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.

Guest Post: Europe’s Soft Coup d’Etat Part 2

Editor’s Note: This is the second of a two part analysis of the politics of the euro-crisis by James Heartfield. Part 1 found here.

In this current moment some of those who are standing up to the EU’s austerity packages have shouted about the attack on democracy. They think that the EU is attacking democracy so that it can push through its spending cuts. So it is. But much more so it is using the debt crisis to push through the abolition of national sovereignty. So often it has.

Two and a half years ago a very prescient sociology professor Ulrich Beck wrote ‘The crisis cries out to be transformed into a long overdue new founding of the EU’. Beck went on: ‘until now there has been no joint financial policy, no joint industrial policy, no joint social policy – which, through the sovereignty of the EU, could be pooled into an effective response to the crisis’. The only real barrier, thought Beck was ‘the national self-delusion of its intellectual elites’ who ‘bewail the faceless European bureaucracy’. (Guardian, 13 April 2009)

December’s Brussels summit, drawing its moral imperative from the sovereign debt crisis, ended with a commitment to create a much-greater coordination of economic and financial policy. Under the agreement national governments must submit balanced budgets, and face ‘automatic penalties’ if they do not. The thesis behind the agreement is that the southern European countries’ spending and indebtedness has undermined confidence in them and because of that in the Euro.

Shifting the blame onto Greece, Spain and Italy for the Euro crisis twists the truth. Throughout the buoyant years of the noughties the success of the European periphery was cited proof that the European Union was working. More, exporting countries, including Germany, were glad that easy credit boosted Greek and Spanish buying of their goods.

Apart from the economics, though, the important shift is towards ‘stronger economic union’. When the crisis began Greece’s troubles suggested to many that the European Union would ‘fall apart’.Professor Beck’s intuition that the crisis would drive the greater integration of economic policy proved to be as insightful as the fears that the whole thing would fall apart. Where he misleads us is in portraying this movement as a greater democratisation ofEurope. On the contrary, the trajectory is towards a much-diminished role for democratic oversight, and a much enhanced role for unelected officials dictating terms to elected governments. ‘Automatic penalties’ is European code for ‘not subject to political negotiation’.

The reason for the ‘automatic penalties’ is that as national elites European governments do not have the authority to see through tough measures. For many years now, governments have leaned on the European Union as an extra-national source of authority. Governments that are not willing to make the case for tighter budgets honestly in their own terms, have hid behind the claim that they must make adjustments to meet the external restraints imposed by Europe.  That is what Italian Minister Guido Cali meant when he said that ‘the European Union represented an alternative path for the solution of problems which we were not managing to handle through the normal channels of government and parliament’.

Not just Italy or Greece, but Britain and Germany sought again and again to ‘tie’ or ‘bind’ themselves into European Union rules that would limit the political temptations of excessive spending. Quite why sovereign states should choose to bind themselves and their successors in obligations that they cannot change or renegotiate is a conundrum for students of international relations. The answer to the puzzle is that these elites no longer derive the same authority that they used to from national electorates or constituent assemblies that once they did. Instead it is in the international summits, most notably the European summits that leaders feel secure, bound together in their mutual fear of the unruly electorates.

Fear of economic crisis is driving the integration of European policy, and it is not being consolidated as a democracy, but as a technocracy, where officials follow procedures, rather than make policies. Six years ago the voters of France and Holland voted down the centralisation of Europe under its then proposed constitution – which was abandoned soon after. Now, using fear of economic collapse, European elites have talked themselves into submitting to a more onerous set of impersonal and bureaucratic rules.

Guest Post: Europe’s Soft Coup d’Etat Part 1

Editor’s Note: Mainstream commentators for the Financial Times, like Wolfgang Munchau, are now giving titles to their op-eds like ‘Greece must default if it wants democracy.’ Meanwhile, ECB bankers argue that you have to scare democratic publics into sado-monetarist bailout packages. And finance ministers, like the Netherlands’ Jan Kees de Jager, want to radicalize Europe’s democratic deficit: “I am in favour of more control, more supervision … Money is the thing we can control Greece with.” The conflict between democracy and technocratic management is becoming increasingly clear. Today and tomorrow we run a two part analysis of these developments by James Heartfield, who argues that this tension is embedded in the logic and political structure of the European Union itself, not just the euro and monetary union. James Heartfield is a writer based in London. His most recent book is The Aborigines Protection Society: Humanitarian Imperialism in Australia, New Zealand, Fiji, Canada, South Africa, and the Congo, 1837-1909 (Columbia University Press).  

***

Europe’s Soft Coup d’Etat Part 1

Winter 2011/12. The Greek parliament is besieged from without by angry protestors. They riot burning down banks and government buildings. The Italian government, too, faces mass opposition – a general strike in protest at government €450 billion spending cuts. InIreland,Spainand many other European countries there are angry protests. But the Greek and Italian governments are not only under pressure from the public. They are answerable to other masters than the electorate.

Greek Prime Minister Lucas Papademos took office on 11 November 2011, though he stood in no election. Before becoming Prime Minister Papademos had been a senior official at the European Central Bank, and an advisor to the outgoing PM George Papandreou. Italian Prime Minister Mario Monti was appointed on 12 November 2011, having been made a life senator three days earlier by President Giorgio Napolitano. Before becoming Prime Minister Mario Monti had been an economics professor and a member of the European Commission. On the face of things, both Papademos and Monti draw their authority from their own parliaments – but everyone knows that is not so. Both of these unelected experts came to power in a ‘Soft Coup’; both deals were brokered by the European Union, in the middle of a harsh public debt crisis.

In the case of Greece, the European Union had been dealing with Prime Minister George Papandreou, leader of the largest, and best-polling political party in the last democratic elections, PASOK, twisting his arm to agree spending cuts. Talks were held between the Greek government, and the ‘Troika’ of the International Monetary Fund, the European Central Bank and the European Commission. Having agreed one round of cuts after another, Papandreou baulked at just how unpopular these were, and in October said that he would let the people vote on more cuts in a referendum. The European Union was outraged at the idea that the voters should be asked.

‘The announcement has surprised the whole of Europe,’ said French President Nicolas Sarkozy. ‘Giving the people a way to express themselves is always legitimate, but the solidarity of all the euro-zone countries cannot be exercised unless everyone agrees to make the necessary efforts.’ In a parliamentary session in The Hague, Dutch Prime Minister Mark Rutte called the threatened vote a ‘very unfortunate development’ and said ‘we have to do everything to prevent it.’ (Wall Street Journal Europe, 2 November, 2011) After crisis talks Papandreou agreed to cancel the public vote and to suspend normal party politics in favour of a government of ‘national unity’, and to stand down as Prime Minister in favour of Papademos. Robbed of a voice Greek people were more willing to protest and even to riot. German Finance Minister Wolfgang Schäuble wants the Greeks to cancel future elections and have a government without any politicians, only ‘experts’.

Around the same time another European leader – of the right in this case – was forced to stand down. Silvio Berlusconi had often been attacked by the European Commission, charged with corruption. But each time the question was put to the polls the wily Berlusconi won over voters. In November 2011, though, the debt crisis gave the Commission the lever it needed to prize Berlusconi out, and he resigned. European Council President Herman van Rompuy told Italians on 11 November 2011 that ‘the country needs reforms, not elections.’ Mario Monti was appointed Prime Minister and, in turn, appointed a ‘Professors’ Cabinet’, or ‘technocratic government’. Monti’s first reforms were to cut spending and to attack trade unions.

In a single week the elected governments of two of Europe’s democracies had been swept aside. At the very moment that Italian and Greek people needed to deal with the problems they faced, they were robbed of the chance. Before they could see their own political representatives argue out the best outcome on party lines, with the parliamentary contest mirroring the contest for votes. The party political system was a lever for ordinary people to push their goals right into the centre of government. But without it, public administration stopped being democratic, or even political. It was called ‘technocratic’ – government as technique, not as a negotiation; mechanical, not through dialogue. Instead of leaders there were experts. Instead of a contest ‘national unity’ was imposed (though many outside did not feel they were a part of it).

The events of November 2011 were called a ‘Soft Coup’, or a ‘coup without tanks’. But what Junta was taking over? Even the angriest protestors were not sure who to blame. If there were no tanks, where was the confrontation?

It would be hard to avoid the role that private financiers played appearing at every corner to warn against any backsliding on cuts. The ‘technocrats’ were not experts in juggling or medicine, but in finance. Mario Monti has been an advisor to Goldman Sachs, Coca Cola and the listing agency Moody’s as well as European Commissioner responsible for the Internal Market, Financial Services and Financial Integration, Customs, and Taxation. Massachusetts Institute of Technology graduate Papademos taught economics at Columbia University and even served as senior economist for the Federal Reserve Bank of Boston in 1980, before taking up positions at the National Bank of Greece and the ECB. Not surprisingly the anti-cuts protestors have been outraged to learn that Monti is a member of the secretive Bilderberg Group – all of which adds to the sense that government has been subverted by a secret coup led by high finance. Still, pointing the finger of blame at ‘capitalism’ or finance seems too vague. Down with capitalism, for sure, but does that really tell us any more about the forces arraigned against democracy?

Greek protestors have seen a German hand behind the changes, and they are not wrong. Chancellor Angela Merkel has called loudly for tighter rules on government spending, and for wayward governments to be reined in. In Athensthe protestors have even burned the German flag (and alongside it the Swastika flag to heap on the insults) while the newspaper Demokratia reports the new austerity agreement with a parody of the sign over the gates at the Auschwitz Concentration Camp ‘Memorandum macht frei’. Greeks talk more often of the wartime occupation when the German Wehrmacht starved the country. Pointing the finger at Germanyseems to make sense, except that Angel Merkel is not alone in her demands for Greek probity. Nicolas Sarkozy (whose country was also occupied by Germanyin the Second World War) is so close to Merkel that the press have coined a collective noun Merkozy. Just before he was bundled out of office, Silvio Berlusconi, too was lecturing the Greeks on the need to stick to their promises. Greek protestors wish that their enemy was justGermany’s leaders.

The Coup d’État against democracy inGreeceandItalydoes have a shape, however soft it looks. Its shape is the European Union. The pressure brought to bear on both countries came through the European Union. The ‘Troika’ of the European Central Bank, the European Commission and the International Monetary Fund brought pressure to bear on the Greek government to change its policies and make-up. Though an ad hoc body, the Troika is reported to be renting an office inAthensto keep an eye on spending there.

The Troika does not just oversee Greek spending. There is a Troika looking at Portugal’s budget, too. Jürgen Kröger, Head of EC mission, Rasmus Rüffer for the ECB and

Poul Thomsen of the IMF visited in May 2011, returning in February 2012 to spend two weeks looking at the budget there before deciding whether to release the latest batch ofPortugal’s €78 billion rescue loan.

In January 2012 all but two of the 27 heads of state at the European Summit agreed to German Chancellor Angel Merkel’s new fiskalpakt with binding limits on budget deficits and quasi-automatic sanctions on countries that breach deficit and debt limits enforced by the European Court of Justice. ‘The debt brakes will be binding and valid forever,’ said Merkel: ‘Never will you be able to change them through a parliamentary majority.’ (Guardian, 31 January 2012). From the European Union viewpoint to put questions of government beyond democratic control is a great success. Binding limits, with automatic sanctions, policed by unelected officials is what they want. ‘Parliamentary majorities’ overriding the expert officials is what is to be avoided.

Nor is it always the case that the enemy is the left. In the same month that the European Council was cooking up the fiscal compact, the European Commission wrote three separate letters of warning to Hungarian President Orban charging him with bringing in ‘undemocratic’ laws. By ‘undemocratic’ they meant that the new constitution put the Central Bank under the control of the democratically elected government, instead of leaving it in the hands of the expert technocrats, while threatening, too, that judges and information commissioners would be subject to the rule of parliament. Step through the looking glass into the EU-world where the rule of the people is dictatorial, but the rule of unelected experts is democracy.

Ex-sixties radical Daniel Cohn-Bendit stood up in the European Parliament to demand that Orban’s constitution be investigated for breaching the EU’s Lisbon Treaty. The man once known as Danny the Red ranted on that the Hungarian leader was striving to beEurope’s equivalent of Hugo Chávez or Fidel Castro (Guardian, 18 January 2012).

Cohn-Bendit as a student radical wrote

“The emergence of bureaucratic tendencies on a world scale, the continuous concentration of capital, and the increasing intervention of the State in economic and social matters, have produced a new managerial class whose fate is no longer bound up with that of the private ownership of the means of production.” (Obsolete Communism, the Left Wing Alternative, London, Penguin, 1969, p 249)

It was far-sighted indeed to spot the very trend towards bureaucratic-managerial rule for which Cohn-Bendit himself would become a spokesman. The only thing he did not foresee was that the bureaucracy that was emerging would be transnational, not just national.

“In a democracy you have to push people to do things by scaring them”

This past Tuesday, at a roundtable on ‘the future of the euro’ at Harvard University, we heard Lorenzo Bini-Smaghi utter these exact words. His Royal Smaghi-ness was a member of the ECB executive board until last November, and was advising his audience on more than his personal political views. He was giving us a glimpse deep into the technocratic vision that predominates in Europe at the moment, and the particular techniques in play to manage the situation. What stood out in the banker’s comments was, first, an extraordinary ideological commitment to the euro and, second, a somewhat delusional vision of social control.

The context for the banker’s comments was a discussion of the austerity measures being rammed down the throats of the Greek public. The measures are but one of the preconditions for a bailout package that will include other disciplinary measures, like international monitors of Greek spending decisions. The ‘people to be scared’ that B-S had in mind were, most immediately, the Greeks. They were to be scared into believing that there was one way and only one way to resolve their debt crisis, and that if everyone did not get in line, the withdrawal of European help would lead to even worse consequences. But it became clear that Bini-Smaghi’s comments applied to more or less the whole European public, perhaps minus the ‘sensible’ Germans. At another choice moment, LBS said “The Italian situation is different from the Greek one, but don’t tell the Italians. That is only something you say outside Italy. Inside, you say the opposite.” In other words, you want them to be scared, even if you have to lie to them.

Why? Because otherwise two things will happen. For one, the majority of Italians or Greeks might get the crazy idea that they don’t have to screw themselves in order to save themselves. There might be alternatives to massive austerity and a bailout of the banks. For another, the greater the fear the greater the limits on political outrage, or at least, the more the local ruling political parties will feel pressure not to attend to local outrage.

Bini-Smaghi’s comments speaks volumes both about a certain technocratic vision or political method and its limits. The method is based on the thought that central bankers and related technocrats possess the technical expertise and know-how to know what the rational response is to an economic crisis. This knowledge is supposedly value-free, and a matter of pure economics. However, most people not only lack this knowledge, they take to the streets in a mistaken, irrational pursuit of their own interests. BS dismissively called this ‘politics.’

So far, so familiar. But the most striking thing about Lorenzo’s BS is that the technocratic vision of control is far more expansive. It is not an attempt simply to apply expert economic knowledge to economic policy. It is a more radical ideological project. The delusion is that the political domain can be subject to the kind of fine-tuned control ‘at the margins.’ It is not just that technocrats ought to run national governments, or at least monitor their spending, but that national publics themselves can be pushed, pulled and cajoled with precision. Bini-Smaghi was talking about incremental doses of austerity until public outrage boiled over, and then stepping off the gas. And if outrage becomes too threatening to the background project, then more and more fear of a withdrawal of bailout funds to scare political leaders into imposing budgets and repressing unrest. One almost wonders if there isn’t some model floating around technocratic circles in which the relevant variables are ‘fear’ ‘austerity’ ‘bailout money’ and ‘outrage.’ The policy strategy being a kind of optimization function in which the aim is to get as close to ‘outrage’ without it boiling over into revolution.

Of course the dream of total social control is nothing new. It rattles around in the mental recesses of any expert claiming a monopoly on the legitimate possession of pure knowledge. But it is in play here in a substantial way. The coyness of the troika – demanding one package of reforms one day, another the next, promising money then imposing more terms, softening stances when protests get too dicey but putting the screws to national leaders, and above all playing a long game of amorphous indecision so as to maximize the space for deception – is all part of this managerial political approach.

Aims are not the same as success. The aim of total social control, especially when it becomes ideological, and especially when it sees politics exclusively as a domain of irrational, emotional behavior that has to be manipulated by various techniques, is its own foolishness. For one, it leaves actors without the ability to acquire actual political knowledge – there appears to be no knowledge to acquire, beyond that of the techniques of manipulating irrational publics. For another, the social world simply is not amenable to that kind of technical, fine-tuned control. Tweaking with the margins of outrage in relation to doses of austerity and fear is not just a creepy and outrageous political project, it is a fool’s game.

Behind Europe’s employment figures

Recent unemployment figures released by the German and Spanish governments have bolstered the idea of a two-speed Europe. In Germany, unemployment has fallen to a 20 year low whereas in Spain it has risen relentlessly for the fifth month in a row. In Germany, there are 2.976 million people actively seeking work. In Spain, the number of jobseekers has risen to 4.42 million. Spain’s population, at 46 million, is only a little over half that of Germany’s 81 million. And yet there are almost twice as many unemployed in Spain. As a proportion of the population, German unemployment stands at 6.8% where as in Spain the rate is just below 23%.

As with the trade figures, where repeated deficits and surpluses consistently divided the Eurozone area, unemployment figures seem to tell a similar story. Those economies with the lowest levels are Germany, Austria, Luxembourg and the Netherlands. The so-called PIGS – Portugal, Ireland, Greece and Spain – have some of the highest unemployment rates.

These figures have bolstered those claiming that tough labour market reforms are the best route out of the Eurozone’s doldrums.This claim is misguided for two reasons.

The first is that the nature of the economic difficulties faced by the German and the Spanish economies are fundamentally different. They may share the same currency but they live in different worlds. For Germany, a more challenging export environment has pushed businesses to make savings in an attempt at managing the downturn. These incremendal responses are evident in the way some employers have exploited the flexible labour market, by making some workers temporarily part-time. In Spain, the experience has been one of a massive bubble followed by a crash. This has been most heavily felt in the construction industry, where a house-building boom has given way to empty, half-finished building projects. Much like in Ireland, there is no soft way out of such a crash. Without the demand for homes, construction workers are laid off. Spanish and German unemployment figures reflect not just different regulatory environments for labour but also fundamentally different national economies.

Secondly, it is far from clear, as already commented upon by The Current Moment, that Germany’s labour market reforms are the best way forward for Spain. Whilst unemployment may be low in these Northern European economies, this is because of much greater flexibility enjoyed by employers. Both Germany and the Netherlands have a very high proportion of contracted workers i.e. workers on fixed contracts that have to be renewed every 6 or 12 months. German businesses have also used various strategies – such as a reduction in working hours agreed upon by managers and workers, known as the Kurzarbeit scheme – aimed at maintaining employment levels whilst introducing savings on labour costs for businesses.

Rather than reinforcing stereotypes about successful Northern European economies and failed Southern Mediterranean economies, these figures should push to think about our goals are when we speak about employment. Is it better to maintain employment levels at all costs or should we also think about the quality of the job and the nature of the employment contract? To rely on contracted workers may provide employers with the flexility to cut working hours or shed labour when necessary and helps them escape costly social charges associated with granting indefinite contracts to workers. But if the value of work is to be judged by its connection to an idea of individual self-realisation, then the nature of the job matters enormously. The reliance on contracted labour reduces the incentive for the employer to invest in its staff. The subjective experience of overcoming difficulties, improving oneself and acquiring new skills – all of what produces the connection between work and an individual sense of freedom – is limited by more flexible kinds of working contract.

For employers, there is a downside to individuals realizing themselves through work. More confident and assertive workers are likely to be more militant and more likely to contest the authority of employers and seek better conditions and higher wages. As we have noted before, this fact help explains why jobs programmes as a way of boosting a recession-hit economy are not popular amongst many businesses and politicians. The nature of employment is therefore also a political matter, one that mediates the relationship between workers and business and that – over the medium to long term – goes a long way to shape the kind of society we live in. In the discussion about employment levels in Europe and beyond, what is important is not just jobs for all but also the kind of work that maintains a relationship between labour and freedom.

Sturm und Draghi

The announcement that the ECB “unleashed a wall of money” to prop up ailing European banks has been greeted with general positive noises, and some confusion. The money is €489 billion in three-year loans, meant to inject liquidity into a tightened banking system, and to allow the banks to, among other things, buy up sovereign debt that the ECB won’t buy directly. The confusion arises from the relationship between the words and actions of Mario Draghi, the recently arrived president of the ECB. Draghi has been at pains to say that the ECB will not act as a lender of last resort, buying up sovereign debt that nobody else wants, without a major EU treaty-change that includes enforced austerity. As he said in an interview with the Financial Times ”We have to act within the Treaty. In general, there must be a system where the citizens will go back to trusting each other and where governments are trusted on fiscal discipline and structural reforms.” Yet, as any number of commentators have noted, providing this wall of money seems to be a kind of end-run around the treaty problem. Though it might not work in the long-run, it is taken by the likes of Paul Krugman as the admirable ‘subtlety‘ of eurocrats, finding solutions within the legal arrangements.

There is of course something positive about the head of an unelected, somewhat secretive, yet enormously powerful institution formally stating that he must follow existing law – the EU treaty in this case. Indeed such affirmation of the treaty is especially important given that many have called on Draghi simply to ignore the treaty and backstop the sovereign debt of southern European countries, or argued that it wouldn’t really violate the treaty. But there are deeper, more widespread political problems here, not least with Draghi’s own political game. If, in fact, Draghi and the ECB were merely playing the responsible Big Bank, keeping its head down and following the rules, and leaving the politics to the politicians, then that would be…something. But it is quite evidently not what Draghi has been doing.

The two-timing – saying one thing, and coming up with new, inventive ways of doing the other – illuminate something of a power game that the ECB is playing. Publicly, Draghi is holding back the ECB backstop under conditions – namely, judicially or politically enforceable limits on fiscal policy of European states, inscribed in a new treaty. That is a straight-up political demand, backed by the power that only the ECB possesses: the economic power to bail-out the southern states and European banks. It is a political demand, moreover, made upon already hurting European publics to endure not just a period of contraction, but a major restructuring of the relationship between their states and their economies. The idea behind the rewritten treaty, in other words, is not just to impose the pain of austerity measures, nor even to dismantle the welfare states, but to inscribe the logic of constraint and lowered expectations into the new supranational and by extension national political institutions.

Draghi, of course, is not the only political agent here – Merkel has led the charge for treaty-change with austerity written in. But her actions are unabashedly and professedly political, and understood to be so.  Draghi’s statements and positions are taken to be somehow the words of an expert, nevermind the ‘subtle’ coercions of offering a continental bailout only on strict terms. Draghi’s views are supposed to be the limited advice of an economic expert, and one who in some sense a neutral actor, outside and above politics – like the institution he runs. What makes the political ploy here worse is the power that backs it. As noted, the ECB is the only one with the potential to offer a bailout, or at least commit to printing enough money to buy up debt, which might calm the bond markets and save the banking system. In certain ways, then, Draghi is not just more German than the Germans, but has a power they don’t have.

Of course, the two-timing – such as the wall of money – reflects the fact that the ECB is not all powerful. Or at least, that it is not so flush with power resources that it can wait out this game of financial chicken longer than those unwilling to make the sacrifices Draghi demands. After all, waiting too long makes backstopping a whole lot more expensive, risky and potentially less effective – no doubt one reason Draghi felt compelled to engage in this recent refinancing operation. But it has to be said that Draghi is playing a political game, one that favors certain interests over others, with potentially far-reaching consequences depending on the ultimate political and legal changes.

Of course, as mentioned, the point is not that Draghi is some all powerful financial witch-doctor, who can wave his magic wand – or not – and get the world to do his bidding. In fact, the other striking feature of the debate around ECB actions is the way in which it speaks to the restoration of a certain status quo ex ante. Although the financial crisis of 2008, and its potential sequel in Europe, produced numerous arguments that mainstream economics had been discredited, and that a “new economic paradigm” was needed, what is striking is just how little has changed. Before the crisis, the dominant view was that a period of Great Moderation had been achieved, largely thanks to the machinations of expert central bankers who fiddled with interest rates. One of the background assumptions of this view was that monetary, rather than fiscal, policy was a finer instrument of economic engineering, not least because ‘less political’ and thus less prone to the messy distortions of democratic politics. Central bankers were gods, or at least master governors, to be appreciated and listened to (despite their continued interest in things like wage suppression). Little moves with interest rates were guessed at and awaited; the public divined, parsed, and poured over statements by the likes of Greenspan a bit like Kremlinologists looking for the relevant post-Cold War obtuse institution of power. Everybody knew that their economic fate was largely out of their hands, but thankfully in trusted hands.

Now we are supposedly on the other end of that paradigm, yet caught in the Sturm und Draghi of another bewildering central bank’s enigmatic words and actions. It is hard to accept how it is that so little could change. Or worse yet, how much the old pattern in certain ways has become even more entrenched. The most significant economic decisions are placed in the hands of undemocratic figures, even when this means toppling national governments (Italy, Greece) to replace them with technocrats. And the dominant common sense is in favor of austerity, rather than rational, democratic control of the economy. The dead-weight of ideological conformity and (hopefully changing) public passivity is what stands out most strongly. At the end of the day, the power of a figure like Draghi is a back-handed reflection of the relative absence, or at least weakness, of alternatives. The truth in the conspiracies about bankers manipulating everything is so much that central bankers favor certain interests but dress up their policies as the public interest (which they certainly do). Conspiracies are a distorted registration of the weakness of the Left, a distortion dangerous because it replaces the political weakness of a potential movement with the comforting illusion that power is beyond anyone’s reach in the first place. Draghi and his ilk should be put in their place and own up to the political game that they play. But they won’t do it voluntarily, and it will take another kind of politics to expand rather than shrink the horizon of economic possibility.

A victory for the regulators?

One view of what happened at last week’s European Council summit is that we saw a struggle between neoliberal Anglo-Saxon capitalism and Europe’s alternative of a more regulated and people-friendly capitalism. David Cameron’s defence of the City of London’s banksters was in line with long-standing attempts to block European efforts at expanding the regulation of financial markets. That he failed, and that Sarkozy and Merkel struck a deal without Britain, is welcomed in this view as one step closer towards tackling the scourge of casino capitalism that has brought the Eurozone, and much of the global economy, to its knees.

There is lots wrong with this view of last week’s acrimonious summit negotiations. For a start, Cameron’s motivations were as much about avoiding a national referendum – and thus keeping his own Conservative –Liberal Democrat coalition alive – as they were about the City of London. The City itself is deeply divided over the issue of financial regulation: some would prefer to keep clear of European harmonization efforts and to go it alone (for a list of all the financial market reforms in the EU pipeline, see here). Others in the City say very clearly that a common European regulatory regime of which the City of London is a part would be better than a split. We should also have no illusions about the motivations of European financial regulators: the political push behind this regulation, led by the European Commissioner for internal market and services, the Frenchman Michel Barnier, comes from the French and the Germans and is driven by competition between national capitals. The goal is to weaken the City of London as a financial center as much as it is to reform European finance. Why side with one over the other in this struggle if not out of German, French or Euro-chauvinism?

Another major problem is to paint Sarkozy, Merkel and others national leaders as great representatives of a more social Europe. Regulatory change is about social and class power. Regulators, especially powerful ones, have huge amounts of discretion. The ends to which that discretionary power is put depends upon the wider social context of the regulation. Where Sarkozy and Merkel stand in this regard should tell us something about the promise of progressive financial market regulation. The development of their own economies has so far been in a decidedly anti-social direction and the recently agreed deal in Brussels cements this trend. This agreement enshrines in law the mistaken idea that fiscal expansion is the cause of the Eurozone’s crisis. In doing so, it gives Europe´s leaders a legal basis with which to pursue their austerity measures. Most of those measures are directly aimed at dismantling social protection in Europe: inter alia, rising retirement ages, cutting pensions, cutting public sector jobs, raising the cost of travel on public transport. These measures ignore the real basis of the Eurozone crisis: the stark unevenness of the national economies which make up the Eurozone. As Martin Wolf recently argued, the best predictor of the crisis in Europe was not government spending but balance of payments accounts.

Sarkozy and Merkel launch vicious attacks on the social conditions of the populations of peripheral Eurozone states, and strong arm their own populations into a decade of austerity measures, all in the name of a starkly lop-sided reading of the current crisis. And at the same time they portray themselves as progressive regulators, seeking to contain the untrammeled power of financial markets. Judged by developments so far, there is little reason to celebrate last week’s agreement as a victory for regulators over markets.

Interview with Peter Hall

Continuing the series of The Current Moment interviews, today we are publishing an interview with Peter Hall, Krupp Foundation professor of European studies at Harvard University. Peter Hall has published widely in the field of European political economy and comparative politics. His published books can be viewed here. One of his recent papers explores the political origins of the current economic crisis.

 

What are the stories right now that you think people either aren’t paying enough attention to, or about which we have the wrong view?

On this side of the Atlantic, we are mesmerized by the fiscal dimensions of the global economic crisis and not nearly attentive enough to what will be required to ensure the U.S. remains competitive and capable of robust economic growth over the longer term.  Above all, that will require large investments in human capital and public infrastructure, since these are the resources on which all kinds of businesses depend for success.  Despite the efforts of some analysts, such as Michael Spence, and of President Obama himself to argue that, by focusing on these issues, we can address the immediate problem of unemployment and long-term growth together, these issues have not yet become central to public debate.  I wish Americans could see how rapidly China is moving on these fronts and how fruitful such strategies have been in parts of Europe, such as Finland.  We are so obsessed with the short-term, on both economic and electoral fronts, that we are moving far too slowly to lay the basis for renewed growth over the long term.

In Europe, discussion of the Euro crisis is dominated by many myths.  But the one yet to be questioned at all seriously is the myth that deregulating markets in labor and goods so as to intensify competition in them will regenerate growth in the southern European economies.  Such moves are typically described as ‘structural reform’ – a term that has become the mantra of the EU and IMF.  In the long run, structural reform may make some economies more competitive, but to pretend that it will revive economic growth in the short to medium term is an illusion.  Yet this illusion is at the center of most of the plans concocted to revive the southern European economies and resolve the Euro crisis.

For obvious reasons, this is a convenient myth, but it is an empty slogan, all the more pernicious because it diverts attention from the role that government has to play in the revival of economic growth.

Let’s turn to the Eurozone debt problem. The dominant view is that Greeks and Italians are corrupt, inefficient and lazy, and that is why they find themselves in this mess. What is your view of what is going on?

For the most part, this is a canard, encouraged far too quickly by many politicians in northern Europe who reacted to the sovereign debt crisis as if it were an issue of morality rather than a crisis with economic and political foundations that threaten the viability not only of the Euro but of the EU.  Those politicians now realize the full dimensions of the crisis, but their initial reactions has made the task of persuading their electorates to accept measures that might genuinely cope with it much more difficult.

The difficulties from which Greece and Italy are suffering have something to do with problems of political, as well as economic, development.  Both countries would be better off with public institutions less prone to corruption.  But to suggest that that their people are not working hard enough or retiring too early is to misrepresent the problem altogether.  Comparative data suggest that the de facto retirement age is not very different in most of southern Europe than in northern Europe and that the southern European countries have taken just as many steps as those in the north to make their markets more competitive over the past ten years.

The roots of the Euro crisis lie, at a much more basic level, in asymmetries in the organization of the political economies in the north and south of Europe.  In general, as David Soskice and I observed in Varieties of Capitalism (2001), the organization of the political economies of northern Europe gives their firms capacities for wage coordination, skill formation and continuous innovation that suit them well to operate strategies of export-led growth, and EMU provided them with guaranteed markets in the rest of Europe.  By contrast, history has left the southern political economies with fissiparous trade unions and limited capacities for concerted skill formation or continuous innovation.  In the past, they coped with that by operating growth strategies led by domestic demand and then devaluing their currencies to offset the inflationary effects of such strategies on their external competitiveness.  In EMU, they were unable to do that.  Instead, not unreasonably, they took advantage of the cheap credit flowing from northern Europe to promote economic growth.  But, unable to offset the inflationary effects through devaluation, they lost competitive advantage to the north.  The result can be seen in the gross imbalance of payments between the two parts of the Eurozone.

The standard recipe for the recovery from the Eurozone crisis is austerity and structural reforms in the peripheries, plus some recapitalization of banks. Do you think this is the right way to go?

To appreciate the Euro crisis, we have to realize that there are two sides to it.  On the one side, there is the longer term problem of how to devise a structural adjustment path that will restore prosperity to both the south and the north.  On the other side, this is a crisis of confidence, notably in the markets for sovereign debt but spreading over time to the European financial system as a whole.  The European Union has remarkable capacities for muddling through, and, given enough time, I believe it can resolve this long-term problem adequately if not perfectly.  But it is never going to get to the long term if it does not effectively address the immediate crisis of confidence and, as everyone now acknowledges, its efforts to do that over the past year have consistently offered too little, too late.

The immediate crisis is what worries me.  With respect it, there are two issues.  Is there a way for the members of the Eurozone to restore confidence in the markets?  And, if that can be identified, will the member states and the ECB be willing to take the requisite measures.  At this point, I think, as do many others, that the only way to restore confidence in the bond markets is for the ECB to guarantee the sovereign debt of its member states against default, except perhaps for Greece where the markets have already priced in a default.  Various schemes have been mooted whereby the ECB might do this, indirectly if not directly.

The problem is that it will not be easy for the ECB or the member governments to do this.  Mario Draghi and the German government currently oppose such a step.  It is forbidden by Article 123 of the Treaty establishing EMU, and the German Constitutional Court likes to take that Treaty seriously.  The only ray of light here is that the relevant resolution passed by the German CDU at its recent conference does not entirely rule out such a step, describing it as ‘a last resort’.  I think the time for last resorts has come, and I could imagine a deal in which the member governments agree to much stricter enforcement of fiscal targets and long-term support for the ECB in return for a measure of this sort.  However, it is an entirely open question whether the Eurozone governments have the political wherewithal to make this move.  If they do not, I think the crisis of confidence is likely to persist and strengthen until an Italian, Spanish or even Belgian default looms, and then it may be too late to save the Euro.  It takes a confidence trick to resolve a crisis of confidence and the sooner one acts, the less costly the resolution.

What do you think would address the trade and debt imbalances between Northern and Southern Europe? Do you think it can be done within the European monetary order?

This is a question about whether balanced structural adjustment is feasible over the long term within the confines of EMU.  Certainly, the current approach of imposing all the costs of adjustment on southern Europe (of which Ireland can be considered an honorary member) is likely to fail.  Except possibly in Ireland where growth is gradually picking up, there is no reason to expect that rapid enough growth can emerge from such austerity to render the debt load of these countries sustainable.  At a minimum, long-term stability depends on a more coordinated set of fiscal policies in which some reflation in northern Europe is married to a softer adjustment path in southern Europe.  However, this will not be easy to secure.  In particular, as Wendy Carlin and David Soskice have observed, reflation poses risks to the wage coordination on which the northern European economies depend for their competitiveness.

Even then, for reasons I have noted, there is some question about whether the southern European economies can prosper within EMU.  Portugal and Greece, in particular, do not have especially strong export sectors and are not likely to grow them overnight.  These countries have long depended on growth strategies that are accompanied by moderate levels of inflation and, because the ECB has to pursue a monetary policy of one-size for all of Europe, it cannot always dampen down that inflation effectively.  In the wake of the sovereign debt crisis, borrowing costs are likely to remain higher in the south, which will help.  But the danger is that, if the southern European governments cannot pursue growth led by domestic demand for fear of its inflationary consequences, they may experience only low levels of growth for the foreseeable future.  Structural reform will help in the long run but likely only a little.

It may well be that Europe can live with persistent imbalances of payments at some level, but the question is whether more effective coordination of fiscal policies will be enough to allow the southern European economies to grow at rates that are politically acceptable to their electorates.

The hegemony of the demand for austerity is striking. It is offered as the solution to the Eurozone crisis, as well as to the American situation – the US Congress even created a supercommittee to find savings. Yet it seems odd to have such agreement around austerity in the midst of a potential double dip recession. What is wrong with the demand for austerity? How do you account for the strength of this common sense?

The demand for austerity can be explained to some extent by the fact that we have just lived through a period in which financial innovation married to inadequate financial regulation made possible much higher levels of leveraging of assets, leading to higher levels of debt, whether in the public or private sectors of the U.S. and Europe.  To some extent, we are paying today for what we ate yesterday.

The best way to pay back these debts, of course, is from the fruits of more rapid economic growth and that is most likely to be secured, as John Maynard Keynes argued, by reflationary policy. Thus, in the context of global recession immediate austerity does not make good economic sense.

To explain why so many are advocating it, then, we have to recognize that economic policy, whether at the national or international level, is rarely driven entirely by concerns about how to improve overall economic well-being.  It is made by actors, who may be political parties or governments, who are also seeking distributive benefits for their constituents, and, in many cases, these distributive demands are cloaked beneath calls for austerity.  Thus, the demand of several northern European governments, including the Finns and the Dutch as well as the Germans, for austerity in southern Europe is motivated, to a significant extent, by a concern to ensure that they do not pay the costs of adjustment in the wake of the Euro crisis.   I see the demands for austerity of many Republicans in the U.S. as an effort to cut public spending programs that they think serve Democratic rather than Republican constituencies.  If distributive concerns were not at the heart of those demands, those Republicans would be much less reluctant to raise taxes in order to balance the budget.

In the US, there is an influential view that we need to have continued expansionary monetary policy but contractionary fiscal policy. That seems to be the recipe of the moment, with the Fed even contemplating another round of quantitative easing. What do you think of this approach to inadequate demand and balance sheet problems?

As the French would say, I am willing to accept this for lack of something better.  Something better would be a coordinated reflation in which more expansionary fiscal policy was now playing a larger role.  We have arrived at this situation, I think, because central banks, including the Federal Reserve and the ECB, have been willing over the past three years to do what governments have been unwilling or unable to do.  For that, they deserve considerable credit.  One can reasonably ask whether the best way to respond to an era marked by a large expansion in lending is to pump even more money into the system, but, since inflation remains low in most of Europe and North America, partly because the trade unions have been so weakened and unemployment is high, this seems to be an appropriate strategy.  In the absence of a substantial fiscal stimulus to aggregate demand, however, it is unlikely to lower unemployment much.

Debt, especially mortgages and student loans, have become a major issue over the past few years. What if anything do you think should be done about it? How should we understand the growing debt of American households in the past decades?

As Ragurham Rajan and others have pointed out, in the United States, during the 1980s and 1990s, easy consumer credit and home equity loans became a substitute for social policy.  They have been the means ordinary people with little in the way of savings used to survive adverse life events and fluctuations in the economy.  Student loans can be seen, in similar terms, as a substitute for publicly-funded education.

They can also be seen as a key component of the growth model operated in the United States over that period.  Growth in this country was led by domestic demand and the only way to sustain demand in an era when disposable income for households at or below median incomes stagnated was to promote the kind of asset boom in housing that gave many the illusion that their wealth was increasing even if their income was stagnant.

In the past two years, as home prices declined and some forms of credit became harder to secure, American households increased their savings and that, in itself, is gradually reducing the debt burden of the private sector. I do not see any need to take steps to further reduce that debt.  Indeed, it is difficult to see how the American economy can continue to grow without the availability of such credit.

However, there are serious longer-term problems on the horizon.  More than half the American populace has no savings for retirement at a time when larger cohorts can be expected to retire and health-care costs continue to rise exponentially, eating into the disposable income of many families.  Part of the problem is that most of the fruits of economic growth over the past three decades have gone to people in the top 1 percent of the income distribution.  In the long run, the solution will have to entail engineering a more equitable distribution of wealth so that ordinary working families have the means to increase both their savings and their spending.

One thing that seems to tie the American and European situation together is the considerable growth of financial activity. Is there anything to the view that the last decades can be understood as a period of financialization? If so, what does it mean to say the economy has become financialized?

Seen from a long-term perspective, this does indeed look like an era of financialization.  The share of profits in the economy going to the financial sector expanded dramatically.  With the invention of new financial derivatives and the development of financial markets, many firms ostensibly devoted to manufacturing, such as General Motors, have made an increasing share of their profits from financial activities that leverage their capital.  That has contributed, in turn, to rising income inequality at the high end of the distribution, as those skilled at financial engineering generated profits large enough to allow them to demand astronomical levels of compensation.

In my view, it would be an exaggeration to say that the economy has become ‘financialized’.  There are still many productive components of the American economy that do not turn on finance.  However, it is apparent that we are all vulnerable to the systemic risks that a large financial sector, increasingly devoted to speculation, entails, and that is a serious cause for concern.  Although some of the financial innovation of recent decades has made some markets more liquid and borrowing easier for some productive firms, I doubt that this type of ‘casino capitalism’, to borrow a phrase from Susan Strange, ultimately contributes enough to economic prosperity to justify those risks.  We are currently paying serious costs for this and, unless financial regulation becomes more stringent than is currently anticipated, I think there will be more to pay.

Related to that question, what do you think accounts for the ‘bubbliness’ of the US and European economies, and especially the scale of these bubbles? We have seen a number of different bubbles and credit crises – housing bubbles in the US, UK, Ireland, and Spain; sovereign debt events in Greece, Portugal, and Italy, perhaps even France. While there was the dot come bubble in the late 90s, and the East Asian financial crisis, those don’t seem to have had the magnitude and systemic character as the latest period. What is, or isn’t, different about what we’re experiencing now?

I do not believe that any single set of factors can explain these diverse developments.  The housing bubbles can be explained, at least in basic terms, by a long period of easy credit, made possible, as I have noted by the expansion of the financial markets in various kinds of derivatives.  That was made possible, in turn, by what I consider lax financial regulation.  It is ironic that economists liked to describe this period as an era of ‘great moderation’.  In each case, however, some ancillary factors were at work.  In Spain, the cost of borrowing was greatly reduced by the confidence effect associated with entry into EMU.  In Ireland, it was encouraged by rapid rates of economic growth.

The sovereign debt crisis has more complex roots.  In Greece, which enjoyed the same easy access to credit as Spain, the fiscal fecklessness of the government is notable.  In Ireland, some of the problems can be attributed to the government’s mistaken decision to guarantee the bonds of its banks.  In different ways, Portugal, Spain and Italy remained creditworthy on the fundamentals but fell afoul of the spreading crisis of confidence in the markets, which has yet to take its last victims.  There are some parallels with the East Asian financial crisis.  The current crisis is worse partly because it has struck the major financial sectors of the western world and we now face the question of who will rescue those who normally do the rescuing.

How optimistic/pessimistic are you about the ability of national democratic procedures to provide solutions to the current economic crises in Europe and in the US? What do you think of the recent proliferation of technocratic governments in Greece and Italy? Does the current crisis expose some basic tensions between capitalism and democracy? If so, how exactly?

In this as in every other case, as Winston Churchill once said ‘democracy is the worst form of government except for all those other forms that have been tried from time to time’.  The notion that governments led by geriatric Eurocrats will resolve their countries economic problems more readily than elected governments is another of those illusions that bedevil the Eurozone.  They have legitimacy in Brussels but imposing austerity is ultimately a task that demands domestic political legitimacy.  I see this as a stop-gap solution that might, at best, persuade officials in Brussels and Berlin that everything has been tried and they must pay more heed to the pain and demands of national electorates.

It is obvious that the cumbersome decision-making procedures of the European Union are not up to the task of heading off a crisis in the financial markets.  But that is not a problem with democracy.  It is a problem of international negotiation.  Democracy enters the picture to the extent that the views of national electorates limit the willingness of their governments to share the costs of adjustment, and that is admittedly a problem for Europe.  A continent so proud of the ways in which its social policies reflect ‘social solidarity’ has been unable to summon up the sense of continental solidarity that would justify a more equitable and efficient solution to the crisis.  But social solidarity does not simply bubble up from below.  It is created by inventive political leadership and we are still waiting to see if the political leaders of Europe are capable of that.

On the larger question, my view is that the global financial crisis has thrown into stark relief the importance of the state in any democratic system.  The crisis itself is rooted in failures of financial regulation that can be linked to the unwillingness of governments to assert the authority of the state on behalf of the people against powerful financial interests.  And the inadequacy of the response to the crisis, especially in the U.S., can be attributed, in some measure, to the widespread reluctance on the part of many people to trust the state with their resources.  In many respects, that is the legacy of the neo-liberal era that followed the economic crisis of the 1970s, when many policy-makers and citizens became disillusioned with the capacity of governments to direct the economy.  Hence, the American government faces the current crisis hobbled by rising levels of distrust in government.  It is not acting more forcefully on the fiscal front partly because large segments of the American population are willing to vote for politicians who claim that government is the problem rather than the solution.

What are your views of the nascent protests (Occupy Wall Street, Indignados) developing in response to the introduction of austerity packages in Europe and the US? Are these movements a continuation of or a break with the anti-globalization movements of the past? Are they likely to fundamentally change public perceptions and government policy or will they have only a very small lasting impact?

There have been two notable political responses to the current economic crisis.  One is marked by a backlash against immigration, in both the U.S. and Europe, reflected in the growing popularity of radical right parties in Europe and the salience of immigration to national political debates in the United States.  This is a familiar feature of economic crises.  The U.S. has a long history of nativist movements.  The other is reflected in the Occupy Wall Street movement and its European analogues.  I can only hope that the former is contained and the latter encouraged.

It is difficult to see how these sporadic protests can be translated into any immediate changes in policy, not least because they have yet to articulate clear political demands.  However, I think they are having an impact.  They have struck a chord in popular opinion.  They bring issues of unemployment and inequality to the fore.  In the short term, I think that may influence voters in American elections next year, and, over the medium term, I believe that even these limited protests will help to shift political discourse in directions that favor those seeking to address issues of inequality and unemployment.

Thoughts on the EU’s fiscal union

The main topic of Eurozone discussions this week, amongst finance ministers, heads of states, and journalists, will be the Franco-German proposal for a “fiscal union”. The details of exactly what is being proposed remain vague. Later today, Sarkozy and Merkel are expected to outline some of what they mean. But for the full plan, we will have to wait for the final announcement at the European summit in Brussels at the end of this week, assuming this proposal wins the support of other EU members.

Already, the debate about this fiscal union has begun. For Sarkozy’s critics in France, from the Socialist Party through to the right-wing National Front, the President has sold French sovereignty (very cheaply) in his attempt at saving the Euro. For many others, the proposed fiscal union is little more than a German Europe.

There is no doubt that Germany is pushing through its own preferred solution to the crisis. France may manage to win concessions on both the role of the European Central Bank and on who has the final say regarding the imposition of sanctions on profligate states (the European Commission? the European Court of Justice? the European Council?) but it has certainly conceded to the German demand that national budget lines are policed as closely as possible.

But does this represent the imposition of German sovereignty over the rest of the Eurozone? The reality, as we have argued before, is more complex. That some states have had their interests better represented via the EU than others goes without saying. In a region where power is unevenly distributed, any consensus has tended to represent a compromise between the more powerful members. Others have been bought-out via side deals designed to ensure their acquiescence to the bigger picture. But to reduce everything to power politics is lose the distinctiveness of what we are seeing today in Europe. The question is not whether or not we are seeing the emergence of German Europe. It is rather: why is a German-dominated Europe taking the form of this kind of fiscal union?

The first point to note is that whilst the new fiscal union may be German in content, it is hardly German in form. Instead, it is premised upon the unerring power of rules overseen by unelected bodies. The idea here is that rules are not merely a tool used in order to reach a particular destination; rules have become an end in themselves. The idea of the fiscal union is that what matters is the ability to constrain – via punitive sanctions if necessary – the spending power of national governments. Attention is focused on how to organize these constraints, not on what they will achieve. The result is actually based on very shaky assumptions, namely that via tighter fiscal policy and some key reforms (e.g. the raising of the retirement age) Europe can return to growth (see here for a critique). Few are convinced by this argument but they agree with the focus on rules.

This fetishizing of rules has driven the sentiment of the markets as much as that of European policymakers: Italy and Greece have been seen in a more positive light ever since their political leaders were swapped for technocratic managers. These managers are seen as more reliable enforcers of common rules, in comparison with their mercurial predecessors. Far from representing a break with the past, this tendency to fetishize rules is a hallmark of European integration. Actual expressions of raw political power reappear at the EU level as neutral rules overseen by technocrats. We have seen this in many other areas and today it has reached fiscal policy.

This faith in rules reflects something broader, what we might call the ideology of technocracy. It is nothing new to say that particular social and political interests present themselves to us not as they are but as carriers of something universal. That is, after all, the very definition of ideology: the particular represented to us as the universal. What is distinctive is that today’s universal is the universe of neutral and non-partisan rules. In Europe today, this ideology is unchallenged because its main opponent – the nation as a particular interest – is so attenuated. The Occupy movement itself has consolidated this trend, seeking to please everyone with its “we are the 99%” slogan. A more divisive and particularlistic politics is needed in order to challenge this ideology of rules.