Tag Archives: class

Capitalism under Hollande

11 Jul

In recent days, French president François Hollande has begun what is perhaps the most important aspect of this presidency, a reform of the French labour market and of capital-labour relations more generally. Typically, very general ideas about these changes were discussed during the presidential campaign but no firm commitments one way or the other were made by Hollande as candidate, not least for fear of angering the unions. Now that he commands a majority in the national parliament and is in a position to push through changes, we can see more clearly the social content of the Hollande presidency. Under conditions of crisis, and in the name of boosting French competitiveness, it is likely Hollande will do something similar to what Gerhard Schroder did in Germany, namely a flexibilisation of labour laws and a shift in the burden of funding social insurance from capital to labour. How hard Hollande will push is unclear but it does seem that history is repeating itself in France: as with Mitterrand, reforms hostile to labour are being undertaken by the left, not by the right.

His method and style are consensual and collaborative. In place of the immediacy and decrees typical of his predecessor, Hollande has organized a conference bringing together all the different representatives of business and labour in France. No firm commitments are to be made immediately. Rather, on key issues commissions have been set up that will discuss proposals and over the course of a year or so will come up concrete reforms. This contrasts also with Lionel Jospin, former socialist prime minister, who had angered business leaders back in 1997 by declaring at the end of a day of discussions the introduction of the controversial 35 hours week. Hollande’s approach is to keep everyone on board and introduce reforms only gradually.

Hollande may have attracted attention from outside of France as a socialist elected after a campaign where he declared “the world of finance” to be his enemy and where he proposed – remarkably off the cuff for such an important policy – to tax at 75% France’s highest earning individuals. But the reality of political change in France is elsewhere. Traditional leftwing parties, like the Front de Gauche, did far less well than many had expected, suggesting that the opportunity for reform à la Schroder has come in France. The form of his consultations is classically corporatist, with labour and business leaders fully represented in ongoing discussions with the state. As in Germany, the critical issue will be whether or not Hollande is able to secure the support of the unions to push through his proposed changes. The German government’s close relationship with the unions was what enabled the country to undertake its internal devaluation in the early 2000s, the source of its present day competitiveness. Keeping the unions on board, as well as the business groups, is essential for Hollande.

The actual substance of the changes is not yet certain but the ideas being floated make clear that the shift in the balance of forces within society is going against organized labour. One key possibility is that the cost of paying for social insurance, which in France lies heavily on business and is a clear legacy of postwar social democracy, may be increasingly levied on workers. This changes the balance between private wealth and public claims on that wealth. At present, there seems little by way of social mobilisation in France – or in the positions taken by unions – to suggest that such a shift will be resisted. The previous Sarkozy government had planned a similar shift but through an increase in VAT, the so-called social VAT, which unions had opposed unanimously. Hollande’s government is thinking instead in terms of raising what is called the CSG (contribution sociale generalise – a tax paid by all, used to finance health insurance, pensions, welfare payments to family etc.), a proposal that currently divides unions, some are in favour and some not. The CSG was already introduced back in 1990 as a way of generalizing the cost of social insurance which up until then had been levied uniquely on salaries and its extension today is in line with these earlier changes. The position of business is clear: unless such a move is made, competitiveness will continue to decline and jobs will be lost. With thousands of jobs in line to disappear as companies – from automobiles to big pharma – shed labour, the pressure on the government to lessen these costs on businesses is very high.

The situation in France is thus a confusing one. A superficial attack on business through capping of salaries in public sectors enterprises and levying a high tax rate for high-earning footballers and other stars, exists alongside a much more substantial reduction in claims the state makes on privately generated wealth. Social insurance, in France, is being transformed. From being something that belongs to society as a whole, and is based on a coercive transfer of wealth from the private to the public purse, it is now a good enjoyed by individuals and one that they need to pay for themselves. What is being given up here is the idea that markets generate systematic inequalities that should be righted through public intervention. From social insurance as a critique of capitalism to social insurance as a private good purchased by individuals through their own contributions. We aren’t there just yet but this is the direction in which France is heading.

Freedom in the Economy 2: Cooperative Control

14 Mar

In a previous post, we defended a universal basic income as a freedom-enhancing economic policy. Such a proposal seems to be of the moment. Peter Frase and Mike Konczal discussed it, built off a post Frase wrote defending a basic income and discussing a convergence between right-wing and left-wing defense of it. Despite the apparent convergence between Left and Right, we suspect a potential divergence is on the surrounding economic conditions (h/t Suresh Naidu on this difference). There are many good things about a universal basic income, but it has its limits. For one, a universal basic income is a lot more freedom enhancing if loads of public goods are already provided – roads, primary education, universal healthcare.

More importantly, a basic income is a good but limited instrument for securing economic freedom in workplace relations. It raises bargaining power, and makes it materially possible to exit work. But the freedom to leave work is not fully guaranteed by a basic income, nor is freedom to leave work all there is to freedom in and at work. Some recent debates between Corey Robin (followed up here) and libertarians, especially Jessica Flanigan at Bleeding Heart Libertarians, and a reminder of a post ‘against jobs’ by Peter Frase, have drawn attention to just this point. It is obvious that having the economic means to leave a job, or at least being able survive for a while without a job, does not remove some of the most significant obstacles to leaving a job. We can use economic language and call these ‘sunk costs’ or simply use common sense and point out that spousal employment, schools for one’s children, family networks, social commitments, expertise and re-training requirements, can all majorly raise the cost of leaving a job. Even on its own terms, a basic income might be insufficient to secure the conditions necessary to allow workers to leave a job, or at least make threats to leave credible enough to put off domineering employers.

But that is not even the most significant point, as it is still a matter of how to think about whether or in what ways we are free to leave a job. The deeper point is that the forms of domination and unfreedom that can exist in an economy are heterogeneous and variegated. A basic income, and the freedom to leave and choose among employments, is a crude way of securing overall economic freedom. After all, though a credible threat a worker makes to leave employment might very well forestall some kinds of abuse, it is something of a nuclear option. If the only way to resist coercion in the workplace is by threatening to leave then it is not all that hard for the employer to call the employee’s bluff, especially when many actual cases of coercion are minor. One suspects that, when the main way of guaranteeing freedom from coercion, abuse and intimidation is by threatening to leave, workplace relations become more antagonistic and conflictual. When all you have is a hammer every problem is a nail. If most problems that arise in the workplace fall below the threshold of needing that hammer, there is little for the worker to fall back on. Unless that worker had voice, not merely exit.

Moreover, even if a basic income can create less unequal bargaining power between employee and employer, it is impossible to write contracts that specify all the relevant conditions. Contracts are inherently incomplete for reasons of imperfect knowledge. A million decisions arise in the workplace itself that could not be predicted. The question then is who should have the rights to control these decisions? These ‘residual rights’ as the economist Oliver Hart called them, can be organized so one person monopolizes them, or they could be distributed more democratically. That is to say, the point is not merely that workers should be free to say what they want, there should be power behind their voices. That is a conventional defense for unions, but onecan take the argument further. It is the idea behind cooperative organization and control of work itself. Workplaces in which the assumption of a labor contract is not that you pick your master, but that you become a co-operator, allow workers to enjoy kinds of freedom that simply are not available if their only option is to stay and serve and employer, or leave and serve a different employer. It is only in this way that each can exercise equal power in the day-to-day structure and operation of the workplace.

A final word in defense of basic income despite its limitations. Workplace cooperatives without a universal basic income would be considerably worse than those when each has a basic income. That is because in cooperatives there will be majorities, not unanimities, and the subtler pressures of public opinion. It is always necessary that any individual be able to leave those conditions. Though one suspects those forces would be weaker, and workers more willing to exercise their control rights against popular opinion, if they enjoy the economic security of a basic income. So if a basic income deals with only one dimension of economic freedom, it is also supportive and supported by other dimensions. All in all, though, there is good reason to think that economic freedom is not exhausted simply by guaranteeing non-coerced contracts. How the workplace is organized, who controls daily decisions, is also its own, distinct question.

Proposals for freedom in the economy: unconditional basic income, cooperative ownership of enterprise, socialized health care.

8 Mar

In a little over a week, one of the editors of this blog, Alex Gourevitch, will be speaking at the Left Forum with Corey Robin and Doug Henwood on a panel on freedom and the economy. The panel is one of three organized under the general theme ‘reclaiming freedom for the left,’ in part inspired by this excellent article by Corey Robin. In anticipation of the panel, we thought we would try out some of the ideas that we will discuss at the Left Forum itself.

The impetus for the economics panel was the economic tendencies of the Occupy happenings, which bounced between anti-Fed, goldbug Ron Paulism and a general attack on corporate personhood. But instead of continue to criticize those economic tendencies, we thought it worth presenting something more positive – not exactly a utopian image of a radically transformed future, but three major economic changes that we believe would significantly increase human freedom. In what follows, we discuss the first: an unconditional basic income.

The idea of an unconditional basic income has floated around policy circles for ages. It has such strange bedfellows as post-Marxist Socialist Andre Gorz, legal theorist Bruce Ackerman, and right-wing crank Charles Murray. It can claim a tradition reaching as far back as Thomas Paine and Thomas Skidmore’s proposals to give all persons a land grant or equivalent value upon reaching adulthood. It is an idea floated at different times by famous socialists like Oscar Lange, left-libertarians like Philippe Van Parijs, and aggressively defended by her Mavericky Maverickness, Sarah Palin.

That’s right, you read that last bit correctly. Lost in the hubbub of the 2008 right-wing debate about whether Obama was a socialists, a fascist, or something worse, was the fact that Sarah Palin, as governor of Alaska, ruled over the only socialist state in the United States. The State of Alaskaowns the major means of production – the Alaskan oil pipeline – and uses the surplus generated from that pipeline to grant, unconditionally, a basic income to all Alaskan citizens. It is called the Alaska Permanent Fund Dividend and as governor, Palin not only happily presided over this economic arrangement, she voted to increase the basic income payout.

A basic income has multiple virtues. Unlike means-tested welfare payments, a basic income is extended to all citizens. This means that the horrible welfare bureaucracy would disappear, replaced by automatic monthly deposits in a bank account. That, in and of itself, would be a gain to human freedom. The USwelfare system can be unbelievably invasive – including unannounced searches of recipient apartments, which get as personal as checking underwear drawers for extra cash, and bathroom sinks for extra toothbrushes (if cohabitating with someone earning an income, you might be cheating the system.) Welfare recipients who need the income are dependent on the state, and must accept this sacrifice of personal freedom for welfare payments. The current welfare system serves more to regulate the poor and to create corrosive distinctions between the deserving  and undeserving poor, rather than deal with poverty itself. A basic income would eliminate that.

A further advantage of a basic income, especially if it were adequately large, would be the reduction of the economic dependence of workers on employers. Those afraid to resist crappy, overbearing, or downright mean employers, would find it much easier to leave a job, or contest conditions at work on equal terms. After all, no matter how ‘fair’ or reasonable a wage-contract is, they are still terms for the sale of one’s labor, and say little about the control one will have over one’s work. The virtue of a basic income is not just that a worker can leave work, but that the added bargaining power makes it harder to walk all over him or her in whatever job the worker happens to find. Here too, the basic income would reduce, if not eliminate, various relations of domination.

A basic income is no magic bullet, but it is more than just an anti-poverty measure. It is the best way to increase the actual and reasonable alternatives of most people, and thus their real freedom.

The Housing Problem: More than a matter of fraud and finance

26 Jan

Amidst the waves and waves of fraud, it is possible that the root of the housing problem – inequality – has remained buried. To be fair, the fraud was monumental. Enough lawsuits have been filed, legislative reports published, investigative media reports run, for us to know that all kinds of illegal schemes, high and low, were an integral part of the housing bubble and financial crisis. At the top there was the way that funds, banks, and other financial outfits, like Goldman Sachs and General Electric Co., bundled and sold mortgage backed securities. There was also fraud at the bottom, in the forging of income statements, robosigning, and other dishonest and illegal methods for generating mortgages. Fraud that continued even after these mortgages were issued, as mortgage servicers did all that they could to prevent loan modifications, jack up fees, and keep borrowers underwater so that they could collect while the system tanked. The bottom-feeding was linked to the high-tech fraud at the top, insofar as the demand for MBS, CDOs, CDO-squareds, was so immense that the only way for mortgage issuers to generate large enough quantities in such a short time was by throwing due diligence to the wind. Then there is the systematic corruption in the fact that, at least at the top, banks made money both by turning shit into gold, and then by waiting for that gold to turn back into shit.

In the midst of all of this fraud, we have to remember that cheap and easy credit was supposed to solve or at least address the housing problem itself. It was supposed to make access to housing possible for borrowers who otherwise had trouble getting loans. That was one of the justifications for many of the changes in regulations that fraudsters took advantage of. Moreover, so long as cheap credit served its welfare-function of increasing consumption, especially of houses, there was less incentive to look into just how this was all made possible (there were, of course, many other factors contributing to indifference towards systematic fraud, not to mention the perfectly legal ways in which systematic risk was spread around the financial system.) What we can say, first off, is that the tradeoff – of increased homeownership for financial innovation in housing finance – was not worth it. The tradeoff was not even close to worth it. As the graph below shows, there was very marginal increase in home ownership. Even if we arbitrarily choose the year of the lowest rate of ownership (1993), even though it is not the beginning of the housing bubble, and compare it with the peak (2004), we get a 7% rise in homeownership, which can hardly all be attributed to financial innovation itself – and by the time the bubble burst most of the gain was wiped out.

And of course this way of financing access to housing came at the price of an immense credit crunch, doubling of unemployment, years of stagnation or recession, collapse of home values, long-run declining access to homes, declining household formation and, as we noted last week, a massive redistribution of wealth upwards.

But it would be a mistake just to blame those in the financial system who benefited, legally and illegally, from this permissive climate. After all, when it comes to housing, they alone did not create the poverty, and in particular the inability to afford housing, that lies at the root of the housing problem itself. Behind all the fraud is the cold hard fact that many are too poor to be able to securely hold or own a house without fraud. That is the root housing problem.

Looking to innovative credit mechanisms and market ‘incentives’ to make housing available to the poor is one of those neoliberal, post-Cold War ‘solutions’ that ultimately created a bigger problem. It registered, among other things, the fact that there is so little class power at the bottom that direct claims to the social product, in the form of low-income housing, public housing, rent controls and other forms of public provision are supplanted by mechanisms that make claims to housing contingent on becoming subject to the discipline of deeply inegalitarian financial and credit markets. But the inability of poor and middle income workers to control enough social product to meet a basic need like housing is a function not just of the economic power of financiers, but of ownership more widely. It is not just finance capital that keeps workers separate from the means of production. In this sense, the housing problem is wider than and predates the fraud and the legal forms of exploitation that it eventually gave rise to.

Expropriating the expropriated (1983-2009), or, Why It’s the Top 20 not Top 1% That Matter

19 Jan

Recently, the Economic Policy Institute published “11 Telling Charts from 2011,” including the following one showing the share that different segments of the US Population took of the wealth gain from 1983-2009.

When we first looked at this chart, we started reading from the left and adding the numbers but did a double take by the time we added the Top 1%, Next 4%, Next 5%, and Next 10% – or the top 20%. Add their shares together and you get 101.7%. At first that just didn’t seem right, since our assumption was that when you add up all the shares one would get 100%. Naively, we had assumed that, while radically unequal, the gain in wealth for all quintiles would positive. A piece of folk philosophy in the United States is that the rich can gain huge gobs of money and power, so long as the poorest can also have some piece; and that those who rise do so on their own merits, but not by making the worst off even worse off. That, as it turns out, is also a premise of the most influential theory of justice in contemporary political philosophy, which states that the only permissible inequalities are those that make the worst off better off than they otherwise would be under pure equality.

The past twenty-five years have followed a different path from mainstream, common sense theories of justice. The worst have been made worse off. Meanwhile, the massive gains of the top 20% were only as large as they were because wealth was redistributed from the poor to the rich (with very moderate gains for the top 20-40%). The expropriated were expropriated some more.

These figures are even more important than the income inequality statistics with which everyone is now familiar, because those income statistics alone give the impression that, at the very least, nobody is being made worse off. In addition, wealth is a much better indicator of social and economic power than income, as it shapes individual bargaining power, determines who controls investment, and establishes the distinction between those who are economically secure enough not to have to work, and those who aren’t. Looking at the graph again, a key political point emerges, which we have made before: the problem is not with the 1% alone. The expropriators area larger class than that. After all, the next 4% took just as large a share of the total wealth increase, and overall, the top 20% are doing quite well. To reuse a chart we have used before, the top 20% control 85% of the total wealth in the United States, and if residential wealth were removed (at least, value of primary homes), that would undoubtedly rise much higher.

So the current political obsession with the 1% introduces a very problematic distortion into the actual dynamics of class, and the real distribution of wealth and power, in the current political economy. We are the 99% has a wonderful, quasi-universalist ring, but actually real distinctions under the rug, and implicitly dodges hard conversations about the real class composition of the United States. A real critique would have to reach beyond mere populism.

This time was different

16 Sep

In our long running attempt to sort out what ‘financialization’ is supposed to mean, we revisited the ‘Finance’ chapter in Doug Henwood‘s excellent After the New Economy. Published in 2003, Henwood’s book describes the collapse of the telecom/dot.com bubble in the light of wider trends in post-war political economy. A brief summary of Henwood’s account (or our reading of it) helps shed light on some features of our own post-crisis stagnation.

The hinge, on Henwood’s account, is the late 1970s, when inflation, full employment, and an uppity working class continued to press its demands, while firms had watched profit rates decline for twenty years. Carter appointed Volcker to the Fed in 1979, and the new chairman took the helm with the famous statement “the American standard of living must decline.” After jacking up interest rates first in 1979, and then, not satisfied, to a peak of 19% in 1981, Volcker eased a bit, before raising them again in 1983 and 1984. By 1981 the damage had already been done – unemployment was at 11%. And if workers hadn’t gotten the message, Reagan was happy to turn to the screw by firing the air traffic controllers. (See Henwood 207-211 for the full account.) As an aside, we can’t help noticing that austerity seems to have been in the Democrats’ back pocket for a long time now – Volcker being a Democratic appointee.

Of course, this story is well-known, but it sets up one important bit of context for thinking about the growing importance of financial operations since the late 1970s. As Henwood points out, the official ideology of the stock market is that it is a way of raising capital for investment. The problem is that “over the long haul, firms are overwhelmingly self-financing – that is, most of their investment expenditures are funded through profits (about 90%, on long-term averages), and surprisingly little by external sources, like banks and financial markets” (p.187). Most shares bought and sold in the market are not, in fact, bought from the issuer by an investor, but are essentially secondary trades. The money exchanging hands does not go to the firm issuing the shares. How, then, to think about the growth of the stock-market?

Henwood’s thought appears to be that the more important feature had to do with changes in ownership and class relations. Against the background of the late 1970s early 1980s upper class offensive, the growing power and influence of shareholders made itself felt in two ways. First, increasing compensation of managers in stocks bound these managers to the short-term fate of the company’s stocks, rather than its long-term economic health. (And recall that this increasing stock-based compensation is a major reason for growing inequality – more important even than changes in tax rates). Second, the emphasis on stock values put a much greater emphasis on increasing profit rates by whatever means necessary – most importantly suppressing wages and labor costs generally. The restructuring of ownership was thus part and parcel of the offensive against the wage and compensation demands of most Americans. It was more a class project of redistribution upwards than a dynamic growth model. Indeed, if Volcker had been more honest, he would have said “the American standard of living for American workers must decline.”

Of course, it’s true that, by the end of the 1990s, the highly mobile capital, sloshing around both in the stock market, and across the globe, did produce some innovation, but in the most inefficient way. All kinds of now forgotten telecommunications (WorldCom, Qwest, Global Crossing) and dot.com ventures  (Pets.com, TheGlobe.com) raised money through mammoth IPOs, and less so venture capital, and crashed hard, with bankers and favored investors making the lion’s share of the money on the up and downswing. Henwood quotes former investment banker Nomi Prins’s calculation that by 2003, over 96% of the telecom capacity lay dormant. Old news, but a painfully familiar story to us, especially given all the unused housing stock. When the stock market does serve as a conduit for investment, it tends to lead to massive over-speculation on asset values, and the promise of returns on stocks and other financial instruments becomes disconnected from the real values, or reasonable potentials, of the underlying assets. And the people who tend to benefit the most are the big and regular players, not the so-called investor class.

However, though familiar, there are at least three aspects of the boom and bust of the late 1990s and early 2000s that strike us as different from the credit-crunch and subsequent stagnation. First, most obviously, at least we got the internet out of the 1990s, whereas now we got a lot of unused houses, and a good portion of the population living in houses they can’t, and never could, afford. The underlying asset, in other words, was never believed to be able to create value. There were at least theories – though many of them wacky – about how the internet, and various websites, could make money, and thus pay returns. Second, the housing bubble was driven not just by speculation on stock values, but by extremely complex new financial instruments that were linked to debt, not equity. The ability to repay mortgages, not the ability to give a return on dividends, was, as far as we understand it, a decisive feature of the CDOs, CDO squareds, and in a way CDSs. No doubt there is an important story to tell there about the class relations and ownership structures involved in that kind of speculation, but it is not quite the same as the shareholders of the world uniting against the working class. Third, in retrospect, what is painfully evident is the role of debt – not just corporate and government, but household – as a response to the ‘decline of the American standard of living.’ The individualized, unspoken, and doomed-from-the-start response to Volcker’s commandment was the taking on of debt by households to sustain consumption they could no longer finance through earnings. This was debt in the form of mortgages, second mortgages, credit cards and student loans. What seems to make this time different is, in a way, the discovery of debt as a way of extracting value from workers that couldn’t be extracted via further wage-suppression. And the economic consequences of debt-financed consumption are even more dire than just a stock bubble, since it made its way into all areas of the economy – anywhere a consumer used borrowed dollars to buy things. Of course, the thing about debt, especially when there is systematic inability to pay, is that it can always be renegotiated. These renegotiations are usually mediated by the state, so it matters who controls the state. On that front, we know which side the balance of forces favors.

 

A plan for growth?

7 Sep

Guest post by Wolfgang Streeck

Several recent posts insisted that without a “plan for growth,” in particular in Mediterranean countries, the European crisis of debt, austerity and international solidarity will continue and get worse. That may well be so. But where is growth to come from? Regarding Greece, Spain and Portugal – I will turn to Italy shortly – it is not that there hadn’t been a “plan for growth” for them in the past. Accession to the European Union gave them access to a huge “internal market,” in fact the largest in the world. European Union regional and structural funds were to help them build the infrastructure they would need to make use of their new opportunities. And the Euro, once introduced, combined with comparatively high national inflation, made for very low real interest rates.

In fact in the years before 2008, Spain and Portugal especially were booming (while Germany, incidentally, was stuck in stagnation and high unemployment, due to low inflation and, as a result, high real interest rates). But as we now know, the money that was flooding the GIPS countries and that could have prepared the ground for sustainable growth and long-term competitiveness went into the wrong channels. Low interest rates and European-funded infrastructures, rather than attracting investment in internationally competitive manufacturing or services, went mostly into speculative ventures in real estate. The experience does not exactly bode well for another round of “planning for growth.”

Why was the window of opportunity in the 1990s and early 2000s missed? It seems that even the best macroeconomic conditions and the most generous infrastructural support must fail to kick off development unless there is a domestic middle class of entrepreneurs willing to make long-term investment in local industrial progress, throwing in their own fate with that of their country or region. (Ireland, because of its English language and its patriotic expatriates everywhere in the world, may be an exception.) Foreign direct investment is apparently not enough as there are almost always opportunities elsewhere for footloose capital to make more money faster. What is needed is a patriotic business class willing to tie their fortune to that of their local society – which is a tall order in a world reshaped by globalization and financialization.

Not that there was no patriotic local entrepreneurship at all in the Mediterranean. There is, for example in regions like Catalonia and the Basque country (as well as in Northern Italy, see below), and indeed these are least affected by the crisis. But where the money has remained in the hands of an oligarchy of aristocratic and pseudo-aristocratic families, very little happens. Financial deregulation has created ample opportunity for those who do not want to dirty their hands to invest in United States Treasury Bonds or in Fifth Avenue real estate, if they are not content with breeding fighting bulls or operating Korean-built ships under Caribbean or African flags and with Chinese crews. It is not all true that there is no money in Greece. Quite to the contrary, the Onassis and Niarchos family clans rank high among the world’s superrich. The problem is that they do not want to invest in their country and that they are freer today than ever to take their money abroad.

There are also good reasons to believe that the Mediterranean superrich pay even fewer taxes at home than their counterparts in Northern Europe. In an interesting way this seems related to European integration. European Union structural funds, later low interest on government borrowing under European Monetary Union, and now the transfers that are being paid in various forms to refinance the Greek and the Portuguese national debt compensate for Mediterranean countries’ inability to tax their money aristocracies. At the same time, they make it unnecessary for governments to invest in more effective tax collection. Northern economic aid has filled and still fills the gaps in public coffers caused by national money migrating abroad or avoiding to be taxed. It thereby in effect subsidizes a latent social compact under which post-Fascist Mediterranean democracies left pre-democratic quasi-feudal elites alone to allow for national reconciliation, instead of expropriating them one way or other in favor of, for example, a new entrepreneurial middle class. Note bene that Greece is among the countries with the highest concentration of wealth, in the hands of a very small number of old families.

Does this seem far-fetched? Take Italy, which is a country consisting of two countries. Northern Italy is part of the Western European heartland, in the same league as Bavaria, Austria, Switzerland or the Rhone Valley. The Mezzogiorno is Italy’s Mediterranean, much like what Greece and Portugal and large parts of Spain are to the European Union. Note how long the Mezzogiorno has had the same currency as Northern Italy, access to the same markets, the same interest rates, and in particular extensive structural aid, far above in fact what Greece and Portugal and Spain and Italy as a whole can ever hope for to receive under even the most extensive and generous European “plan for growth.” All to no avail because of an archaic, pre-capitalist social structure that for political reasons was left essentially unchanged. In fact, in a complicated story that could, however, easily be replayed elsewhere, Northern Italian support for modernization in effect enabled the old elites of the South to make sure that they remained in control and everything remained as it was, in the famous Gattopardo way.  Since there was money flowing in from the outside, nobody in Rome needed to pick a fight with those diverting the money from the inside into unproductive luxury consumption or even more uncouth activities. In fact increasingly, the outside money was diverted to buying political support for governing parties in a socially unchanged and economically stagnant Mezzogiorno, with cynicism over “growth” plans that were in reality corruption schemes growing from year to year.

It is interesting the see how categorically Northern Italians today object to further transfers from North to South. Quite a few – viz. the enormous electoral support for the Lega Nord – are even willing to let the Italian national state break up so they can keep their money for themselves. If Northern Italians don’t want to pay for Southern Italians any more, having given up hope after so many years that a “plan for growth” can be devised that really works, how can one expect German or Dutch or Danish taxpayers to agree to an institutionalized transfer-cum-economic development regime for Greece and Portugal and, very likely, others? Remember that one reason why the Italian Southern experiment with accommodating a pre-industrial power structure was for a long time politically acceptable in Italy was that it was subsidized by Northern European countries, in the form of European Union regional aid (which originally went almost exclusively to Italy). As this ran out, in part because after 1989 so many other countries began claiming assistance, the Italian North-South social compact is breaking up. Currently the hope is that Europe will pay, not just for Sicily, but for the Italian state as a whole. But unlike Northern Italy paying for the Mezzogiorno, there is no third party helping Northern Europe pay for the Mediterranean.

Economic growth is not just about macroeconomics but also about social structure. Mediterranean countries may, some nationally and some only regionally, have missed the opportunity to acquire a class structure conducive to industrial competitiveness in a post-Fordist world. Now it may be too late, both because the local money, which is still largely preindustrial money, can more easily than ever exit, and because building post-Fordist competitiveness may simply take too much time in a world whose markets are already divided up between economic power houses like Germany and China. Perhaps when Spain, Portugal and Greece broke free from fascist dictatorship in the 1970s, they would have been better advised not to follow the Social-Democratic recipes offered by the European Community: of liberal democracy rather than social and political revolution (land reform!), economic growth through admission to international markets and assisted by subsidized infrastructural investment, and in particular exclusion from power of the radical Left, Euro-communist or not, on the postwar Italian model.

With respect to the latter, it may help to remember the peculiar starting point of the trajectory that has now come to a climax: the 1970s, when Enrico Berlinguer, leader of the Italian Communist Party, under the impression of Kissinger’s putsch in Chile (1973), abstained in the middle of the decade from joining the Italian government, afraid that the same could happen to him that had happened to Allende (Aldo Moro was killed in 1978); when the Revolution of the Carnations (1974) brought a Communist group of military officers to power in Portugal; when the best-organized opposition at the end of the Franco regime (1976) were the – Communist – Commissiones Obreras; and when it was not clear at all who would take power in Greece after the military junta had to give up (1974). Promising post-Fascist transition governments accession to the European Union was above all a tool for containment: for preventing a (Euro-) Communist Mediterranean from happening. Keeping the Communists out of power meant neutralizing the most committed enemies of the old elites, which allowed for and made necessary accommodation with the latter under a policy of national unity. The hope was for a Social-Democratic kind of progress: for class compromise, liberal democracy, a social market economy reinforced by European integration, and a slowly rising middle class modernizing the new Mediterranean, while the old elites would slowly wither away. Having lured post-Fascist Mediterranean democracies onto the Social-Democratic path to stabilize their Southern rim, Germany, France and the others now have to pay the bill, in the form of unending transfers supporting ever new “plans for growth” that will again and again turn out to be, at best, plans for keeping the Mediterranean poor house of Europe from exploding.

Professor Wolfgang Streeck is director of the Max Planck Institute for the Study of Societies (MPIfG), based in Cologne, Germany. His most recent book is Re-Forming Capitalism: Institutional Change in the German Political Economy, published by Oxford University Press.

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