Tag Archives: finance

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.)

On politics and finance

30 Nov

Buried under the frenzy around the Leveson report was the British government’s coup of attracting Mark Carney, governor of the Canadian Central Bank, to London. Apparently ruled out of the running, much to the chagrin of those who felt he was the best man for the job, Carney has now been appointed as governor of the Bank of England and will take up the job next summer. For those who view these appointments as purely about expertise and experience, this is a great victory. Gone it would seem are the mercantilist days where nationality, wealth and government policy were so closely aligned. The cosmopolitan financial press, from the Financial Times to The Economist, are satisfied. Britain, it seems, is a pioneer in these international recruitments for national institutions: think of the English football team. That Carey was a Canadian certainly helped make him acceptable to the British establishment. He’s sort of one of us, after all, runs the sentiment. But the principle still stands that positions such as these are all about competence and expertise. There is no politics or partisanship here and the appointment of Carney, we are told, is proof of that.

It is also proof of a number of other things. One is that there is emerging a cadre of elite central bankers who move relatively seamlessly from one appointment to another. National boundaries seem less restrictive than in the past. This holds true to some degree at the global level, where competition for posts such as head of the IMF or the World Bank has become more intense. The old Bretton Woods division of the spoils between Europe and the United States is coming under serious pressure and may not survive the next round of appointments. And nationally, central banks are opening up with Britain leading the way. Curiously, the European Central Bank in this regard is behind the times: its appointments are rigidly based upon the principle of achieving balance between nationalities. The unfortunate Lorenzo Bini Smaghi was edged out of the ECB executive board because it wouldn’t do to have two Italians in there and no Frenchman. Draghi became director, Smaghi was out, and Benoit Coeuré was in. This seems rather old hat and overly political compared to the forward looking Bank of England. Whether other central banks follow Threadneedle Street’s example is unclear but the principle has been established and there is no short supply of expert central bankers.

It is also proof that the way we understand banking, finance and monetary policy today is entirely free of political principle. The struggle between banking and financial interests and those of elected representatives is a long-standing and epic struggle. There is nothing new there. But central banks have often been seen as exceptions. They are, after all, lenders of last resort and in that respect are eminently political institutions. Those critical of the ECB in the current crisis have often suggested that it’s role should become more, not less, political in so far as it needs to act in order to save the Eurozone from collapse. Yet the implication of Carney’s arrival is that the tie between central banks and national politics should be cut. This is a mistake. Carney may be Canadian but the Bank of England remains firmly part of the functioning and survival of the British economy. And the Bank of England should still be understood as an agent of national capital, in spite of who is running it.

Carney’s appointment also chimes with a more general feeling that politics is seeping out of macro-economic policy as a whole. Illustrative in this regard is the debate underway at the moment around who might replace Tim Geithner as US Treasury Secretary. One name that has been floated around, and who the FT considers a realistic outside contender, is Larry Fink. As head of the biggest asset management group in the world (BlackRock manages around 3.7 trillion US dollars of assets), Fink is a heavy-weight figure, as important as those running the big Wall Street banks. However, his entire background is in finance. He certainly has views about how the US economy should be run but to appoint Fink would be to give the job to an expert. And this is not a job as central banker but as Treasury Secretary, an ostensibly political appointment. Of course, experts have long been appointment to this position. There is even talk of Geithner stepping down and joining BlackRock and Fink moving in to take his place. Were this to happen, it would illustrate how firmly financiers dominate economic policymaking and how expertise in finance has become the baseline for political appointments within the US Treasury.

As we’ve argued before on this blog, expertise does matter in politics. But the overwhelming tendency today is to view macro-economic policy as a purely technical realm, rather than as one where technical questions co-exist alongside fundamental differences of political principle and alongside important moral questions. Such a tendency has the effect of shielding economic policy from public criticism and gives to public financial institutions like central banks a veneer of political and social neutrality. In fact, no amount of expert knowledge can obviate the need to make political choices. The most honest experts will say that various scenarios are possible and that the choices depend upon what outcomes we want. It is these outcomes that we should be debating, not which expert can magically solve our ethical and political dilemmas about what sort of society we want to live in.

The problem with Peugeot-Citroën

25 Oct

There are some classical components to the problems faced by one of France’s best-known car-makers, Peugeot-Citroën. An economic downturn has hit Peugeot-Citroën’s sales. Its dependence on car-buying in the Southern European markets of Spain, Italy and Greece was higher than some of its rivals and so it has been harder hit by the Eurozone crisis. It hasn’t so successfully relocated production to cheaper parts of Europe, as Germany’s Volkswagen has done for instance, meaning that labour costs remain high. The decision to close its large plant North-East of Paris, at Aulnay-Sous-Bois, was an obvious case of shifting manufacturing activity out of France to places where wages are lower. Overall, margins are tight in an incredibly competitive industry and the downturn has pushed the less competitive players to the edge.

Looking more closely, though, the picture is more complex. This week, the French government intervened in the company’s crisis. Having long spoken about the need to limit the famous “plan sociaux” of big French firms, the government’s intervention was not directly aimed at limiting the number of jobs to be lost through the closure of the Aulnay plant. In fact, the government seems largely to have accepted that Aulnay will close. Instead, the intervention took the form of a bail-out of Peugeot-Citroën’s financial arm, Banque PSA Finance (BPF). Faced with the threat of a credit downgrade of 5.6bn Euros of its debt, owing to the declining fortunes of the car firm, the bail-out is reported to involve a guarantee of around 4bn Euros of debt and the supply of new credit lines of up to 1.5bn Euros.

It is no coincidence that the government intervention is in the form of a bail-out to the financial arm of Peugeot-Citroën. In recent years, the car-maker has made money not just out of making and selling cars but also out of financial activities associated to its car business. Involving itself in the provision of credit to potential car-buyers has been one way the company has managed to stay in the black. In the third semester of 2011, the total revenue of the company rose by 3.5%. However, this growth did not come from car sales as such. It came mainly from the company’s component manufacturing arm (Faurecia), its manufacturing logistics arm (Gefco) and from its bank, BPF. As with other automobile companies, Peugeot- Citroën has had to rely on revenue streams other than just those of car manufacture. As the company began to rely on financial activities, it became increasingly vulnerable to any rise in its borrowing costs. This is what is happening today, hence the government bail-out. Paradoxically, the very success of Gefco means that may be sold by Peugeot-Citroën in an asset fire-sale intended to raise much needed cash (for details on the Gefco sale, see here).

The events at Peugeot-Citroën appear as a classic case of government intervention in an ailing manufacturing sector. In fact, the government is bailing out a bank owned by the car company, set up as a way of profiting from credit provision. This suggests that it is easier for a government to channel funds in ways that keep a financial subsidiary afloat than it is to prevent mass redundancies and factory closures. It also tells us of the extent to which car-makers today rely on more than just selling cars to balance their books.

Varieties of finance?

17 Oct

In a previous post, we looked at the structure of the European banking system. We asked whether there was a particular European story that can help explain the sorry state of the current European economy. It was noted that the size of the European banking sector, so much larger than in the United States, reflected the central role banks in Europe play in financing the private sector. In the US, there is more reliance on capital markets than on banks and so the assets to GDP ratio of US banks is much lower than in Europe.

Can we transform those differences into something more systematic? Do differences in financial markets point to deeper and broader differences between different types of societies? The question here is whether there exists the same kind of variety in financial sectors as there does in capitalist economies more generally. A popular way of classifying capitalist systems is according to type: liberal market economies, coordinated market economies and mixed market economies. This is the famous “varieties of capitalism” approach. Can we say that the financial sectors in Europe are shaped by these national institutional factors? One basic distinction, for instance, is between market-based and relationship-based borrowing and lending. In more liberal market economies like the UK, companies are expected to rely more on the open market as a source of finance. In a coordinated market economy, corporate financing is fed through bank-to-business relationships.

Finding out whether any of these patterns exist in the date on financial markets is not easy. Interest has tended to be in the ties between business and politics, not in the correspondence between differences in financial markets and broader varieties of capitalist production. But there is some data out there. In the Liikanen report on the European banking industry, we see little evidence for these kinds of patterns. In terms of the balance between stock market capitalization, total debt securities and bank assets, we do see differences between Europe and the US. But within Europe, a supposedly liberal market economy like the UK has bank assets that massively outstrip any other European country and offsets its larger stock market capitalisation (p119 of the Liikanen report). The data on financial institutions and markets collected by Thomas Beck, Ash Demirgüç-Kunt and Ross Devine (available here) is extensive but suggests that the biggest difference is between income levels, not between varieties of capitalism. Another way of thinking about the varieties of financial markets is whether it can help explain different national government responses to the current economic and financial crisis. One study of this by Beat Weber and Stefan Schmitz (available here) found that institutional factors did not in fact influence very much the rescue packages put together by European governments. They point instead to other factors. The degree of inequality in society, which they take as an indication of the fact that policymakers in those countries use access to credit as a substitute for higher wages (what Colin Crouch calls “privatized Keynesianism” – see here), is for them one element that explains the form the government bail-outs took. On the varieties of capitalism, they note that as an approach it is focused more on production and not on financial systems. It has therefore little to say about financialization as such.

National differences remain important and a feature of the current crisis is the difference in the national responses. Behind efforts to build a common European response are national bail-out packages that differ greatly in terms of size and in the strictness of their conditions. But financialization as such, and the boom of the late 2000s, was common to many high-income countries. By way of explaining the current crisis, Beck and his colleagues write that “the lower margins for traditional lines of business and the search for higher returns were possible only through high-risk taking” (p78 of this paper). The implication here is that the lack of profitability in the real economy drove the expansion of financial activity in the 2000s. This explanation isn’t perfect but it certainly helps us understand why it has been so difficult for governments to return to positive growth. If financialisation was itself more symptom than cause, then we are still left with the causes of the crisis today.

A comment on Soros

18 Sep

For a long-time a bête noire amongst pro-Europeans because of his status as the financier that forced Britain out of the Exchange Rate Mechanism and thus cemented the UK’s outsider status in European monetary integration, George Soros has recently emerged as one of the most authoritative commentators on the ongoing Eurozone sovereign debt crisis. His most recent article in the New York Review of Books was one in a long line of alarmist but thoughtful interventions into the debate.

Soros’ main argument is that Germany needs to choose between either fully backing the Euro or leaving the Eurozone altogether. Lacking the will to act as paymaster, but determined to keep the Euro together, Germany has been accepting the bare minimum that is needed to keep the currency union together. According to Soros, this is a case of the cure being worse than the disease. By insisting on national responsibility for EU-incurred debts, Germany risks recasting the egalitarian European integration project around the twin poles of creditor and debtor. Debtors are pushed into deflationary traps as they struggle under debt burdens and national antagonisms deepen as debtor states survive on a Euro drip provided by miserly creditors. All in exchange for deep cuts in social protection and welfare.

The novelty of Soros’ argument lies in his claim that a German exit from the Euro would save rather than sink the currency. His reasoning is clear. When a debtor – like Greece – leaves the Euro, the benefits of a depreciating new currency are offset by the strangling effect of Euro-denominated debts rising dramatically in value. When a creditor like Germany leaves the Euro, however, the situation is different. The creditor, of course, faces a loss. But those remaining in the currency zone benefit enormously: depreciation of the Euro would bring competitiveness back to Eurozone members and the main political obstacle to further political integration –German obstructionism – would have disappeared. The Eurozone would be free to introduce key measures – debt mutualisation, for instance – that would exist were it not for Germany.

By blaming Germany, Soros’ argument appears as part of a more generalized anti-German sentiment popular all across Europe. In fact, Soros himself seems rather comfortable with the idea of a German-dominated Europe. He would just rather that Germany accept the responsibility that comes with empire. As he puts it, “imperial power can bring great benefits but it must be earned by looking after those who live under its aegis”. Soros’ advocacy of German paternalism is hardly a compelling vision. But his focus on the German origins of the crisis are welcome as they challenge the notion that profligate spending by Southern cone European governments is at the heart of the current mess. But there are limits to the blame game.

It is certainly the case that German banks and businesses benefitted from the introduction of the Euro. In particular, it meant that consumers in Southern Europe could – via public or private borrowing made possible by the low risk premiums brought about by monetary union – buy German exports. But it is also the case that in the late 1990s and early 2000s, Germany was – as The Economist put it – the “sick man of Europe”. The changes put in place by Chancellor Schroder were far from socially neutral: labour markets were liberalized and wages were frozen or cut in real terms. Only the Social Democrat’s hold over the trade unions made this possible. Germany underwent an internal devaluation with the burden of adjustment squarely pushed onto the German working class. It was in this period that Die Linke, a party to the left of the SPD, was created. The sentiment driving German caution in this crisis is thus a complex one. It certainly involves some miserliness and a good dose of anti-Southern prejudices. But it also includes an understandable fatigue on the part of German workers at having to bear the burden of adjustment. When we read that in recent weeks banks have been holding over 700 billion Euros in surplus liquidity at the ECB, it seems that there is ample room for some adjustment on the part of German capitalists.

Soros’ account of the crisis is also curiously Eurocentric. As someone aware of the global dimensions of the current economic and financial crisis, he chooses to focus on the unique features of Eurozone governance. Had the Eurozone been armed with a common treasury, and not just a European central bank, Soros suggests that there would have been no Eurozone crisis. Policy mistakes, tied to the short-sightedness of Eurozone policymakers, have caused the crisis. This is at best a partial explanation. Outside of the Eurozone, the British and US economy are struggling to exit a major economic downturn. The crisis itself – beginning with the Lehman Brother’s collapse – originated in the US. Popular mobilization against the inequalities that have build up in recent decades is not European either. It was unwise to create a common currency without institutions capable of exercising the required political discretion in a time of crisis. But the crisis is one of capitalism, not just of the Eurozone. Were the right institutional fixes to be introduced, we would still be faced with the twin problems of financialization and debt-financed growth. And endlessly replicating an export-based growth model raises the question of who will be the “market of last resort”? In focusing on the Eurozone, Soros misses the wider dimension of the crisis.

Betting on austerity

12 Sep

Recent announcements by the European Central Bank have suggested a renewed round of activism for the Frankfurt-based institution. On The Current Moment, we have commented on how the Euro has become a material constraint for a regional economy still marked above all by national variations and diversity. Previously, during the 1990s, national governments across Europe invoked the constraints of the Maastricht convergence criteria as reasons to cut spending and to elevate macro-economic policymaking to a quasi-constitutional status and thus untouchable by the masses. At that time, the Euro was more a political strategy than it was a real material constraint. Today, this has changed. Ideas become entrenched in institutions over time and are subsequently more difficult to challenge or to transform.

Looking at Draghi’s recent decisions, and seeing how promptly France has entered into the austerity camp, we can also see that the Euro serves as a sanction for the lack of political experimentation in Europe today. The claim that “there is no alternative to the Euro”, made by Draghi, Merkel and others, is shorthand for saying that there is no alternative to the approach adopted so far in response to the Eurozone crisis: backhanded financial transfers to Europe’s ailing financial sector combined with much more public austerity measures designed to reassure markets about the long-term viability of European economies.

Draghi’s speech last week – taken by some as leap into new terrain for the ECB – was a reiteration of this same approach. Though the ECB’s announcement appeared to transform the ECB into a lender of last resort, it was in fact just one big bet on austerity. The novelty of Draghi’s announcement was that bond purchases – hitherto tightly limited to precise and timely interventions – would be unlimited. The head of the ECB also promised that the ECB would rank itself as equal to other creditors, meaning that its bond buying would not result in private creditors finding themselves unceremoniously pushed behind the ECB in the pay-back queue. Taken at face value, Draghi seemed to be doing what many have argued should have been done a long time ago: transform the ECB into an institution with the powers to print money in the event of real crisis.

Looking at the decision more closely, we see that Draghi was more cautious (see here for a useful discussion of how previous bond-buying efforts by the ECB have failed to have their intended effect). What he was in fact proposing was unlimited bond purchases on the condition that needy economies commit themselves to the conditionality set by the EU creditors. His promise also rests on the very big assumption that the austerity measures being introduced across Europe will in the medium term lead to a return to growth. Because if not, then there is no amount of ECB backing that will do the trick. On conditionality, there are reasons why some governments may balk at accepting the terms coming from Brussels. Cooked up by national and European officials, these conditions are likely to be far-reaching and Spain’s leader, Mariano Rajoy, has quite a bit to loose by accepting them. On the effect of austerity, the assumption seems to be that if governments make the tough cuts necessary to get back to budgetary balance, they will also return to positive growth. Looking around Europe, this is difficult to believe.

Draghi’s move is firmly within the European consensus about the need for bailouts to the financial sector combined with drastic cuts in government spending everywhere else. This approach, unsuccessful so far, sits as the only idea pursued by policymakers of all political stripes. The Euro appears as both a material constraint upon an uneven and diverse regional European economy and an obstacle to any kind of political experimentation in macro-economic governance.

On the LIBOR scandal

17 Jul

A feature of economic crises is that they propel into the spotlight the more obscure parts of markets and of capitalism. The Eurozone crisis has made everyone roughly conversant about government bonds and sovereign debt. Acronyms like the EFSF and the EFSM, triple A ratings and CDSs (credit default swaps), are regularly bandied about. The BBC’s website now has a handy online dictionary, the crisis jargon-buster, that defines various economic terms, from base rates through to liquidity traps. The murky world of lenders of last resort and the practices of seignorage have also entered into public discussion. Most recently, it has been the turn of LIBOR, otherwise known as the London inter-bank offered rate.

LIBOR, as its name would suggest, is the rate at which banks in London lend to each other. It is determined as a kind of average of the different estimates given by the banks of how much they think they would need to pay by way of interest to borrow money. Those estimates are given daily and LIBOR is calculated for different kinds of loan instruments and in different currencies. Banks in a bad way and likely to pay more for their loans would be expected to submit higher estimates. Banks with solid balance sheets would submit lower estimates. One would expect LIBOR in good times of financial calm to be low and steady. One would expect it to rise in dangerous moments of finance crisis (see here for the late 2008 movements of LIBOR).

The scandal is based on the rather intuitive idea that given that banks are setting themselves the rate at which they have to borrow and lend, they have a strong incentive to fiddle those rates. The discussion underway at the moment has a strong whiff of the unreal about it. Complaints are made about the temptation to manipulate and the lack of honesty in setting LIBOR. But what else do we expect to see? Are we meant to be surprised that banks are not the best judge of their own financial health, a least when such judgements will have self-fulfilling knock-on effects for them? And that they should shy away from honestly communicating the state of their balance sheets to other competing banks within the City? Is it not obvious that banks in a bad way would tend to systematically propose rates that are lower than what their troubled loan book would suggest? At the very least, the indignation betrays a seriously naïve view of how markets work. It is also not surprising that the Bank of England should have been complicit in the manipulation of this inter-bank rate given its proximity to the government’s involvement in mopping up the massive losses made by British banks after the Lehman collapse. It was after all in the Bank of England’s interest to make it as easy as possible for British banks to have access to liquidity. Otherwise, claim Bank of England officials, the inter-bank loans market would have dried up altogether and brought some banks down with it.

Making sense of this kind of scandal needs more than a bout of shoulder-shrugging “well, what do you expect?” from cynics. It needs a strong done of realism about the nature of markets and of capitalism. Redirecting private accumulation towards public ends has always been a matter of political struggle and state coercion. Political control over economic activity did not happen by accident. The indignation we see today about the LIBOR scandal needs to be transformed into a political movement capable of articulating a vision that goes well beyond the myth of munificent and self-regulating markets.

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