Public Debt, Regional Integration and The South Bank

23 March 2012

The EU debt crisis foretells a more serious global debt crisis, caused by unlimited growth and the ongoing financial casino. Latin America's emerging financial and regional architecture offers hope for a new type of integration based on solidarity. 

Public Debt, Regional Integration and The South Bank1

Five countries that belong to the EU – Greece, Ireland, Portugal, Spain and Italy – are in deep trouble. The name given to the huge bubble afflicting these countries and globalised finance in general is indebtedness. But it is not only their problem. France, the USA and Brazil also have gigantic public debts and, sooner or later, may also drown. We must accept this: the world is living a generalised crisis of insolvency. Only a new financial architecture, serving another development paradigm, delinked from unlimited growth and the financial casino, can overcome, not only the symptoms, but also the roots of the crisis.

This should not be a surprise to anyone, since capital has been shaped to concentrate wealth, rather than distribute it to all who need it. Money currently becomes concentrated through a mindless financial casino fueled by the macabre mechanism of compound interest. Interest does not represent real wealth; it is simply an instrument for exponentially elevating the monetary value of debt. German finance expert, Margrit Kennedy, provides a convincing illustration: one cent lent at a 4% compound interest rate per year in the year 0 AD would be worth, in 1750, a sphere of gold weighing the same as planet Earth. In 1990, it would be worth 8,190 planets of gold.

Market mechanisms no longer reflect the operation of the real economy. Rescue packages to save countries mean new loans that add to the already unpayable public debt. In fact, they are conceived precisely to save the banks rather than 'rescue' people or the economy. They do not reduce the public debt stock, but rather increase it. They only serve to “roll over” the debt, making its payment possible in the short run, while converting interest into new debt. This debt becomes increasingly unpayable and is perpetuated at the expense of society, through undemocratic foreign intervention and fiscal adjustment policies that curtail social investment. Meanwhile unlimited speculative earnings by banks are guaranteed by public policy. The banks? Yes, the same ones that, in collusion with other financial enterprises, engendered the speculative crisis that shook the world in 2007-2008, are now involved in debt crises that will create a deeper global economic crisis and future financial crises.

Such arguments are not welcome by the Troika - The European Central Bank, the European Commission and the International Monetary Fund - that leads European Union´s economic policy.

Proposals that target the roots of the crisis, and not just the symptoms, would include:

  • Full, participatory and transparent audits of the public debts of all over-indebted countries in order to identify the illegal and illegitimate portions of these debts; 
  • Plebiscite that allows the population to express its view about the cancellation of the illegal or illegitimate debts and the conditions for the payment of the legal portion that would protect public social investments; 
  • Abolition of compound interest and speculative financial practices as key measures towards building a new financial architecture, thus curtailing exorbitant and unpayable debt and making the banking business a more ethical practice; 
  • Socially and environmentally responsible management of the public budget.

A responsible budget management will always subordinate servicing financial debts below the priority of social and environmental expenditures. For this purpose, a conceptual and accounting restructuring of financial debts is necessary. The juridical instruments to make this possible include: legislation that puts a cap on financial debt payments (as was done with the German post-World War II debt), so as to free sufficient revenue for the domestic priorities; defining a ceiling for public indebtedness; replacing compound interests with simple interest; public management of interest rates exchange rates, tax inflows and outflows of financial capital.

The Crisis and European Integration

In my view, the European Union as such is not one of the causes of the crisis. Creating a commercial and political union and adopting a common currency are important steps towards efficient regional governance. But the conditions for its success require such a union to be democratic; to benefit each and every European person, community and nation; to be founded upon cooperation and the equitable sharing of these benefits; and to be environmentally sustainable. However a market without regulations and social and economic development planning is unable to provide these guarantees, and the current crisis proves it. The careless use of public savings to rescue private banks, as practiced by governments in Europe and North America, is illegitimate, unethical and contrary to the very logic of capitalism! Governments' and multilateral agencies' approaches to the crisis are placing democracy, economies and respect for plurality at risk.

The problem is how Europe conceives and has been implementing integration. There is a clear divorce between the social and the political economy. Euro could be the regional currency without annulling the right of individual countries to maintain their own currencies and the right to plan the equitable and sustainable development of their socio-economies. The Union integrated Europe around two dominant countries – Germany and France – and under a corporate-dominated regime and a banking structure that are harshly competitive and insufficiently regulated. The peripheral countries in Europe, such as Greece, had to submit both their sovereignty and the organisation of their economies to impositions from the Centre. The hypertrophy of finance and public debt profoundly harmed Europe's economy. And the Troika is responding to the crisis, generated by the progression of neoliberal capitalism, by implementing further neoliberal policies. Instead of overcoming social inequalities, the greed of big capital only deepens them, feeding the conflict between social classes.

The Integration of Latin America and the Caribbean

In Latin America, regional integration has moved extremely slowly, delayed by political differences and lack of long term vision. Instead of a comprehensive, Bolivar-inspired continental integration, the countries of Latin America have been split by a variety of integration projects, in a diversity of contexts: Mexico in NAFTA – North American Free Trade Area (with Chile as a candidate since 1994); Argentina, Brazil, Uruguay, Paraguay and Venezuela in MERCOSUR – Southern Common Market; the Andean nations in CAN - Andean Community; and the Caribbean countries in CARICOM. These arrangements, focused on commercial relations, have not been sufficiently sound to prevent the continent from falling prey to greedy speculators, their offensives and their retreats. These divisions were further aggravated by the advance of neoliberal policy, initiated in the debt crisis of the 80s which led to the imposition by multilateral agencies of “adjustment” policies and “reform of the State”, euphemisms for cuts in social investments, massive privatisation of public assets and services, and the handing over of strategic areas of the economy to transnational corporations.

The most comprehensive current initiative towards integration is UNASUR – the Union of South American Nations – which has 12 member countries. Its main agency is the Latin-American Economic and Financial Council, which has been especially focused on the financial crisis and has sought to establish a financial safety net and control over UNASUR member states' international reserves, currently deposited predominantly in US and European banks. Ecuador´s proposal for a new financial architecture includes the creation of the South Bank2 and the establishment of a sovereign foundation for endogenous development. This proposal is the soundest, the most democratic and environmentally concerned of current integration initiatives. The South Bank intends to minimize the use of the US dollar by employing national currencies and eventually a regional currency. Development loans will no longer be measured in dollars and this will reduce foreign indebtedness and will reduce pressure on the external sectors of the partner economies.

Brazil has acted skeptically to plans for further regional integration. Both Lula’s and Dilma’s administrations are more respectful towards other Latin American countries than former governments. Yet the illusion still prevails that Brazil might be globally viable by itself. The Brazilian elites – colonial, racist and authoritarian, as well as extremely self-centered – seem to believe that the hegemonic position of Brazilian capitalism in the region turns it into a natural candidate as a future leader in the mainstream, core world economy. Bourgeois national pride prevails and has put a brake on true progress towards the integration of peoples of the continent. Meanwhile the debate about regional integration is almost completely absent among the working classes, who are too busy ensuring their material survival and preventing further losses inflicted by the permanent confrontation with greedy capital owners.

As a result in Brazil the language of integration has mainly been used to justify the transnational expansion of big Brazil-based corporations, using public funds channeled through the BNDES – the Brazilian Economic and Social Development Bank. The world’s second largest mining corporation, Vale, is now present in 38 countries. The cultural dimension of integration has been subordinated to the hegemony of cultural products coming from the US, Japan and Western Europe. Integration, based on this conception, is reduced to the expansion and domination over new markets and nothing else.

The experience of ALBA-TCP – Latin American Bolivarian Alliance/People’s Trade Treaty – brings new hope. ALBA-TCP is a platform of international cooperation based on the idea of social, political and economic integration among countries of Latin America and the Caribbean. ALBA-TCP is not based on trade liberalisation, but on the vision of social well-being, cooperation and economic reciprocity. Since 2009, the ALBA-TCP members introduced the regional monetary unit, the SUCRE, which is a unit of accounts for transactions that go through a compensation chamber, sharply reducing transfer costs, establishing cooperation among the national Central Banks and replacing the dollar in transactions between member countries.

ALBA-TCP intends to be a seed for collaborative continental integration. The eight members are: Venezuela, Cuba, Bolivia, Nicaragua, Dominica, Ecuador, Antigua and Barbuda, and Saint Vincent and Grenadines. They are rich in resources and share a history of colonial exploitation and slavery. They want full control over their wealthy territories and waters, and are convinced that a regional union is a first step towards economic and political sovereignty. The aggregate population of the region is 75 million, with a totalGDP of US$ 700 billion. One of the promising examples of its potential is the 'Grand National Enterprises' which are uniting the creative expertise of partner countries in a variety of productive sectors (health, science and culture, food production, infrastructure, environmental protection) and creating innovative forms of exchanges of goods and services to respond to the most pressing needs of partner countries.

ALBA-TCP proves that a better way for integration in the region is possible, based on the vision of union among peoples around values such as freedom, acceptance and respect for diversity, sharing, cooperation, sisterhood. The practice of these values leads the project beyond mere integration of markets towards solidarity among the peoples of the region in the quest of “sumak kawsay” (living well) and happiness.


Source: Essay published in Portuguese, in Massa Crítica n. 57, PACS, Rio de Janeiro

1 First presented in the III International Seminar “Alternatives to Confront the Crisis”, Brasília, Oct. 4-7, 2011