Tag Archives: Inequality

The SPD under Merkel

2 Jun

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

The effects of QE

21 Oct

Of all the new terms that have been invented since the beginning of the crisis in 2008, quantitative easing is perhaps the most bizarre. A purely technical term, it has entered into everyday language as ‘QE’. Monetary policy has taken centre stage as the main tool governments have to do something about growth and QE is it.

Tucked away in the small money supplement of the FT weekend was a long piece on QE. Its discussion of the effects of quantitative easing is worth commenting on. QE is basically a monetary stimulus programme, where central banks create money and use it to buy assets from banks and other financial institutions. The main thing central banks have bought are government bonds. Holders of bonds have therefore exchanged them for cash and that cash is what the governments hope will be spent in ways that stimulate the economy. QE was dreamed up at a time when interests were so low that they couldn’t really go any lower, making a traditional monetary policy response to an economic downturn impossible. The standard approach had been to cut interest rates in a downturn, raise them when the economy seemed to be overheating. Unable to do that with rates so low, QE was the radical alternative.

QE has been striking by its ubiquity: it has been the key policy response of the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan. What is surprising is how prevalently it has been used but how sceptical people are of its effects. The idea is that cash injected into the economy would generate new economic activity. There is little evidence, however, that QE has done that. Banks have tended to use the money to boost their capital ratios rather than to increase lending to businesses. Companies have sat on increasing piles of cash. QE in general is seen as having had little effect on the real economy.

Where has its impact been felt? After all, the US Federal Reserve has been buying $85bn a month of US government bonds since it started its QE. Intervention on such a huge scale cannot be free of effects. According to the FT, the main impact of QE has been on asset prices rather than on the real economy as such. These prices have risen considerably, boosting the wealth of those who own such assets. Predictably enough, that means the already very wealthy. The FT cites a Bank of England study that finds that in the UK, the top 5% of households hold 40% of the assets whose price has risen most because of QE. The central banks’ policy of printing money has inflated some asset prices, to the great benefit of those that hold them.

For everyone else, the effect has been more mixed. By keeping interest rates at very low levels, QE has obviously favoured the lenders over the savers. All those hoping to earn some return on their savings have been disappointed. Home owners, especially those with big mortgages, have been happy.  This view of QE helps us understand some of the curious features of this current economic downturn: as the real economy data continues to give cause for real concern (unemployment remains high, growth is anaemic, business investment remains very low), the price of fine art, the best wines and the high end properties in London, Paris and New York have all soared. With low interest rates and with central banks injecting so much liquidity into the bond markets, investors are looking for some return wherever they can. And that includes in a Monet or a large house in Neuilly or Richmond.

The best defence of QE cited by the FT was that things could have been worse without it. It returned confidence to markets and investors, and so helped us avoid the complete collapse that could have occurred in 2008 or 2009. As the FT admits, this argument is difficult to prove: “we just don’t know what would have happened without QE”. It is surprising that a policy with such obvious distributional effects has not been the subject of greater debate or disagreement. This is perhaps because the term itself is so euphemistically technical. Or because it has been carried out by central banks whose place is somewhat outside the terrain of partisan politics. It may also be that governments have been good at convincing people that there is no alternative to QE, which is tantamount to saying that they have no way of tackling problems in the real economy directly but can only work through asset prices.

This, of course, is not true. Governments could intervene far more directly in the economy. However, QE sits alongside the view that governments are fiscally constrained and need to reduce their outgoings as much as possible. Fiscal austerity combined with QE gives us the policy mix for the current period: a massive boost in the prices of assets owned by the wealthiest section of society and extensive cuts in government spending on public services. However technical it may sound, there is nothing ideologically neutral about QE and its effect.

 

The Future of Work

20 Jun

TCM editor, Alex Gourevitch, will be speaking with Kathi Weeks, author of The Problem With Work, about ‘The Future of Work‘ this Sunday at PS1. It is part of Triple Canopy’s ‘Speculations on the Future‘ program. In advance of this event, we thought it worth laying out a few facts relevant to the discussion. While we have spoken about some of the political questions at stake in the work/anti work debate (here, here, and here), those were relatively fact free speculations. And necessarily so. The issue at stake was hopes and desires for the future, and the organizing aspirations for a possible left. These discussions, however, can always do with a small dose of vulgar empiricism. A brief look at some relevant facts suggests that the most likely, if not most desirable, future of work is roughly that of increasing dependence on the labor market and lower quality work for most people. One word of caution: the data is limited to the US and Europe, entirely because that is our area of expertise and where the data is most readily available.

Although every so often there are breathless declarations of the end of workthe collapse of work, and that technology is leading to a world without work, the historical trend is the opposite. Ever since the 1970s, an increasing share of the population has been working. For instance, the graph below shows the employment to population ratio in the United States. Notably, even after the dramatic post-2008 decline, a higher percentage of Americans still work in the formal labor market than anytime before the mid 1970s. Slide1Similar survey data from Eurostat of all people between ages 15 and 64 shows, wherever data is available, that there have been dramatic or gradual declines in ‘inactivity‘ or non-participation in the labor market. In Germany, 35.9% of 15 to 64 year olds were inactive in 1983 while in 2012 that number had sunk to 22.9%. In Spain the drop was from 44.1% in 1986 to 25.9% in 2012. For France, 31.6% (1983) to 29% (2012), and the UK 29.1% (1983) to 23.7% (2012). The Netherlands saw the largest decline from 1983 to 2012, from 41.4% to 20.7%. The most likely future of work in the US and Europe is that more people will be working for wages or salaries than ever before, as absolute numbers and as a percentage of the population.

Three recent changes to the political economy suggest not only increased participation in, but greater dependence on, wage-labor, especially by those on the bottom end of the labor market. These are a) stagnation or reduction of welfare benefits, b) stagnation or decline of wealth and c) stagnant wages and precarious employment. Welfare and wealth are alternatives to wages as sources of consumption; lower wages and precarious employment increases insecurity of and need for employment.

For instance, in the case of welfare, the stagnation or reduction of welfare benefits means that states offer the same or worse benefits to those who cannot find or live off a job. This is consistent with increased numbers taking advantage of these benefits. For instance, recent reports made much of the 70% increase in Americans using food stamps, which represents a doubling of the amount spent on food stamps, since 2008. But food stamps alone are hardly enough to live off, and their increased use reflects the increase in unemployment. More broadly, American welfare benefits are not enough for most people to live off, many states recently cut benefits, and the welfare system is famously designed to spur labor market participation, not provide an alternative to it. Moreover, in Europe, where welfare benefits are more generous and less conditional, the consequence of austerity policies is, at best, to limit the growth of any such programs and in various countries to reduce or even eliminate them. Cuts to public employment and hiring freezes, increases in retirement age, and other measures mean the reserve army of labor will be larger, and most people will have fewer/poorer state provided alternatives to finding a job.

Finally, the increase in part-time, low-wage work, alongside stagnant or declining wealth at the bottom, further entrenches labor market dependence. We were unable to find longitudinal wealth data on Europe, but in the United States we have seen net declines in wealth for the bottom 60% of the population.

Share Total Wealth 1983-2009

Since wealth assets are not only an alternative source of income, but also, in the US especially a source of retirement income, this means greater dependence on the labor market for the working age population, as well as postponement of retirement, further swelling the ranks of the labor market. On top of which, wages remain stagnant and full-time work harder to find. Jobs are low-paying, part-time, and insecure and once one starts looking not at median but bottom quintiles, the situation is only worse. These trends are equally evident in Europe, where part-time, less secure employment has increased in places like the UK and Netherlands, alongside the more often commented increases in unemployment in places like Greece, Spain and Portugal.

In all, then, we can say that alternatives to employment have gotten worse or disappeared for the majority of people in the US and Europe, while the available jobs pay, on average, less than they used to and offer less security. There is every reason to think that the most likely near future of work will give us strong reasons to think about a different way of organizing work – about a better, if less likely, future.

It’s all about wages

29 May

The FT is running this week a series of articles (here but behind a firewall) on European manufacturing and how it is surviving the crisis. In an article on French industry, it suggests that focusing on the grim facts of deindustrialisation and declining competiveness in the North-East of the country risks missing much of what makes French industry successful. It argues that in some sectors France is following the German recipe of success: focus on cutting edge industries, invest heavily in research and development, and make the best use of a highly skilled (though albeit expensive) labour force in order to produce high-quality manufacturing products. The example it gives is of passenger jet engine-maker, Safran, and its more specialised companies like Turbomeca that make helicopter engines.

The article has some arresting facts and figures. Turbomeca is recruiting 200 new engineers this year, a reflection of its status as the world’s largest helicopter engine maker by volume. Safran, its parent company, is recruiting up to 7,000 new engineers, half of which will be employed in France. Its strategy has been to focus on R&D: 12% of its sales revenue was reinvested last year into research. On the Hollande government’s 20 billion Euros tax credit aimed at boosting competitiveness, the article cites the Peugot-Citroen CEO as saying that it will only bring down the company’s 4 billion Euros labour cost bill by 2.5%.

The article itself suggests high labour costs can be offset by investment strategies that focus on innovation and research. But the figures it gives all go to show that what matters is the ability to bring down the wages bill: either via internal adjustment or through outsourcing. Internal adjustment is what Southern European countries have been experiencing, with a positive impact on some export sectors. In France, Safran’s success comes from outsourcing 70% of its engine components. Much of the lower end manufacturing is done in countries with lower wages, a move that also matches German businesses. Another arresting fact: according to McKinsey, in 2009 the average hourly cost of a French factory worker was 32 Euros and in Germany it was 29 Euros. But taking into account the contribution of component suppliers from Eastern Europe, where wages are lower, the real cost of German labour was 25 Euros an hour.  In discussions of Germany’s current competitiveness, much is made of Schroder’s labour market reforms and the discipline shown by the country’s labour force. Less attention is given to the role played by this out-sourcing strategy. The FT article concludes with the suggestion that North Africa should become France’s low wage periphery in the way that Eastern Europe has become Germany’s, something Renault has already done by relocating some of its car production to Morocco.

There has been much debate about how France can regain some of its competitiveness. Some suggest a strategic reorientation away from traditional manufacturing towards more hi-tech activities. What seems obvious is that lowering wages is still the strategy overwhelmingly favoured by businesses. Given how unlikely it is that this occurs via internal adjustment in France, the most probable outcome is that French companies continue to exploit outsourcing opportunities.

Buying time and running out

11 Apr

Guest book review of Wolfgang Streeck’s „Gekaufte Zeit: Die vertagte Krise des demokratischen Kapitalismus“. Berlin: Suhrkamp, 2013.

By Philip Mader, Governance Across Borders editor and postdoctoral fellow at the Max Planck Institute for the Study of Societies in Cologne, Germany

streeck cover

Democratic capitalist societies have been “buying time” with money for the past four decades – first via inflation, then public debt, then privatised Keynesianism – but are running out of resources for postponing the inevitable crisis. As a result, we now find ourselves at a crossroads where capitalism and democracy part ways. That in a nutshell is the thesis of Wolfgang Streeck’s new book, currently only available in German, but being translated for publication with Verso.

The book is based on a series of three “Adorno Lectures” given by the director of the Max Planck Institute for the Study of Societies in the summer of 2012 at the renowned Institut für Sozialforschung in Frankfurt (other lecturers in recent years included Judith Butler and Luc Boltanski). Its radical language and conclusions may be surprising for those who remember Streeck’s days as advisor to the “Bündnis für Arbeit” initiated by Germany’s former Chancellor Gerhard Schröder, which precipitated far-reaching labour market and social security reforms, or of Streeck’s demands for institutional reforms to forge a more competitive and flexible low-wage service sector in Germany modelled on the USA (Der Spiegel, 1999). But crises bring new beginnings, and Streeck’s defense of democracy against its subjugation to the market is auspicious. His analysis of the economic, political and ideological straightjacket that states have found themselves in, not just since the crisis but certainly more pronouncedly in its wake, ties together a revamped analysis of capitalism with a compelling critique of the “frivolous” politics of European integration. With some wit, a characteristic taste for good anecdotes, and above all great clarity, Streeck studies the processes of the moyenne durée which produced the “consolidation state” as the supreme fulfilment of a Hayekian liberal market vision, and which brought us to the impasse of the current period.

The book begins with a critical appraisal of how useful the Frankfurt School’s crisis theories from the 1960s and 1970s still are for explaining today’s crises. While their works are by no means invalidated, Streeck contends that yesteryear’s crisis theorists could scarcely imagine how long capitalist societies would be able to “buy time with money” and thereby continually escape the contradictions and tensions diagnosed by their theories of late capitalism. He explains the developments in Western capitalism since the 1970s as “a revolt by capital against the mixed economy of the postwar era”; the disembedding of the economy being a prolonged act of

successful resistance by the owners and managers of capital – the “profit-dependent” class – against the conditions which capitalism had had to accept after 1945 in order to remain politically acceptable in a rivalry of economic systems. (p. 26)*

By the 1970s, Streeck argues, capitalism had encountered severe problems of legitimacy, but less among the masses (as Adorno and Horkheimer had expected) than among the capitalist class. Referring to Kalecki, he suggests that theories of crises have to refocus on the side of capital, understanding modern economic crises as capital “going on strike” by denying society its powers of investment and growth-generation. The 1970s crisis, and the pathways that led out of it, thus were the result of capital’s unwillingness to become a mere beast of burden for the production process – which many Frankfurt theorists had tacitly assumed would happen. Capital’s reaction to its impending domestication set in motion a process of “de-democratising capitalism by de-economising democracy” (Entdemokratisierung des Kapitalismus vermittels Entökonomisierung der Demokratie). This ultimately brought about the specific and novel form of today’s crisis and its pseudo-remedies.

The rest, as they say, is history. In the second part, Steeck outlines how public debt rose with the neoliberal revolution, something mainstream economics and public choice quickly and falsely explained away as an instance of the “tragedy of the commons” with voters demanding too much from the state. However, the rise in debt came in fact with a curtailment of the power of democracy over the state and the economy. First, the good old “tax state” was ideologically restrained – starving the beast – and gradually found itself rendered a meek “debtor state” increasingly impervious to any remaining calls for redistribution by virtue of its objective impotence. Then, the resulting power shift to what Streeck calls the state’s “second constituency” – the creditor class, which asserts control over its stake in public debt and demands “bondholder value” – generated a standoff which Streeck observes between the conflicting demands of Staatsvolk und Marktvolk. The fact that the debtor state owes its subsistence less to contributions from the taxpaying “state people” and more to the trust of its creditor “market people” leads to a situation in which debtor states must continually credibly signal their prioritisation of creditors’ demands, even if it harms growth and welfare. Creditors, in their conflict with citizens, aim to secure fulfilment of their claims in the face of (potential) crises. The ultimate power balance remains unclear, but the “market people’s” trump card is that they can mobilise other states to fulfil their demands, leading to a kind of international financial diplomacy in their interest.

The archetype of such a transnational financial diplomacy, Streeck contends in the third and final part, is Europe under the Euro, where we encounter an even more wretched type: the “consolidation state”. Consolidation, Streeck argues, is a process of state re-structuring to better match the expectations of financial markets, and the consolidation state is a sort of perverse antithesis to the Keynesian state, acting in vain appeasement of the financial markets in hope of one day again being permitted to grow its economy. Its story begins with Friedrich Hayek, whose 1939 essay The Economic Conditions of Interstate Federalism Streeck presents as a strikingly accurate blueprint for the modern European Union, complete with references to the common market as assuring interstate peace. The European “liberalisation machine” slowly and successively reduced national-level capacity for discretionary intervention in markets; but it was European Monetary Union which ultimately rendered one of the last powerful (yet blunt) instruments available to states impracticable: currency devaluation. The resulting multi-level regime, a regime built on an unshakable belief in European “Durchregierbarkeit” (roughly: the capacity to govern Europe) and driven by a bureaucratic centre (or centres) increasingly well-insulated from democratic meddling, completes the actual European consolidation state of the early 21st century. Within this kind of hollowed-out supra-state individual countries have to fulfil their duties to pay before fulfilling any duties to protect, and recent “growth pacts” like Hollande’s are mere political showmanship. In the present framework even more substantial programmes would be likely to fail, Streeck argues with reference to Germany’s and Italy’s huge and hugely unsuccessful regional growth programmes. Stemming the decline of the southern Europe with transfer payments while adhering to monetary union with Germany is as much an impossibility as it is fuel for future discord.

Now, with tighter financial means, the cohesion of the Brussels bloc of states depends on hopes invested in neoliberal ‘structural adjustment’ with a parallel neutralisation of national democracies by supranational institutions and a targeted cultivation of local support through ‘modern’ middle classes and state apparatuses, who see their future in western European ways of business and life. Additional packages for structural reform, stimulus and growth from the centre are mainly of symbolic value, serving as discussion fodder for the greater public and for the mise-en-scène of summit decisions, as well as for politically and rhetorically absorbing whatever is left over of social democracy. Finally, puny as these may be financially, they can also be used to distribute loyalty premiums and patronage to local supporters: instruments of elite co-optation by doling out advantages in the Hayekisation process of European capitalism and its state system. (p. 203)

What can be done? It would be wrong to describe Streeck’s conclusions as optimistic. The capacity of populations or politicians to resist the imperatives of the consolidation state appears small, even where he argues that popular opposition is key, pointing to some rays of light in recent social movements. Streeck characterises present capitalist society as a “deeply divided and disorganised society, weakened by state repression and numbed by the products of a culture industry which Adorno could hardly have imagined even in his most pessimistic moments” (p. 217). It is furthermore politically held in check by a transnational plutocracy which has far greater sway over parliaments and parties than citizens. Given the likely failure of the consolidation state at restoring normality, we have thus arrived at a crossroads where capitalism and democracy must go their separate ways.

The likeliest outcome, as of today, would be the completion of the Hayekian social model with the dictatorship of a capitalist market economy protected against democratic correctives. Its legitimacy would depend on those who were once its Staatsvolk learning to accept market justice and social justice as one and the same thing, and understand themselves as part of one unified Marktvolk. Its stability would additionally require effective instruments to ensure that others, who do not want to accept this, can be ideologically marginalised, politically dis-organised and physically kept in check. […] The alternative to a capitalism without democracy would be democracy without capitalism, at least without capitalism as we know it. This would be the other utopia, contending with Hayek’s. But in contrast, this one wouldn’t be following the present historical trend, and rather would require its reversal. (p. 236)

Small acts of resistance, Streeck notes, can throw a spanner in the works, and the system is more vulnerable than it may appear; the Draghis and Bernankes still fear nothing more than social unrest. For Streeck, projects for democratising Europe, calls for which have recently gained momentum, can hardly work in a Europe of diverging interests. They would have to be implemented top-down, and furthermore have to succeed both amidst a deep (public) legitimacy crisis of Europe and against an already firmly embedded neoliberal programme with a decades-long head-start.

Streeck places his highest hopes in restoring options for currency devaluation via a kind of European Bretton Woods framework; “a blunt instrument – rough justice –, but from the perspective of social justice better than nothing” (p. 247). Indeed, a newly flexible currency regime would re-open some alternatives to so-called “internal devaluation” – nothing but a euphemism for already-euphemistic “structural adjustment” – and thereby permit a more heterogeneous political economy within Europe which could better match cultural differences (the book’s references to which sometimes seem to teeter on the edge of calls for national liberation). The Euro as a “frivolous experiment” needs to be undone, Streeck claims. But would that really mean a return to social justice? States like Great Britain or Switzerland hardly suggest a linkage, least of all an automatic one. Furthermore, declines in real wages from currency devaluation can mirror those of internal devaluation, merely with the difference of how politically expensive the process is (and it would still likely be central bankers, not democratic institutions, taking the decision). A return to national currencies looks like an all too easy way out, falling short of political-economic transformations for restoring some semblance of social justice to capitalism – let alone social justice as an alternative to capitalism.

Nonetheless, Streeck’s is a forceful argument in favour of preserving what vestiges remain of national sovereignty in face of capitalism’s attacks on democracy, as tools for gradually pushing back the transnational regime of market sovereignty. He concludes that the greatest threat to Western Europe today is not nationalism, but “Hayekian market liberalism” – whether the one could be the dialectical product of the other remains another question. Above all his analysis of capital as a collective player capable of acting with guile (Williamson) to ensure capitalism remains in its better interests – intellectual traces of Streeck’s days as a scholar of collective bargaining, perhaps – is clearly one of the most innovative approaches to understanding the class dimension of the political economy of the present crisis. His anatomy of the type of regime we increasingly have to deal with, the consolidation state moulded to address capital’s own legitimacy crisis yet sacrificing democratic legitimacy in the process, perhaps offers the most cogent picture of the present multi-level political economy of debt in Europe (and beyond). Taking back the consolidation state and re-appropriating democracy from capitalism’s clutches at the crossroads, of course, is a task beyond the reach of any book.

(*All quotations are the reviewer’s own translations from the German original.)

Microfinance and European Crisis Management

11 Mar

Guest post by Phil Mader, a researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany, and an editor of the Governance Across Borders blog, http://www.governancexborders.com

Microenterprises galore in India, soon too in Italy?

Microenterprises galore in India, soon too in Italy?

Well-established in low-income countries, microfinance is recently on the ascent as a crisis management tool in Europe. The parallels to Structural Adjustment in Latin America in the 1980s and 90s, where it played a key role in helping the bitter pill of austerity go down, are striking. But the experience of the global South over the past three decades warns against expectations of microfinance in the EU bringing anything but a glut of tiny, low-productivity, poverty-push enterprises which are likely to become entangled in debt traps.

2006 was the year small loans in developing countries were knighted as “the vaccine for the pandemic of poverty”, with the Nobel Peace Prize for Grameen Bank and its founder Muhammad Yunus bringing international fame to the idea that financial markets could effectively combat poverty. But loans for peace? Staunch supporters like Bernd Balkenhol (formerly ILO) argue the Nobel prize actually honoured the effectiveness of small loans at upholding social peace – an idea which is gaining new traction in erstwhile-affluent countries whose social peace is threatened by crisis and austerity.

As the “pandemic” of poverty spreads to Southern Europe, policymakers are seeking to apply the lessons learned in Asia, Latin America, and Africa, where microfinance has been established as a permanent pillar of social policy in many countries. As with prior aspects of neoliberalism, policies are often first tested in the Global South before their successive deployment in more advanced capitalist economies.

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression,”

the Italian Ministry of Foreign affairs recently quoted its minister, Giulio Terzi di Sant’Agata. The ministry noted Italy acting as a forerunner in Europe, having adopted a law on microfinance. The EU runs a number of microfinance programmes, expanded since 2010, aiming at getting the unemployed – particularly youths and ethnic minorities – into work through self-employment. A 2012 report argued that EU public funding should catalyse “the entry of private capital in order to create a self-sustainable market in the long run” – building new markets in times of crisis whilst keeping the poor busy and mollified via private credit; a most practical combination.

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi, of Monti’s interim crisis management committee/government, could hardly have made the case for microfinance as a device for austerity facilitation more clearly. Tiny loans may not work at creating economic growth or significantly alleviate poverty, as the experiences of microfinance-saturated countries like Bangladesh or Bolivia show and numerous scientific studies have underscored; but they have certainly proven their worth at tempering redistributional demands while facilitating structural adjustment. They work to “contain public spending” while preventing “material distress from encouraging populist deviation” (Terzi), tiny loans are a handy “political safety net” to uphold consumption and provide alternative (self-)employment, as political economist Heloise Weber observed more than a decade ago.

Working – up to a point, that is. India, with its focus state Andhra Pradesh (AP), in 2010 joined the ranks of Nicaragua and Bosnia as countries whose microfinance sectors recently melted down. Popular unrest and agitation forced the government of AP to curb all microfinance operations following a wave of suicides among borrowers. AP used to be India’s most microfinance-friendly state, earning the nickname “Mecca of Microfinance”, to whose highly profitable lenders international investors flocked like pilgrims.

While the microloan industry – which is now in protracted decline in India – has accused the government of foul play, the crisis’ causes ultimately lay not in a political attack, but rather in the original political support for microfinance as a tool in facilitating AP’s ambitious neoliberal restructuring. The loans placated the affected populations for some time, while opening up new outlets for capital markets, this recent paper finds, which led to the widespread overindebtedness which ultimately caused the suicides.

Politically enticing as a tool for austerity politics as the tiny loans may be, the experience of the Global South with microfinance doesn’t bode well for European countries attempting to bolster low incomes and drive economic growth. Perhaps this is why Terzi only claims that microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”, rather than bringing real material benefits for borrowers. For the time it takes to embed reform agendas and austerity politics, at least, the expectation is that microfinance may serve as a regime-consistent tool of seemingly doing something for impoverished and precarious segments – keeping them busy and competitive as entrepreneurs – while preventing them from getting all too uppity.

The Florange affair

6 Dec

As long-time observer of French politics Art Goldhammer has pointed out, there is little in the French government’s battle with the Indian steel magnate, Lakshmi Mittal, that makes sense. Uncertainty prevails over what deal the government has done with Mittal, what promises he may or may not have given, and what the future is for the Florange plant that is at the centre of the whole affair.

One thing that seems to be clear: there will be no forced nationalization of the plant, as argued for by France’s industry minister, Arnaud Montebourg. Well-known as a voice on the left of an otherwise rather centrist Socialist government, Montebourg has long championed the cause of “de-globalization”: a return to national protection and a more traditional national industrial policy of old. Montebourg plunged into the Mittal affair by criticizing publicly the Indian businessman, accusing him of not keeping his promises. His proposed solution – that gave much hope to the workers of the steel plant threatened with closure – was to force a nationalization of the plant. Mittal resisted, saying he was willing to let the government take over some of the plant but he wanted to retain those elements he thought could be profitable. At issue are two blast furnaces at Florange which Mittal argues are no longer worth keeping given the overcapacity of steel production in Europe. As demand for steel has fallen, so Mittal has been forced to rationalize production. Existing demand can be met by steel production in other sites, such as Dunkirk (read economist Elie Cohen on this here), leaving the Florange furnances without customers. As the government wasn’t ready to cough up the cash needed for a full nationalization, and many in the government were opposed to doing so, it made a deal with Mittal. Though Mittal committed himself to 180 million Euros of investment in cold steel processing at Florange, the issue of the blast furnaces remains unsolved. The government is claiming that it has saved the 629 jobs that were threatened but the unions don’t think Mittal will keep his word.

What is really at stake in this affair? In many ways, it seems distinctly French and confirms much of what The Economist wrote about France a few weeks ago in its special report on the country. Loud union reps camping out at the entrance to the site, vitriolic anti-capitalist rhetoric from leftwing ministers, behind-the-scene deals brokered between political and business interests: all evidence of the poor state of corporate France.

Beyond some of these clichés, two issues stand out. One is to do with Montebourg. His appointment as minister responsible for revitalizing French industry was surprising. As someone who harbours ambitions far grander than saving a few hundred jobs on the Franco-Luxembourg border, Montebourg could have been expected to resist the poisoned portfolio. It was obviously going to mean fighting a losing battle over unproductive sites like Florange and yet he accepted the job. What has been tested in the Florange affair is Montebourg’s representativeness. Does he stand for a strong current in French opinion and within the Socialist Party about a state-led route for industrial rejuvenation? Is it correct to see France as torn between its Colbertian instincts of old and a new recognition of the need for liberalisation and market-driven competitiveness? This is the kind of ideological battle The Economist likes but events over the last few days suggest something rather less dramatic is going on in France. Montebourg doesn’t seem to have his own industrial strategy but nor does the government. At the very least, strategies are about choices and priorities. What the government’s response over Florange has demonstrated is immobility and fright: unwilling to give up on the Florange workers and yet unable to place their intervention in this case within a wider plan for French industry. Montebourg appears as the fire-fighter in chief more than as a voice for an alternative French industrial strategy.

The second issue is about nationalization itself. Elie Cohen argues that the Florange affair is different from other recent instances of nationalization: General Motors in the US, Alstom in France. He is right to point to differences: there is little in common between Florange and the company-wide restructuring that resulted from the government takeover of General Motors. But he doesn’t mention the other obvious case of nationalization, that of banking and financial institutions. Via bail-outs, some of these have become the property of tax-payers. In all cases, this was evidence of massive strategic intervention by public actors to save a financial system they believed was on the rocks. Why is it that such interventions are free from the sense of helplessness and pointlessness that government involvement in failing manufacturing industries evokes for all observers?

Former Danish Prime Minister, Poul Rasmussen, an articulate European social democrat, once made the observation that many Western politicians appear unwilling to accept a shrinking of their country’s financial sector but they are willing to run down almost entirely their manufacturing sectors. He put this down to a deference elected representatives felt in the face of suave and sophisticated bankers. He perhaps exaggerated the point but it is certainly true that whilst government intervention to save failing industries appears to us anachronistic, intervention to prop up a tottering financial sector is seen as far-sighted and brave. This is surely as much about sentiment as it is an objective assessment. After all, a reason why the government couldn’t afford to nationalize Florange is that it still hasn’t paid off the debts incurred in saving its banks. These are the kinds of priorities the French government cannot articulate but they are nevertheless there in the background and structure government action over the mid to long term. There is no strategy there, but an underlying structure of interests and relations of power upon which French society rests.

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