Tag Archives: financialization

The SPD under Merkel

2 Jun

As part of its continuing series on the European Left, The Current Moment publishes an article by Wolfgang Streeck on the SPD under Merkel. Wolfgang Streeck is a director at the Max Planck Institute for the Study of Societies in Cologne, Germany. Widley recognized in Germany and abroad for his work in sociology and political economy, Wolfgang Streeck’s most recent book is published this month in English with Verso, under the title Buying Time: The Delayed Crisis of Democratic Capitalism.

 

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Since the fall of 2013 Germany has been governed by a Grand Coalition, led by the Christian Democrats under Angela Merkel and including as junior partner the Social Democrats under Sigmar Gabriel. Arguably the union of Black and Red was nothing more than the formalization of an informal cohabitation that had followed the end of the first Grand Coalition of the new century in 2009. Now that the opposition in the Bundestag has been reduced to a tiny and politically dispersed minority, it seems not much of an exaggeration to consider the government firmly in the hands of a centrist national unity party into which the two former Volksparteien have peacefully dissolved.

What is remarkable is how happy the two parties are with their reunion, and how stable their share in the vote has remained since 2009: the CDU/CSU attracting roughly 40 percent of the electorate – at steadily declining rates of turnout – and the SPD being stuck at around 25 percent, a result that was considered catastrophic in 2009 when it was attributed to having been the smaller party in a Merkel cabinet. Now the SPD seems content with having ceased to be in serious completion for the Chancellorship, if not forever then for a very long time.

There are several reasons for the stability of the current power-sharing – or better: cooptation – regime and its apparent prospects for a long life. Angela Merkel seems much to prefer the SPD over the coalition partner of her second term, the FDP. With the Social Democrats on board, she is no longer at risk of being forced by her party, or tempted by her own passions if such she has, to hurt the feelings of pensioners, the unemployed, or the remaining clients of the welfare state by pursuing neoliberal “reform”, at least in Germany. While the SPD is less given to electoral-political panic, being (still) sufficiently far away from the five-percent hurdle, the FDP may never recover and disappear in the no-man’s land outside of the Bundestag. Moreover, if the SPD were for some reason to break away from Merkel, there are now Greens, eagerly waiting to claim the place of the SPD as the CDU’s partner in government – and the SPD knows this. Having abandoned their old leadership after the disappointing election results of 2013, the Greens are still angry with themselves for having rejected Merkel’s invitation to coalition negotiations. Merkel can now choose between two comfortable majorities, one with the SPD and one with the Greens, and next time around she may actually want to change partners once the SPD will have done the dirty work of revising the Energiewende in line with the interests of the German export industry and, perhaps, the private households suffering from steadily increasing prices of electricity. More on this below.

Meanwhile, Red-Green-Red, a government formed under SPD leadership and including the Greens and the Left, looks ever more remote as a practical possibility. The Greens, having finally abandoned their leftist inclinations, will not let entering a government that includes Die Linke get in the way of their being perceived as a thoroughly buergerliche, middle-of-the road party with a socially progressive and environmentally conscious agenda. And while the Left has worked hard to style itself as a staunch supporter of “Europe” – which in Germany is now the same as the Euro – its empathy with Russia in the crisis over Ukraine is likely to make it even more of an outcast in the German party system than it already is, not least because of the SPD’s untiring denunciations.

Inside the SPD Sigmar Gabriel, party leader and minister of economic affairs, is now fully in control. Not least this is because Merkel, by making major substantive concessions to him during the coalition negotiations, including a disproportionate representation of SDP ministers in the cabinet, made it easier to forget the party’s crushing defeat of 2013 that ut received under his leadership. Moreover, Gabriel’s candidate for Chancellor, Steinbrück, miraculously disappeared only two or three days after the election, as though he had never existed; nobody has heard from or of him since. Steinmeier, Gabriel’s other former rival, is happy to be back at the Foreign Office, in the post he already occupied in the first Grand Coalition 2005 to 2009 when the party was sufficiently impressed with him to make him candidate for the Chancellorship, to disastrous effect.

As to Gabriel, his junior partnership with Angela Merkel has given him the means to heal the rift between the SPD and the unions, with two policy moves he extracted from the CDU/CSU. The first is the introduction of a general minimum wage, the second an effective lowering of the pension age for a select group of workers. Both measures are still in the legislative process and details are contested between the SPD and factions in the Christian-Democratic Parties. The Chancellor, however, as one would expect, sticks firmly to the Coalition agreement and there is no doubt that the two measures will eventually be passed in one form or other.

The prehistory of the impending minimum wage legislation is rather curious. For a long time the unions had opposed any legal regulation of low wages, in order to protect collective bargaining. The first to break ranks was the service sector union, Verdi, which after the Hartz reforms had finally lost control over the low wage end of the labor market. With a delay of a few years IG Metall, still the most powerful among the unions, concurred, which it might have done much earlier given that there are practically no low wage workers in its constituency. Now the SPD can offer a legal minimum wage as a tribute to its union allies, and as a sign that social-democratic participation in government carries real benefits for workers – which in this case is actually true.

Pension reform, too, serves to mend fences with the unions. Under the first Grand Coalition the then Social-Democratic party chief and Minister of Labor, Franz Müntefering, almost single-handedly raised the legal age of retirement to 67 years, bypassing the SPD in what was practically a coup-de-état with the support of Merkel. The new legislation will allow workers with more than 45 years of service, including times of unemployment, to retire at age 63, at full pension. The matter is more complicated than it looks and more complicated than its supporters and detractors make it look. What is true is that it will benefit mainly the core union constituency of male manual workers. In exchange, the SPD has swallowed an even more expensive pension increase for mothers with children born before 1992, which was and is a pet project of the Christian Democrats trying to get back the female vote. Like the minimum wage, both pension reforms are fought tooth and nail by German economists, a neoliberal monoculture of astonishing internal conformity that has never been more predictably opposed than now to anything looking only slightly like it might be social-democratic.

In addition to minimum wage legislation and pension reform, three issues in particular will dominate the agenda of the Grand Coalition. Ultimately they will decide upon which constellation of political forces Merkel’s fourth term – and nobody seriously doubts that she wants and will get one – will be founded. The first is Europe. Here the SPD was always in agreement with Merkel, in government or out. It is true that once in a while it deployed anti-Merkel rhetoric to attract the Euro-idealistic segment of the middle class, as represented primarily by the Greens. In this vein, before the 2013 election Gabriel made several attempts to win the backing of intellectuals such as Jürgen Habermas, for what he pretended to be a social-democratic alternative to Merkel’s European policy. The message, although mostly coded and subtle, was that Merkel did less than required to mitigate the suffering in the South. But the only practical consequence, if any, was that Merkel won and the SPD lost among those afraid that “Europe” would become too expensive. It seems that this was why Merkel felt no need to be vindictive about the Social-Democratic attacks.

In fact, when coalition negotiations began after the election, the first deal that seems to have been struck on the very first day was that the SPD gave up on the Europeanization of government debt (“Eurobonds”) so dear to the heart of the Greens and the progressive middle-class milieu, in return for the CDU agreeing to the legal minimum wage. Both CDU/CSU and SPD know that more than symbolic assistance for the crisis countries would be costly at the ballot box although the SPD, to Merkel’s delight, had to pretend for the consumption of the “progressive” part of its constituency that it did not care about this. In truth, Merkel, Schäuble, Gabriel, Steinmeier and the forgotten Steinbrück have for long formed an Einheitsfront, knowing they must defend the Euro to the hilt as it is the lifeline of the German export industry, not just of its employers but also of its unions. For the German economy, European Monetary Union means a favorable external exchange rate plus fixed prices for their products in a captive “internal market” protected from political distortion in the form of a readjustment of national currencies. The German political class knows that at some point this will have to be paid for, but they are determined to keep the price as low and as invisible to voters as possible. One way of doing this is insisting on “reforms” in debtor countries, another offering financial support for social programs in Greece or Spain that are small enough not to make a dent in German public finances but also too small to make one in the South’s misery. Much more important is the tacit backing by both CDU and SPD of the European Central Bank’s various covert measures to bail out the ailing Southern European banking industries and surreptitiously refinance the debt of the Mediterranean states, in contravention of the Maastricht Treaties. While the Christian Democrats pretend they don’t know, the Social Democrats claim credit with their pro-Euro supporters for not getting in the way of the ECB’s “emergency measures”.

The so-called “European elections” were officially framed in German politics in two not readily compatible ways at the same time and by the same players. First, they were depicted as a Manichaean battle between the “good Europeans” united in the CDU/CSU/SPD/Greens/FDP Einheitsfront and the “enemies of Europe” – the “Anti-Europäer” – represented mainly by a new center-right party, AfD, which had formed to demand an end to monetary union. During the election campaign all controversial issues among the governing parties, most of them just pseudo- controversial anyway, had been hidden away (no mention any more of “Eurobonds”!), just as at the European level all impending critical decisions had been postponed (like banking union and the various additional “rescue operations” it will require). This left as common objectives for both Christian and Social Democrats a higher voter turnout and keeping the AfD as small as possible. Both goals were in part achieved as the 7.0 percent won by the AfD remained below the protest vote in many other countries, and turnout increased for the first time in decades in a national election, from 43.3 to 48.1 percent.

Second and simultaneously, the election was presented as a competition between two individuals, both long-serving European functionaries with indistinguishable European convictions, running Europe-wide for the Presidency of the European Commission on behalf of their respective “party families”: the Luxemburger Christian Democrat Jean-Claude Juncker and the German Social Democrat Martin Schulz. Merkel had more or less enthusiastically allowed her party to participate in the charade, apparently on condition that she rather than Juncker was featured on the CDU election posters. The SPD, on the other hand, insisted that the “winner” of the contest had to be appointed President, even though nothing like this can be found in the Treaties, and although Schulz never had a realistic chance of gaining a majority in the Parliament. Remarkably, throughout the campaign the SPD presented Schulz under the slogan, “From Germany, for Europe”, in obvious contradiction of Schulz’ pan-European rhetoric outside his home country. The nationalist frame in which the Social-Democratic “European” candidate was advertised paid off handsomely. While the Christian Democrats lost 2.6 percentage points and ended up at 35.3 percent, the SPD gained 6.5 points (up from 20.8 percent in 2009, which had been the party’s lowest result ever) to finish at 27.3 percent.

The election over, it is again the time of the European Council, the representation of national governments, which today means the time of Angela Merkel. If she wants she can now act as the informal leader of her “party family” and try to install Juncker at the head of the Commission. For the required majority in the European Parliament she will need the support of the Social Democrats, which she might get if she offers Schulz a post as Commission member, maybe as Vice President. This she would be able to do by sacrificing the sitting German commissioner, a former Christian-Democratic Minister President of the Land of Baden-Württemberg who, conveniently, happens to oppose Merkel’s anti-nuclear energy policy. Sending Schulz to Brussels on the German ticket would make Merkel’s German coalition partner happy: not only would it transport the German Grand Coalition to the European level – where Christian Democrats and Social Democrats had always worked together hand-in-glove – but the SPD had during the coalition negotiations demanded the German post on the Commission, without the two sides having come to an agreement. Moreover, a Schulz appointment would usefully demonstrate, if such demonstration was still needed, that Merkel knows how to punish disobedient members of her camp. Alternatively, Merkel could, after a period of indecision, disregard the election results altogether and appoint a Commission President able to get the approval of the British – which would exclude both Juncker and Schulz. This would be a positive signal to the rising numbers in Europe, not just in the UK, who favor a repatriation of competences from Brussels to the nation-states. In particular, it would be a good preparation for the impending negotiations with London on a revision of the Treaties in this sense. Germany, it would appear, should have a strong interest in keeping Britain inside the EU, if only as reassurance against all too ambitious integration projects as are likely to originate in Southern member countries and could be quite costly from a German perspective. Ultimately, perhaps after some public fuss, the SPD, in charge after all of the German Foreign Ministry, will go along with this as it always has.

The second issue the SPD will somehow have to master is the implementation, drawn out over more than a decade, of the balanced budget constitutional amendment passed by the first Grand Coalition under Merkel in 2009. As CDU-CSU and SPD had passed the amendment together, it would be hard for both to defect from it. On the other hand, while the language that was inserted in the Constitution is extremely detailed and technical, making the amendment the longest ever and entirely unreadable for the general public, loopholes can always be found to mitigate spending cuts if need be. As long as the general economic situation in Germany continues to be as good as it is now, the consolidation of public finances, which has already begun, will cause only little pain and budget balancing can remain a joint undertaking. Already, however, the 2014 pension reform was counter to the spirit of austerity under which the Schuldenbremse was installed, and the moment tax revenues will begin to stagnate or decline, the higher pension entitlements will make themselves painfully felt. Among the budget items that may then become politically contentious are the still very high annual transfers to the Neue Länder, the former GDR. For a government that will for political if not for other reasons have to defend these against spending cuts, it will be impossible to advocate new fiscal transfers to the Southern and, increasingly, the South-Eastern member states of EU and EMU, regardless of whether through Brussels or on a bilateral basis. Obviously this will further constrain German options in Europe and in the defense of the common currency. While this is unlikely to destabilize the Black-Red coalition, what may become critical is that the Länder, which together account for half the public spending in Germany, may have a harder time than the federal state to consolidate their finances as required for them by the amended federal constitution. It so happens that most of the Länder are today governed with strong Social-Democratic participation, and some Länder Prime Ministers are powerful figures within the SPD. Bringing them in line with the Federal Government’s fiscal consolidation policy will be a strong test for the SPD national leadership and the Social-Democratic cabinet members, and one that they may well fail.

The third and final of the three critical issues for the Social Democrats under the Grand Coalition is energy. When Merkel ended the nuclear age in Germany by command decision during the panic after Fukushima, she with one stroke gained for herself the option of a Black-Green coalition. In this, perversely, she could count on the support of the SPD, which had long identified itself with the Greens’ anti-nuclear energy stance, in spite of considerable skepticism among the unions, who were concerned about jobs, and among local governments, often Social-Democratic, who worried about a secure energy supply. When general enthusiasm about the Energiewende had dissipated and the immense difficulties of replacing nuclear energy wholesale with renewables began to make themselves felt, Merkel cunningly conceded energy policy to the SPD, by agreeing to move it from the ministry for the environment to the economics ministry which the SPD had claimed for its party leader. Gabriel will now have to square several circles at the same time. First, he will have to find ways to end and perhaps reverse the rise in energy prices for private households caused by the heavy subsidization of renewables. Second and at the same time, he must reassure the Green element in the SPD that he will not fall behind Merkel with respect to the pace and scope of the “energy turn”. Third, German industry has meanwhile become more restive than ever over the rising price of energy, and firms are beginning to talk about relocating production to countries where energy is cheaper. The same fear is expressed by unions in the manufacturing sector, in particular the union of chemical workers, which happens to represent also the energy-producing industry, including the operators of nuclear power plants. Fourth, the European Union in Brussels has become suspicious about what it perceives to be public subsidies (“state aids”, in Brussels jargon) to lower the costs of energy for manufacturers in energy-intensive sectors – which, in turn, are in fear of Brussels depriving them of their benefits. Fifth, citizens, including some of those who had applauded the end of nuclear energy, are becoming averse to the construction of the new power lines required for the transport of wind energy from the north to the south of the country. For Social Democrats, the main battlefield will be the retail price of electricity for low-income households, followed by employment in manufacturing and energy production. No doubt Merkel had every reason to hand the responsibility for Energiewende to her partner, with the Greens waiting in the wings for when Gabriel will have to throw the towel under the intensifying pressures from different and incompatible interests. This, then, may be the hour of Black-Green.

 

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.

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.

The state of European banking

5 Oct

 

In his assessment of a new report published on banking reform within the EU, Martin Wolf starts off with an arresting statistic. In 2010, he writes, US banks had assets worth 8.6 trillion Euros. Banks in the EU had assets worth 42.9 trillion Euros. For the US, those assets represented 80% of GDP; in the EU, they represented 350% of GDP. The EU’s banking sector, claims Wolf, is too big to fail and “too big to save”.

Wolf’s fact raises interesting questions. Can we say that in Europe the expansion of the financial sector has been so significant that it dwarfs developments in the US and gives us an explanation for Europe’s current sovereign debt crisis? Explanations of the Eurozone crisis have in recent months increasingly focused on governance issues tied to the Eurozone itself and to poor economic performance of many Eurozone economies. Is the implication that the crisis is a European affair?

A useful place to look in order to answer these questions is the report that Wolf cites, put together by a group of experts and led by Errki Liikanen, governor of Finland’s central bank. Most of the coverage of the report has been about its recommendations: ones that are not so different from those of the Vickers report in the UK (see here for a comment on Vickers). However, the report itself gives a detailed account of the crisis and of the transformations in the European banking sector.

In general, it implies that whilst there is variation, there is no “European exception”. The origins of the crisis lie in the collapse in the sub-prime mortgage market in the United States, which put a number of lending institutions into serious difficulty. This localized crisis quickly fed through an internationalized financial system to affect non-US institutions. Many European banks were left with very bad loans on their books: the German bank, Deutsche Industriebank IKB, was one of the first to be bailed out by the Bundesbank. As early as August 2007, the interbank lending market in Europe dried up altogether: the ECB had to step in with an injection of 95 billion Euros. In December of the same year, it injected a further 300 billion. At issue here is the generalized dependence of US and European financial institutions on what turned out to be very bad loans.

On the size of the assets of European banks, compared to other parts of the world, the report also has a lot of good information. The report notes that the EU banking sector is very large when compared with other countries and regions, as the figures above make clear. However, it notes that this reflects the fact that bank intermediation plays a bigger role in Europe than elsewhere. What this means is that banks are the principal source of private sector financing in Europe in contrast to the US for example. Banks in Europe also have mortgages on their balance sheets, whereas in the US Fannie Mae and Freddie Mac soak up these mortgages and are government-sponsored institutions. The staggering difference in the assets of banks in Europe and the US is not automatically a sign of different trends in financialisation but points also to some more long-standing differences in the nature of private sector financing. The report also notes that the restructuring of the banking sector which occurred in the US post-Lehman, in particular the collapse of small and medium-sized banks, has not occurred in Europe. The level of total assets has thus remained constant, propped up by ECB and national government intervention in Europe. Here there is a marked difference between Europe and the US: interventions in Europe have prevented restructuring, in the US they were a conduit for change.

There is no particular European story to the growth of the financial sector in Europe. Some specific features of bank intermediation have interacted with more generic features of financialisation that we can observe in Europe and elsewhere. What is less clear from the report itself is whether the growth of the financial sector has been the result of changes within the non-financial sector, a freer regulatory environment or simply the working out of a speculative frenzy within financial institutions aiming to make more money in the short term, with little regard for longer term consequences. The recommendations of the report suggests it believes that the latter two factors are the most important.

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.

Stat of the day

9 Jul

In an otherwise curious article critiquing traditional Keynesian policies, British peer – and Labour guru – Maurice Glasman writes that:

“Of the £1.3 trillion lent by banks in the British economy between 1997 and 2007, 84% was in mortgages and financial services”.

This clearly suggests a change in the function of the banking system in the UK: rather than lending in ways that contribute to large-scale capital and labour intensive projects, it has been the facilitator of a debt-dependent growth model.

If in doubt, regulate…

13 Jun

Another idea that has gained traction in recent days is that of a European-wide banking union. This idea, as with Eurobonds, is not new but the most recent bail-out of the Spanish banking sector has put it back onto the agenda. Key figures – from the President of the European Commission to the head of the European Central Bank – have come out in favour of a banking union. The fact that the bank at the centre of Spain’s difficulties, Bankia, was for so long able to hide its problems, even to the point of being fêted as a success story until not very long ago, has made many doubt the ability of national regulators to properly keep a tab on what their banks are doing. Ergo, the turn towards a pan-European regulatory solution.

Exactly what a European banking union would look like or what powers it would have depends on who you ask. Maximalists tend to hover around the EU institutions as they believe such a union would further strengthen the EU. According to Commission President, Jose Manuel Barroso, a banking union could include an EU-wide deposit guarantee scheme, a rescue fund financed by banks themselves and the granting an EU authority the power to order losses on banks. Minimalists, from within national regulatory bodies, claim that only a small set of powers need be transferred to a Brussels-based body. They also stress that a European banking regulator already exists in the form of the London-based European Banking Authority. The EBA already has powers to make rules and to force banks to comply. It was behind this year’s stress tests of Europe’s biggest banks and the demand that they boost their capital ratios. Minimalists also say that only a small number of big banks should be supervised. What Merkel called the “systemically important banks”.

Over the weekend, two heavy-hitters (of a sort), Niall Ferguson and Nouriel Roubini, weighed into the debate. They noted that for two years now inter-bank lending in Europe has been replaced by a singular reliance on ECB financing. And some countries – Greece and Spain – are experiencing a steady rise in withdrawals from their banks. As well as a direct recapitalization of the European banking system, Ferguson and Roubini argue that an EU-wide system of deposit insurance needs to be established, alongside a European-wide system of banking supervision and regulation.

Some of the same criticisms made of Eurobonds can be made of the banking union idea. That the political conditions for its creation are absent is evident from the kind of discussions being had about how such a banking union would be set up. Cognizant as ever that national publics are unlikely to wave through any forward movements in integration, some suggest that instead of creating a banking union via an EU treaty change – a slow and complex process, fraught with opportunities for sabotage by recalcitrant domestic populations – it would be possible to simply give over the regulatory power to the ECB. And this could be done without a treaty change but just by a unanimous vote of the European Council. As Alex Barker on the FT Brussels blog writes, this “avoids the political headache of more treaties” and “is faithful to the unsaid rule of this crisis: central bankers should win more power, regardless of whether they deserve it”. That so much thought is given about how to push through such a banking union without going through democratic procedures of ratification suggests the solution itself lacks the public support it would need to be a success. Even short-term fixes such as providing banks directly with extra capital raise big questions about how the money being provided will actually be used. There is always a balance to strike between politics and expertise and giving new institutions the powers to make decisions based on expert judgement is not necessarily anti-democratic. But when the democratic authorization is entirely absent, or when new institutions are created in ways that explicitly avoid any wider public debate about their merits, we can be confident that the stick has been bent too far in the direction of expertise.

Another problem is that – in line with another unsaid rule of the present crisis – the banking union seems to represent a case of “if in doubt, regulate”. As already mentioned, a European Banking Authority already exists. But critically, a more muscled Brussels-based variant wouldn’t necessarily address any of the more fundamental questions about the financialisation of Europe’s economy and the way this financialisation has interacted with some of the structural features of the Eurozone. More regulation can simply mean refusing to look more closely at the root of the problem. It is unsurprising that the EU’s kneejerk reaction to a problem is to try to create new regulation. We should resist the temptation to regulate and think instead about the fundamental causes of the present crisis.

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