On the 18th and 19th of September, a variety of stakeholders and several political groups of the European Parliament held the 2018 edition of the “post-growth” conference.
The event tackled the complex topic of the interplay between our economic and financial system and its dependence on “growth” and the inherent physical limits of our planet, finite resources, climate change and sustainability.
MEP Philippe Lamberts’s opening speech painted a clear picture of the global situation: “When you have rising inequalities and a rising ecological footprint, then you know you have a problem.”
One of the main obstacles, however, comes from the way that the financial system functions. This issue was discussed in the workshop on “money, debt (and interest rate) in a post-growth economy”. The current financial system creates money via debt. This sounds obvious to most but its implications remain obscure. At the moment, most of the money that exists in the world has been created by private banks by issuing a loan, to a government, a private company, or a consumer (mortgage, consumer loan). The system relies on a steady cycle of money creation and destruction in order to maintain enough money in the economy to enable continued and stable exchanges of goods and services. If tomorrow all of the outstanding debt was repaid in full, there would be nearly no money left in the economy. Indeed, repaying debt means destroying money. But every time private banks create money, they attach an interest which needs to be repaid on top of the money created. The only way to repay a loan with interest is to “recapture” money from a newly issued loan to someone else in the future (or to yourself, which is called “rolling over your debt”). This means that this system locks economies into forced growth, via an eternal cycle of money creation and destruction, growing the debt. Also, this grants private banks unprecedented power, as they decide which project they decide to fund, typically the least risky and most profitable, which is not necessarily aligned with public interest like the need to develop sustainable development technologies etc.
This is why it is so important to examine the money creation mechanism, since it is far from neutral and produces effects that impact the entire society.
Fran Boait, from Positive Money, presented some possible alternatives including changing the mandate of the European Central Bank to go beyond monitoring inflation and financial stability, and be authorized to create money and inject it directly into the economy, either funding public investment projects from governments, or injecting it directly in the economy (distribution to citizens directly, or “Quantitative Easing for the people”).
Josh Ryan-Collins, Researcher at UCL Institution for Innovation and Public Purpose, explored further the problems stemming from the current financial system:
- Virtual wealth: compound interest allows monetary wealth to diverge from productive capacity. In essence, valuations on the stock market and the “wealth” created is decoupled from the “real life” increase in productivity or the real economy.
- Discounting the future – undervaluing future wealth in economic decision making and focusing on short term gains.
- Instability and inequality: tendency for credit to flow to non-productive existing assets (speculative lending). For instance, lending focused on acquiring land or existing private property only contributes to drive their prices up, but does not help in creating new products or services.
Potential solutions to these problems include:
- Credit guidance: guide loan issuance via regulation, like increasing lending to invest in green technology, etc. It is done a bit in China, but not here because we adopted a pure free market approach.
- Larger role for state investment banks: in Europe, we have the KFW in Germany as an example. These can make a difference by investing in projects which are in line with certain key objectives and goals like the Sustainable Development Goals.
- Stakeholders vs. Shareholder banks: instead of asking for collateral and lend to people you don’t know, a banking where you understand and are closer to your customers and local companies.
- Fiscal policy: create demand and crowd in investment in innovation and green/public interest projects, for instance by tax incentives etc.
A new paradigm on how money is created ties in directly with the idea of Universal Basic Income (UBI). Giving the European Central Bank powers to directly inject money into the economy by granting it to citizens in order to stimulate the economy is close to this idea, but such a “stimulus” cannot take the form of a UBI for simple macro-economic reasons: a constant growth in the money supply with no mechanism to “destroy” money would lead to mass inflation. UBI funded via taxation, however, is possible.
The benefits of UBI are many according to the panel of speakers discussing this idea:
- Stimulation of employment: since UBI is unconditional, any income adds up to UBI and thus people are not discouraged from working as with social benefits (since these benefits are conditional on being unemployed).
- Gender equality: a UBI could encourage men to get involved more in the family, take longer paternity/parental leaves given the increased financial security and equal financial compensation that both parents would get.
- Reduction of bureaucracy: “traditional” social benefits are very complex and require a massive bureaucracy and form filling to function.
- Reduction of poverty/social inclusion: the most obvious benefits of all is the potential to lift people out of poverty.
Many conditions, however, need to be met in order to implement UBI. First, since it has to be funded via taxation, much needs to be done to curb tax evasion and harmonize fiscal policy at EU level, especially corporate tax. At present, given that there are no “minimum” standards for corporate tax, competition between Member States in an attempt to attract corporations have drawn corporate taxes down. While this “race to the bottom” was closed for taxes such as VAT (value added tax), which is set at minimum levels by EU law in order to avoid Member States undercutting each other in an attempt to capture consumption from other Member States, corporate taxes remain outside of EU law. Also, a UBI would need to meet certain requirements, especially being at a sufficient level to allow everyone to live in dignity, and maintain specific social benefits for families with special needs (disability benefits etc). Many proposals for a UBI have been presented with the misguided intention of cutting back on social benefits, as a disguised cost saving exercise, proposing UBIs which would not allow all people to live in dignity.
Finally, several broader considerations were discussed during the conference, especially the increasing threat of mounting populism as a reaction to growing inequalities, and the powerlessness of policy makers who, even with the best intentions, are blocked by a gripped political system (for instance, failing to reach a majority support for progressive policies in the European Parliament, or having their proposals shot down by opaque decision making processes of the European Council).
While the conference presented many great ideas for a profound reform of the economic and financial system, they remained tied to public authorities and their willingness to regulate for their success: a lot of “ifs”. If people vote differently, if we obtain a political majority, if people put pressure on their governments, if…
Two levels of action were only briefly mentioned: the international/global level and the grassroots level.
The international/global environment could negatively affect any attempt of EU policy makers (in the event they would find a consensus to act which is by no means easy): so called “neutral” rating agencies could worsen the risk profile of all EU Member States, increasing their cost of borrowing on the financial markets which would offset any “positive” effects of progressive policies, other countries will react to EU policies in ways which might undermine these policies (for instance, filing a complaint at the WTO assimilating certain regulations as disguised protectionist measures)… In essence, the EU does not operate in a vacuum, but the discussions during the conference didn’t reflect that reality.
The grassroots level has also been underestimated. Several participants pointed to innovative grass roots initiatives like time based currencies or time banks allowing people to exchange an hour of their time against an hour of someone else’s time, circular or sharing economy initiatives were mentioned and the adoption of local currencies, alternative currencies and crypto-currencies by communities of like-minded citizens or even cities and regions were also discussed, underlining the positive effect on economic stability and boosting the local economy. Objections given to such initiatives reflected the maxim “where you sit is where you stand”: most speakers pointed to the difficulty of such initiatives to reach scale (conveniently omitting that public authorities can greatly affect the upscaling of such initiatives). From the point of view of policy makers, citizens taking initiatives directly outside of “official” government-led policy represented competition.
This might be one of the key lessons for smaller political groups in the European Parliament, lamenting that no actions can be taken until they win the elections: perhaps they should consider mobilizing their constituency in order to implement certain initiatives locally, directly, instead of waiting systematically for the “next elections”, achieving broad, European wide consensus for progressive policies, not only inside the European Parliament but in every single Member State. People are tired of promises, they want action.
All in all, the conference was an excellent opportunity to take stock of the progress made. It would be unfair, as many speakers pointed out, to say that nothing has been done. In Europe, we have managed to curb carbon emissions, renewable energies have seen an unprecedented boom in the last decade, but much remains to be done. While scientific arguments have managed to convince most citizens and politicians, economic arguments keep on delaying action. Any meaningful change will have to address the blocking effect that the current financial and economic system has on the progressive initiatives that are necessary in order to curb climate change and avoid the apocalyptic scenarios that major scientists have forecast if nothing changes.