lot like most Southern European countries today. In Mexico’s case, runaway government spending in the 1970s, fueled by high oil prices and greased by foreign debt, threatened to bankrupt the country after the Fed sharply raised interest rates to curb rampant inflation in the United States, increasing Mexico’s interest payments even as oil prices crashed to earth. 

Similarly, money poured into Spain and Greece when investors persuaded themselves that the bonds of all members of the euro zone should be as safe as Germany’s, the region’s most creditworthy country. In Greece, this allowed a government spending binge. In Spain it ignited a housing bubble. Both countries were left with an unbearable burden when the world economy hit a wall, creditors took flight and the money stopped.

In the five-plus years it took me to get a degree (Mexican degrees take longer) the Mexican economy contracted about 2 percent. By the time I got my graduate degree two years later, gross domestic product per person was 8 percent less than it was in 1982. Yet despite the enforced austerity, Mexico’s foreign debt in 1988 still amounted to 56.5 percent of Mexico’s economic output, more than it had six years before. 

This must sound familiar to Europe’s unemployed. If anything it’s far worse there. The Greek economy has shrunk more than a fifth over the last five years. Government debt amounts to about 170 percent of the economy; it was 100 percent when the crisis started. The economies of Ireland, Portugal, Spain and Italy are smaller, too, than they were five years ago. Their debt burden is heavier. And still, European leaders insist that more of the same must be the solution.

Porter says that Brady Bonds helped solve the Latin America debt crisis, but then he questions the applicability of a similar solution in Europe's case:

What can Europe learn from this experience? Proponents of austerity will probably note that the harsh years planted some of the seeds of Mexico’s recovery. Bankers will remark that Mexico’s absolute debt reduction package was small — much less than the 50 percent or so already granted to Greece. Economists will note that Mexico had a degree of freedom that no member of the euro area has: it could devalue its currency to gain export competitiveness. 

Nonetheless, the Brady plan was a crucial ingredient. It not only reduced Mexico’s interest costs, it also produced a jolt of confidence that pushed down domestic interest rates and buoyed the peso — reducing the burden of foreign debt. It prompted flight capital to return to the country and set off an investment boom.

The cold war, Porter argues, was a critical ingredient in getting the nations to agree to debt restructuring. Leaders in the West were afraid of Mexico tilting socialist.

The only hope of that we have today is for a genuine transformation in our politics. Occupy Wall Street for a month or two in the fall of 2011 fulfilled this hope. Political parties are captured by business-as-usual money; we need a clean sweep. Then, as a result of a police crackdown and the presidential election of 2012, Occupy evaporated seemingly overnight. Now, from what I can tell, our best hope for a political reboot is Italy's Five Star Movement.

Rachel Donadio has a story this morning, "Upstart Party in Italy ‘Occupies’ a Parliament That Is Already Paralyzed," about the continuing gridlock in Rome. The parties can't form a government and soon there will be an election to select a new president:

The pressure is rising because the seven-year term of Italy’s 87-year-old president, Giorgio Napolitano, ends in May, and his replacement must be elected with a two-thirds majority of the same divided Parliament.

Italy’s Constitution forbids a president to dissolve Parliament and call new elections in the final six months of his term. 

The presidency has traditionally been a largely symbolic office, but Mr. Napolitano has become a bulwark against political instability. Last month, he named a committee of 10 politicians, experts and technocrats and asked it to produce a list of issues on which the squabbling parties could find consensus. They are expected to issue their findings this week.

On Tuesday, some of the Five Star Movement lawmakers “occupied” the Senate, meaning they remained in their seats after the day’s session. The group said they would stay until midnight to protest a decision by the presidents of the Lower House and Senate not to form permanent committees until Parliament forms a government. 

They passed the time by reading aloud from a legal code. 

Mr. Grillo, who does not serve in Parliament but runs the Five Star Movement with what critics say is an autocratic hand, accused the two parliamentary leaders of having carried out “a coup” by blocking the creation of committees.

The last paragraph of Donadio's story is not encouraging:

Mr. Bersani [leader of the center-left Democratic Party] has so far failed in his efforts to try to persuade some of the Five Star lawmakers, all of them first-time politicians, to support a center-left coalition. But as time passes, the movement appears to be splintering and may not vote as a bloc.

New political formations are hard to hold together. Grillo is smart to keep the Five Star Movement in motion doing actions like its occupation of the Senate. My experience with the Green Party coming out of the 2000 presidential election is that we did not do enough actions to keep people focused and engaged. We spent our time in a tedious bylaws revision process which lasted months, created division and killed any flame. So far the Five Star Movement seems to be avoiding these mistakes. The best thing for the Five Star Movement would be new elections as soon as possible.