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Will Angela Merkel Save the West?

16 Mar

TCM contributor Chris Bickerton has an essay on Merkel in the New York Times.

As Ms. Merkel prepares to meet this week with President Trump, many people may hope that she will stride into the White House and issue a robust defense of the liberal international order. Don’t count on it.

If the future of Western liberalism rests on Ms. Merkel’s shoulders, then it really is in trouble. She has often spoken in support of European and Western unity, but her actions have done little to strengthen them. Moreover, it’s not clear how deep her ideological commitment to liberalism really is — or, for that matter, whether she has any ideological commitments at all.

The full article is here.

Sturm und Draghi

23 Dec

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.

The end of independence

11 Jul

The claim that the European Central Bank was independent of any political interference was always a little difficult to substantiate. Membership of its governing committee was rigidly tied to nationality even though members were expected to vote in the general European interest. Recently, French President Nicolas Sarkozy insisted that Italy retire one of its members in order to avoid there being two Italians – and no Frenchmen – within the upper echelons of the ECB. Neutral indeed. Nevertheless, the ECB’s creation was perhaps the best expression of the belief that short-termist and self-serving politicians need to keep their hands out of the monetarist policy pot. In the monetary policy jargon, this is all about ensuring that central banks can issue ‘credible commitments’ to the markets. So when they say they are going to be tough on inflation, everyone believes them.


Recent events have suggested that the ECB’s independence is being steadily mined by the ongoing Eurozone crisis. One reason is because of the faultlines exposed by the crisis, with the ECB being firmly located on one side of the growing gulf between creditor and debtor interests across Europe. The ECB, and particularly its out-going director, Jean-Claude Trichet, has consistently argued against anything that might look like default on the part of those countries signed up to an EU bail-out package. In so doing, the ECB has put itself forward as the leading defender of the private creditor interest in Europe. Neutral indeed. Most recently, the ECB declared its intention to raise Eurozone-wide interest rates 0.25%, from 1.25% to 1.5%. This is in order to quell inflation, the result of food and energy price-hikes, which some think will provoke higher wage claims in the Eurozone’s bigger economies. The response from Ireland, Greece and Portugal was immediate: does the ECB not realize that in raising rates it is making it even more difficult for these countries to repay their loans?


The second reason is more subtle but also more important. Whilst being officially a non-political body authorized to deal exclusively with Eurozone monetary policy, the ECB has been getting steadily more involved in fiscal policy, notably in providing cash-stricken Eurozone members with much needed liquidity. The ECB, like any central bank directed by political concerns, has been acting as lender of the last resort. It has for some time been keeping the Greek banking system afloat. To date, the ECB has provided about 100bn Euros in loans to Greek banks, in exchange for Greek government bonds classified as junk by the markets.


The official reason why Trichet declares himself so fervently against any default by Greece is that it will create “contagion” in the markets: if Greece defaults, will private investors not believe that Portugual and Ireland will also do the same? But there is another reason why a Greek default would be a problem for the ECB. It would force it explicitly out of its independence shell and into the terrain of political choice. With Greece in default, the ECB could abandon the country’s banking system by ending its loans. Or it could make its role in fiscal policy explicit, providing finance to governments shut out of international markets. This is a choice both Trichet and national governments would rather avoid as it would force them to reveal their cards about whether they support closer political union within the Eurozone. Whilst central bank heads and member states may disagree on this point, they all seem to agree that they’d rather not be forced to have a public debate about it. A Greek default would make that debate increasingly difficult to avoid.

Sarkozy and the French banking sector

29 Jun

It was announced on the 27th June, by French president Nicolas Sarkozy, that French banks had agreed to a plan to rollover a large chunk of the debt owed to them by the Greek government. Le Monde reports that this was decided upon at the weekend, with aim of bringing the French proposal to an International Institute of Finance meeting in Rome on the 27th where around 400 financial companies would be present. Without giving up on debt repayment as such, in the French plan the banks agreed to extend new loans to the Greek government as existing loans come up for repayment. These new loans would be extended over a longer time period, giving Greece more breathing room. Originating as a German idea to force private investors to share some of the burden in bailing-out Greece, France and the ECB had been firmly opposed to the idea. Now, cast as a purely voluntary affair, France has struck a deal with its big banks remarkably quickly.

Reported in the financial press as an arduous process, likely to take weeks, the French government has announced a deal within days. How was this done so quickly? Part of the answer is of course the degree of exposure of the big French banks. By some way, they are as a whole more vulnerable than banks from other European countries.

Banks Exposure (Billions of Euros)
BNP Paribas (Fr) 5
Société Générale (Fr) 2.9
Axa (Fr) 1.9
Dexia (Fr-Belgian) 3.5
Generali (It) 3
Commerzbank (German) 2.9
Royal Bank of Scotland (UK) 1.1

Source: Forbes

That said, these figures also show that exposure to Greek debt runs through the European banking sector. So how to explain the speed of the French plan? A hat tip to my colleague, Daniel Mügge, for the answer. The French government, whilst having divested itself of its share of the banking sector as with its share of public services in general in the course of the 1980s and 1990s, is still able to coordinate policy with the main banks. No longer a state-run economy, France nevertheless rests upon a set of remarkably close relationships between political, business and finance leaders. The French deal was brokered by a working group, with representatives of the French treasury, the ministry of finance and the secretary general of the Elysée palace, Xavier Musca. Three of the biggest French banks – Société Générale, BNP Paribas and Crédti Agricole – are reported to have made their proposal to the government but there was much pressure in the other direction too. In other countries, such as Germany, it is by no means clear that the government will be able to put a similar agreement together. This is not only because its banks are marginally less exposed than the French banks but also that the nature of the relations between government and the banking sector is different.

The dismay of the dismal science

22 Jun

Recently, a group of French economists have published a manifesto under the title of ‘dismayed economists’ (économistes atterrés). All four of the original authors of the manifesto are well-established economists, either within universities or employed as trained economists by the French state. Their starting point has been the surprising lack of debate by economists around some of the assumptions that ground the current Eurozone crisis. The manifesto challenges what its authors see as the basic parameters of ECB/EU policymaking: the efficiency of markets, the pursuit of economic growth through fiscal prudence, the Euro as a bulwark against economic crisis.

Given the paucity of public debate, their intervention is welcome. Going beyond the wide-spread criticism of bail-out packages and austerity measures, these economists take on the intellectual foundations of these policies. They argue, for instance, that financial markets are not the only or the best judge of a state’s solvency. Whether a state is solvent or not is based on an assessment of future trends. As a prediction of the future, it is both subjective and likely to be self-fulfilling: a negative assessment will produce a negative outcome, a positive assessment a positive outcome. They also argue that debates around public debt tend to assume that what matters is simply a government’s willingness to tighten the purse strings. The false analogy here is between individual households and government budgets. For governments, public debt is also a product of the relationship between growth levels and interest rates. When interest rates are higher than growth levels, debt levels will grow. Focusing on reducing debt, rather than boosting economic growth, can therefore be counter-productive. We see this in the problems faced by Southern European economies: whilst their austerity plans are aimed at reducing their debt levels, if these economies remain in recession then there is little that austerity plans can do. In Greece, a year of austerity measures has seen industrial production fall by 11% – no wonder that Greece has returned to the EU and the IMF for a second bail-out deal.

This manifesto is a welcome call to thinking about economics as a product as much of political decisions as about the ‘natural’ workings of the market. We need to see more of this in the contemporary reflections on political economy. Where this movement will go is itself politically unclear. It may well fall, if it hasn’t already, within the organizational clutch of the French Attac movement, curiously silent during the 2007-2008 financial crisis but rearing its head today as the European crisis deepens. One of the original authors of the manifesto, Thomas Coutrot, co-presides the Attac movement. Other Attac members, such as Jean-Marie Harribey (former co-president) signed the manifesto and is active on the public speaking circuit. Attac have not, in the past, been able to provide much intellectual depth to their mobilization. Their focus has been on attacking la pensée unique (what in English is referred to as TINA – There is No Alternative) rather than on any sustained assessment of current trends and their main contradictions. Perhaps this time it will be different. In any case, an intellectual critique of contemporary political economy is certainly what’s needed today.

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