Tag Archives: debt

Why Torture a Victim Whose Will Is Already Broken?

14 Jul

The draft of the agreement between the Greeks and the Eurogroup is out and, as everyone has noticed, it is not just an act of revenge, it is a piece of legislative torture. It contains old demands, like pension reductions and higher taxes to fund primary surpluses, as well as new demands, like reduction in the power of unions and a massive privatization of state assets using a separate fund controlled by Greece but monitored by the EU’s institutions. In fact the document asks for a massive legislative program touching on every aspect of Greek economic life – tax policy, product regulation, labor markets, state-owned assets, financial sector, shipping, budget surpluses, pensions, and so on. This legislation is demanded within the next few weeks. Such a package is the kind of thing one sees during or just after wartime, not as the product of democratically negotiated decisions. Let’s remember that the programme on which Tsipras and the Eurogroup agreed is something asked of a country that has already experienced a very severe depression, already implemented a number of constraints requested by creditors, has 25% unemployment and a banking crisis. What is the point of torturing a victim whose will is already broken? To destroy all opposition.

I think this should not be read as a proposal for restoring growth to Greece or even as the reflection of an economic blindness in Europe but as the reflux of the EU political project, of which the euro is the purest expression: the preference for technocratic domination over popular sovereignty. This program describes an architecture of rule, one that expresses utter indifference to the attempt by peoples to manage their affairs democratically, and one that demands enormous reserves of discretionary power for the Eurogroup. Note not just the scope of the Eurogroup’s demands but the molecular level of detail with which they lay out demands. For instance, as part of their package of “ambitious product market reforms,” they insist on changes in “Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation).” Then there are the new demands, like “rigorous reviews and modernization of collective bargaining [and] industrial action,” which is Eurospeak for rubbing out labor rights. Other demands make it clear that these decisions are not only extensive and fine-grained, but designed as much as possible to remove responsibility and control from the Greek people and their government. The “scaled up privatisation programme” is to “be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions.” And the “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets” are “subject to prior approval of the [European] Institutions.”

Most telling of all, “The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament.” That is to say, on every above named area of reform – from tax policy to labor markets – the government must consult first with its European managers. The piece-de-resistance, however, is that the Greeks are maximally accountable to the Eurogroup while the Eurogroup is minimally accountable and maximally arbitrary. Having listed its demands the document then says, “The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities.” Later, the document says that an ESM programme is possible “Provided that all the necessary conditions contained in this document are fulfilled.” There is no guarantee the money is forthcoming. In other words, the Eurogroup retains maximum discretion to decide that Greece has failed to meet any of the impossible demands made upon it, while the Greeks possess no similar ability to hold the Europeans to account for their failures. Recall, for instance, that the agreement requires Greece to run budget surpluses that the Germans and French have never managed to achieve and that the ECB recently refused to extend sufficient emergency financing to the Greek banks, essentially engineering a near bank-failure in direct violation of its mandate to provide emergency liquidity to illiquid banks.

There are those who think that you can be pro-Euro and anti-austerity. As this round of negotiations show, the economics and politics of the euro are not separated like that. The Euro is a political project. It is unification without sovereignty. It is the delegation of national sovereignty to groups of finance ministers and supranational bodies whose main task is to suppress the re-appearance of the very source of their power. The political institutions and practices that have grown up around the euro and the EU are based on the belief that exercises of sovereignty are dangerous, irresponsible, and unaccountable. Although these institutions are in one sense nothing more than the product of agreements between nations, their raison d’etre is to prevent any further, outright expression of that sovereign power. That is why they insist on total subjection to their decisions, and why Greece became about more than Greece. The Greeks dared to assert popular sovereignty at the only level it is currently possible to do so. The bitter irony being that the discretion demanded by these post-sovereign entities is less accountable than when exercised as the outright power of a democratically elected government. And no less vindictive.

Alex Gourevitch

 

Dreaming dangerously

8 Jul

Slavoj Zizek’s response to the Greek referendum  apologises for a potentially fatal flaw in Syriza’s strategy.

For Slavoj Zizek a lesson to be drawn from Syriza’s referendum victory last Sunday is that:

‘The moment has come to move beyond the irrelevant debates about the possible mistakes and misjudgments of the Greek government. The stakes are now much too high.’

Zizek is right that we should take no notice of the criticisms of Syriza for not compromising enough with the European institutions. However, we need to be very alert to the fact that, notwithstanding the Syriza leadership’s charisma and elan, their pro-Euro strategy and rhetoric are a potential disaster for the Greek people and for the European left.

Zizek’s own argument throws up the key reason to continue to debate Syriza’s approach. He argues that in the face of ‘the technocratic status quo that has kept Europe in inertia for decades’:

‘only a new “heresy” (represented at this moment by Syriza) can save what is worth saving in European legacy: democracy, trust in people, egalitarian solidarity.’

He points out that ‘democracy, trust in the people, egalitarian solidarity’ is a program that is no more radical than that which was once put forward by moderate social democracy. But he also observes that Syriza, in promoting this moderate ‘heresy’ through its campaign to stay in the Eurozone, ‘effectively wants something that is not possible within the coordinates of the existing global system.’  But if that is right, then Zizek’s new heresy, as it is ‘represented by Syriza’, is really a fantasy, because Syriza, throughout the referendum campaign and since, has promoted the idea of a European Union characterized by ‘democracy, trust in people, egalitarian solidarity’, something that Zizek knows is not possible.

The reason it is not possible is that both the Euro and the wider European Union are technocratic projects that remove full political control of Europe’s economies from its national governments. In the Eurozone, control of policy is handed over to intergovernmental forums at European level, such as the Eurogroup of finance ministers that is presided over by Zizek’s ‘emblematic bad guy’ in the Greek drama, Dutch finance minister, Jeroen Dijsselbloem. In these European forums, national leaders technocratically impose the dictates of the market, insulated from the tawdry ‘ideological’ contestation of electoral politics (aka democratic accountability). In other words, the Euro is founded on distrust of the people, frustrating democracy and evading solidarity; these are its raison d’etre.

While Syriza has exposed and provoked Europe’s technocratic politicians, it has failed to understand that technocratic intransigence and democratic deficit are constitutional features of the Euro project. As a consequence of this failure, it has convinced the Greek people to vote for two mutually exclusive positions – No to technocracy and austerity, Yes to the Euro. This contradiction in Syriza’s strategy presents a serious danger to both Greece and European democracy generally.

Perhaps, when Zizek says that Syriza represents his heresy of ‘democracy, trust in the people, egalitarian solidarity’, he means that Syriza will now show its true colours. If Greece is kicked out of the Eurozone, Syriza can say to the Greek people: ‘we did everything possible to return the Eurozone to a moderate social democratic path, but it is just not possible. Now we must do something different.’ And no doubt Greek officials are working hard on technical contingency plans for Grexit. The problem is that Syriza appears to have done nothing politically to prepare either the Greek people or their supporters for such a radical change of direction, at least not in public. Syriza’s leaders have instead insisted that a No vote is a vote to stay in the Eurozone. If its true colours really are anti-Euro, then the Syriza leadership is waiting a dangerously long time to show them.

From the point of view of the Eurozone, ejecting Greece from the Euro would be a mark of the failure of the technocratic project of European integration. And that is giving Eurozone leaders pause for thought. Perhaps, given the growing evidence of the failure of their project, and their own resultant political weakness, the Eurozone leaders will throw in the towel and come around to the Syriza heresy. But just writing that down indicates how unlikely it is, which is why Zizek doesn’t believe it is possible either.

If Greece is forced out of the Eurozone, Syriza may find itself presiding over an economic collapse that it has claimed all along will not happen. In the medium-term, Grexit may be good for the Greek economy. But in the short run it will be very difficult indeed, and given that Syriza has not prepared its supporters or Greece for Grexit, executing such a sudden political U-turn in dire economic straits, will test the Greek left’s credibility, inventiveness, and coherence to the limit. The alternative to Grexit appears to be that Tsipras tries to sell a deal that is no better (or not much better) than the one they were offered before the referendum, which will be a political disaster for Syriza.

Neither of these alternatives seems likely to achieve more democracy, trust in the people or solidarity. Instead they each threaten only to reinforce the popular perception that even such a moderate program is no more than a fantasy of left-wing dreamers. The danger lies not in the moderate ideological content of Syriza’s demands as such, but in Syriza’s fostering of the illusion that these moderate demands can be met within the Eurozone. It is this problem that Zizek’s merely laudatory response to the referendum result obscures.

The unraveling of Syriza’s pro-Euro strategy risks further lowering political horizons in Europe, and stripping the radical left of its recently regained credibility at a time when mainstream politics also lacks authority. Further fragmentation in public life, especially in Greece, is in prospect. Debating whether Syriza’s strategy has been a good one seems anything but irrelevant. The stakes are much too high not to debate it.

Peter Ramsay

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.)

The time inconsistency of austerity politics

18 Mar

Mario Monti

 

At his last European Council summit meeting, at least for the time being, Italian Prime Minister Mario Monti gave some parting advice to his fellow leaders. Written up as a four page letter and reported on in the FT, Monti argued that the main problem with austerity policies is that there was too big a lag between the positive effect of reforms and their negative bite. Giving his own version of the old adage that things have to get worse before they get better, Monti explained that this doesn’t fit very well with the rules of the electoral cycle. The promise of austerity and supply-side reforms is that they bring gains by way of employment and growth in the long term. The difficulty is that politicians are judged according to pain they bring in the short-term. Something needs to be done to bridge the gap in order that reform agendas are not derailed, as he thinks they have been in Italy. From the perspective of the European Commission or the German Bundesbank, the issue is how to make sure that in the time in between enacting reforms and feeling their positive effects, susceptible policymakers are not tempted to give up on earlier promises and go for quick fixes, like expansionary fiscal policy or other Keynesian pump-priming tricks.

This discussion raises a number of issues. As a trained economist, Monti no doubt knew that his argument was a restatement of what macro-economists call the problem of time inconsistency. This is the notion that policy rules – such as a commitment to balance budgets over the medium term – lack credibility when they are made sequentially. As soon as a firm commitment is spread over a length of time, the possibility arises that short-term considerations will assert themselves. Such policy commitments are thus time inconsistent – they fail to hold over time and thus need to be insulated as much as possible from political pressures.

If this is Monti’s analysis, two questions arise. The first is what if the policy rule has no credibility in the first place – irrespective of whether we are talking about the short, medium or long-term? The commitment of EU member governments is that austerity combined with supply side reforms equals a return to growth. We are into our fifth year since the outbreak of the current crisis in 2008, austerity policies have themselves been in place for a number of years, up to three to four years in some countries. Austerity is nothing new, nor is the idea that supply side reforms boost growth and employment, and yet these policies are not being seen to deliver. Monti’s analysis of current difficulties in Italy and elsewhere, that rests upon the idea of extended lag between introducing reforms and securing their rewards, in fact places a great deal of faith on the idea that these reforms will eventually work. At issue today is not people’s short-termism. It is the more fundamental issue of whether cutting spending and raising taxes in a recession is any way to stimulate growth.

The second question is about what Monti suggests we should do. If we return to the idea of time inconsistency, then we find a very clear recommendation. Institutions should be created that make it as difficult as possible to renege on a policy commitment. This is the famous recommendation to favour rules over discretion. These institutions should be given the responsibility for contentious political agendas – like keeping down government spending, being hawkish on inflation, reform labour markets – in order that legislatures and electorally accountable executives are not tempted to go for short-term fixes.

The problem is that we are not in the 1970s anymore. Profligate legislatures have not been driving today’s budgetary crises. The contrary is true, as we see from the Netherlands through to the UK and Spain. Moreover, today’s crisis happened in a world of rules, not of discretion. Problems of sequential policymaking were hived off to independent central banks, independent budgetary offices, fiscal councils and an array of European rules and regulations in the field of macro-economic policy. As a result, the problem surely lies in something deeper and more fundamental than simply the institutional environment for elected policymakers. This won’t stop European commissioners and national politicians arguing for the strengthening of European rules. In fact, as the Fiscal Compact has shown, this seems to be the dominant framework with which European policymakers are working today. We should be wary of such explanations. A policy framework dedicated towards the curtailment of expansionary policies has given us a European continent saddled with debt and a global debt crisis. There is something more to this than the theory of the time inconsistency of optimal policy rules.

The end of insolvency

10 Jan

An arresting fact published yesterday in the Financial Times: the lowest rates of insolvency in Europe in 2011 were in Greece, Spain and Italy, the countries that faced the brunt of the Eurozone economic crisis. The newspaper continues: fewer than 30 in every 10,000 companies fail in these three countries, at the same time as nearly one in three companies is loss-making. There couldn’t be a clearler proof of the fact that Schumpeterian creative destruction has taken leave of Europe.

There are various explanations for this. For instance, the low level of corporate insolvencies is partly a reflection of government action: companies that might otherwise have gone bust have been able to borrow from their governments at very low rates, making refinancing of existing loans possible. Fearful of the political fall-out from lots of businesses going bust, governments have kept them alive. The broader climate of cheap borrowing, made possible by central bank action, has also played its part.

According to the FT, however, action by public authorities is only partly to blame. The real culprit appears to be the banks. Faced with so much pressure on their balance sheets, and saddled with bad loans, banks have been very reluctant to force businesses into insolvency or restructuring procedures. Rather than take the hit, they have preferred to hang on, letting the bad loans sit on their balance sheets. This has been the case particularly in Spain, but also elsewhere across the continent. Here we obviously see the underlying causes of the crisis working their way back into its resolution. Central to the debt-financing that occurred prior to the crisis, it is the same debt that prevents a more decisive resolution of this crisis.

We should, of course, be wary of bullish talk about the constructive effects of insolvency. The FT quotes one company chairman who laments the fact that all the company’s revenues are being taken up by pension payments to retired employees. “We are unable to invest in new growth areas”, he complains, because of these pension obligations. One wonders what his solution would be: renegue on the payments and ask the pensioners to find alternative sources of income?

Clearly, the idea of creative destruction works less well in an age when corporations have welfare obligations. But is also rests upon an expectation that public authorities command enough authority to be able to weather restructuring storms. Evidently in Europe this is not the case. Alongside a fear of social unrest is also a fear and hostility towards change. In countries like Greece, Italy and Spain, and certainly in France, governments talk about supply side reform and a fundamental transformation of their economies but there is little idea of where they would like to go or of what they would like to do. This political impasse is matched at the corporate level. Creative destruction after all rests upon an optimistic attitude towards the future: something new can be built, new energies can be released if the old is torn down. Restructuring is often driven by hedge funds looking to buy up assets cheaply and sell them on for a profit. But in Europe’s current predicament, we also see hostility towards change present across the political and corporate elite. And the banks, supposedly the most gung-ho and reckless of the lot, are the most cautious of them all.

The problem with Peugeot-Citroën

25 Oct

There are some classical components to the problems faced by one of France’s best-known car-makers, Peugeot-Citroën. An economic downturn has hit Peugeot-Citroën’s sales. Its dependence on car-buying in the Southern European markets of Spain, Italy and Greece was higher than some of its rivals and so it has been harder hit by the Eurozone crisis. It hasn’t so successfully relocated production to cheaper parts of Europe, as Germany’s Volkswagen has done for instance, meaning that labour costs remain high. The decision to close its large plant North-East of Paris, at Aulnay-Sous-Bois, was an obvious case of shifting manufacturing activity out of France to places where wages are lower. Overall, margins are tight in an incredibly competitive industry and the downturn has pushed the less competitive players to the edge.

Looking more closely, though, the picture is more complex. This week, the French government intervened in the company’s crisis. Having long spoken about the need to limit the famous “plan sociaux” of big French firms, the government’s intervention was not directly aimed at limiting the number of jobs to be lost through the closure of the Aulnay plant. In fact, the government seems largely to have accepted that Aulnay will close. Instead, the intervention took the form of a bail-out of Peugeot-Citroën’s financial arm, Banque PSA Finance (BPF). Faced with the threat of a credit downgrade of 5.6bn Euros of its debt, owing to the declining fortunes of the car firm, the bail-out is reported to involve a guarantee of around 4bn Euros of debt and the supply of new credit lines of up to 1.5bn Euros.

It is no coincidence that the government intervention is in the form of a bail-out to the financial arm of Peugeot-Citroën. In recent years, the car-maker has made money not just out of making and selling cars but also out of financial activities associated to its car business. Involving itself in the provision of credit to potential car-buyers has been one way the company has managed to stay in the black. In the third semester of 2011, the total revenue of the company rose by 3.5%. However, this growth did not come from car sales as such. It came mainly from the company’s component manufacturing arm (Faurecia), its manufacturing logistics arm (Gefco) and from its bank, BPF. As with other automobile companies, Peugeot- Citroën has had to rely on revenue streams other than just those of car manufacture. As the company began to rely on financial activities, it became increasingly vulnerable to any rise in its borrowing costs. This is what is happening today, hence the government bail-out. Paradoxically, the very success of Gefco means that may be sold by Peugeot-Citroën in an asset fire-sale intended to raise much needed cash (for details on the Gefco sale, see here).

The events at Peugeot-Citroën appear as a classic case of government intervention in an ailing manufacturing sector. In fact, the government is bailing out a bank owned by the car company, set up as a way of profiting from credit provision. This suggests that it is easier for a government to channel funds in ways that keep a financial subsidiary afloat than it is to prevent mass redundancies and factory closures. It also tells us of the extent to which car-makers today rely on more than just selling cars to balance their books.

Varieties of finance?

17 Oct

In a previous post, we looked at the structure of the European banking system. We asked whether there was a particular European story that can help explain the sorry state of the current European economy. It was noted that the size of the European banking sector, so much larger than in the United States, reflected the central role banks in Europe play in financing the private sector. In the US, there is more reliance on capital markets than on banks and so the assets to GDP ratio of US banks is much lower than in Europe.

Can we transform those differences into something more systematic? Do differences in financial markets point to deeper and broader differences between different types of societies? The question here is whether there exists the same kind of variety in financial sectors as there does in capitalist economies more generally. A popular way of classifying capitalist systems is according to type: liberal market economies, coordinated market economies and mixed market economies. This is the famous “varieties of capitalism” approach. Can we say that the financial sectors in Europe are shaped by these national institutional factors? One basic distinction, for instance, is between market-based and relationship-based borrowing and lending. In more liberal market economies like the UK, companies are expected to rely more on the open market as a source of finance. In a coordinated market economy, corporate financing is fed through bank-to-business relationships.

Finding out whether any of these patterns exist in the date on financial markets is not easy. Interest has tended to be in the ties between business and politics, not in the correspondence between differences in financial markets and broader varieties of capitalist production. But there is some data out there. In the Liikanen report on the European banking industry, we see little evidence for these kinds of patterns. In terms of the balance between stock market capitalization, total debt securities and bank assets, we do see differences between Europe and the US. But within Europe, a supposedly liberal market economy like the UK has bank assets that massively outstrip any other European country and offsets its larger stock market capitalisation (p119 of the Liikanen report). The data on financial institutions and markets collected by Thomas Beck, Ash Demirgüç-Kunt and Ross Devine (available here) is extensive but suggests that the biggest difference is between income levels, not between varieties of capitalism. Another way of thinking about the varieties of financial markets is whether it can help explain different national government responses to the current economic and financial crisis. One study of this by Beat Weber and Stefan Schmitz (available here) found that institutional factors did not in fact influence very much the rescue packages put together by European governments. They point instead to other factors. The degree of inequality in society, which they take as an indication of the fact that policymakers in those countries use access to credit as a substitute for higher wages (what Colin Crouch calls “privatized Keynesianism” – see here), is for them one element that explains the form the government bail-outs took. On the varieties of capitalism, they note that as an approach it is focused more on production and not on financial systems. It has therefore little to say about financialization as such.

National differences remain important and a feature of the current crisis is the difference in the national responses. Behind efforts to build a common European response are national bail-out packages that differ greatly in terms of size and in the strictness of their conditions. But financialization as such, and the boom of the late 2000s, was common to many high-income countries. By way of explaining the current crisis, Beck and his colleagues write that “the lower margins for traditional lines of business and the search for higher returns were possible only through high-risk taking” (p78 of this paper). The implication here is that the lack of profitability in the real economy drove the expansion of financial activity in the 2000s. This explanation isn’t perfect but it certainly helps us understand why it has been so difficult for governments to return to positive growth. If financialisation was itself more symptom than cause, then we are still left with the causes of the crisis today.

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