Tag Archives: Euro

Europe’s internal adjustment

14 Feb

With all the talk of competitive currency devaluations and international currency wars, less attention is being paid on the arresting fact that some countries within the Eurozone are achieving what many thought they could not: an internal devaluation via wages and other production costs.

A consequence of this is that some Southern European economies are regaining shares in export markets, their products cheapened by a mixture of labour market reforms and downwards pressure on wages. The FT recently reported that in Portugal exports in 2012 rose by 5.8%, with exports to outside the EU rising 20% in this period. This was Portugal’s third consecutive year of plus 5% export growth. Writing about Spain, Tony Barber suggested that a similar phenomenon was occurring in the Spanish manufacturing sector. Car companies planning to reduce production in France and Belgium are boosting output in Spain. Nissan has committed 130 million Euros of extra investment into its Barcelona plant in order to raise annual production to 80,000 units. Ford, Renault and Volkswagen have all followed suit with their own investments. Barber explains that lying behind such decisions are changes in Spanish labour laws. A reform package last year introduced by the government has loosened up collective bargaining practices, making it easier for firms to negotiate favourable terms with workers.

The ability to boost export competitiveness by internally devaluing is not uniform across the Eurozone. France has enacted its own labour market reforms but labour costs remain significantly higher there than in Spain or Portugal. Monti in Italy has been less successful in pushing through labour market reforms. This unevenness has had the effect of exaggerating the competition between countries within the Eurozone. Unable to compete with one another via national currency manipulations, competition is realized via changes in the labour market. Accepting lower wages has become a matter of national duty in today’s Eurozone.

This development has various implications. The first is that it seems parts of the Eurozone are able to achieve what we thought was only possible in the olden days of the Gold Standard: internal adjustment where the burden falls upon societies, not currencies. This worked back then because there were far fewer public expectations about jobs and welfare to challenge the harsh assumptions of Gold Standard supporters. When such internal adjustment became intolerable, it collapsed. We might have expected something similar today. In fact, the quiescence of European labour has made internal adjustment possible. In some places, it has meant hollowing out national democracy in favour of more stable, technocratic alternatives, but the single currency remains. Differences between the constraints imposed by Eurozone membership and those of the Gold Standard help explain some of the stability of the former but not all. Much is also due to weak labour militancy.

Another implication dovetails with a previous post on falling productivity in the UK. In some Eurozone member states, productivity figures have improved. In Spain, productivity is has risen by 12% since mid-2008. However, such increases have not been achieved via any labour-saving investments. There have been no marked technological developments that explain rising productivity figures. Rather, gains have been made through labour itself. This tells us a great deal about European capitalism: it is far easier to claw back price competitiveness via assaults on labour than it is to boost productivity through capital investment in research, product development and technological improvement. Paradoxically, we can say that weak labour militancy results in low incentives for firms to channel capital into labour saving technology.

The kind of internal adjustment taking place within the Eurozone is thus hardly a victory for supporters of austerity. Competiveness is boosted in short-term ways, via downward pressure on wages. There is no longer term gain in productivity that might actually leave a socially useful legacy for societies as a whole. Recessions and social upheavals in the past had the same human cost in terms of wasted lives but they came with great labour-saving inventions and other gains. European leaders are so worried about currency wars precisely because Yen and Dollar devaluations threaten to wipe away the marginal gains in price competitiveness their businesses have made. And they know that were this to occur, there would be nothing much left. Only the waste.

The Zombie Currency and the Fetters of Europe

4 Sep

Hobbes once said that money is the “Sanguification of the Commonwealth” Wherever it circulates, so it brings goods from those who produced them to those who need them, and in the process sustains the life of the body politic, the same way blood sustains the life of the body. If Hobbes was right, that is a bad sign for the euro. The euro was supposed to be the lifeblood of the European Union, circulating through and nourishing the political institutions of the Euro-Leviathan. Instead it is sucking the life out of it.

Part of the problem is that the euro was not just supposed to nourish existing institutions but conjure into being a set of institutions that had not yet been fully created. It was a political project through and through. It was supposed to compensate for the EU’s democratic deficit and confusion of powers: a kind of European version of post-Tiananmen China – economic vitality in the place of more democratic institutions. But, unlike China, the EU never went all the way to creating a highly coordinated, if undemocratic, Euro-Leviathan. What the euro promised was financial integration, macroeconomic stability, and technocratic peace. A common currency managed via European Central Bank monetary policy would bring borrowing costs down, given the implicit continental wide guarantee. This is exactly what happened at first. Sovereign debt yields converged rapidly, such that where Greek yields had been almost 25% in 1992 compared with German 7% yields, by the end of 2000, two years after the introduction of the euro, their yield were nearly the same. Credit flowed freely across borders, as did capital, consumer goods, and even labor.

But as we have seen over the past months, the background guarantee of supranational monetary support was not actually there, the Leviathan was a many-headed hydra, and the underlying economies diverged rather than converged. The ECB’s mandate is to control inflation not save banks or engage in fiscal transfers. There is no coordinated continental-wide fiscal policy. The responses to the recent crisis have been short-term, ad hoc moves, like the Long Term Refinancing Operations, in which the ECB loaned money to national banks to buy sovereign debt, in an attempt to keep yields low and increase liquidity.

The effect has been to extend the sclerotic features of the European political system into the economy, rather than to have that economy breathe life into the political institutions. Consider the following three facts, which together reveal just how rapidly the European economy has financially dis-integrated, even as the euro ghosts along preventing this dis-integration from becoming an economic reorganization:

  1. First, as everyone has noticed, sovereign debt yields have radically diverged to reflect not the strength of a continental economy with a coordinated economic policy, but rather dramatic differences in national economic potentiality. Germany is safe, France moderate, the PIIGS increasingly risky. (Note both the convergence from 1999-2009, and the rapid divergence from 2009 onwards. Graph from the ECB)

  1. Second, as Gillian Tett reported in May, cross-border private lending has seized up. An essential feature of eurozone financial integration had been the willingness of banks to make loans in one country backed by assets from another. Lending to Greek consumers were matched by German funds; lending to Spanish borrowers covered by French assets. Now, as Tett observes, “banks are increasingly reordering their European exposure along national lines…the fracture has already arrived for many banks’ risk management departments.”  Banks now demand that any loan to a particular country be backed by funding from that country. Where the economic strength of Germany thus facilitated borrowing, speanding and investment in weaker economies, it now subtracts from that same provision of credit. Given the economic contraction, Greece, Spain, Italy now have fewer good assets to put up against loans that now has to be backed nationally. This “asset-liability matching” is an indication that banks are already treating the european economies as breaking up, even if this break up is not registered at the level of different currencies able to register these different economic potentials. An April ECB report on financial disintegration notes that the standard deviation in interbank lending rates across countries has continued to grow and fluctuate wildly since 2009, and an August report confirms continuation of the trend in various financial markets: “the pricing of risk in the repo market…has become more dependent on the geographic origin of both the coutnerparty and the collateral, in particular when these stem from the same country.”
  1. Recently, the Financial Times reported corporations have had to seek financing from the corporate bond market, because bank loans are in short supply, and that the yields on corporate bonds are nationally divergent. According to the FT, “Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs.” Further, this particular instance of fragmentation heavily favors large businesses that can sell bonds on corporate bond markets, and some countries have many more corporations with access to these markets than others. Money is going into already established avenues for investment, not new growth areas. Once again, financial markets are reflecting the fragmentation of the European economy.

In sum, diverging national bond yields, diverging bank loan structures, diverging corporate borrowing costs. The blood is running through the arteries of a foreign host.

The ECB is not so much keeping the euro alive as keeping it from dying. Public funding by the ECB is replacing private funding at the cost of sinking more and more money into going concerns, suppressing new avenues for investment. Banks are not lending to companies, they are investing in their own sovereign debt or parking cash back at the central bank. Major companies are sitting on cash hoards rather than investing.

The Euro is a zombie currency – a monetary undead, wandering around feeding off the flesh of living economic entities. Of course, there is an alternative to trying to goad skittish banks and bearish companies into investing. One could sequester savings and force investment through a massive, European wide investment plan. But that would require decapitating the zombie, or however else one finally kills the walking dead. The fetters of the EU political structure weigh too heavily on the economic forces of the Eurozone to allow such a radical act. There may be a European solution to the continent’s economic malaise, but it won’t come from the EU.

The Van Rompuy draft

28 Jun

This evening, heads of government will discuss a draft proposal put together by the President of the European Council, Herman Van Rompuy, and his team, prepared “in close collaboration” with the heads of the European Commission, the Eurogroup and the European Central Bank. Though it seems the terrain is already being prepared for an inconclusive summit, it worth looking at Van Rompuy’s draft to see exactly what is to be discussed.

The draft is striking by virtue of its conditional wording: there are many ifs, coulds, possiblies and maybies. The whole draft reads as a tentative and rather speculative account of what reforms the EU could take on board if it wanted to move forward with fiscal and monetary integration. There is none of the hubris or confidence one might find in earlier drafts produced by European institutions, confident of their authority and of member state compliance.

There are nevertheless a few measures that seem a bit more thought out and have a whiff of probability about them. One is the integrated supervision of banks, the so-called banking union. This measure seems likely largely because member states can all agree on the point that national regulators have been found wanting. Instead of national regulators that sign off on generous assessments of the state of national banks, something more robust is needed. What is surprising is that the draft – with the presumed agreement of ECB head, Mario Draghi – singles out the ECB as the institution most likely to take on this role. This is surprising because – as Dermot Hodgson as shown – the ECB is generally rather reticent about any attempt at expanding its competences. Far from being a power-hungry supranational actor, the ECB has shied away from taking on new roles. Its sole concern is its price stability mandate: anything else smacks of back-handed attempts at imposing some sort of political oversight onto the bank, a terrible idea according to mainstream central bank thinking. Either it has accepted this new role because it does see it as an opportunity to increase its power or it has had this forced upon it in some way. One reason may be a convergence between Draghi, Van Rompuy, Barroso and Juncker, on the need to set up this banking union in a way that avoids any messy involvement with domestic politics. By placing it within the ECB, Van Rompuy notes in his draft, existing treaty law (“the possibilities foreseen under Article 127(6) of the TFEU”, to be exact) should be sufficient. A tidy legal solution to a thorny problem, and one that Draghi can no doubt appreciate even if it means a slight expansion in the ECB’s remit.

On the “integrated budgetary framework”, another important chunk of Van Rompuy’s draft, it is obvious what might be accepted by national leaders and what remains pretty unlikely. The key suggestion is that stronger measures to control the upward end of government spending need to be introduced. Van Rompuy suggests that in the end “the euro level area would be in a position to require changes in budgetary envelopes if they are in violation of fiscal rules”. This begs the question of what the sanction would be exactly – probably, fines of some sort – but it also makes clear how the evolution of economic governance in Europe is following well-trodden lines. What is being suggested here is really a constitutionalizing of limits to what governments can spend: exactly what national governments have been discussing for some time and what former French President Nicolas Sarkozy had proposed in France.

The push to make excessive spending truly illegal is hardly new and the ideas are familiar to anyone who followed the events of the 1990s and the Maastricht criteria. Overwhelmingly, economic growth is assumed to come from private sector activity, supply-side reform and from a focus on exports. There is to be a minimal role for public spending in any national growth strategy. National government discretion with regard government spending, and especially the idea that market instability should be compensated by discretionary uses of the public purse, has little role to play in the draft. That the fiscal excesses were more consequence than cause of the present crisis, and were initially the result of massive wealth transfers in the form of bank bail-outs after the Lehman Brothers collapse, is not taken into account. Even the part of the draft that mentions a “European resolution scheme” to be funded by bank contributions – “with the aim of orderly winding-down non-viable institutions and therefore protect tax payer funds” – pales in comparison to the tax-payer funded European Stability Mechanism that is vaunted as a possible “fiscal backstop to the resolution and deposit guarantee scheme”.

What remain far more tentative are the parts that describe the issuance of common debt and the creation of a fully-fledged European treasury: ideas that are being firmly resisted by Chancellor Merkel. And the mention of strengthening democratic legitimacy is an afterthought in a draft that focuses on measures intended to restrict as much as possible the room of manoeuvre for nationally-elected representatives.

There is little evidence of federalizing ambition in Van Rompuy’s draft. The most likely measure – the banking union – is proposed in a way that avoids having to rewrite any existing laws. The suggestions about common budgetary rules are driven by national governments so lacking in authority that they need binding external frameworks in order to impose any sort of fiscal discipline on their own societies. The reaction to this end of week summit will most likely be disappointment at what is not in the final communiqué. But judging from Van Rompuy’s draft, the real problem is what is in it.

The problem with Eurobonds

7 Jun

As the Eurozone crisis deepens, some new ideas are emerging. Some have been aired for a while but are only beginning to be taken seriously. In this post, The Current Moment considers the issue of Eurobonds. In future posts, we will consider some of the other solutions being suggested, such as the idea of a banking union, the plans for which have been recently floated by the European Commission.

 

In a continued deepening of the Eurozone crisis, attention is focusing on Spain. Rather than investing in production during the boom years, bank capital in Spain was mainly channelled into property development. As the bottom fell out of the property market, Spanish banks have been left with worthless loans on their balance sheets. The regionalized nature of its banking system has made these problems less transparent than elsewhere and the scale of the problem has only recently emerged. Even now, there is considerable speculation about exactly how much it would take to stabilize Spanish banks. The IMF’s most recent estimate is that Spanish banks will need at least 40 billions Euros of new capital. In the meantime, loans are drying up for business and Madrid is being shut out of the international bond market.

There is some debate about whether in the longer term the Spanish economy will be able to raise competitiveness levels. The boom years were not entirely devoid of productive investment and optimists point to a weaker Euro boosting the country’s exports. Portugal, according to the FT (29/05/12) specializes in high end shoes and black toilet paper. Spain may find some of its exports benefiting from a falling Euro. But these competitive gains are not shared across the Eurozone as a whole: countries dependent on exporting to within the Eurozone will not benefit from a falling Euro. Any Spanish gains in competitiveness in the medium to long term are likely to come at the expense of the French, the Italians and other Eurozone member states.

For many, this all points to Eurobonds as the solution to the crisis. Far from exaggerating the differences between national economies within the Eurozone, Eurobonds are seen as a way of mobilizing these differences (especially German competitiveness) for the common good of the Eurozone as a whole. The basic idea of Eurobonds is that instead of national governments issuing bonds, the EU as a whole would do so. Those countries currently facing punitively high interest rates on new bond issues would find their borrowing costs falling. German bonds, currently serving as safe havens for international investors, would see a rise in interest rates, costing the German taxpayer but stabilizing the Eurozone as a whole. This idea was raised back in 2010 by the Bruegel think tank with its blue bond proposal. The idea here was that a Eurobond could be issued for debt of up to 60% of GDP for Eurozone members. Debt in addition to that would have to be financed by purely national government bonds. This would mean lower rates for sustainable debt levels and higher rates for excessive debt levels. The idea was batted away by Chancellor Merkel as a poor substitute for supply-side reform in crisis-stricken countries.

As opposition to austerity politics as strengthened, consolidated in recent months by the election of François Hollande in France and the inconclusive Greek elections, Eurobonds have come back onto the agenda. The term is used by Hollande as a rallying cry and as a measure of his success in Europe: if he is able to get the topic onto the EU agenda, he will have won his battle of wills with Merkel. Ever supportive of measures that may increase its own powers, the European Commission supports Eurobonds, as do leaders such as Mario Monti in Italy.

The more technical discussion about the exact modalities of any Eurobond issue asides, there are two major problems with this idea. The first is that as a solution to the Eurozone’s economic crisis, Eurobonds essentially rest upon the idea that borrowing more money can help Europe grow out of its current recessionary state. Given the performance of this particular growth model, that seems unlikely. As already argued on The Current Moment, Europe faces an impasse on growth: stuck between Hollande’s European neo-Keynesianism and Merkel’s insistence on national supply-side reforms, there are few alternatives to these two positions, neither of which inspire confidence.

The second problem is that Eurobonds present us with a direct clash between technocratic rationale and political reality. From the technocrat’s perspective, Eurobonds appear as a sensible solution to a thorny problem. Politically, they run against almost all the trends in place today in Europe. They would imply wealth transfers across national boundaries, something that is firmly resisted by national publics who would be expected to pay more. They would require considerable institutional strengthening at the European level in order to put in place the mechanisms needed to make decisions about how Eurobonds should be issued and how the funds raised should then be distributed. This comes at a time when the EU, according a recent Pew poll, is experiencing a “full blown crisis of public confidence” (see here for an overview of the poll).

Eurobonds would only exacerbate the democratic failings of European integration whilst at the same time they fall short of answering key questions about Europe’s growth model.

Was there austerity? Is there still?

22 May

As the Euro debate trades one nostrum for another, shifting from ‘pro-austerity’ to ‘pro-growth,’ it is worth asking ourselves what ‘austerity’ was about. After all, as Tyler Cowen and others have argued, if austerity means an absolute decline in spending, then that hasn’t happened. As this graphic from Veronica de Rugy shows, there has been an overall slowing of the growth rate of spending, with slight absolute declines in Spain, Ireland and Greece from 2009 highs:

 

But the graphic does not show dramatic cuts in real dollars. So is all this talk of austerity a ruse or rhetorical flourish? Is ‘austerity’ simply defined according to one’s economic preferences? That is sort of Cowen’s view, at least insofar as Cowen believes there is no good definition of austerity, which is why the word austerity just ends up measuring the distance between the amount of spending one thinks is correct relative to the actual amount of spending.

While the Left might be inclined to jump at Cowen et al.’s approach to austerity, it is worth separating a few things. Data on overall state spending blurs together at least two distinct issues – changes in popular consumption (and expectations about that consumption) as compared with the role of the state in managing capitalism. Increases, or non-dramatic decreases, in state spending are perfectly compatible with across the board belt-tightening when it comes to popular consumption. War-time austerity, after all, is just that – sudden increases in overall state-spending, but simultaneous limitations on popular consumption. The graph below shows the rapid increase in US public spending during WWII despite belt-tightening at home:

Given the long-term trend over the twentieth century of the state’s increasing involvement in managing various aspects of capitalism, it would be very surprising if state spending dramatically declined. But it can still remain the case that the state is withdrawing from various welfare functions, or limiting its role in maintaining popular consumption – either through direct redistribution or through employment programs.

Consider, for instance, the fact that, over the same period that Cowen et al. think there have not been ‘savage cuts,’ we have seen the US, Spain and Greece cut public employment. The US government, for instance, has cut about 586,000 jobs since the recession began. As Doug Henwood pointed out a month ago (and the WSJ later agreed), state and local cuts to employment are responsible for about 1 to 1.5% of the unemployment. Put another way, were it not for cuts in public employment, the unemployment rate would be closer to 7%, not 8.5%. The Greek agreement includes cutting 15,000 jobs, despite a 22% unemployment rate. A similar story can be told for Spain. So it is worth separating discussions of austerity from overall state involvement in the economy. Spending can remain constant or even increase even as the state imposes new limits on its willingness to support popular consumption.

 

Interview with Wolfgang Streeck

3 Jan

Continuing our series of interviews, today we publish an interview with Wolfgang Streeck. A guest contributor to The Current Moment, Professor Streeck is Director of the Max Planck Institue for the Study of Societies (MPIfG), based in Cologne, Germany. The author of many books and articles on comparative political economy, he recently published ‘The Crises of Democratic Capitalism‘ in the New Left Review.

 

What are the stories right now that you think people either aren’t paying enough attention to, or about which we have the wrong view?

Generally the historical and political-economic continuities between the global inflation crisis of the 1970s, the widespread public debt crisis of the 1980s, the internationally agreed consolidation and financial deregulation policies of the 1990s, and the worldwide private debt crisis of the 2000s, with its commutation into another public debt crisis.

Turning to the Eurozone debt problem, a dominant view is that Greeks and Italians are corrupt, inefficient and lazy, and that is why they find themselves in this mess. What is your view of what is going on?

The Mediterranean version of the debt problem reflects a specific relationship between modern states and societies on the periphery of Europe that have become stuck, partly or wholly, in pre-modern social structures and lifeways. In Italy and Spain in particular, this relationship is furthermore complicated by deep divisions between advanced regions such as Lombardy and Catalonia, and backward regions like the Mezzogiorno and the Spanish South. In quasi-feudal areas, or in an entire country such as Greece, huge concentrations of old wealth coexist with widespread rural poverty and stagnation. Vacationers from the North romanticize this as an easy-going way of life and tend to be envious about it. They also notice that there is corruption, and clearly a lot more than, say, in Sweden or Finland. What they don’t see is that there is also a lot of oppression by local elites with more or less close connections to the legal and illegal markets offered by modern capitalism, not to mention the political parties of the modern state. To be able to catch up with capitalist modernity, these societies would in the past have needed social revolutions to expropriate the old money and clear the way for the new money of middle-class industrial entrepreneurs. But this happened in Italy only in parts of the country, and in the post-fascist democracies of Portugal, Spain and Greece in the 1970s a revolutionary response to backwardness was prevented not least by the containment policies of Northern Europe and the United States. One of the tools of that policy was admission of Greece, Portugal and Spain, first into the European Union, and then into Monetary Union.

The standard recipe for the recovery from the Eurozone crisis is austerity and structural reforms in the peripheries, plus some recapitalization of banks. Do you think this is the right way to go?

I really don’t know what the solution is. Perhaps austerity is politically sustainable for the two decades that are claimed to be required for fiscal “consolidation” in debtor countries, perhaps not. In any case it will have to be accompanied by some form of, very likely hidden, transfer payments from the North, which also may or may not be politically sustainable, in this case with Northern electorates. “Structural reforms”, in the language of ruling economists, are not much more than union-breaking and the creation of tax-free economic development zones. But nobody tells us what the sectors are where growth is to take place, in countries squeezed between high-technology competition like Germany and low-wage competition like Thailand. Structural development policies that go beyond supply-siderism are not only expensive but are likely not to work when imposed from above or from the outside on a traditional social structure; see Southern Italy where fifty years of Cassa di Mezzogiorno were by and large an unqualified disaster. There is no reason to believe that Brussels or Berlin will in a decade be more successful in Greece than Rome was in Sicily for half a century.

What do you think would address the trade and debt imbalances between Northern and Southern Europe? Do you think it can be done within the European monetary union or does it require a fundamental change or dismantling of that union?

The problem is: there will be no such dismantling. The middle classes in the Mediterranean consider EMU as the lesser evil compared to a return to national currencies, because their savings are denominated in Euros and full membership in the European Union harbors vague promises of individual mobility and collective support, however meager. In the North, the common currency ensures export industries against competitive devaluation and guarantees a favorable external exchange rate. This is why German industry, including industrial trade unions, are strongly in favor of “European solidarity,” meaning that Mediterranean countries must by all means be prevented from getting out of the monetary trap in which they have moved themselves when joining the common currency. Some sort of competitiveness tax to be paid out of public budgets or in the form of some sort of “Eurobonds” is accepted as the price for unlimited access to Southern markets, especially if it is paid by taxpayers at large and not by industry itself. Here I see an unholy alliance between Southern middle classes and state elites on the one hand, and Northern export industries on the other. It will, however, be an unhappy alliance as Southern countries will inevitably be disappointed by the benefits they will receive from the North, while Northern electorates will resent such benefits regardless how small they may be, at a time when they themselves have to accept spending cuts of all sorts. Like in Italy, the South will hate the North and vice versa. Northern clichés of lazy Southerners will be complemented by Southern clichés of Northern, in particular German, imperialism. Europe will grow together at the price of rising nationalist resentment.

The hegemony of the demand for austerity is striking. It is offered as the solution to the Eurozone crisis, as well as to the American situation – the US Congress even created a supercommittee to find savings. It seems odd to have such agreement around austerity in the midst of a potential double dip recession. Why is there such agreement on this point and what do you think of the demand for austerity?

There seems to be no way to close the gap between public expenditures and public revenue by higher taxes, in no country. This being so, what remains to reassure creditors are spending cuts. Financial liberalization has made it easy for owners of significant wealth to move abroad; right now the London real estate market, in places like Chelsea, Kensington, Hampstead and Belgravia, is booming from rich Greek families putting their money in new homes. Tax increases are resented even by the middle classes who would more than the rich benefit from a functioning welfare state; one reason seems to be that for a long time higher public revenues will have to pay for goods already consumed. Those who would have to pay increased taxes because they cannot move their money or themselves out of their country may even prefer continuing public deficits to fiscal consolidation as long as austerity is firmly institutionalized and creditors can as a result be sure to get their money back. This is because, rather than having their savings confiscated, they could keep them and lend them to the state, drawing interest on them and eventually passing them on to their children. As I said, this presupposes a “credible commitment” of public policy to giving priority to servicing the public debt over keeping the political promises inherent in social citizenship. In practice this means a suspension of democracy to the extent that it is linked to social citizenship.

How optimistic/pessimistic are you about the ability of national democratic procedures to provide solutions to the current economic crises in Europe and in the US? What do you think of the recent proliferation of technocratic governments in Greece and Italy? Does the current crisis expose some basic tensions between capitalism and democracy? If so, how exactly?

I have written about these tensions, caused by ultimately incompatible demands for “market justice” and “social justice” having to be balanced against each other. Democracy is more than democratic procedures; it also expresses itself through social movements and general strikes. Even so, in present circumstances it lacks power and the capacity for collective action on the relevant battlefield, which has become the international monetary system. Today, states and their governments are facing two sovereigns at the same time: their peoples, organized nationally, and “the markets,” organized on a global scale. The latter clearly prevail over the former: see the replacement “from above” of the elected political leaders of Greece and Italy by representatives of the “economic reason” vested in the international money industry, shifting the political economy from social to market justice as the latter is deprived of its democratic empowerment.

What has perhaps not been said clearly enough is how the postwar settlement between the two kinds of justice came to be revised after the end of the “Golden Age.” When postwar growth ended in the late 1960s, the functional needs of capital accumulation began gradually to push aside the social needs whose institutionalized recognition had been the condition for workers being prepared to live with capitalism. More and more “capital controls,” in a broad sense, were removed while one promise after the other that had been made to buy labor in after 1945 was withdrawn. Such promises included a steady increase in living standards, progressive de-commodification of labor through an expanding welfare state, politically guaranteed full employment, “industrial democracy,” an encompassing regime of collective bargaining and trade union rights, a broad public sector providing citizens with social services as well as with stable employment, equal access to education and social advancement, a moderate and certainly not growing level of social and economic inequality, and the like. All of these disappeared or were “reformed,” often beyond recognition. The almost four decades since the end of postwar prosperity were a long series of defeats for labor, and of successful attempts on the part of capital gradually to re-establish its hegemony, with market justice pushing social justice to the sidelines of the political economy. It was not the logic of democratic claim-making or social citizenship or even democratic political opportunism that undercut the postwar social compact, but the historical reassertion of the logic of capital accumulation that had for a limited period been contained and overruled by democratic politics – just as the fiscal crisis of today was not caused by ordinary people demanding more than they were entitled to, but by the winners of the market first refusing to pay for their social license to enrich themselves, and later blackmailing governments to save them from the fallout of their own recklessness.

Right now it is democracy itself that is about to be rescinded – at the national level, which is where it came to be located under democratic capitalism, without replacement at the supranational level, where it should today move but nobody knows how. Increasingly democracy is turning into an empty shell, a formal ritual, not just in the United States but also in Europe. In the camp of the Indignados at the Puerta del Sol in July 2011, I saw a hand-painted sign saying: Como se puede hablar de democracia si no se puede cambiar el sistema económico en las urnas? (How can one speak of democracy if one cannot change the economic system at the ballot box?)

What are your views of the nascent protests (Occupy Wall Street, Indignados) developing in response to the introduction of austerity packages in Europe and the US? Are these movements a continuation of or a break with the anti-globalization movements of the past? Are they likely to fundamentally change public perceptions and government policy or will they have only a small lasting impact?

I know too little about such movements. I am looking for signs of an impending cultural break with possessive individualism, competitive greed, hedonistic consumerism. This is a tall order indeed, but I feel nothing less would do. Beyond “protest” or calls for “reform,” what would be interesting to see are actual changes in people’s ways of life, some kind of separatism and recapturing of local autonomy, with people cutting themselves loose from the capitalist mainstream and becoming less dependent on it, materially and mentally: a way of life where time matters more than money, ideal goods more than material ones, and social bonds more than individual property. That may not be available without a measure of neo-romanticism or even insurrectionism. What one might hope for is a sort of cultural change that, unlike 1968 and its aftermath, would not lend itself to being transformed into a “new spirit of capitalism,” as described by Chiapello and Boltanski. At the intellectual level, I find the growing literature on low-growth, no-growth and de-growth capitalism (or perhaps post-capitalism?) intriguing and I wish one could find good reasons for believing that working for this politically would not necessarily be futile.

What, finally, do you think the appropriate political response is to both these crises and their aftermath?

What is “appropriate,” and in what sense? What I see coming in Europe seems far from “appropriate” to me but it will probably come anyway. Clearly, the United States and the UK will continue to depend economically on an overblown international financial system that happens to reside mainly on their territories, and that they regulate in their national interest rather than the interest of all. The question is: is there anything on the horizon that could break the trend of the past three decades toward an ever more unstable, unpredictable, uncontrollable – in other words, ever more capitalist – global capitalism, with an ever more unequal distribution in the historically rich countries of wealth and risks and opportunities and life chances? I see nothing.

Spain: predictable results in uncertain times

21 Nov

The most remarkable thing about yesterday’s election results in Spain is how unremarkable and predictable they were. For weeks, the opinion polls had been predicting that the incumbent Socialist government would be trounced and it duly was. The opposition Partido Popular (PP), lead by a seasoned PP politician, Mariano Rajoy, won 186 seats in the 350 seat assembly. The Socialist Party, the PSOE, won 110 seats. In terms of percentage of the vote, the PP’s victory was all the more striking: 44.62% of the vote for the PP, 28.73% of the vote for the PSOE. The scale of the PP’s victory was no doubt a reflection of the widespread disaffection with the governing Socialists. But beyond that, there was little in the results that indicated the scale of the economic and social crisis the country is facing. No new political formations have been thrown up by the crisis. The United Left party (IU) won 11 seats and 6.2% of the vote – not an insignificant result. But generally the smattering of small parties that won altogether 54 seats were an ideological mixture: left, right, Catalan and Basque nationalist. The Indignados movement, fueled by a widespread disenchantment with the ruling political class, did not prompt any mass withdrawal from the electoral process. Their slogan – They Don’t Represent Us! – did not seem to have much impact. The abstention rate was 28.3%: higher than in the two previous elections (2008 and 2004) but lower than in 2000.

Though unemployment stands at above 20% and the country’s ability to auction its bonds on the international market is looking shakier by the day, the prevailing sentiment in the course of the campaign was that of resignation. Rajoy himself did not propose any new ideas on how to tackle the crisis. His cryptic slogan that promised to transform Spain into the “Germany of the South” could be interpreted in a multitude of ways. His promises of fiscal rectitude and public sector reform was – in the absence of specificities – no more than a vague nod in the direction of both the markets and the EU. That an election at such a crucial time should throw up so few surprises is perhaps a fair reflection of how people are responding to the crisis. But in the case of Spain, it is surprising. After all, when the global financial crisis hit in 2008 Spain was performing well. Its government did not – contrary to Greece – run up large debts in the good times. Public borrowing was low as tax receipts from high growth rates ballooned. In 2007, its debt ratio was only 36% of GDP and from 1999 through to 2008 Spain ran a balanced budget on average i.e. its borrowing was equal to zero.

Spain’s problems today are in part the result of an asset price bubble. Whilst the government did not run up debts during the boom years, private borrowing in Spain rose rapidly as individuals were able to access credit easily via national and international channels. When the downturn struck, individuals found themselves saddled with extensive debts. Regional Spanish banks have also been left with a large number of bad loans, made to finance real estate projects that will never see the light of day. Repayment of these debts has cast a long shadow over the Spanish economy as spending power is squeezed and as banks refrain from financing the private sector.

However, this does not explain why the Spanish government is today struggling to find buyers for its bonds. That is to do with the common currency union. In a downturn, governments usually run up debts in order to pay for increases in welfare payments: with +20% unemployment in Spain, those payments are large but given Spain’s position at the beginning of the crisis it should be able to weather the storm. However, because of the common currency union, the use of automatic stabilizers is limited: Spanish government borrowing is judged not on its own terms as much as in terms of the wider dynamics of the Eurozone. The fact that these automatic stabilizers would have an inflationary effect which would reduce the debt burden in the longer term is also ruled out by the currency union. The disciplinary effect of monetary union is thus not neutral but specifically kicks in to restrain some policies rather than others. As already argued on The Current Moment, the effect is to structurally lock countries into internal adaptations through domestic wages and prices instead of adapting through a mixture of internal and external measures.

A measure of success for today’s protest movements should surely be whether or not they are able to challenge ruling orthodoxies in ways that impact upon electoral outcomes. The evidence from Spain is that up until now, protests have had no such impact.

Explaining the strong Euro

31 Oct

As Europe’s sovereign debt crisis rages on, it is easy to forget about the Euro. In the midst of the crisis, the currency itself is holding up remarkably well. Andrew Watt,  over at Social Europe, has asked how it is possible that the currency – which many are predicting will soon disappear under the pressure of its own internal contradictions – is actually comparatively strong. He noted that the currencies weakened most by the crisis are the US dollar and the UK pound. The Eurozone’s sovereign debt problems have affected the value of the Euro but mainly in a way that has seen it depreciate against “safe haven” currencies such as the Swiss Franc. It has not so far depreciated significantly against the pound or the dollar. This may change, given the impact of the ECB’s decision over a year ago to start buying up the government bonds of countries like Greece. Deutsche Bank predicts that against the dollar the Euro will over the next 12 months depreciate from 1.38 $ per Euro to 1.25 $/Euro. Significant as that may be, it is also noteworthy for the EU’s current starting point, which is relatively strong against the dollar.

Watt correctly pointed to the European Central Bank as key to the Euro’s movements. One big difference between the Bank of England and the Federal Reserve in the US and the ECB in Frankfurt has been the practice of quantitative easing by the British and US central banks. One intention behind printing money is to depreciate the currency (by putting more dollars and pounds in circulation) and thus stimulate exports. The UK pound lost 1% of its value against the Euro after Mervyn King, director of the Bank of England, announced another 75 billion pounds of quantitative easing.

There is another way of looking at this same issue. A feature of the ECB is its peculiar exposure to political pressures. In some respects, it seems entirely immune from any such pressure. The ECB has maintained its hawkish policy on inflation, raising rates when all other comparable economies are cutting theirs. In 2011, the ECB has raised interest rates twice. With rates relatively higher in Europe, the pressure upwards on the Euro is maintained. It may seem absurd that as the Eurozone as whole struggles to avoid recession the outgoing ECB director congratulates himself on keeping inflation low. Trichet, in an article in Die Spiegel, earlier this year, was dubbed “the German Frenchman”. Over on the FT’s Alphaville blog, much is made of the ECB’s insulation from political pressures. As Joseph Cotterill quite rightly notes, the ECB is not here to save the world. Those expecting the ECB to transform itself into the Eurozone’s political saviour will be disappointed.

But to say that the ECB is entirely insulated from political pressure is wrong. Rather, its exposure to such pressures is selective. The decision by Trichet in May 2010 to start buying up the sovereign bonds of embattled European economies prompted the departure of then German board member and head of the German Bundesbank, Axel Weber. This decision, which saw the ECB go beyond the terms of its mandate, was widely seen as evidence of French pressure. The ECB’s role is thus far from politically neutral. Its actions reflect the specific configuration of the European Union’s supposedly supranational institutions. Formally independent from member states, these institutions are heavily shaped by the outlooks and preferences of national executives and national officials. At the same time, they are very far removed from events on the ground and from the concrete interests of majorities within EU member states. The ECB’s actions reflect the varied interests of Europe’s governments but not those of its people.

Guest Post: Europe and Democratic Funding

27 Oct

Editors’ Note: The European banking crisis continues to unsettle markets, and to raise serious doubts about not just the economic but also political future of current European institutions. As our guest post today by Anush Kapadia points out, underlying the turmoil is the achingly familiar ‘democratic deficit’ problem, but this time present in a new form. The basic democratic challenge this time reaches beyond the question of the EU’s institutional structure to the question of how its member states, and supranational institutions, relate to (financial) markets. As Kapadia points out, this democratic challenge, though it has special characteristics in the European case, is a general one facing any state seeking funding yet also seeking to retain enough autonomy to remain under the control of its citizens.

Europe and Democratic Funding

Anush Kapadia

The European crisis is one of legitimacy, not of the European project per se but of the financial fundamentals of moderns states. The lopsided nature of the European project merely serves to highlight the potentially undemocratic side of the financial undergirding of state power. It also foreshadows a potential solution to the problem.

It is not hard to notice that while scorn is routinely reserved for the unelected Eurocrats who want to squash national sovereignty, very little seems to be said about the legitimacy of unelected markets dictating terms to sovereign states. Morality, it seems, is on the side of the creditor: sovereigns, like us ordinary folk, should pay their debts.

But sovereigns, like people, have a responsibility to maintain their own autonomy to the extent they can. When governments fund themselves in ways that put their sovereignty at risk, they are abrogating their democratic duty. This is the double-edged nature of government borrowing: democracy can be aided by the flexibility and liquidity of marketing government debt, but beyond a point debt turns to poison.

So how can democratic states take advantage of the bond markets without being consumed by them?

The answer from creditor-morality is simple: don’t borrow beyond your means. And there is truth in this homily. The problem of course is that the very extent of ones means is subject to the judgment of the self-same creditor. To a large degree, solvency is in the eye of the creditor.

For any economic unit, the pattern of cash inflows rarely maps perfectly on to the pattern of cash outflows. Individual cash (dis)hoarding can of course mitigate this mismatch; what we call “banking” is merely the socialization of this liquidity-matching function: units with excess inflow lend to units facing outflow constraints via the intermediation of a bank. If the matching process stops, a borrowing unit’s cash commitments can swamp its cash inflows: the unit is dead. If your creditors stop rolling over your debt, the music stops very quickly indeed.

Prudence dictates that the unit steer clear of such peril. Yet when faced with myriad constraints, units will load up on credit if that dimension is eased. The market price of the unit’s debt is meant to be an indicator of proximity to peril. Yet as we have seen, this indicator is notoriously fickle: one day the unit is extremely creditworthy, the next day it’s bust.

Now especially if the economic unit is a democratic state, it has a solemn duty to avoid such peril. This means that it has a solemn duty to avoid fickle funding. And this in turn means avoiding the bond market beyond the point of prudence.

This is exactly what Europe has been groping towards, willy nilly. It is precisely because Europe lacks a common fiscal authority that it is seeking this solution. In so doing, it foreshadows a more democratic method of state funding.

Most see Europe as an unfinished federal project and indeed weak on that score. What they miss is that Europe is a new experiment in interstate relations, not a slow-motion rerun of US history. The people of Europe do not want to be part of a federal state. This is axiomatic; it renders the nation-state analogy for Europe nugatory. Our imaginations are constrained by this nation-state frame.

This national impossibility is what ultimately ties the hands of the ECB as an effective lender of last resort; its paranoid ideology is merely icing on the cake. A prudent lender of last resort mitigates the fickle nature of market funding by stabilizing the credit system as a whole when the market mood inevitably turns. This function can only perform its stabilizing work if it has credibility; it has credibility because it is backed by a fiscal authority.

Thus if the ECB were to act as an adequate lender of last resort in this crisis, it would implicitly call into being the absent European fiscal authority. And this cannot happen because the European people don’t want it. The Bundestag is merely the institutional expression of this desire. Of course, if the ECB acts as a lender of last resort in this crisis without at least implicitly calling into being a common fiscal leviathan, the ECB itself will take the place of the impaired sovereigns as the target for the markets. A lender of last resort without fiscal backing is not credible; the markets will gnaw away at it until implicit backing is made explicit. The assets that the ECB purchases will lose value to the point where the ECB’s own balance sheet will start to look shaky; the Euro itself would start to melt away.

Hence all the machinations around the EFSF (recent summit statement here). One can see how this institution might be the kernel of a common fiscal authority, at least in its borrowing power if not (yet) its taxation power. And that’s what the fight is about now. The Germans want to keep it small and limited so that it won’t prefigure some kind of common fiscal mechanism, but if it’s too small it’s not credible enough to function as a lender of last resort.

So no ECB, no EFSF. And the markets are completely roiled. Where oh where can a distress sovereign go for funding? China.

Well, not literally, but certainly figuratively. With the ECB and EFSF hamstrung because of the latent common fiscality they imply, Eurocrats have to find another set of balance sheets with spare capacity. This is where the special-purpose-investment-vehicle (SPIV) solution enters the fray.

Without getting into the details, there are two current plans to bolster the capacity of the EFSF (ignoring the somewhat loopy French plan to turn it into a bank): make it an insurance company or make it a kind of collateralized debt obligation (remember those?). There might be some combination of these solutions, but the latter is the one to focus on.

Floating a SPIV by the EFSF means that the latter would create and underwrite an entity that would issue highly-rated bonds; the proceeds of this sale would be used to buy encumbered sovereign debt. (Note: The same structure was used to by mortgages; the resulting securities were thus called mortgage-backed securities. The same tranche structure is envisioned here so that private money take come in and take the more risky elements of the vehicle). And who are the potential sources of funding for this vehicle? Sovereign wealth funds and other “international public investors.” The patient, institutional capital, in other words, not the fickle market money.

Since these new investors have very deep pockets and have their eye on the very long-term (some of them are sovereigns themselves after all), they are not subject to the same incentives as normal players in the bond market. The latter tend to be highly-leverage and work on the narrowest of margins. Having drastically underpriced sovereign risk, the fickle money markets are now drastically overpricing it; yesterday’s promise of growth has turned in today’s demand for austerity. Long-term investors look at long-term value rather than short-term prices; think Buffet rather than Bear. These investors would typically hold the bonds to maturity and can ride out short-term fluctuations because of their deep pockets. And at the moment they are getting a deal.

The absence of a common fiscal authority in Europe has lead to a credibility crisis at its heart. Most see the solution to this as an aping of the history of the nation-state: “build a fisc already!”, this position screams. But that way is closed to Europe. They are charting a new history.

Because of these constraints, the Europeans are finding that another route to stability is in effect to de-marketize some portion of their sovereign debt and place it with buy-and-hold institutions. What we might consider is that Europe’s ex post crisis response might be a way of insulating democratic states from the fickle markets ex ante.

The analogy with bank funding is clear: part of the problem with banks leading up to the crisis was that they were funding in highly liquid markets at ever-shorter maturities and in ever-greater proportions. This made them vulnerable to a run; subprime burst the bubble and the inevitable run followed. What is the proposed solution? Mandatory funding durations imposed by the regulators: long-term assets ought to be funded by long-term liabilities to the extent possible.

The state is a long-term asset, our long-term asset. It needs a funding structure adequate to its long-term democratic duties. A state simply cannot legitimately allow itself to be bossed around by the markets. This means that the state (and the banks it underwrites) should not be allowed to fund in fickle markets beyond a certain point; no matter how cheap and liquid this funding appears, the cycle will turn and austerity will result.

The East Asians learned this after their crisis and responded with cash hoarding. But this is globally suboptimal: banking was invented so that we wouldn’t all have to keep our cash under our mattresses. Better lend it out to those who need it; if we are long-term savers, we can afford to lock it up for a while.

That’s what pension funds do; that’s what sovereign wealth funds do. We know that how we fund our governments matters for its legitimacy, but our democratic common sense ties only taxation to representation. Yet the structure of state borrowing is equally critical. It is to this patient structure of funding that Europe’s experiment now turns, at least at the critical margin. There might be a lesson in there for all of us.

“Contagion”, market pessimism and democracy

19 Sep

As European finance ministers last week converged on Wrocław in Poland for a meeting of the economic and finance grouping of EU member states, the so-called ECOFIN meeting, many analysts and commentators were talking more openly about the modalities of a Greek default. This is still vehemently denied by most governments in Europe, not least by the government in Athens, but it is worth considering how exactly it should be done.

The first question is which should come first for Greece: exit from the Euro or default on its debts (thanks to Klaus Giesen for first raising this). Looking at the commentary in the financial press, most assume that a default will come first, either by necessity or simply because defaulting might not automatically mean Greece has to leave the Euro. In its weekend edition, the Financial Times considered the option of a Greek default, followed by a more favourable assessment by private creditors of its growth outlook paving the way for Greece’s return to international loan markets. It seems also clear that default would come first, simply because of the difficulties of preparing to introduce a new currency without anyone finding out. Were it to emerge that Greece was secretly printing a new Drachma somewhere, there would be a run on its banks and any existing loans would dry up.

If a default occurred, and this put a stop to the money currently entering Greece via the European Central Bank and the IMF, the government would be unable to pay its everyday bills. It would not have enough money to pay its civil servants or to meet its welfare obligations to its citizens. At the same time, Greece’s banks are heavily exposed to its own government’s debt: a default would leave the banks high and dry. In this respect, the economy would grind to a halt. Greece would be left with two options: exit the Euro and begin issuing its own currency in order that it can start paying its own bills and recapitalize its banks; or sit in limbo, hoping that some kind of help will come from outside, whilst on the ground in Greece the cash economy gives way to a temporary bartering arrangement and the creation of quasi-currencies in the search for some kind of medium of exchange.

Putting all this into some perspective, and if we remember that Greece’s economy accounts for only a tiny proportion (less than 3%) of the overall Eurozone economy, the most likely scenario would be for Greece to default and – assuming that wasn’t enough to convince private creditors that it could return to growth in the medium term – it would exit the Euro but in a way that saw it tided over by loans from the EU. The difficult period between default and a new currency winning some kind of international credibility could be made easier by help from other European governments.

What makes this orderly default and exit from the Eurozone unlikely? Everything hangs on the problem of what analysts are calling “contagion”. In fact, contagion is the wrong word. The problem is simply that if Greece’s default were to work in Greece’s favour, it would make it seem attractive for other crisis-stricken countries like Spain, Portugal or Italy to follow, raising the prospect of a mass default that would be incredibly expensive for those banks exposed to government debt in those countries. But if Greece’s default were to be a complete mess, that would also spook the markets, making it seem as if there was no alternative to keeping the Eurozone together, putting the spotlight on the political problems faced by Merkel, Sarkozy and others. So for a Greek default, both success and failure would cause problems: damned if you do, damned if you don’t.

Much of the concern about the Eurozone thus rests on the nebulous idea of “contagion”, a term which gains its force from its implication that events can develop randomly and in unexpected ways, a little like the spread of an epidemic. In fact, there are strong reasons to suppose that a Greek default and/or exit from the Eurozone could be contained. Greece is not Italy or Spain. The underlying basis of these economies is quite different, with the fundamentals in Italy in particular being much stronger.

What prevails in contemporary analysis is as much an overwhelming pessimism with the ability of democratically elected representatives to tackle contemporary economic problems as it is a clear-headed assessment of economic fundamentals. It is this lack of faith in democracy that is making the Eurozone crisis so intractable, not the objective and relentless laws of the markets.

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