Financialization European-style

It is often said that financialization exists mainly in the United States and the United Kingdom. Western European countries, with their higher savings rates and smaller financial sectors, enjoy a better balance between industrial and tertiary sector productivity and financial activity. When the global crisis first broke in 2008, this was the message from France’s then finance minister Christine Lagarde: France is insulated from the crisis because its recent growth has not been so driven by credit and borrowing.

Focusing on statistics such as savings rates can tell us something about the nature of financialization. But this only goes so far. As we have argued before on this blog, financialization points us towards something broader: a re-structuring of both the financial and non-financial economy. This development exists in Europe as much as it does elsewhere, though the manner in which it develops can be a little different. In a recent article, finance economist Harald Hau analyses the EU’s most recent bail-out plan for Greece. His conclusion fits with an earlier Current Moment post: European governments have relieved banks of much of their debt burdens in Greece, resulting in what Hau calls a “reverse wealth tax” from Eurozone and IMF taxpayers to the richest 5% in the world.

The mechanics of the transfer are worth noting. Overall, the supposed private sector contribution to the new plan is modest: 37 billion Euros out of an overall plan of 109 billions Euros (plus, don’t forget, the 110 billion Euros of the first bail-out plan). However, Hau notes that the market discount for Greek debt was already 50%. Private creditors were unsurprisingly willing to accept a 21% write-down on their loans – much better than what the market was offering them. What is also striking is that European governments have guaranteed the new Greek debt via the European Financial Stability Facility, the EFSF. If we consider the extent to which talk of a Greek default has become commonplace, with many saying it’s a question not of whether but of when, then it is again no surprise that private creditors have been happy to swap loans to Greece – tinged by the strong possibility of default – with guaranteed cash via the EFSF.

The real mystery is how all of this was possible politically. In the UK, the nationalization of some banks during the crisis was both controversial and has generated fierce discussion since then about the rights and wrongs of such a move. But compared to what the EU is doing, the UK government’s decision was far more in the interests of the taxpayer. In the case of taking up ownership of banks, there is a strong chance of getting one’s money back. As Hau notes, the EU could have pursued this route, providing direct bank support through recapitalization. Instead, it chose to guarantee sovereign debt, a move that directly transfers wealth from taxpayers to private creditors.

The answer has to be that regional integration of the kind seen in Europe has the political effect of distancing these kinds of decisions from the electoral constituencies directly affected by them. Sarkozy, Merkel and other national leaders are able to do things via the EU that they could not do nationally. Financialization is thus alive and well in Europe, with its bent towards technocratic justifications well-served in an EU equally interested in masking political choices behind the veneer of expertise.