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By Harold Meyerson
Editor-at-Large, The American Prospect

It’s Europe where democracy is in headlong retreat. There, the leaders of the continent’s largest nations — German Chancellor Angela Merkel and French President Nicolas Sarkozy — have asked their fellow European leaders to relinquish control of their national budgets to unelected European Union technocrats and judges. Any nation whose budget deficit exceeds 3 percent of its gross domestic product will face (as yet unspecified) financial sanctions, which can be suspended only by a supermajority of other E.U. member nations’ leaders.

The economic consequences of this piece of misapplied fiscal puritanism are frightening enough. If the other E.U. nations agree to it, they will be consigning their citizens to years, maybe decades, of declining living standards. If a country is in recession — and some European nations already are — it will not be able to make job-creating investments. What’s more, a balanced budget is no guarantor of economic health. Spain, for instance, was running budget surpluses right up until its privately funded housing bubble collapsed. When unemployment soared to 20 percent, its budget inevitably plunged into the red. But the changes proposed by Merkel and Sarkozy do nothing to curtail the cycles of speculative boom and bust. By prohibiting governments from enacting Keynesian stimulus legislation, they merely make it all but impossible for a country like Spain to recover. (more…)

Leo W. Gerard

By Leo W. Gerard
USW International President

Japan, no economic small fry, challenged China last month. The conclusion of the dispute is a cautionary tale for countries confronting China about currency manipulation.

In September, Japan seized a Chinese trawler captain after his boat collided with two Japanese Coast Guard ships near some East China Sea islands claimed by both countries.

Immediately afterward, China “coincidentally” detained four Japanese employees of Fujita Corp., charging them with filming in a restricted military area. When Japan proposed a prisoner swap, China upped the ante instead — halting shipments of rare earth minerals to Japan. China controls 93 percent of the world’s rare earths, which are minerals essential for manufacturing high-tech and energy-efficient products, from cell phones to wind turbines.

Japan caved, releasing the Chinese captain unconditionally. Suddenly, China rescinded its restriction on rare earth exports to Japan and released three of the four imprisoned Japanese nationals, ending the dispute one captive ahead of Japan.

This incident confirmed China as a burly international tyrant. The caution for countries attempting to negotiate with China is to avoid Japan’s mistake, which was single-handedly contesting the giant. For America, that means seeking an end to China’s currency manipulation by simultaneously pursuing every option the United States has, including  formally naming China a currency manipulator,  imposing tariffs on imports from countries that undervalue currency and creating a community of allies to campaign together to combat the illegal trade practice.

Rallying partners should be reasonably easy, as Japan, Brazil and the European Union all have exhorted China in recent weeks to allow the value of its currency to freely float on international markets.

Like the United States, each has acted unilaterally. Last week, EU finance ministers confronted Chinese Premier Wen Jiabao at a European-Asian economic summit in Brussels. Wen rejected their demands for China to speed appreciation of the yuan in relationship to the euro.

Also last week, Brazil doubled a tax it charges foreigners who purchase Brazilian bonds.  This was an attempt to slow speculation that has increased the value of its currency, the real, by 39 percent against the dollar over the past 22 months.

A day later, Japan announced it would lower its benchmark interest rate and purchase $60 billion in government bonds and securities, both actions designed to lower the value of the yen, which would cheapen its exports.

The Swiss tried intervening in the market in 2009 to hold down the value of its currency, the franc, but failed. Singapore, Thailand, India and Canada have considered it.

So far, America has just attempted to persuade China to stop undervaluing the yuan – a practice that artificially suppresses the price of Chinese exports while at the same time artificially raising the price of imports into China from America and other nations.  China’s deliberate currency undervaluation accounts for a significant part of America’s massive trade deficit with China.

Last spring, the United States asked China politely to allow the value of its currency to float up. As the United States awaited China’s answer, the U.S. Treasury delayed issuing its semi-annual foreign exchange report in which it could name China as a currency manipulator, then initiate a formal response.

China replied June 19 that it would allow the yuan to float on international currency markets. Treasury then released its report – which, no surprise, failed to list China as a currency manipulator. Since China’s announcement, the yuan has increased in value less than two percent – this for a currency believed by many economists, including the conservative C. Fred Bergsten, director of the Peterson Institute for International Economics, to be undervalued between 25 and 40 percent.

Annoyed with China’s failure to keep its pledge and angry over unfair trade gutting 2 million jobs from the body of the American economy over the past decade, Congress reacted just before its recess. With massive bi-partisan support, the House passed a bill that would allow the Commerce Department to impose tariffs on imports to counter the effects of currency manipulation. If passed by the Senate and signed by President Obama, it would expand the definition of improper government subsidies to include manipulation of currency to gain trade advantages.

Afterward, just nine days before the next Treasury report on currency manipulation is due on Oct. 15, Treasury Secretary Timothy Geithner, in a speech at the Brookings Institution, offered thinly veiled criticism of China’s persistent manipulation:

“When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same. . . This sets off a dangerous dynamic.”

In rebuffing the European Union’s request for revaluing, the Chinese prime minister claimed allowing the yuan to appreciate too quickly would bankrupt Chinese factories as their prices rose to uncompetitive levels, and the resulting exodus of unemployed workers to the countryside would provoke social unrest.

No one wants that. Workers everywhere applaud the rise of millions of Chinese citizens out of abject poverty. But increasing the value of the yuan will benefit Chinese workers at the same time as it begins to balance currencies worldwide. An appreciated yuan effectively increases Chinese workers’ wages.

By deliberately undervaluing its currency, the government of China is waging a stealth trade war against the rest of the world. Independently, the United States must protect its economy, but to reign in this international outlaw, America also must secure the help of a posse.

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Leo W. Gerard also is a member of the AFL-CIO Executive Committee and chairs the labor federation’s Public Policy Committee. President Barack Obama recently appointed him to the President’s Advisory Committee on Trade Policy and Negotiations. He serves as co-chairman of the BlueGreen Alliance and on the boards of the Apollo Alliance, Campaign for America’s Future and the Economic Policy Institute.  He is a member of the IMF and ICEM global labor federations and was instrumental in creating Workers Uniting, the first global union.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.

The price of the rescues of Greece, Spain and Portugal will be brutal deflation. The International Monetary Fund, which supposedly learned from its earlier mistakes of imposing austerity on already damaged economies, is back in cold-bath mode, demanding higher taxes and dramatically reduced spending as its pound of flesh.

The European Central Bank and key leaders of the E.U. are promoting economic pain as the price of relief. Here at home, President Obama has sworn off serious new outlays for jobs or aid to the states, and is using his fiscal commission to pursue a bipartisan consensus on spending cuts and higher taxes.

The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

You don’t have to be a Keynesian to recognize that the economics of belt-tightening is a fool’s errand in a recession.

With the exception of a few smaller nations, the large deficits in the OECD countries are not the result of fiscal profligacy, but of revenue losses caused by the downturn. And in the case of Greece, supposedly the poster child for profligacy, the new Socialist Papandreou government is having to clean up after the fiscal finagling of its conservative predecessor. Greece certainly needs tax reform to make sure that so many of its very wealthy do not hide their assets. It does not need general austerity.

The US has been spared this phase of the crisis so far, because the Federal Reserve has been willing to be buyer of last resort of all manner of securities, including government debt. This remedy is far from ideal, and it needs to be wound down as soon as recovery comes, as well as combined with structural reforms. But the Fed rescue certainly beats a total collapse.

In Europe, by contrast, this rescue act is far more difficult politically and institutionally. Sovereignty is divided along nations pursuing their own self-interests, a fledgling E.U. and a central bank that lacks either the Fed’s full powers, its history, or its self-confidence.

But Europe had better come through this test as a more unified and politically effective system or we will all suffer. This is no time for skeptics of the Euro or the E.U. to be gloating.

In fact, the Germans and the French have put their self-interest aside, and have pushed for a rescue plan that prevents default on government bonds and benefits Europe’s less affluent nations. With aid to Greece monumentally unpopular, German Chancellor Angela Merkel was willing to lose a key state election in order to prevent a Euro collapse This statesmanship is admirable — but the austerity demands are not.

The current global economic crisis, now entering a new phase as a crisis of sovereign debt, has only one rough precedent. The last time major nations (such as Germany, its European creditors, and much of Latin America) faced insolvency, the combination of financial collapse and deflation helped create depression, dictatorship, and then World War II.

In the US, we finally ended the Great Depression with massive wartime borrowing and public outlay. We ended the war with a debt-to-GDP ratio of more than 120 percent, more than double today’s ratio. In Britain, debt-to-GDP peaked at about 250 percent.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money. Inflation rose slightly after the war, but was manageable. And thanks to the deferred demand and careful economic management of the war years, peacetime conversion brought not a recession but a boom.

Today’s situation is different. The origin of all the debt is not a war but a financial collapse. The new round of financial panic is the result of still fearful markets, a still fragile banking system, and deficits caused mainly by reduced output, not overspending.

In this context, it is insane to think that we can recover from a financial panic and an economic recession by inducing a worse recession in the name of fiscal soundness. For now, while the real economy heals, there is no substitute for aggressive central bank intervention to restore markets in sovereign debt. The right grand bargain is tough financial reform and limits on Wall Street–so that this crisis is never repeated. The wrong grand bargain is austerity for everyone else.

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Robert Kuttner’s new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos. In addition, he is the author Obama’s Challenge.

Fred Redmond

By Fred Redmond
USW Vice President Human Affairs

Four hours into the New Year, a political activist who was also a well-known trade unionist was celebrating at a party in the town of Montoso when a political opponent stabbed him numerous times in the chest.

As Adolfo Tique lay dead, his six children fatherless, police interrogated the assassin.

Then they let him go.

By American standards, it’s a shocking story. But in Colombia, where it occurred, it’s not. It’s the kind of story I heard repeatedly, heartrendingly when I visited Colombia last month with a delegation of British Parliamentarians and unionists led by the United Steelworkers and Unite the Union, which together last year formed Workers Uniting, the first transatlantic union.

The visit left us with no reason to believe Colombia suddenly had become worthy of a Free Trade Agreement with the U.S., Canada or the European Union.

The fact that Colombia is the most dangerous place in the world for trade unionists seemed to have made the same impression last year on Democratic candidate Barack Obama. In April of 2008, at an AFL-CIO convention, he promised to oppose the proposed Colombia Free Trade Agreement. He said, “The violence against unions in Colombia would make a mockery of the very labor protections that we have insisted be included in these kinds of agreements.”

This April, however, President Obama stung U.S. unions, which worked hard for his election and the FTA’s defeat. After Obama and Colombian President Alvaro Uribe Velez sat together at lunch and spoke several times at the Fifth Summit of the Americas, White House spokesman Robert Gibbs announced that Obama had asked U.S. Trade Representative Ron Kirk to work on the FTA.

Say it ain’t so, Mr. President! Say you haven’t turned your back on unionists just because you shared a sandwich with another head of state. Tell us you won’t ignore Tique’s six orphans or 2,700 slain unionists over the past 25 years because of Uribe’s charming banter over soup.

Terrible, disquieting signs suggest it is so, however. Uribe bragged that he’d gotten Obama’s autograph with this note: “To President Uribe, with admiration!” And later Kirk would say Obama is a “great admirer” of Uribe and the strides he has made in reducing violence against union officials.

Also, Uribe bragged that he’d explained to Obama how his administration had protected unionists. He said that before he took office in 2002, there were only two convictions for the murders of workers, but since then there have been 184.

The most reliable source of such statistics, however, the Colombian National Labor School, provides radically different numbers.  Luciano Sanin Vasquez, the school’s director, testified before the House Education and Labor Committee Feb. 12, that the number of successful prosecutions was 91.  So either Colombia doubled convictions within the two months’ time between Mr. Sanin’s testimony and the Fifth Summit of the Americas, or Uribe exaggerated his success in beginning to deal with the 40-year blood bath his country has endured as right wing militias fought left wing guerillas with trade unionists and human rights activists and rural populations caught in the cross fire.

And even Uribe’s inflated conviction number is hardly impressive. It still represents a 99 percent impunity rate. Kill a Colombian unionist, and 99 out of 100 times you’ll get away with it – the police may question you, but then they’ll just let you go, like they did in the Tique murder.

At lunch with President Obama, Uribe wrangled himself an invitation to the White House. No big deal, really. Uribe had been to Washington before, and Bush had never been able to persuade Congress to pass the FTA.

But Uribe also persuaded Obama to drop by Bogotá the next time he’s visiting Latin America. This, however, is significant. This is a trip Obama should make.

Having just returned from Colombia, I believe this excursion could make all the difference in the Colombian FTA for President Obama. But only if President Obama makes his own schedule and does not adhere to some sham show tour set up by Uribe’s people.

Obama needs to meet with some of the Colombian people who spoke with my delegation, including peasant farmers, human rights defenders and trade unionists. While I was in Colombia early in April, Hernan Polo Barrera, the head of the teachers trade union, SITRAENAL, was shot dead in front of his house. Because he’d received numerous threats, he’d asked for protection, but the government refused to provide it. He was the 13^th trade unionist killed so far this year.

When Obama goes to Colombia, I want him to speak with Mr. Polo’s 16-year-old daughter, Liseth, who was standing next to her father when he was gunned down and who was wounded in the attack. She was rushed to the hospital as the killers escaped on motorcycles. They have not been caught.

I also want President Obama to spend some time with the six year old son of Arled Samboni Guaca, an active member of the Colombian agricultural workers’ trade union, FENSUAGRO, who had received numerous death threats from Colombian paramilitary groups. Father and son were walking to a shop on Jan 16 when two gunmen approached them and shot Mr. Samboni seven times. The gunmen escaped. The little boy watched his father die.

Then there’s José Jair Valencia Agudelo, an activist in the Colombian teacher’s union EDUCAL. President Obama should speak with this assassination-attempt survivor. He was shot six times Feb. 26 in the town of Filadelfia a week after authorities refused to give him the transfer and protection that he’d sought because he’d received death threats.

President Obama must speak with one more grieving unionist. He is Jorge Caicedo, leader of the health workers trade union ANTHOC in the Colombian region of Narino. Paramilitaries tried to get to him through is wife, Cecilia Montano. They shot her three times in the head in the town of Tumaco on Jan. 5^th.

Before the new president is drawn in by Uribe’s contention that Colombia should be awarded an FTA because fewer trade unionists and human rights activists and rural peasants are murdered each year now, Obama must hear from the victims. And he should remember what Human Rights Watch wrote to House Speaker Nancy Pelosi last fall:

“Free trade should be premised on fundamental respect for human rights, especially the rights of the workers producing the goods to be traded. In Colombia, workers cannot exercise their right without fear of being threatened or killed. Without concrete and sustained results in addressing this basic problem, ongoing anti-union violence and impunity would, as President-elect Barack Obama has noted, make a “mockery” of labor protections in the agreement. We believe that Colombia should be in compliance with such protections before the accord takes effect, as has generally been demanded with FTA commercial provisions.”