Tag Archives: Eurozone crisis

The meaning of Merkel’s victory

2 Oct

Originally published in the October issue of Le Monde Diplomatique

Angela Merkel and her Christian Democrat party (CDU/CSU) have won a resounding victory in Germany’s general election. Merkel has broken what had become an established rule of European politics since the beginning of the crisis: incumbents don’t get re-elected.

Merkel had seen this at first hand as close working relationships with other European politicians were felled by electoral fortunes. The peculiar alliance of France and Germany (“Merkozy” to the European press) was undone as Nicolas Sarkozy lost out in the 2012 French presidential election to his Socialist challenger, François Hollande. Mario Monti, another favourite partner of Merkel, was routed in Italy’s election earlier this year by the comedian-cum-blogger Beppe Grillo and his Five Star movement. Incumbents have lost out across southern Europe — Spain, Greece, Portugal — as voters hope that a change in government might mean a change in fortunes. There has been no decisive shift left or right, just a broad and sweeping dissatisfaction with existing governments. Apart from Germany.

Merkel’s re-election doesn’t mean that nothing has changed in Germany or that it has been blissfully untouched by the Eurozone crisis. Looking at the substance rather than at the party labels, we see shifts. The more dogmatically free-market FDP, Merkel’s coalition partner in the outgoing government, failed to secure any parliamentary representation at all. The Left Party, Die Linke, a persona non grata for mainstream German politicians because of its roots in East German Stalinism and its opposition to NATO, now has more parliamentary seats than the German Greens. If the Social Democrats (SDP) enter into a coalition with Merkel’s party, then Die Linke will lead the opposition within the Bundestag.

The policies of Merkel herself have steadily drifted leftwards as she has taken on ideas first floated by the SDP. From military conscription to a minimum wage and rent controls, Merkel has adopted policies that first came from the left. This had the effect of emptying much of the campaign of any traditional ideological conflict. German voters have not been divided by the politics of left and right, given the vastly similar programmes adopted by the main parties. Merkel has even given up on nuclear power, in a move that pulled out from under the feet of the Green Party their most distinctive policy position. Instead, the campaign was fought around the language of risk and of personality. Germans preferred Merkel’s low-key, homely aspect to Steinbrück’s debonair image and, seeking reassurance in the widespread depoliticisation, voted for Merkel’s motherly, risk-averse approach.

Political stability in Germany reflects its unique position in Europe as the country that has survived the crisis. Not unscathed, as the leftwards shift suggests, but markedly better off than any other country. Having reformed itself in the early 2000s, German industry rode an export-led boom that continues today. As trading partners in Europe — from Eastern Europe through to southern Mediterranean economies — crashed and burned from 2009 onwards, Germany compensated by expanding sales in non-European export markets. What it lost by way of demand in Europe it has gained in emerging markets, especially in Asia. Germany’s current account surplus, at $246bn over the last year (6.6% of GDP), is greater than China’s. Along with a more flexible labour market that is keeping unemployment low (but part-time employment high), we have the material foundation for Merkel’s victory. But though this foundation is solid, Germany is not booming. Since the early 2000s, German wage growth has been very limited. Moreover, few Germans own their own homes, meaning that they have not experienced the same wealth effects of rising house prices felt by a chunk of the British middle- and upper-middle class, the Dutch, Italians and Spaniards. They have been saved from the effects of collapsing property prices but have not known the heady days of year-on-year price rises. Merkel’s cautious optimism reflects the attitude of a large part of the German working and middle class who feel that their relative prosperity is precarious and needs to be closely guarded.

The meaning of Merkel’s victory for the rest of Europe is mixed. It is possible that Merkel will soften her stance to some extent now the election is over, though we should not expect any sudden U-turns on something like Eurobonds. A slow recalibration of the Eurozone economy is more likely, as crisis-hit countries like Spain and Ireland regain some competitiveness via internal adjustments to wages and prices. Where Merkel may compromise is on measures to boost domestic demand. If Germans were to consume a little more rather than save so much, that would help pull other Eurozone economies out of their deep depression. Though something like this may happen, any recalibration will still occur within the context of a Eurozone marked by massive disparities in wealth and spatially organised around a clear logic of centre and periphery.

Making the best of a good crisis?

17 May

A recent debate has emerged around the use European elites can make of the Eurozone crisis. According to the Naomi Klein theory of social change, backed up recently by Paul Krugman, crises are used by capitalists as opportunities to reform economies in their favour. Whether such crises, or “disasters” to use Klein’s turn, are wars provoked by outside interventions (Iraq) or financial crises of the kind we are seeing today in Europe and elsewhere, the point is that crises are good for those who favour neoliberal policies.

In the context of the austerity versus stimulus debate, Krugman suggests that the reason why austerity is preferred is not that it works (it clearly isn’t working) but it is because stimulus might work. If European economies begin to grow again, then the window of opportunity to replace “social Europe” with a neoliberal alternative will have gone. Successful stimulus will only strengthen the case against deeper structural reform. Krugman notes that this view is already entering into the evaluation of Japan’s recent attempt at monetary stimulus: cautious voices are pointing out that if this works, then there will be no incentive to tackle the country’s underlying problems.

There is quite a bit wrong with this explanation for austerity, however compelling it may seem at the intuitive level. Everyone likes to bash those far-sighted capitalists – the elusive 1% – who conspire behind closed doors to get what they want at the expense of everyone else, the 99%. But this is more a conspiracy theory than it is an explanation of why governments are committed – for the time being – to the austerity agenda. Profiting from a crisis is one thing. Creating a crisis in order to implement a cunning plan is another. In Europe, there is no doubt that authors of the bail-outs have tried to calibrate carrot and stick, using the difficulties of the present crisis in countries like Greece and Portugal as a way of encouraging structural reform. They have also cautioned against any suggestion that the crisis is over, believing that such talk will undermine the commitment of national elites to the reform programme. All this, however, is a far cry from the notion that crises are manufactured as opportunities for neoliberally inspired reforms.

Krugman makes the added point that elites chose austerity over stimulus because they feared the latter could be too successful. He invokes the work of the Polish Marxist Michal Kalecki and his notion of the political business cycle. According to Krugman, Kalecki’s idea explains why businessmen don’t like Keynesian economies. In fact, Kalecki argues something much more specific. At issue for Kalecki is not the ability of Keynesian deficit spending to return crisis-ridden capitalist economies to the status quo ante, which is what Krugman and others imply. Kalecki’s point is not about the stabilizing effects of Keynesianism but rather about its transformative and radical political effects. These are not internal to Keynesianism itself – Keynes was far from being a radical on this point – but are part of the political consequences of Keynesian policies (hence the title of Kalecki’s famous 1943 essay, ‘Political Aspects of Full Employment’).

Kalecki argues that full employment, as a policy goal, is both feasible and attainable. However, politically, the problem with maintaining full employment is that it empowers the working class to the point that it begins to challenge the basic contours of the capitalist economy itself. Full employment has a creative effect by way of ideas and actions that threatens the fabric of capitalist society. It holds up the prospect of a better society and stimulates people to think about how that alternative could be achieved. Kalecki’s point is that stimulus makes a return to the status quo ante more difficult and that is why owners of capital will do everything to frustrate governments who identify full employment as their main goal.

In today’s context, what is striking is that the austerity versus stimulus debate is had against a backdrop of consensus around the nature of the economic system. Both are means to an agreed end and Krugman’s argument for stimulus is that it works better than austerity in this regard. Kalecki’s point about stimulus was that it throws open, because of the mobilisation and politicisation of workers, the question of what the ends are and of what kind of economic system we would like. If we want to bring back Kalecki to the present discussion, it is this aspect that we should emphasize. And to resist Krugman and Klein’s conspiratorial accounts of intended crises and infinitely cunning capitalist elites.

François Hollande, a year on

7 May

hollande

A year into his Presidency, François Hollande is struggling. Of all the analyses made of his first year in office, very few have been positive. At The Current Moment, we commented extensively on the elections a year ago and on Hollande as a leader (see here, here and here). A few points are worth reiterating to make sense of today’s widespread disappointment.

It is important to remember that what secured Hollande’s victory a year ago was the prevailing anti-Sarkozy sentiment. Some of that feeling came from a rejection of the substance of Sarkozy’s presidency and so signalled a real endorsement of Hollande’s agenda. But much of the anti-Sarkozy feeling came from a reaction against his style: showy, celebrity-focused, hyperactive, lacking the gravitas expected of the President of the Republic. This list could go on.

Far from challenging this superficial rendering of politics as a matter of competing styles and personalities, the Socialists launched their own brand: normality, embodied in the rotund (but much-slimmed) cheeriness of François Hollande. He enjoys football, he makes jokes, he will govern through the country’s institutions and not above or alongside them. The notion of the ‘normal presidency’ never really stuck, not least because it lacks any capacity to inspire. But it did just enough to give Hollande the election victory on May 6th. Other factors counted too of course: his promise of a 75 per cent tax on incomes above 1 million Euros was timed perfectly to play on the anger felt towards high earners living in luxury at a time of social crisis. Even then, Hollande’s victory was wafer thin. He edged in front of Sarkozy by very little in the first round (28.63% to Sarkozy’s 27.08%) in comparison to Sarkozy’s thumping victory against Ségolène Royal back in 2008. In the second round, Hollande secured 51.64% of the vote, to Sarkozy’s 48.36%.

Throughout the campaign, the gap narrowed between the two leading contenders, transforming what many thought would be a sure victory for the Socialists into a very narrow one indeed. Hollande, an unremarkable figure until then, tipped by few as a likely winner for the presidency, certainly held his nerve. More than anything else, though, he was in the right place at the right time. This explains why his popularity has plummeted. Constructed on the back of the antipathy towards Sarkozy, the fading memory of the latter brings with it a steady erosion in Hollande’s popularity. This is not a problem of voters forgetting the past too easily. It is a product of the negative and opportunistic campaign of the Socialists in 2012.

Hollande’s difficulties today are also to do with what has happened since May 2012. The gay marriage bill has been pushed through but at the expense of a widespread societal mobilization against it, one that brought many people out of their provinces and onto the esplanades of the country’s capital. This author remembers seeing dozens of coaches, all full to the brim, tearing through the Bois de Boulogne on a Sunday morning on their way to an anti-gay marriage demonstration and all coming in from well outside of the capital and its surrounding suburbs.

One event that hit the government particularly hard was the Cahuzac affair: the admission by a government minister, the minister for the budget no less, after many months of denial, that he had a bank account in Switzerland which he kept hidden from the French taxman. The reason the Cahuzac affair has been so damaging for the government is that Hollande’s critique of capitalism, and in particular those private companies and private individuals that escape paying taxes, was always a moralistic one. Hollande presented his case against finance as a moral crusade: it was a war against the vulgar anti-egalitarian materialism of the financial class, fought in the name of the republican values of common good and a sense of patriotic duty attached to contributing to the public coffers.

Cahuzac’s secret Swiss bank account struck at the heart of this moral crusade by bringing those corrupt values into the heart of Hollande’s cabinet. In some ways, Hollande can’t be blamed for having trusted someone who then betrayed him. To misjudge someone’s character is something we have all done at some point. For Hollande, the difficulty was that there was nothing other than this moral crusade underpinning his critique of capitalism. What could have been dismissed as a mere personal failing on the part of an individual, had Hollande’s critique been more substantial, has had the effect of a devastating blow.

This crusade against finance has also been exposed to the harsh winds of the continuing national and European crisis. On this, the French government has managed to achieve very little. A central plank of Hollande’s campaign was his promise to rewrite the European Fiscal Compact, notably by injecting into it a strong growth component. Even at the time, it seemed improbable that Hollande – after the election – would travel to Berlin and tell Angela Merkel what to do. Unsurprisingly, very little in the Compact was changed and Hollande has so far struggled to dent Merkel’s determination to stick to her austerity agenda in the run up to elections in Germany in the Autumn. Promising a radical shake up of France’s sclerotic economy, Hollande commissioned a report from prominent industrialist, Louis Gallois. Focused on competitiveness, Gallois suggested a number of ‘shock’ measures which the government chose to ignore. Hollande may still pursue a reform agenda, by bringing Gallois or someone like Pascal Lamy into a more technocratic cabinet after a summer reshuffle. But there is little momentum in either the reforming or the staunchly anti-austerity direction, leaving all sides unhappy at the government’s immobilism.

Hollande has tended to make his case by courting fellow travellers, latching onto Southern European leaders like Rajoy, or more recently Enrico Letta, whose national difficulties expose the limits of the German austerity agenda. Alliance-building, however, is no substitute for a programme. As remarked upon by Current Moment co-founder Alex Gourevitch, the fact that the case for austerity is currently unravelling has more to do with the pain it is inflicting on European societies and rather less to do with any political alternative being proposed by its growing army of critics.

Buying time and running out

11 Apr

Guest book review of Wolfgang Streeck’s „Gekaufte Zeit: Die vertagte Krise des demokratischen Kapitalismus“. Berlin: Suhrkamp, 2013.

By Philip Mader, Governance Across Borders editor and postdoctoral fellow at the Max Planck Institute for the Study of Societies in Cologne, Germany

streeck cover

Democratic capitalist societies have been “buying time” with money for the past four decades – first via inflation, then public debt, then privatised Keynesianism – but are running out of resources for postponing the inevitable crisis. As a result, we now find ourselves at a crossroads where capitalism and democracy part ways. That in a nutshell is the thesis of Wolfgang Streeck’s new book, currently only available in German, but being translated for publication with Verso.

The book is based on a series of three “Adorno Lectures” given by the director of the Max Planck Institute for the Study of Societies in the summer of 2012 at the renowned Institut für Sozialforschung in Frankfurt (other lecturers in recent years included Judith Butler and Luc Boltanski). Its radical language and conclusions may be surprising for those who remember Streeck’s days as advisor to the “Bündnis für Arbeit” initiated by Germany’s former Chancellor Gerhard Schröder, which precipitated far-reaching labour market and social security reforms, or of Streeck’s demands for institutional reforms to forge a more competitive and flexible low-wage service sector in Germany modelled on the USA (Der Spiegel, 1999). But crises bring new beginnings, and Streeck’s defense of democracy against its subjugation to the market is auspicious. His analysis of the economic, political and ideological straightjacket that states have found themselves in, not just since the crisis but certainly more pronouncedly in its wake, ties together a revamped analysis of capitalism with a compelling critique of the “frivolous” politics of European integration. With some wit, a characteristic taste for good anecdotes, and above all great clarity, Streeck studies the processes of the moyenne durée which produced the “consolidation state” as the supreme fulfilment of a Hayekian liberal market vision, and which brought us to the impasse of the current period.

The book begins with a critical appraisal of how useful the Frankfurt School’s crisis theories from the 1960s and 1970s still are for explaining today’s crises. While their works are by no means invalidated, Streeck contends that yesteryear’s crisis theorists could scarcely imagine how long capitalist societies would be able to “buy time with money” and thereby continually escape the contradictions and tensions diagnosed by their theories of late capitalism. He explains the developments in Western capitalism since the 1970s as “a revolt by capital against the mixed economy of the postwar era”; the disembedding of the economy being a prolonged act of

successful resistance by the owners and managers of capital – the “profit-dependent” class – against the conditions which capitalism had had to accept after 1945 in order to remain politically acceptable in a rivalry of economic systems. (p. 26)*

By the 1970s, Streeck argues, capitalism had encountered severe problems of legitimacy, but less among the masses (as Adorno and Horkheimer had expected) than among the capitalist class. Referring to Kalecki, he suggests that theories of crises have to refocus on the side of capital, understanding modern economic crises as capital “going on strike” by denying society its powers of investment and growth-generation. The 1970s crisis, and the pathways that led out of it, thus were the result of capital’s unwillingness to become a mere beast of burden for the production process – which many Frankfurt theorists had tacitly assumed would happen. Capital’s reaction to its impending domestication set in motion a process of “de-democratising capitalism by de-economising democracy” (Entdemokratisierung des Kapitalismus vermittels Entökonomisierung der Demokratie). This ultimately brought about the specific and novel form of today’s crisis and its pseudo-remedies.

The rest, as they say, is history. In the second part, Steeck outlines how public debt rose with the neoliberal revolution, something mainstream economics and public choice quickly and falsely explained away as an instance of the “tragedy of the commons” with voters demanding too much from the state. However, the rise in debt came in fact with a curtailment of the power of democracy over the state and the economy. First, the good old “tax state” was ideologically restrained – starving the beast – and gradually found itself rendered a meek “debtor state” increasingly impervious to any remaining calls for redistribution by virtue of its objective impotence. Then, the resulting power shift to what Streeck calls the state’s “second constituency” – the creditor class, which asserts control over its stake in public debt and demands “bondholder value” – generated a standoff which Streeck observes between the conflicting demands of Staatsvolk und Marktvolk. The fact that the debtor state owes its subsistence less to contributions from the taxpaying “state people” and more to the trust of its creditor “market people” leads to a situation in which debtor states must continually credibly signal their prioritisation of creditors’ demands, even if it harms growth and welfare. Creditors, in their conflict with citizens, aim to secure fulfilment of their claims in the face of (potential) crises. The ultimate power balance remains unclear, but the “market people’s” trump card is that they can mobilise other states to fulfil their demands, leading to a kind of international financial diplomacy in their interest.

The archetype of such a transnational financial diplomacy, Streeck contends in the third and final part, is Europe under the Euro, where we encounter an even more wretched type: the “consolidation state”. Consolidation, Streeck argues, is a process of state re-structuring to better match the expectations of financial markets, and the consolidation state is a sort of perverse antithesis to the Keynesian state, acting in vain appeasement of the financial markets in hope of one day again being permitted to grow its economy. Its story begins with Friedrich Hayek, whose 1939 essay The Economic Conditions of Interstate Federalism Streeck presents as a strikingly accurate blueprint for the modern European Union, complete with references to the common market as assuring interstate peace. The European “liberalisation machine” slowly and successively reduced national-level capacity for discretionary intervention in markets; but it was European Monetary Union which ultimately rendered one of the last powerful (yet blunt) instruments available to states impracticable: currency devaluation. The resulting multi-level regime, a regime built on an unshakable belief in European “Durchregierbarkeit” (roughly: the capacity to govern Europe) and driven by a bureaucratic centre (or centres) increasingly well-insulated from democratic meddling, completes the actual European consolidation state of the early 21st century. Within this kind of hollowed-out supra-state individual countries have to fulfil their duties to pay before fulfilling any duties to protect, and recent “growth pacts” like Hollande’s are mere political showmanship. In the present framework even more substantial programmes would be likely to fail, Streeck argues with reference to Germany’s and Italy’s huge and hugely unsuccessful regional growth programmes. Stemming the decline of the southern Europe with transfer payments while adhering to monetary union with Germany is as much an impossibility as it is fuel for future discord.

Now, with tighter financial means, the cohesion of the Brussels bloc of states depends on hopes invested in neoliberal ‘structural adjustment’ with a parallel neutralisation of national democracies by supranational institutions and a targeted cultivation of local support through ‘modern’ middle classes and state apparatuses, who see their future in western European ways of business and life. Additional packages for structural reform, stimulus and growth from the centre are mainly of symbolic value, serving as discussion fodder for the greater public and for the mise-en-scène of summit decisions, as well as for politically and rhetorically absorbing whatever is left over of social democracy. Finally, puny as these may be financially, they can also be used to distribute loyalty premiums and patronage to local supporters: instruments of elite co-optation by doling out advantages in the Hayekisation process of European capitalism and its state system. (p. 203)

What can be done? It would be wrong to describe Streeck’s conclusions as optimistic. The capacity of populations or politicians to resist the imperatives of the consolidation state appears small, even where he argues that popular opposition is key, pointing to some rays of light in recent social movements. Streeck characterises present capitalist society as a “deeply divided and disorganised society, weakened by state repression and numbed by the products of a culture industry which Adorno could hardly have imagined even in his most pessimistic moments” (p. 217). It is furthermore politically held in check by a transnational plutocracy which has far greater sway over parliaments and parties than citizens. Given the likely failure of the consolidation state at restoring normality, we have thus arrived at a crossroads where capitalism and democracy must go their separate ways.

The likeliest outcome, as of today, would be the completion of the Hayekian social model with the dictatorship of a capitalist market economy protected against democratic correctives. Its legitimacy would depend on those who were once its Staatsvolk learning to accept market justice and social justice as one and the same thing, and understand themselves as part of one unified Marktvolk. Its stability would additionally require effective instruments to ensure that others, who do not want to accept this, can be ideologically marginalised, politically dis-organised and physically kept in check. […] The alternative to a capitalism without democracy would be democracy without capitalism, at least without capitalism as we know it. This would be the other utopia, contending with Hayek’s. But in contrast, this one wouldn’t be following the present historical trend, and rather would require its reversal. (p. 236)

Small acts of resistance, Streeck notes, can throw a spanner in the works, and the system is more vulnerable than it may appear; the Draghis and Bernankes still fear nothing more than social unrest. For Streeck, projects for democratising Europe, calls for which have recently gained momentum, can hardly work in a Europe of diverging interests. They would have to be implemented top-down, and furthermore have to succeed both amidst a deep (public) legitimacy crisis of Europe and against an already firmly embedded neoliberal programme with a decades-long head-start.

Streeck places his highest hopes in restoring options for currency devaluation via a kind of European Bretton Woods framework; “a blunt instrument – rough justice –, but from the perspective of social justice better than nothing” (p. 247). Indeed, a newly flexible currency regime would re-open some alternatives to so-called “internal devaluation” – nothing but a euphemism for already-euphemistic “structural adjustment” – and thereby permit a more heterogeneous political economy within Europe which could better match cultural differences (the book’s references to which sometimes seem to teeter on the edge of calls for national liberation). The Euro as a “frivolous experiment” needs to be undone, Streeck claims. But would that really mean a return to social justice? States like Great Britain or Switzerland hardly suggest a linkage, least of all an automatic one. Furthermore, declines in real wages from currency devaluation can mirror those of internal devaluation, merely with the difference of how politically expensive the process is (and it would still likely be central bankers, not democratic institutions, taking the decision). A return to national currencies looks like an all too easy way out, falling short of political-economic transformations for restoring some semblance of social justice to capitalism – let alone social justice as an alternative to capitalism.

Nonetheless, Streeck’s is a forceful argument in favour of preserving what vestiges remain of national sovereignty in face of capitalism’s attacks on democracy, as tools for gradually pushing back the transnational regime of market sovereignty. He concludes that the greatest threat to Western Europe today is not nationalism, but “Hayekian market liberalism” – whether the one could be the dialectical product of the other remains another question. Above all his analysis of capital as a collective player capable of acting with guile (Williamson) to ensure capitalism remains in its better interests – intellectual traces of Streeck’s days as a scholar of collective bargaining, perhaps – is clearly one of the most innovative approaches to understanding the class dimension of the political economy of the present crisis. His anatomy of the type of regime we increasingly have to deal with, the consolidation state moulded to address capital’s own legitimacy crisis yet sacrificing democratic legitimacy in the process, perhaps offers the most cogent picture of the present multi-level political economy of debt in Europe (and beyond). Taking back the consolidation state and re-appropriating democracy from capitalism’s clutches at the crossroads, of course, is a task beyond the reach of any book.

(*All quotations are the reviewer’s own translations from the German original.)

The time inconsistency of austerity politics

18 Mar

Mario Monti

 

At his last European Council summit meeting, at least for the time being, Italian Prime Minister Mario Monti gave some parting advice to his fellow leaders. Written up as a four page letter and reported on in the FT, Monti argued that the main problem with austerity policies is that there was too big a lag between the positive effect of reforms and their negative bite. Giving his own version of the old adage that things have to get worse before they get better, Monti explained that this doesn’t fit very well with the rules of the electoral cycle. The promise of austerity and supply-side reforms is that they bring gains by way of employment and growth in the long term. The difficulty is that politicians are judged according to pain they bring in the short-term. Something needs to be done to bridge the gap in order that reform agendas are not derailed, as he thinks they have been in Italy. From the perspective of the European Commission or the German Bundesbank, the issue is how to make sure that in the time in between enacting reforms and feeling their positive effects, susceptible policymakers are not tempted to give up on earlier promises and go for quick fixes, like expansionary fiscal policy or other Keynesian pump-priming tricks.

This discussion raises a number of issues. As a trained economist, Monti no doubt knew that his argument was a restatement of what macro-economists call the problem of time inconsistency. This is the notion that policy rules – such as a commitment to balance budgets over the medium term – lack credibility when they are made sequentially. As soon as a firm commitment is spread over a length of time, the possibility arises that short-term considerations will assert themselves. Such policy commitments are thus time inconsistent – they fail to hold over time and thus need to be insulated as much as possible from political pressures.

If this is Monti’s analysis, two questions arise. The first is what if the policy rule has no credibility in the first place – irrespective of whether we are talking about the short, medium or long-term? The commitment of EU member governments is that austerity combined with supply side reforms equals a return to growth. We are into our fifth year since the outbreak of the current crisis in 2008, austerity policies have themselves been in place for a number of years, up to three to four years in some countries. Austerity is nothing new, nor is the idea that supply side reforms boost growth and employment, and yet these policies are not being seen to deliver. Monti’s analysis of current difficulties in Italy and elsewhere, that rests upon the idea of extended lag between introducing reforms and securing their rewards, in fact places a great deal of faith on the idea that these reforms will eventually work. At issue today is not people’s short-termism. It is the more fundamental issue of whether cutting spending and raising taxes in a recession is any way to stimulate growth.

The second question is about what Monti suggests we should do. If we return to the idea of time inconsistency, then we find a very clear recommendation. Institutions should be created that make it as difficult as possible to renege on a policy commitment. This is the famous recommendation to favour rules over discretion. These institutions should be given the responsibility for contentious political agendas – like keeping down government spending, being hawkish on inflation, reform labour markets – in order that legislatures and electorally accountable executives are not tempted to go for short-term fixes.

The problem is that we are not in the 1970s anymore. Profligate legislatures have not been driving today’s budgetary crises. The contrary is true, as we see from the Netherlands through to the UK and Spain. Moreover, today’s crisis happened in a world of rules, not of discretion. Problems of sequential policymaking were hived off to independent central banks, independent budgetary offices, fiscal councils and an array of European rules and regulations in the field of macro-economic policy. As a result, the problem surely lies in something deeper and more fundamental than simply the institutional environment for elected policymakers. This won’t stop European commissioners and national politicians arguing for the strengthening of European rules. In fact, as the Fiscal Compact has shown, this seems to be the dominant framework with which European policymakers are working today. We should be wary of such explanations. A policy framework dedicated towards the curtailment of expansionary policies has given us a European continent saddled with debt and a global debt crisis. There is something more to this than the theory of the time inconsistency of optimal policy rules.

Microfinance and European Crisis Management

11 Mar

Guest post by Phil Mader, a researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany, and an editor of the Governance Across Borders blog, http://www.governancexborders.com

Microenterprises galore in India, soon too in Italy?

Microenterprises galore in India, soon too in Italy?

Well-established in low-income countries, microfinance is recently on the ascent as a crisis management tool in Europe. The parallels to Structural Adjustment in Latin America in the 1980s and 90s, where it played a key role in helping the bitter pill of austerity go down, are striking. But the experience of the global South over the past three decades warns against expectations of microfinance in the EU bringing anything but a glut of tiny, low-productivity, poverty-push enterprises which are likely to become entangled in debt traps.

2006 was the year small loans in developing countries were knighted as “the vaccine for the pandemic of poverty”, with the Nobel Peace Prize for Grameen Bank and its founder Muhammad Yunus bringing international fame to the idea that financial markets could effectively combat poverty. But loans for peace? Staunch supporters like Bernd Balkenhol (formerly ILO) argue the Nobel prize actually honoured the effectiveness of small loans at upholding social peace – an idea which is gaining new traction in erstwhile-affluent countries whose social peace is threatened by crisis and austerity.

As the “pandemic” of poverty spreads to Southern Europe, policymakers are seeking to apply the lessons learned in Asia, Latin America, and Africa, where microfinance has been established as a permanent pillar of social policy in many countries. As with prior aspects of neoliberalism, policies are often first tested in the Global South before their successive deployment in more advanced capitalist economies.

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression,”

the Italian Ministry of Foreign affairs recently quoted its minister, Giulio Terzi di Sant’Agata. The ministry noted Italy acting as a forerunner in Europe, having adopted a law on microfinance. The EU runs a number of microfinance programmes, expanded since 2010, aiming at getting the unemployed – particularly youths and ethnic minorities – into work through self-employment. A 2012 report argued that EU public funding should catalyse “the entry of private capital in order to create a self-sustainable market in the long run” – building new markets in times of crisis whilst keeping the poor busy and mollified via private credit; a most practical combination.

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi, of Monti’s interim crisis management committee/government, could hardly have made the case for microfinance as a device for austerity facilitation more clearly. Tiny loans may not work at creating economic growth or significantly alleviate poverty, as the experiences of microfinance-saturated countries like Bangladesh or Bolivia show and numerous scientific studies have underscored; but they have certainly proven their worth at tempering redistributional demands while facilitating structural adjustment. They work to “contain public spending” while preventing “material distress from encouraging populist deviation” (Terzi), tiny loans are a handy “political safety net” to uphold consumption and provide alternative (self-)employment, as political economist Heloise Weber observed more than a decade ago.

Working – up to a point, that is. India, with its focus state Andhra Pradesh (AP), in 2010 joined the ranks of Nicaragua and Bosnia as countries whose microfinance sectors recently melted down. Popular unrest and agitation forced the government of AP to curb all microfinance operations following a wave of suicides among borrowers. AP used to be India’s most microfinance-friendly state, earning the nickname “Mecca of Microfinance”, to whose highly profitable lenders international investors flocked like pilgrims.

While the microloan industry – which is now in protracted decline in India – has accused the government of foul play, the crisis’ causes ultimately lay not in a political attack, but rather in the original political support for microfinance as a tool in facilitating AP’s ambitious neoliberal restructuring. The loans placated the affected populations for some time, while opening up new outlets for capital markets, this recent paper finds, which led to the widespread overindebtedness which ultimately caused the suicides.

Politically enticing as a tool for austerity politics as the tiny loans may be, the experience of the Global South with microfinance doesn’t bode well for European countries attempting to bolster low incomes and drive economic growth. Perhaps this is why Terzi only claims that microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”, rather than bringing real material benefits for borrowers. For the time it takes to embed reform agendas and austerity politics, at least, the expectation is that microfinance may serve as a regime-consistent tool of seemingly doing something for impoverished and precarious segments – keeping them busy and competitive as entrepreneurs – while preventing them from getting all too uppity.

Italy: populism versus technocracy?

7 Mar

Article originally published here with Le Monde Diplomatique

Written by The Current Moment co-founder, Chris Bickerton, and Carlo Invernizzi Accetti

Italian politics has reached an impasse. In last month’s elections, the vote split three ways. A roughly equal proportion of votes (almost 30%) went to the centre-left coalition led by Pier Luigi Bersani and to Silvio Berlusconi’s centre-right coalition. Ahead by a fraction of the votes for deputies, the centre left won a majority of the seats in the lower chamber. But with the regional basis for the senatorial elections, no corresponding majority was produced in the upper chamber. The third block, which secured roughly 25% of the vote in both chambers, is Beppe Grillo’s Five Star Movement (M5S). Since the other two blocks are coalitions, M5S actually stands as the single largest political party in the parliament. Mario Monti, who headed the Civic Choice party and whose decision it was to have early elections, secured just over 10% of the vote, leaving him far behind in fourth place.

How will this impasse be overcome? The media are full of speculation. Some predict new elections, others some sort of political bargain between the main players. Grillo is so far refusing to strike deals with any side, making new elections likely. But beyond the political quid pro quos, we can draw broader political lessons from Italy’s election, which also illustrate more general structural trends in European politics.

Several commentators have pointed out that the traditional left-right axis appears to be ceding ground to a different polarity, structured around the opposition between populism and technocracy. The successes of Grillo and Berlusconi were denounced by the leader of the German social democrats, Peer Steinbruck, as the victory of two “clowns” – an assessment taken up by the German media and by The Economist. Yet, opposed to the “clowns” are figures like Bersani and Monti, considered more serious and reliable. More than any concrete difference over policy, at issue is the competence, seriousness and expertise of the political actors: Mario Monti is cast as Italy’s technocrat-in-chief, Grillo as his populist nemesis. Even Bersani himself played the card of the responsible centre-left leader. In an effort to distinguish himself from Berlusconi’s campaign, which blamed Italy’s ills on Monti’s EU-backed austerity agenda, he firmly committed himself to respecting Europe’s fiscal rules.

While this opposition between populism and technocracy is emerging as a fundamental dividing line in Italian politics, the electoral campaign illustrated something further: it suggested that populism and technocracy entertain a far more complex relationship with each other, which involves some unexpected points of contact and elements of complementarity. Many of the key players and party coalitions actually seem to display several of the distinctive features of both.

Reading the Italian election results through this lens may help us to make better sense of them. It also warns us that there is something amiss in the common opposition between European technocrats and national populists.[1] These political categories are part and parcel of the changing nature of national politics and mapping them onto a clash between atavistic nationalists and dry Brussels bureaucrats only reproduces the Eurosceptic discourse.

Let us begin with the figure most widely seen as the victor, Beppe Grillo. It is clear there are several characteristically populist elements in his political style and in his message – the attack against the established political order and elites, the appeal to the wisdom of the ‘ordinary man’ and the central role of Grillo himself as a charismatic authority figure. Yet few commentators have noticed the more technocratic side of his movement. A recurring element of Grillo’s rhetoric is the claim that the Five Star Movement is neither left- nor right-wing but, rather, interested in proposing “effective solutions” to “concrete problems”, thus going beyond “ideological disputes”. And it is in this spirit that Grillo has claimed that even though his movement will not enter into a coalition with any other political party, they are open to giving their support to specific policy proposals, to be evaluated on a case by case basis “on their own merits”. Far from the ideological discourse we are used to associating with traditional populist movements, Grillo’s flaunted pragmatism suggests that if he is to be considered a populist at all, we may have to admit the existence of a new specifically ‘technocratic’ populism. The Five Star Movement’s programme reinforces this impression. It is a long list of concrete measures, backed up with evidence from local experiences: there is no justification of the underlying values or assumptions of the movement, and no political vision. Challenging the empty professionalism of career politicians, Grillo claims that his parliamentarians, selected from all walks of life, are the real experts.

Mario Monti, the great loser in the election, presents the inverse picture. The respect he initially commanded, domestically and internationally, stemmed from his credentials as a competent technician. The moment he decided to forego this a-political stance and enter the electoral contest, he revealed something about the way technocrats understand the notion of politics. For him, becoming a politician meant trying to dumb down his message in an effort to appeal more directly to what he thought were people’s real concerns. This led to several awkward moments in his campaign, where he appeared to be desperately trying to use some of the same theatrical tricks as a Grillo or Berlusconi, without any of the flair. The image of the erstwhile sober European commissioner holding a puppy on TV and trying to endear himself to viewers by saying “I can feel its heart” was perhaps one of the defining moments in his campaign. Just as Grillo appears to be the harbinger of a new kind of ‘technocratic populism’, has Monti created the opposite image, as some kind of ‘populist technocrat’?

Bersani’s failure is different, but falls within the same basic framework. The leader of the centre-left coalition had the opportunity to break out of the technocracy-vs-populism model and present a properly political programme focused on the pan-European debate about austerity versus growth. For the Italian Democrat Party, this would have meant challenging some of the basic assumptions of the austerity framework and contributing, by way of substance, to the question of growth in Italy, and in Europe. But Bersani’s party failed to do this: its overwhelming concern was to reassure doubters of its seriousness and reliability as an enforcer of austerity. During the campaign, the Democrats’ economic spokesman Stefano Fassina said his party was against fiscal stimulus and preferred an EU-level deal in which a softening of austerity measures was the sweetener, received in exchange for handing over extensive powers over national budgets to the EU. The counterpart was his denunciation of both Berlusconi and Grillo as politically and economically “irresponsible”. So the real choice in the election, according to Fassina, was between the populists and Europeanists, a position that avoided criticizing the operating assumptions behind austerity policies. Bersani frequently said that he was not against austerity and had sided with Merkel in her criticisms of Berlusconi in late 2011.

Berlusconi’s own performance deserves some comment. Initially written off as a sure loser, he managed to rally a sizeable part of his previous electorate, preventing a clear victory of the centre left. But this (relative) success did not just come from his populist appeal. Contrary to most foreign media reports, Berlusconi did not transform himself into a German-bashing anti-austerity advocate; his attacks on Merkel were a very small part of his overall campaign. The key to his appeal has long been his capacity to combine a specific brand of populism with a more familiar technocratic discourse. His public persona, his identification with the Italian people, the emptiness of his party and the dependence on his charisma all point to a populist figure. Yet his constant references to himself as a businessman rather than a politician, his managerial and corporate approach to politics, and his emphasis on numbers and ‘practical’ solutions are closer to a technocratic discourse. This combination highlights the similarities between Berlusconi and other prominent political figures in Europe, such as Tony Blair and Nicolas Sarkozy.[2]

This all suggests that populism and technocracy are not two poles of a new political spectrum, replacing the erstwhile contest between left and right. Nor does this division map onto a confrontation between nation-states and supranational bureaucracies. Populism and technocracy amount to complementary political styles, not to different political programmes. In fact, their strength comes from the fact that national political life is no longer organized as a contest between competing world-views. It is because there was little to separate the political programmes of the centre left, centre right and the M5S movement that the opposition between populism and technocracy captured the imagination of the media and analysts. Monti tried his hand – very awkwardly – as a populist whilst Grillo’s adherence to evidence-based policies and refusal to present an integrated, ideological vision of change makes him as much technocrat as populist. Berlusconi has combined these two styles for years. And Bersani – fleeing any real engagement with the debate about austerity and growth in Europe – hid behind comfortable reassurances about the safety of a Democratic Party victory.

Why should populism and technocracy emerge as the dominant political styles of our post-political age? The answer lies in their common affinity over political representation: they share an open hostility to parties and to parliaments. The technocratic vision is based on a very clear critique of the partisanship of elected assemblies and the inherent bias of party cadres. Monti’s strength was his distance from party politics. As soon as this disappeared, his aura evaporated. Grillo’s movement is equally hostile to parties and parliaments. Its operational logic is that of sensible local initiatives raised magically to the level of national policy. Its campaign was not about issues or ends; it was about the veniality of the political class itself. Populism and technocracy are the political styles that best correspond with widespread public cynicism and an elitist disregard for majoritarian democracy. They are symptoms of the demise of politics, not expressions of its renewal.


[1] See for instance Mark Leonard’s much publicized essay, Four Scenarios for the Reinvention of Europe, published in November 2011.

[2] On the similarities in political style between Berlusconi and Sarkozy, see Pierre Musso’s 2008 book, Le Sarkoberlusconisme (Paris: Aube). On Tony Blair, see Peter Mair’s 2006 essay, ‘Ruling the Void? The Hollowing of Western Democracy’, New Left Review, 42, pp25-51..

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 end of insolvency

10 Jan

An arresting fact published yesterday in the Financial Times: the lowest rates of insolvency in Europe in 2011 were in Greece, Spain and Italy, the countries that faced the brunt of the Eurozone economic crisis. The newspaper continues: fewer than 30 in every 10,000 companies fail in these three countries, at the same time as nearly one in three companies is loss-making. There couldn’t be a clearler proof of the fact that Schumpeterian creative destruction has taken leave of Europe.

There are various explanations for this. For instance, the low level of corporate insolvencies is partly a reflection of government action: companies that might otherwise have gone bust have been able to borrow from their governments at very low rates, making refinancing of existing loans possible. Fearful of the political fall-out from lots of businesses going bust, governments have kept them alive. The broader climate of cheap borrowing, made possible by central bank action, has also played its part.

According to the FT, however, action by public authorities is only partly to blame. The real culprit appears to be the banks. Faced with so much pressure on their balance sheets, and saddled with bad loans, banks have been very reluctant to force businesses into insolvency or restructuring procedures. Rather than take the hit, they have preferred to hang on, letting the bad loans sit on their balance sheets. This has been the case particularly in Spain, but also elsewhere across the continent. Here we obviously see the underlying causes of the crisis working their way back into its resolution. Central to the debt-financing that occurred prior to the crisis, it is the same debt that prevents a more decisive resolution of this crisis.

We should, of course, be wary of bullish talk about the constructive effects of insolvency. The FT quotes one company chairman who laments the fact that all the company’s revenues are being taken up by pension payments to retired employees. “We are unable to invest in new growth areas”, he complains, because of these pension obligations. One wonders what his solution would be: renegue on the payments and ask the pensioners to find alternative sources of income?

Clearly, the idea of creative destruction works less well in an age when corporations have welfare obligations. But is also rests upon an expectation that public authorities command enough authority to be able to weather restructuring storms. Evidently in Europe this is not the case. Alongside a fear of social unrest is also a fear and hostility towards change. In countries like Greece, Italy and Spain, and certainly in France, governments talk about supply side reform and a fundamental transformation of their economies but there is little idea of where they would like to go or of what they would like to do. This political impasse is matched at the corporate level. Creative destruction after all rests upon an optimistic attitude towards the future: something new can be built, new energies can be released if the old is torn down. Restructuring is often driven by hedge funds looking to buy up assets cheaply and sell them on for a profit. But in Europe’s current predicament, we also see hostility towards change present across the political and corporate elite. And the banks, supposedly the most gung-ho and reckless of the lot, are the most cautious of them all.

Italy: the return of politics?

15 Dec

Originally published on the 14th December in the Monde Diplomatique

Last Friday, the secretary of Silvio Berlusconi’s right-wing People of Liberty party launched a vitriolic attack against the technocratic incumbent, Mario Monti. Stating clearly that Monti no longer enjoyed the support of his party, Angelino Alfano’s goal was to prepare the ground for Berlusconi’s return to Italian politics. Monti responded by calling everyone’s bluff. He promptly resigned, brought elections expected in the spring of next year forward to February, and made it clear that the rising borrowing costs and tumbling market confidence that followed were all Berlusconi’s fault.

Monti’s move reveals the shallow political foundations of today’s interim resolution of the Eurozone crisis. Temporary stability was bought in Italy via the suspension of partisan politics. In the 1970s and 1980s, economic and political crisis saw the ushering in of military rule in Greece and Turkey. Today, technocratic rather than military solutions are preferred. This was seen at the national level in Italy and Greece with governments led by Monti and Papademos. In Spain, Greece and Ireland, it was managed via bail-out agreements brokered between national and European officials. In the Portuguese case, its bail-out was carefully timed so that it would be finalized and signed off by a caretaker government. The incoming government elected in June 2012, led by Pedro Passos Coelho, was then able to declare that its hands were tied and agreements made by its predecessor should be honoured. The Eurozone crisis has been contained only via the suspension of politics, a course which Monti’s resignation would appear to reverse.

Monti may well now run for office. But on what ticket? If he stands as a candidate in the elections early next year, Monti will no doubt present himself as the candidate who is beyond politics. Already egged on by centrist Catholic parties, and feared by the main centre left and centre right parties, Monti’s whole political persona is that of a non-partisan figure who implements what is sensible and what interest-driven political parties cannot bring themselves to do. Monti’s personal austerity matches his political message. If he ran, he would be a serious threat to those mainstream parties, the Party of Liberty especially, who in the public mind encapsulate the corruption of the political process itself. Monti’s ticket would be a technocratic one.

Against whom would he run? Italian politics is dominated by the centre right and centre left parties. Berlusconi’s return is indicative not only of his relentless desire for public attention but also of the absence of alternatives to him within the party. On the centre left, the new leader, Pier Luigi Bersani, is generally seen as a pragmatic ex-Communist, willing to endorse much of Monti’s programme so far. It is possible, however, that both these parties suffer from public disaffection with organized politics. Many doubt the ability of Bersani to reign in trade unions and have few illusions about the direction Berlusconi would take if re-elected. The alternative to these mainstream parties is Beppe Grillo’s Five Star Movement: a popular political movement that mobilizes the disenchantment widely felt with the political establishment. A well-known comedian in Italy, Grillo’s movement is explicitly anti-establishment and many of those involved in it deny that they are members of a political party at all.

In next year’s elections, Italian politics may find itself squeezed between the technocratic programme and figure of Mario Monti and the populist alternative of Beppe Grillo. Already, some support for the Five Star Movement has disappeared as Monti has soaked up the anti-establishment sentiment of Grillo’s followers. Squeezed in the middle, the mainstream parties are increasingly tempted by either the technocratic or populist alternatives. Berlusconi has already suggested that he plans a virulently populist campaign, focusing on anti-German sentiment in Italy. Bersani may seek to out-manoeuvre Monti by adopting his own version of technocratic austerity.

Italy is in this way a microcosm of wider trends present within European societies. The shrinking of the political mainstream and the rise of technocratic and populist alternatives appear to be one of the main leitmotifs of how the economic crisis is transforming social and political life in Europe. Europe’s political systems are slowly being transformed into populist technocracies. Italy will be worth watching as a barometer of these important trends.

Follow

Get every new post delivered to your Inbox.

Join 1,435 other followers

%d bloggers like this: