France’s heterodox economists

Back in June, The Current Moment blogged about a manifesto written by a group of “dismayed economists” in France whose critique of free market orthodoxies was beginning to gain ground. This past weekend, a long interview with one of the original signatories of this manifesto, the French economist André Orléan, was published in Le Monde. Focusing on the role of financial markets in macro-economic policymaking, Orléan makes a number of excellent points.

He notes that historically, the role of specific economic interests, such as those of finance or of specific sectors of the real economy (export industries, domestic farming interests etc.) have been contained by the wider concerns of governments. The universality of the general interests holds sway against the particularities of individual groups. He makes the good point that this battle has often been fought through national central banks. They have been the main tool used by the executive power to pursue the interests of wider society. This gives us a rather different perspective on what is often assumed to be the narrow partisanship of politically-controlled central banks. In the mainstream economic literature, independent central banks are the guardians of the public interest; central banks directed by national executives are prisoners of political short-termism. This may be the conventional view today but Orléan reminds us that the historical record supports the opposite view: politically-controlled central banks were the vehicles for the articulation of the public interest. The primacy of politics over economics, as Orléan puts it, has had as one of its main tools the power of the central bank. This might shed a different light on the Orban government in Hungary: attacked for its anti-democratic ambitions, one of Orban’s proposed reforms was to curtail the independence of the Hungarian central bank. Rather than welcome this as an attempt to regain political control over macro-economic policy, Orban was criticized for his nascent authoritarianism. In fact, the more powerful assault on the democratic control of macro-economic policy has been waged over the years by the European Court of Justice, particularly its attack on the notion that national public sectors should be shielded from the competitive pressures of the private sector.

Orléan also has an interesting reflexion on the nature of finance. Contrasting it with the market for goods or services, he notes that finance has a “directly collective dimension”: it is concerned not just with individual sectors but with the economy as a whole. He gives the example of the infamous downgrading of France’s triple A rating by the agency, Standard & Poor’s. In its report, S&P referred to the EU’s new fiscal compact agreed upon in December 2011 (which the UK and the Czech Republic are today refusing to ratify), which it judged inadequate to meet the demands of the Eurozone debt crisis. Orléan notes that it is exactly this kind of very general judgement that is typical of the financial sector; and yet such generality does not pass through – as with democratic decision-making – a system by which a variety of different views are confronted via the freedom of the ballot box. This curious combination of its very narrow representative claim along with its interest in the economy as a whole can go some way of explaining the rise of technocratic governments in Europe today: they express the same peculiar combination, with individual technocratic leaders such as Italy’s Mario Monti having a history of very close relations to the world of finance.

Orléan’s views on the way out of the current crisis are based around a reassessment of the idea of value in the economy and of value creation. He argues for a much greater focus on the creation of value within the real economy, as this is ultimately where jobs and growth are created. He suggests that a new law should be introduced that firmly separates savings banks from investment banks, an argument included in the French Socialist Party’s programme. There is nothing radically new in Orléan’s arguments but his attack on conventional assumptions in economics is both powerful and welcome.

The EU’s six-pack

Tomorrow, finance ministers from all EU member states will meet to formally vote on a new set of proposals drafted by the European Commission. Entitled the ‘new economic governance package’, these proposals have been in preparation for many long months. They have been worked on by an army of national experts in the Council and civil servants within the Commission. Government representatives in Brussels have been making sure that any disagreements are ironed out before ministers meet tomorrow to stamp the package with their approval. The package was already all but finalized at the last meeting of EU finance ministers in Poland (see relevant statement by the Polish Presidency of the EU here).

The economic governance package contains six new legal instruments (see here for a summary), hence it’s nickname, the ‘six-pack’. Its main goal is to tighten supervision over national government budgets. The philosophy underpinning the package seems to be that the current European crisis is the result of excess spending by governments (for why this is only a partial account of the crisis, see here). The proposals are thus designed to “lock-in” prudent fiscal policy through an array of rules and a tightened sanctions regime. Governments running excessive deficits, for instance, will only be able to avoid a sanction from the European Commission if the Council musters in return a qualified majority of votes against the sanction (the so-called “reverse voting mechanism”). The Commission’s supervision of government spending will be expanded to include overall government debt in addition to its existing role in supervising deficits. The package also includes a new ‘excessive imbalance procedure’: an in-depth review of a country’s economic situation undertaken by the European Commission at the demand of the Council. Based on the results of this procedure, the country concerned would have to present to the Council a plan for how to resolve these ‘excessive imbalances’.

As a measure of what will be the consequences of the Eurozone crisis, this is a good start. More dramatic developments may ensue as governments struggle to contain the consequences of a likely Greek default. But as far as the day-to-day running of the Eurozone goes, the measures proposed by the Commission are likely to form the horizon for macro-economic policy in the EU for the years to come. Looking at the proposals, we see that nothing fundamentally different is being proposed. The modifications point to a tougher regime of regulation of national economic policy, particularly as regards government spending. The connection between national finance and economic ministries and pan-European institutions of control and supervision will become tighter. And the scope for pressuring countries with budgetary difficulties will increase. Being a member of the EU won’t change dramatically, but it will become a meaner and harder-edged place. And the presumption of the package is simple and is consistent with the philosophy of the EU as a whole: bad behaviour by national governments is to blame; greater supervision by external, non-partisan authorities is the solution.

Looking for growth

We have often argued at The Current Moment that what is missing in both the US and Europe is a real plan about how to make these economies grow. The political right points to the need for tax cuts; the left prefers state-funded jobs programmes. Neither addresses the problem of a languishing private sector, where firms are sitting on cash rather than reinvesting it. Central banks have tried to stimulate the economy by pushing down interest rates as way of stimulating private borrowing. As argued before (here), quantitative easing has not had the desired effect.

One response to the current problems is to point to the need to get consumers spending again. Firms are sitting on cash because they are gloomy about the future: without more buoyant demand, more investment will only mean the production of unsold goods. Critics of the austerity measures being pushed through across Europe often frame their opposition in terms of its effect on demand: how can European economies grow if the continent’s consumers are being hit with new taxes, cuts in welfare incomes and job losses?

This consumption-oriented view of growth is worth comparing with the growth experiences of the emerging markets. Growth does not just come from consumption. In fact, things look rather different if you look outside of the US and Western Europe. Take China. In its recent World Economy report, The Economist notes that the percentage of the gross national product that is consumed has fallen steadily in China since the 1970s.

If we were to map China’s annual growth figures on the graph, the relationship between consumption and growth would be an inverse one: a rise in the latter as the former has fallen. This makes sense if we look at how Chinese investment decisions are made. Capital is channelled via state-controlled banks into production. The percentage of the GDP that is reinvested is remarkably high in China: around 50% of GDP. It is on average half of that in OECD countries.

One way of looking at the contemporary slump in Western Europe and the US is through the lens of productive investment rather than that of consumption. The Chinese model has its own limitations, not least its reliance upon the demand for its exports in overseas markets. China is also at a different stage of its development, meaning that we are not comparing like with like. But it is nevertheless useful as a way of generating different sorts of questions. In what ways are investment decisions made? By whom and with what goals exactly? And crucially, how has the role of financial intermediaries changed over time and what impact have those changes had on investment? We don’t have answers to these questions yet but they are a good place to start when thinking about the growth problems in contemporary Europe and in the US.

Can the European Central Bank really save the Eurozone?

The Belgian economist, Paul de Grauwe, has been calling for some time for a comprehensive reform of the Eurozone’s institutions. Contagion, he argues, is inevitable in a currency union that lacks adequate political power. There is no way out of the Eurozone crisis other than more political union. It would appear de Grauwe has the ear of European Central Bank chief, Jean-Claude Trichet: over the weekend the ECB started buying up Spanish and Italian government bonds, at rates low than those being offered by the market. Another step towards the ECB acting as a lender of last resort.

De Grauwe’s account of the crisis is simple and compelling. He argues that government bond markets in a currency union like the Euro are “inherently fragile”. They are basically issuing debt in a currency the value of which they have no real control over. Greece, Spain, and Italy all issue their debt in Euros and yet they do not control the value of the Euro in the same way that the UK or Switzerland control the value of the Pound and the Swiss Franc. Governments in London and Bern can, in extremis, force their central banks to print more money. There will always, in theory, be enough money to pay back bondholders. In the Eurozone, there is no such guarantee as the ECB is not a lender of last resort. And this makes the Eurozone inherently fragile. In practice, the ECB has been buying bonds of crisis-struck member states but it has done so as an exception, not as the rule.

De Grauwe’s recommendation is then simply to give the ECB responsibility as lender of last resort in the government bond markets of Eurozone member states. This should put a stop to contagion, according to de Grauwe. But will it? Defaults have occurred in the past in countries that both issue their own currency and have control over their national central banks. Why should the Eurozone be any different?

De Grauwe’s analysis supposes that there is an institutional quick fix to the Eurozone’s problems. This is akin to suggestions made in the US, covered in the Current Moment, about resolving the debt burden via low interest rates and some easy money provided by the US Federal Reserve. Two problems stand out here. The first is that the problem the Eurozone faces is not an institutional one but it is the inability of some Eurozone member states to return to growth. Until national income in troubled Eurozone member states grows faster than state expenditure, or until a realistic prospect of this arrives onto the horizon, the debt crisis will continue. The European Central Bank, even as lender of last resort and notwithstanding the esteem with which central bankers are held today in macro-economic circles, cannot restore profitability to national economies of the Eurozone.

The second problem is a political one. De Grauwe has nothing to say about the political implications of transforming the ECB into a lender of last resort. Some are beginning to wonder about the democratic quality of these developments but generally it is considered an afterthought to a more pressing set of institutional questions. This repeats the patterns of the past: innovations at the EU level are subsequently presented to domestic populations as a fait accompli, to be given a stamp of approval by voters. Why this should work now, when previous efforts to do the same failed miserably, is anyone’s guess. The Eurozone’s debt crisis, if resolved, is likely to be followed by a political crisis as the EU scrambles to find legitimacy for its new powers.

Financialization European-style

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

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

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

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

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