François Hollande, a year on

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

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

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

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

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

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

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

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

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

Buying time and running out

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

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 21^st 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.)

Winds of change in France?

Much has been said and written about the Gallois report on competitiveness, made public earlier this week. The 31^st report on competiviness produced in the last 10 years, this one had been commissioned by the French prime minister. Louis Gallois, a prominent figure in French industrial life, is seen as able to bridge the divide between French business and the French state. Relations have soured recently between the two, in particular between small and medium sized businesses and the recently elected Socialist government. Gallois’ own career has involved heading large companies that are competitive internationally but are also very closed tied to the French state. He is an emblematic figure of French state capitalism.

The report itself rightly highlighted what is a pressing problem for France: a looming deindustrialisation. France is in the difficult position of straddling an increasingly empty middle ground. On the one side, there are the high-quality goods produced by an export power like Germany, goods that remain expensive but whose quality guarantees that they dominate the high-end markets for cars and many other industrial products. On the other side are lower quality goods from Asia that win-out on price. They are cheap and good enough to crowd out slightly better quality but signficantly more expensive French-made products. Stuck in between this polarisation, France has in the last 10 years lost a great deal of export market shares. Hundreds of billions of Euros of exports have been lost and around 750,000 manufacturing jobs have gone in the last decade. This was not always so: until the early 2000s France enjoyed a strong showing on the balance of payments, not least relative to Germany. But it has now gone deeply into deficit, as the graph below shows. France has not seen the kind of reversal of fortunes that Spain, Greece or Portugal have but its current acccount deficit has been steadily growing.

The report itself recommended that the burden of social security payments should be shifted – to the tune of a 30 billion Euro transfer – away from business and salary contributions and towards generalized taxation, in the form of the CSG tax (generalized social contribution) and VAT. French economist Jean-Claude Casanova put it thus: when employees decide to have babies, companies face a rise in labour costs that in some cases can push them into the red. Bizarrely, as soon as the main recommendation of the Gallois became known – what the author referred to as a “confidence shock” for French business – the government declared that it would not be implementing this particular recommendation. It preferred a different system for lowing labour costs that involved a complex credit transfer system. Companies will have to work out for themselves what they can win back from the state through these transfers, something that favours large companies with bulging accounting departments. Smaller firms, the ones suffering most from declining competiveness, will find the system opaque and difficult to implement. Regardless of where you stand on the rights and wrongs of the labour cost/competitiveness debate in France, the government’s handling of the report was poor.

It would be wrong, though, to dismiss all this with a gallic shrug and a muttering of plus ça change. The business newspaper, Les Echos, points to one recommendation in the report likely to be taken on by the government and one which could have a very considerable impact on France in the medium to long term. Gallois proposed that French firms systematically include in their governing bodies worker representatives. In companies with more than 5,000 employees, between a quarter and a third of the members of these governing bodies should be worker representatives. Les Echos celebrates this as a signal that France will move in the direction taken up by Germany, Austria and other countries with much more successful industrial policies than France. In the German case, this rule is applied to companies with more than 500 employees. For companies with over 2,000 employees, the proportion of worker representatives in these governing bodies rises to 50%. Les Echos argues that therein lies the key to Germany’s success in turning itself round and boosting its competitiveness.

What Les Echos is getting at is labour discipline. German companies were able to boost competitiviness in the absence of currency devaluations largely because German workers accepted the cost-cutting measures being proposed, many of which were harsh and involved temporary unemployment. As well as the German government having a strong hold over unions, company directors themselves have a better hold over their own workforce. The consensual way labour and business interests within German firms implemented the competitiveness drive of the mid to late 2000s in Germany goes a long way to explaining Germany’s present export success. France has famously been an example of a very different kind of industrial relations: more conflictual, dominated by the role played by unions, resistant to change. What the Gallois report proposes is a way in which French labour could be better controlled. If implemented, this could have a far greater impact on French industry than the more public spat over VAT, CSG and how to finance social security. At least, that is what Les Echos hopes. Perhaps, in focusing on its rejection of Gallois’ proposal to raise CSG and VAT, the government is deflecting attention from other measures, that could be more far-reaching in the long term. French business-labour relations will not be transformed over night but this could be the beginning of a greater disciplining of labour through co-option into the decision-making process.

Aglietta on the crisis

In a comment last week on George Soros’ well-publicized essay on the Eurozone crisis, we noted his fixation with the European roots of the present crisis. In his view, the combination of the Eurozone’s curious institutional design (a common currency without a fully empowered central bank) and the overly cautious approach of European policymakers together explain the European sovereign debt crisis. Whilst there is a specific European dimension to the crisis, we argued that it is also a crisis of capitalism, not just of the Euro.

In a piece published in the New Left Review in May 2012, the French economist Michel Aglietta gives his account of the European crisis. His account is more general and wide-ranging that Soros’. His explanation of the debt build up in Western economies is tied to the emergence of a new “accumulation regime”: one that demands a maximisation of returns for shareholders and downward pressure on labour costs. The gap between stagnating wages and the demand needed to maintain growth levels is provided through credit. The availability of credit in Western economies was made possible by various factors, including financial innovations and the recycling of large dollar surpluses built up by East Asian economies. These surpluses were an outcome of the East Asian crash of the late 1990s: a traumatic event that pushed governments in the region to insulate themselves from further instability by focusing on export-led growth.

Whilst generating a great deal of liquidity within the global financial system, these developments in East Asia also help explain why European economies failed to capitalize on the boom years of the 2000s when borrowing rates across the continent fell steeply on the introduction of the Euro. Aglietta notes that the intention in the early 2000s was that the mobility of capital within Europe would lead to a convergence of national economies. Productive investments would be sought out and the differences between national economies would slowly disappear. Capital certainly flooded to those countries that had the highest interest rates prior to 1999 – Greece, Spain etc – but there was no evening out of competitiveness across the region. In fact, as Aglietta notes, divergences grew. This was because at the same time as capital was moving into Europe’s periphery, so were East Asian economies beginning a concerted export drive as a response to their 1997-1998 crisis. Unable to compete with these imports, industrial activity in Spain, Portugal and elsewhere shrunk. Capital was channelled into a property and services boom, with growth becoming dependent upon rising house prices. In a better starting position and not faced with the temptations of sudden influxes of capital, countries like Germany and the Netherlands faced up to East Asian competition and were able to generate their own export surpluses. Aglietta also notices that given the poor performance of the German economy in the first half of the 2000s, the country was not sucked into the property boom that affected countries like Ireland and Spain. Divergences within Europe are thus not only an internal European story but have a global dimension as well.

Aglietta makes a number of other important points. His discussion of the options open to Greece and to Europe makes for interesting reading. He notes that Europe cannot really afford a Japanese-style era of deflation and high public debts. A reason for this is that Japan has a large industrial sector and is in a very dynamic part of the world. Aglietta also observes that Japanese debt is financed by Japanese savers, meaning that the risk of spiralling debt refinancing costs is kept low. In Europe the situation is different on all counts, making it difficult to replicate the Japanese model. On Greece, Aglietta gives a detailed breakdown of how “Grexit” would work, arguing that the long-term benefits outpace the short-term costs. Argentina, he argues, did the right thing but it did it badly. Greece could learn lessons from it and exit the Euro in a more orderly manner.

For all the elegance in his exposition, Aglietta’s solution to the crisis is surprisingly apolitical. He argues that “the euro must be constituted as a full currency, which means it must be undergirded by a sovereign power” (p36). This means transferring competences to the European level, fiscal union, and a long-term development strategy based on the idea of permanent transfers from one part of Europe to another. Aglietta’s recommendations are obvious but the problem today is that public opinion across Europe is moving in the opposite direction, against the idea of further transfers of power to European institutions. In practice, pursuing Aglietta’s recommendations means deepening the gap between national politics and European-level policymaking, thus compromising democracy in the name of economic emergency. Whilst that may provide some palliative to the economic crisis, it will only make the political crisis even greater.

A comment on Soros

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.

Still no alternative to austerity

An interesting post on austerity over at the Economist’s Free Exchange blog. It makes the point that British business – generally in favour of austerity measures when they were first introduced back in 2010 – is now beginning to change its mind. It’s not difficult to work out why: Britain is facing a third quarterly decline in GDP, with a 0.5% contraction in the British economy expected for the second quarter of 2012. For the UK this is particularly galling given the fiscal boost of the Olympics and the expectation that this would mean a heady summer for at least some British businesses. Perhaps it is true that as many people left the UK as entered it for the Games, making the net effect close to zero.

The Economist’s post suggests that the tide is perhaps turning in the UK, with austerity giving way to a new consensus around pro-growth measures. It notes that Cameron’s government is considering an “economic regeneration bill” for the Autumn and that Boris Johnson – with an eye perhaps on the Tory leadership – is talking up the need for big government infrastructure projects (based around London, of course).

The difficulties faced by the UK economy should give food for thought to those arguing that the route to economic growth lies via an exit from the Eurozone. One might have expected the UK to boost competitiveness through cheapening its currency but – on the contrary – the British pound has become something of a safe haven for those with lots of cash. Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy. The debt burden for individuals and businesses, incurred in the heady pre-2008 years, is still depressing growth and holding back new investment plans.

The idea that the tide is turning at the level of elite opinion is difficult to substantiate. There were always voices calling for moderate fiscal stimulus alongside cuts in government spending. Back in 2010 the debate between the Tories and Labour was not about whether the government should drastically reduce spending – both agreed that it should – but it was all about timing. Shock treatment versus gradual reductions eased along via some discretionary spending. Austerity was the backdrop with the debate focused on how, not if. Little, it seems, has changed.

As noted on The Current Moment last week, the debate in the US presidential campaign is also about how the government’s deficit can be reduced, with both camps fighting over who is more credible in their deficit-cutting plans. In France, a government was elected with an ostensibly pro-growth agenda. In his campaign speeches, Hollande regularly fulminated against austerity politics, claiming he represented an alternative. And yet – bar the few measures introduced that are intended to put a little more money in people’s pockets – the real challenge for the Hollande government is the 2013 budget and finding the money to meet its balanced budget obligations. Much to the chagrin of the left of the Socialist Party, Hollande has signed off on the EU’s fiscal compact with little regard for the growth measures he had promised. Budget cuts will be financed in part via higher taxes but also via spending cuts. The Greek premier, Antonis Samara, is about to undertake a desperate trip to Paris and Berlin where he will ask for a bit more leeway in his efforts at balancing the Greek deficit. Merkel and Hollande are shifting all responsibility for the decision on whether to grant Greece an extension to the Troika, as if the issue was a technical one to be decided by accountants from the European Commission. From the US through to Europe, there is little evidence that the tide is turning.

Even though economies are stagnating under the burden of austerity measures, the intellectual case for an alternative still needs to made. Until then, it will be more of the same.

Capitalism under Hollande

In recent days, French president François Hollande has begun what is perhaps the most important aspect of this presidency, a reform of the French labour market and of capital-labour relations more generally. Typically, very general ideas about these changes were discussed during the presidential campaign but no firm commitments one way or the other were made by Hollande as candidate, not least for fear of angering the unions. Now that he commands a majority in the national parliament and is in a position to push through changes, we can see more clearly the social content of the Hollande presidency. Under conditions of crisis, and in the name of boosting French competitiveness, it is likely Hollande will do something similar to what Gerhard Schroder did in Germany, namely a flexibilisation of labour laws and a shift in the burden of funding social insurance from capital to labour. How hard Hollande will push is unclear but it does seem that history is repeating itself in France: as with Mitterrand, reforms hostile to labour are being undertaken by the left, not by the right.

His method and style are consensual and collaborative. In place of the immediacy and decrees typical of his predecessor, Hollande has organized a conference bringing together all the different representatives of business and labour in France. No firm commitments are to be made immediately. Rather, on key issues commissions have been set up that will discuss proposals and over the course of a year or so will come up concrete reforms. This contrasts also with Lionel Jospin, former socialist prime minister, who had angered business leaders back in 1997 by declaring at the end of a day of discussions the introduction of the controversial 35 hours week. Hollande’s approach is to keep everyone on board and introduce reforms only gradually.

Hollande may have attracted attention from outside of France as a socialist elected after a campaign where he declared “the world of finance” to be his enemy and where he proposed – remarkably off the cuff for such an important policy – to tax at 75% France’s highest earning individuals. But the reality of political change in France is elsewhere. Traditional leftwing parties, like the Front de Gauche, did far less well than many had expected, suggesting that the opportunity for reform à la Schroder has come in France. The form of his consultations is classically corporatist, with labour and business leaders fully represented in ongoing discussions with the state. As in Germany, the critical issue will be whether or not Hollande is able to secure the support of the unions to push through his proposed changes. The German government’s close relationship with the unions was what enabled the country to undertake its internal devaluation in the early 2000s, the source of its present day competitiveness. Keeping the unions on board, as well as the business groups, is essential for Hollande.

The actual substance of the changes is not yet certain but the ideas being floated make clear that the shift in the balance of forces within society is going against organized labour. One key possibility is that the cost of paying for social insurance, which in France lies heavily on business and is a clear legacy of postwar social democracy, may be increasingly levied on workers. This changes the balance between private wealth and public claims on that wealth. At present, there seems little by way of social mobilisation in France – or in the positions taken by unions – to suggest that such a shift will be resisted. The previous Sarkozy government had planned a similar shift but through an increase in VAT, the so-called social VAT, which unions had opposed unanimously. Hollande’s government is thinking instead in terms of raising what is called the CSG (contribution sociale generalise – a tax paid by all, used to finance health insurance, pensions, welfare payments to family etc.), a proposal that currently divides unions, some are in favour and some not. The CSG was already introduced back in 1990 as a way of generalizing the cost of social insurance which up until then had been levied uniquely on salaries and its extension today is in line with these earlier changes. The position of business is clear: unless such a move is made, competitiveness will continue to decline and jobs will be lost. With thousands of jobs in line to disappear as companies – from automobiles to big pharma – shed labour, the pressure on the government to lessen these costs on businesses is very high.

The situation in France is thus a confusing one. A superficial attack on business through capping of salaries in public sectors enterprises and levying a high tax rate for high-earning footballers and other stars, exists alongside a much more substantial reduction in claims the state makes on privately generated wealth. Social insurance, in France, is being transformed. From being something that belongs to society as a whole, and is based on a coercive transfer of wealth from the private to the public purse, it is now a good enjoyed by individuals and one that they need to pay for themselves. What is being given up here is the idea that markets generate systematic inequalities that should be righted through public intervention. From social insurance as a critique of capitalism to social insurance as a private good purchased by individuals through their own contributions. We aren’t there just yet but this is the direction in which France is heading.

The problem with Eurobonds

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

 

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

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

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

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

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

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

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

A European approach to the crisis

Largely because of electoral reasons, French President Nicolas Sarkozy has suggested recently that Europe is “turning the page” in its financial crisis. At a European summit at the beginning of March, he declared that it was the first summit since August 2011 not to have been a “crisis summit”. A few days ago, he declared the financial crisis over.

There is certainly a sense that the urgency and the gloom of 2011 has lifted in early 2012. The risk premium demanded by investors to hold the government bonds of countries like Italy and Spain has fallen considerably and stories of bank runs and Eurozone atrophy have fallen away. It is worth asking then what has been Europe’s approach to its crisis and whether we right to think it has been an adequate response.

Two features stand out. The first is the emphasis – policed by European institutions and formalized in the EU fiscal pact – on budgetary austerity and labour market reforms. Cutting government spending has become the prime goal of national governments across Europe, closely followed by reforms of national labour markets. Budgetary austerity runs across all the Eurozone: from the Netherlands where pressure to cut budgets looks like it will bring down Mark Rutte’s coalition government, to the UK, France and elsewhere, not least in Greece where it has been the basis for a fundamental assault on the country’s social fabric. National labour market reforms have been pushed mostly in the southern European countries: Greece, Italy, Spain, Portugal. There has been some change in Northern Europe: in France the retirement age was raised and the Sarkozy government has argued for shifting the burden of social security contributions from employers onto taxpayers in the form of a “social VAT”. Elsewhere, labour market reform is deep and painful and may yet lead to an unravelling of the alliance between national technocrats and EU-backed reform. But the sense in Italy, where Monti is fighting the unions, and in Spain where Rajoy faced down a general strike yesterday, is that changes will go through.

The second feature is the backdoor use of taxpayer Euros to prop up the continent’s financial system. Whilst the public assault on spending programs and on labour market regulation is an explicit policy of European governments, this latter feature is more hidden. It is nevertheless a key element in the European approach to resolving the Eurozone crisis. It has two elements to it. One is the commitment to European sovereigns in the form of the “bailout bazooka”. In an angry letter to the Financial Times last Wednesday, Klaus Regling, chief executive of the Luxembourg-based European Financial Stability Facility, took issue with the description of his Facility as a “toy gun”. He pointed out that in fact the sum of the bailout provisions provided by European governments is considerable: almost 1 trillion Euros in total has been disbursed since the start of the crisis. This includes the two bailout packages for Greece, the write-down of Greek debt (the so-called Greek private sector involvement operation), the Irish and Portuguese bail-outs, the European Central Bank’s secondary market purchases, 250 billion Euros of uncommitted EFSF resources and promise of 150 billion Euros to the IMF.

The second element is something Regling didn’t include in his list, namely the ECB’s longer-term refinancing operations (LTRO). These operations have been in two stages, first last December and again in February of this year. In essence, LTRO has involved the ECB in providing cheap three year loans to banks. This was intended as a way of injecting liquidity into the European banking system so as to avoid any bank collapsing altogether. Over time, the hope is that this liquidity will work its way into the real economy in the form of bank loans to business. The amount of liquidity provided by the ECB is huge: 1.019 trillion Euros in total.

Taken together, the European approach to the crisis has been to mix frontdoor assaults on government spending and labour laws with a backdoor taxpayer-funded bail-out of banks and of embattled sovereigns. There are two, deeply troubling elements contained within this approach. The first is the hypocrisy: a focus on austerity on the one hand and the provision of largesse on the other. The only way to understand this is as a massive wealth transfer away from taxpayers. It isn’t as simple as saying that cuts to social security provision are being used to fund the bail-out of banks since some the bail-out money has gone to pension funds who have faced serious losses on investments in southern European countries. But there is a wealth transfer at work that reflects a balance of forces within society and the transfer is not towards European labour.

The second is the doubt about whether throwing more money at the financial sector can really solve a more endemic problem. Debt-fuelled growth was a characteristic of the years leading up to the crisis: either government-debt in the case of southern European societies or private debt in places like the UK. The idea that issuing more debt can lift Europe out of the crisis seems ungrounded. More likely is what we are seeing: banks that have taken up the offer of the ECB’s loans have parked them back at the ECB rather than using them as a basis for a renewed round of lending to business. The economics of the European approach seem naïve, the politics are just plainly anti-labour.

In From The Cold

Over the weekend, the Financial Times reported on a story about a deal between the UK and European officials intended to bring the UK back in from the cold after the row over the fiscal pact late last year. This row had left the UK isolated with many accusing Cameron of sacrificing the UK’s relationship with the EU in order to defend his friends in the City of London.

As we argued then, the idea that continental Europe had finally liberated itself from the neoliberal anti-regulationist shackles of London finance was greatly over-done. This sentiment was a mixed bag of Euro-chauvinism and some false hopes placed in the socially progressive potential of the Sarkozy-Merkel alternative. However, what was striking was Cameron’s apparent willingness to alienate all his European peers. His break with the consensus was exactly the kind of actions that the EU is meant to guard against: as Perry Anderson has put it, in the EU any such kind of public disagreement is considered a serious breach of etiquette.

This is what makes the FT’s weekend story interesting. It reports that British and European officials discussed the possibility of swapping the portfolios of European Commissioners, bringing the Frenchman Michael Barnier over to foreign affairs and putting Baronness Ashton in Barnier’s place as Commissioner for the Internal Market. Barnier and Ashton would thus swap places in order that Cameron can reassure the City that at the person responsible for financial regulation in Brussels is the reasonable and compliant Cathy Ashton, and not the hard-headed Paris-backed Mr Barnier.

This story is good evidence of what has already been commented on at the Current Moment: the desire of the EU’s member states to remain part of the club, almost at any cost. Cameron was willing to have a public fight but his officials then worked behind the scenes to see what arrangement could be found. This desire to avoid exclusion has driven much of the UK’s policy towards the EU for some time: public protestations matched by private assurances and continued close relationships between officials and experts. This also tells us something about the nature of the Commission’s portfolios: rather than being themselves political offices, they are instead titles that can be traded in order to fashion a deal. As the FT put it, British officials were reportedly “handed Barnier’s head on a plate” by Commission officials hoping to bring Cameron round on the fiscal treaty.

The fiscal pact has been ratified in the absence of the British. But further down the line we will see the British government somehow assimilated into the European policy process and able to work the rules round so that they can accommodate British interests. That is the proper etiquette of the EU.