Tag Archives: financial crisis

Why Syriza Failed

31 Jul

Recent events in Greece have baffled many observers. Prime Minister Alexis Tsipras walked out of talks with Greece’s creditors, calling a snap referendum on their proposals. It appeared to be crunch time. Tspiras denounced the EU’s ‘blackmail-ultimatum’, urging ‘the Hellenic people’ to defend their ‘sovereignty’ and ‘democracy’, while EU figures warned a ‘no’ vote would mean Greece leaving the Euro. Yet, even during the referendum campaign, while ostensibly pushing for a ‘no’ vote, Tsipras offered to accept the EU’s terms with but a few minor tweaks. And no sooner had the Greek people apparently rejected EU-enforced austerity than their government swiftly agreed to pursue harsher austerity measures than they had just rejected, merely in exchange for more negotiations on debt relief. This bizarre sequence of events can only be understood as a colossal political failure by Syriza. Elected in January to end austerity, they will now preside over more privatisation, welfare cuts and tax hikes.

How can we explain this failure? I argue three factors were key. First, the terrible ‘good Euro’ strategy pursued by Syriza, the weakness of which should have been apparent from the outset. The second factor, which shaped the first, is the overwhelmingly pro-EU sentiment among Greek citizens and elites, which created a strong barrier to ‘Grexit’ in the absence of political leadership towards independence. Third, the failure of the pro-Grexit left, including within Syriza, to win Syriza and the public over to a pro-Grexit position.

The ‘good Euro’ fantasy

The strategy pursued by Tspiras and his former finance minister, Yanis Varoufakis, has been dubbed the ‘good Euro’ approach. Essentially, they argued that a resolution to Greece’s economic depression could be found within the confines of the single European currency. The failure of previous governments to do this was simplistically assigned to the fact that they ‘never negotiated’ with the Troika but merely implemented its demands. Instead, Syriza would make common cause with other anti-austerity groups and sympathetic governments across Europe, pushing for more favourable bailout terms. This involved an attempt to ‘delegitimise’ the creditors by appealing – as Tsipras did even when denouncing the creditors – to the ‘founding principles and values of Europe’, supposedly norms of social justice like ‘rights to work, equality and… dignity’. From this perspective, the referendum was never intended to be a decisive moment for the restoration of Greek democracy and autonomy. It was merely called to strengthen the Greek government’s position when bargaining with the creditors, which is why Tsipras never stopped seeking another ‘bailout’ even as campaigning was underway.

But to any clear-eyed observer, this strategy was disastrous from the outset, because it rested on two flawed premises.

The first was that the allies Syriza sought were either too weak, or simply did not exist. Perhaps the most remarkable thing about the European response to the global financial crisis has been the near-total absence of any effective resistance to the conversion of a banking crisis into a fiscal crisis of the state and from there to the imposition of austerity. With the exception of Greece and Spain, elections across Europe have tended to shift goverments to the right, even – as in Britain – after five years of cuts to state spending. The lack of effective anti-austerity resistance itself reflects the wider collapse of left-wing political forces from the 1980s. The disarray of the rump parties of social democracy, clearly unable to offer any alternative to austerity, is merely the prolonged death rattle of this epochal defeat. This was never promising terrain for a ‘good Euro’ strategy.

One hope of Syriza was the rise of Podemos in Spain – like Syriza, a loose alliance emerging from street-level, anti-austerity protests. But, as Varoufakis rapidly realised, ‘there was nothing they could do – their voice could never penetrate the Eurogroup’. Similarly, while Syriza notionally classified EU governments as pro-austerity, anti-austerity and neutral, with pro-austerity governments ostensibly in the minority, it was unable to leverage any international support. The French – perhaps the main hope – promised support in private, but criticised Greece in public. Nor were the governments of other countries suffering from EU-imposed austerity sympathetic. In fact, Varoufakis recalls, ‘from the very beginning… [they] made it abundantly clear that they were the most energetic enemies of our government… their greatest nightmare was our success: were we to succeed in negotiating a better deal for Greece, that would of course obliterate them politically, they would have to answer to their own people why they didn’t negotiate like we were doing.’ It should therefore have been immediately clear to Syriza that the building materials for the progressive bloc it hoped to construct simply did not exist.

The second flawed premise was ‘leftist Europeanism’, the idea that the European Union is primarily about values of ‘social justice’, such that appeals to these values could overcome demands for austerity. Again, this notion was ludicrous from the outset. By the time Syriza was elected, the EU had already subjected the Greek people to grotesque abuses. These include: 25 percent unemployment (57 percent among youths) by 2012; the mass collapse of small businesses; a 25 percent rise in homelessness from 2009-11; a 75 percent rise in suicides from 2009-11; mass emigration; and a massive health crisis, with spikes in epidemic diseases and a drop in life expectancy of three years (a phenomenon generally only seen in war-torn countries), nonetheless followed by a further 94% cut in health funding from 2014-15. Even pro-EU liberals outside Greece are now reconsidering their naïve faith in ‘social Europe’ after what has happened there. To any Greek, the real values being pursued through the EU ought to have been crystal clear. As one Varoufakis advisor notes, ‘the only weapons… [Syriza brought] to the negotiating table were reason, logic and European solidarity. But apparently we live in a Europe where none of those things mean anything.’

Eurobarom 1


Eurobarometer: percentage of EU citizens expressing trust in EU institutions. Source.

 Eurobarom 2

Eurobarometer: what does the EU mean to you personally? Source.

As Varoufakis and Tspiras discovered almost immediately, EU institutions have little to do with democracy, either. The informal Eurogroup of Finance Ministers, Varoufakis notes, makes ‘decisions of almost life and death, and no member has to answer to anybody’. ‘From the very beginning’ (i.e. from their first meeting in February), Varoufakis encountered a ‘complete lack of any democratic scruples, on behalf of the supposed defenders of Europe’s democracy’. Germany’s finance minister told him: ‘Elections cannot change anything’. Some ministers agreed with Syriza’s critique of austerity, but essentially said, ‘we’re going to crunch you anyway.’ What further demonstration did Syriza need that EU leaders are not interested in social justice, only containing the Euro-crisis – and thereby protecting their own shoddy financial institutions from debt default and contagion – by making Greece the whipping boy of Europe?

The Greek fetish of European membership

Unsurprisingly, critics had declared the ‘good Euro’ strategy a failure as early as February, while Varoufakis’s post-resignation interviews reveal that its chief executors also swiftly recognised its flaws. So why did it ever appear a good idea in the first place? Ultimately, Syriza was elected on a platform both of ending austerity and remaining in the Euro – the latter position being shared by all of its main political rivals and by 80 percent of the public. This contradictory position reflects the attachment of Greek citizens and elites to ‘Europe’ as a refuge from their domestic political difficulties, and thus a reluctance to confront and resolve these difficulties alone.

As The Current Moment’s co-editor, Chris Bickerton, has shown, this is part of a general trend across the EU. From the 1970s, faced with crises of rising expectations and increasing social unrest, European elites have – through varying national trajectories – tried to create a new social, political and economic settlement by entrenching themselves within international elite networks. The EU’s structures are generally not supranational authorities but rather elite solidarity clubs, where ministers pursuing unpopular ‘reform’ agendas can draw upon each other’s support against their respective populations, thereby basing the content and legitimacy of their actions not on democratic mandates but on the legalistic European processes of policy coordination and harmonisation. By linking virtually every state apparatus across European borders, elites have thereby transformed once-sovereign nation-states into EU ‘member-states’, heavily constrained, with popular sovereignty deliberately negated. European elites can no longer imagine life outside of these structures, because it would represent a vast step-change: a need to re-engage with their own populations as the sole source of their authority, and the need to articulate clear political visions for their nations instead of relying on the latest EU action plan to guide their polities.

Each member-state has followed its own particular trajectory into this dismal arrangement. In Portugal, Spain and Greece, the process was strongly marked by their 1970s transition from authoritarian rule. In much the same way as the recent Scottish referendum proposed to make Scotland independent of the United Kingdom but immediately constrain its autonomy by retaining EU membership, these southern European nations emerged from authoritarian rule only to constrain democratic choice by swiftly joining the then European Economic Community. For the Greeks, joining ‘Europe’ was apparently a way to help draw a line under the past. It signalled their rejection of military rule, their ‘identity’ ‘as Europeans’, their distinction from authoritarian neighbours like Albania and Turkey. And it precluded the return of authoritarianism by locking Greece into various intergovernmental agreements and processes that entrenched liberal rights. The same motive and process had guided the formation of the European Convention on Human Rights in the early post-war years, and the later flight of Eastern European states from ‘Brezhnev to Brussels’, as Bickerton puts it.

Thus, for wide swathes of the Greek public, and especially the liberal and left elite, membership of the EU is valued precisely for its constraints. The fear, as Varoufakis himself clearly articulated, is that the beneficiaries of Grexit would not be the ‘progressive left, that will rise Phoenix-like from the ashes of Europe’s public institutions’, but rather ‘the Golden Dawn Nazis, the assorted neofascists, the xenophobes and the spivs’. His successor, Euclid Tsakalotos, issued similar warnings from the foreign ministry. Their fear was essentially of what the Greek people would do, left to their own devices.

This concern is hardly unique to Syriza. Across Europe, the dominant – perhaps only – elite justification for European integration is that its only alternative is a return to nationalism (or worse) and war. The Greek version of this politics of fear is simply mediated through the recent historical experience of military rule. Syriza’s embrace of this pessimistic narrative clearly signified a profound lack of faith in its own capacity to lead Greeks towards a more progressive future as an independent nation.

This quite widespread ideological attachment to Europe was undoubtedly reinforced by the apparent economic benefits of EU membership before the Euro crisis. In 1974, when the Colonels’ regime fell, Greek GDP per capita was just $2,839. When Greece joined the EEC in 1981, it was $5,400. By 2001, when Greece joined the Euro, per capita income had more than doubled to $12,418. Under the Euro, average incomes then nearly tripled to $31,701 by 2008. Greece literally appeared to go from third world to first in the space of two generations. In real terms, of course, the increase was always smaller – from $12,829 to $24,148 from 1974-2008 – but this was still a significant ‘catching up’ with other European states. As is now widely recognised, much of the post-2001 boom was fuelled by reckless borrowing and its benefits were always maldistributed, with a narrow oligarchy dominating a state-led patronage system. This is undoubtedly why the Greek oligarchy, while evading the consequences of austerity itself, has waged a strong pro-EU campaign, including through the media organisations it dominates, and is implacably opposed to Syriza, which had pledged to ‘destroy’ the ‘oligarchy system’. However, economic benefits also flowed to a wider coalition, with handouts like early pensions for professional groups and public sector unions supportive of the status quo.

graphic 3

Greek GDP Per Capita, current US$. Source.


graphic 4


Greek GDP Per Capita (Purchasing Power Parity) 1990=100. Source.

Combined, these factors seem to have made many Greeks leery of Grexit, even as the economy shrivelled. For some, when the crisis struck, there was apparently a guilty sense of the chickens coming home to roost – that ‘the party was over’ – with two-thirds of Greeks actually supporting austerity in 2010. Although this support collapsed over the next four years, fuelling the rise of Syriza, fear of the unknown remained very strong. Even in the most favourable scenarios, restoring the drachma would be hugely destabilising in the short to medium term and risk undoing the residual benefits of Euro membership. This motivation seems particularly strong among those with most to lose.

All of this helps explain the structural constraints facing Syriza leaders upon their election. The Greeks were both tired of austerity and yet fearful of exiting the Euro. Consequently, they demanded an end to austerity within the Euro. Squaring this circle was an impossible task.

But this should not let Syriza off the hook. Insofar as Syriza leaders understood that these popular demands were incompatible, they ought to have exercised political leadership by trying to lead the Greek citizenry towards a more rational position. The most crucial step was to outline a compelling vision for a Greek economy independent of the Euro, where life might be tough for a few years (but probably no tougher than under perpetual EU-imposed austerity), and recovery was eventually possible via the currency devaluation that every sane economist argues is both essential for Greece’s recovery and impossible within the Euro. This Syriza comprehensively failed to do.

Despite their leftist élan, its leaders seem just as incapable as their European counterparts of imagining a future for themselves and their country outside the strictures of European integration. Syriza’s failure remains one of leadership and strategy, irreducible simply to popular attitudes. The Syriza leadership has now embraced a deal that it openly admits is rotten, claiming ‘there is no alternative’. This merely signals a refusal to accept political responsibility for articulating an alternative. Ultimately, they – like the leaders of Europe’s other ‘member-states’ – are too afraid of the consequences of genuinely restoring autonomous, democratic decision-making to their nation. As Stathis Kouvelakis comments, this reflects their ‘entrapment in the ideology of left-Europeanism’. When Greek officials denounce the ‘almost neo-fascist euro dictatorship’, they are heaping the blame entirely on German sadomonetarism while evading their own failure to rebel against it, however difficult that rebellion would undoubtedly be.

As a consequence of this hesitancy, Syriza leaders spurned the growing social basis for a pro-Grexit line, which emerged despite, not because of, them. While in January 2015, 80 percent of Greeks favoured remaining in the Euro, by the time of the referendum this figure had fallen to 45 percent, with 42 percent favouring the serious consideration of Grexit.

The left’s failure to produce Grexit

This leaves one remaining question: why were those on the left, able to see all of the foregoing problems, unable to change Syriza’s course? After all, much of the above criticism of the ‘good Euro’ strategy was initially articulated by figures within Syriza, most notably Costas Lapavitsas, Stathis Kouvelakis and others members of its ‘Left Platform’. The Greek far left has also long demanded Grexit. Left Platform figures had adopted a position of ‘no more sacrifices for the Euro’ in 2012/13 and have long argued for default and Grexit, with apparently growing support. 44 percent of Syriza’s Central Committee backed the Left Platform’s call to break from negotiations and pursue a radical ‘plan B’ in late May. Tsipras was reportedly being constrained by their resistance in parliament in June. After the referendum, the Left apparently won over a (bare) majority of Syriza’s Central Committee to oppose capitulation, backed by many grassroots activists. Yet, only 38 Syriza legislators (out of 149) rebelled against the government (six of whom merely abstained). Although this left

Tsipras dependent on opposition legislators to survive, in subsequent votes that number has shrunk to 36 (with Varoufakis among the defectors), while Left Platform ministers have been sacked or resigned. Amazingly, the ‘good Euro’ strategy persists.

Part of the explanation for this is the nature of Syriza itself as a loose coalition rather than a traditional leftist party. Initially merely an electoral coalition, formed to contest the 2004 elections, Syriza became a party only in 2012, merging 13 political groups ranging from social democrats to hard-line Marxists. Syriza’s dominant parliamentary faction has always been Synaspismós, itself a democratic socialist coalition, led by Tsipras. Syriza’s ‘Left Platform’ – comprising the ‘Left Current’ and ‘Red Network’ – are relative newcomers and, even when joined by the Communist Organisation of Greece (KOE), also a Syriza member – simply lack the numbers required to impose their preferences.

Moreover, despite the 2012 merger, Syriza did not develop party structures capable of discussing, determining and imposing a collective ‘party line’. This looseness permitted a high degree of open internal dissent and had a ‘horizontalist’ flavour much celebrated by contemporary critics of traditional leftist parties. But the downside is that this organisational form effectively permitted the central leadership to determine policy, while more critical elements simply became a sort of internal ‘loyal opposition’.

Syriza’s leftist elements were not unaware of this, but were compelled to join the party having failed in their initial quest to form a broad, anti-EU alliance with the anti-capitalist left. As Kouvelathis describes it, the Left Platform crowd joined Syriza in 2012 only after these proposals left were rejected by the main component of Antarsya (Anticapitalist Left Cooperation for the Overthrow), a far-left coalition formed in 2009. The KKE, the Communist Party of Greece, also remained aloof. The sticking point was apparently the ultra-leftists’ insistence on a programme of immediate rupture from the Eurozone as the bulwark of ‘neoliberalism’. However, as noted earlier, in 2011/12 this position had virtually no popular support. Nor, reflecting the long-standing decline of Greece’s far left, did these far-left parties have any electoral standing.

Essentially, while Syriza had the wrong line but at least the capacity to get elected, the radical left arguably had the correct political line but lacked any capacity to translate it into policy. Following a crisis common to all European states in the 1980s, the Greek far-left has been extremely fragmented, remaining, despite the formation of horizontalist alliances, unable ‘to actually articulate an alternative project’, and producing ‘catastrophic electoral results’, according to Antarsya’s Panagiotis Sotiris. This strategic ineptitude led them, unlike Syriza, to fail to translate their mobilisation of Greeks in the 2011 ‘movement of the squares’ into party organisation and electoral success. This was arguably a serious failure of the horizontalist model with its renunciation of forming parties capable of seizing the state. As Sotiris laments: ‘we never realized that the question was about power… reclaiming governmental power. At that point, we did not have this position, but Syriza had it’.

Unsurprisingly, then, the Left Platform group threw in its lot with Syriza. But in so doing, it inevitably became somewhat marginalised and constrained: outnumbered within Syriza by centre-leftists and balanced within government by Syriza’s coalition partners, the right-wing Independent Greeks (ANEL). Through this Caesarist balancing act, as Kouvelakis recounts, ‘the government, the leadership, became totally autonomous of the party’. The lack of democratic structures within the loosely constituted party has permitted Tsipras to dominate: the Central Committee has not convened for months. But nor, it seems, has the Left Platform been willing to precipitate a full-on confrontation. Even when voting against the post-referendum ‘bailout’, it carefully manipulated its vote to try to avoid removing Tsipras’s majority support from within his party, the loss of which has traditionally triggered elections in Greece. (Ultimately, so many non-Left Platform Syriza MPs rebelled that this majority was lost anyway, although no election has been called.)

But these questionable tactics, an inevitable part of the difficulties of party politics, are probably secondary to the larger strategic failure, which was to neglect to present the citizenry with an alternative plan for Greece’s future outside the Euro until early July. Kouvelakis now admits this was a serious mistake.

It is not that the plan took forever to draft: it was already in hand long ago, but there was ‘internal hesitation about the appropriate moment to release it.’ This apparently stemmed partly from fears that Greece was ‘ready’ for Grexit. Lapavitsas has long argued for a managed and ‘orderly’ Grexit, but as late as 10 July he openly doubted whether any preparations had been made. Varoufakis’s subsequent revelation that only five officials had been tasked with this suggests that he was correct (as well as signifying his utter disinterest in alternatives to striking deals with the creditors). Essentially, reflecting its marginal position in the ruling coalition, the Left Platform was dependent on the governing part of Syriza to lay the technical ground for their Grexit strategy, which they clearly had no interest in doing. Its members had also become swept up in day-to-day events, Kouvelakis recalls, being ‘neutralized and overtaken by the endless sequence of negotiations and dramatic moments and so on… it was only when it was already too late… that [our] proposal was finally made public… This is clearly something we should have done before.’ The Left Platform thus failed to provide the leadership that their Syriza colleagues refused to provide and that their compatriots so badly needed.


What lessons can we draw from this sorry tale?

The main one is that the European left must shed its illusions about European solidarity. First, the EU is not, and has never been, a font of democracy and social justice. The left, broadly defeated at home through the 1980s, has increasingly put its faith in supranational institutions to protect human rights and social protections, including the EU’s ‘social chapter’. That this only ever expressed the left’s domestic weakness was starkly revealed when European elites combined after 2008 to inflict austerity on their own peoples, and domestic resistance was utterly ineffective. Appealing to EU leaders to uphold norms of democracy and social justice, as Syriza did, is clearly futile. Syriza should be credited with one achievement. It has finally pulled away the veil, forcing everyone to recognise the EU’s true character.

But, secondly, it is equally illusory to put one’s faith in European parties, peoples and social movements, in the hope of a transnational alliance capable of generating more progressive outcomes. This hope for a ‘counter-hegemonic bloc’, long expressed by Gramscian scholars of the EU, has been peddled for 20 years without success, expressed in forms like the European Social Forum, which ultimately go nowhere. Sadly, Syriza found little to no effective support beyond their own borders. Again, this reflects the collapse of progressive political organisations capable of turning humanitarian sympathy into meaningful political action.

This experience strongly suggests that the prevailing European order cannot be effectively contested by progressive forces at the European level. They are simply too weak and isolated. After all, part of the elites’ purpose in rescaling governance to the European level is precisely to outmanoeuvre opposition, which is rightly assumed to be less able to organise regionally than nationally. This suggests that progressive forces must operate primarily on the more hospitable terrain of the nation-state. They need to lead a movement among their own people, even if it means arguing with them, rather than relying on those abroad who already agree with them. This implies a need to recover space for this activism by reasserting the autonomy of domestic politics from European regulation – i.e., by reclaiming popular sovereignty.

Despite growing left-wing Euroscepticism, this step seems to remain anathema to most. Syriza’s leadership were openly leery of popular sovereignty, warning of a fascist revival. This fear is widespread among European elites, suggesting a strong suspicion of the masses, perhaps especially among supposed progressives. But even Syriza’s Left Platform seemed wary of articulating the necessary steps for the restoration of Greek autonomy, despite their clear premonitions of disaster. This is a sign of how deeply the ‘member-state’ mode of politics has been entrenched over several decades. It will be a hard habit to kick.

Another lesson concerns the organisational form and content of anti-EU resistance. Broad coalitions, rooted in societal mobilisations, are crucial, but insufficient without strong party organisation. Syriza’s formation as a party helped create the structures and programme necessary to help turn popular mobilisation into political power. It thereby achieved what every fashionable, ‘rhizomatic, horizontalist network’ – from Occupy to the Greek far left – has failed to: to exert some grip over state power and thus potentially leverage over social change. Yet, its absence of strong internal democracy also allowed its leaders to pursue an unworkable strategy and even betray the expressed wishes of the electorate. Against the Eurocrats for whom ‘elections cannot change anything’, the task is to rebuild truly democratic parties capable of articulating an alternative and attractive vision for the future of European societies.

Lee Jones



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.


François Hollande, a year on

7 May


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

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

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

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

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

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

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

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

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

Buying time and running out

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 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.

A comment on Soros

18 Sep

For a long-time a bête noire amongst pro-Europeans because of his status as the financier that forced Britain out of the Exchange Rate Mechanism and thus cemented the UK’s outsider status in European monetary integration, George Soros has recently emerged as one of the most authoritative commentators on the ongoing Eurozone sovereign debt crisis. His most recent article in the New York Review of Books was one in a long line of alarmist but thoughtful interventions into the debate.

Soros’ main argument is that Germany needs to choose between either fully backing the Euro or leaving the Eurozone altogether. Lacking the will to act as paymaster, but determined to keep the Euro together, Germany has been accepting the bare minimum that is needed to keep the currency union together. According to Soros, this is a case of the cure being worse than the disease. By insisting on national responsibility for EU-incurred debts, Germany risks recasting the egalitarian European integration project around the twin poles of creditor and debtor. Debtors are pushed into deflationary traps as they struggle under debt burdens and national antagonisms deepen as debtor states survive on a Euro drip provided by miserly creditors. All in exchange for deep cuts in social protection and welfare.

The novelty of Soros’ argument lies in his claim that a German exit from the Euro would save rather than sink the currency. His reasoning is clear. When a debtor – like Greece – leaves the Euro, the benefits of a depreciating new currency are offset by the strangling effect of Euro-denominated debts rising dramatically in value. When a creditor like Germany leaves the Euro, however, the situation is different. The creditor, of course, faces a loss. But those remaining in the currency zone benefit enormously: depreciation of the Euro would bring competitiveness back to Eurozone members and the main political obstacle to further political integration –German obstructionism – would have disappeared. The Eurozone would be free to introduce key measures – debt mutualisation, for instance – that would exist were it not for Germany.

By blaming Germany, Soros’ argument appears as part of a more generalized anti-German sentiment popular all across Europe. In fact, Soros himself seems rather comfortable with the idea of a German-dominated Europe. He would just rather that Germany accept the responsibility that comes with empire. As he puts it, “imperial power can bring great benefits but it must be earned by looking after those who live under its aegis”. Soros’ advocacy of German paternalism is hardly a compelling vision. But his focus on the German origins of the crisis are welcome as they challenge the notion that profligate spending by Southern cone European governments is at the heart of the current mess. But there are limits to the blame game.

It is certainly the case that German banks and businesses benefitted from the introduction of the Euro. In particular, it meant that consumers in Southern Europe could – via public or private borrowing made possible by the low risk premiums brought about by monetary union – buy German exports. But it is also the case that in the late 1990s and early 2000s, Germany was – as The Economist put it – the “sick man of Europe”. The changes put in place by Chancellor Schroder were far from socially neutral: labour markets were liberalized and wages were frozen or cut in real terms. Only the Social Democrat’s hold over the trade unions made this possible. Germany underwent an internal devaluation with the burden of adjustment squarely pushed onto the German working class. It was in this period that Die Linke, a party to the left of the SPD, was created. The sentiment driving German caution in this crisis is thus a complex one. It certainly involves some miserliness and a good dose of anti-Southern prejudices. But it also includes an understandable fatigue on the part of German workers at having to bear the burden of adjustment. When we read that in recent weeks banks have been holding over 700 billion Euros in surplus liquidity at the ECB, it seems that there is ample room for some adjustment on the part of German capitalists.

Soros’ account of the crisis is also curiously Eurocentric. As someone aware of the global dimensions of the current economic and financial crisis, he chooses to focus on the unique features of Eurozone governance. Had the Eurozone been armed with a common treasury, and not just a European central bank, Soros suggests that there would have been no Eurozone crisis. Policy mistakes, tied to the short-sightedness of Eurozone policymakers, have caused the crisis. This is at best a partial explanation. Outside of the Eurozone, the British and US economy are struggling to exit a major economic downturn. The crisis itself – beginning with the Lehman Brother’s collapse – originated in the US. Popular mobilization against the inequalities that have build up in recent decades is not European either. It was unwise to create a common currency without institutions capable of exercising the required political discretion in a time of crisis. But the crisis is one of capitalism, not just of the Eurozone. Were the right institutional fixes to be introduced, we would still be faced with the twin problems of financialization and debt-financed growth. And endlessly replicating an export-based growth model raises the question of who will be the “market of last resort”? In focusing on the Eurozone, Soros misses the wider dimension of the crisis.

The Zombie Currency and the Fetters of Europe

4 Sep

Hobbes once said that money is the “Sanguification of the Commonwealth” Wherever it circulates, so it brings goods from those who produced them to those who need them, and in the process sustains the life of the body politic, the same way blood sustains the life of the body. If Hobbes was right, that is a bad sign for the euro. The euro was supposed to be the lifeblood of the European Union, circulating through and nourishing the political institutions of the Euro-Leviathan. Instead it is sucking the life out of it.

Part of the problem is that the euro was not just supposed to nourish existing institutions but conjure into being a set of institutions that had not yet been fully created. It was a political project through and through. It was supposed to compensate for the EU’s democratic deficit and confusion of powers: a kind of European version of post-Tiananmen China – economic vitality in the place of more democratic institutions. But, unlike China, the EU never went all the way to creating a highly coordinated, if undemocratic, Euro-Leviathan. What the euro promised was financial integration, macroeconomic stability, and technocratic peace. A common currency managed via European Central Bank monetary policy would bring borrowing costs down, given the implicit continental wide guarantee. This is exactly what happened at first. Sovereign debt yields converged rapidly, such that where Greek yields had been almost 25% in 1992 compared with German 7% yields, by the end of 2000, two years after the introduction of the euro, their yield were nearly the same. Credit flowed freely across borders, as did capital, consumer goods, and even labor.

But as we have seen over the past months, the background guarantee of supranational monetary support was not actually there, the Leviathan was a many-headed hydra, and the underlying economies diverged rather than converged. The ECB’s mandate is to control inflation not save banks or engage in fiscal transfers. There is no coordinated continental-wide fiscal policy. The responses to the recent crisis have been short-term, ad hoc moves, like the Long Term Refinancing Operations, in which the ECB loaned money to national banks to buy sovereign debt, in an attempt to keep yields low and increase liquidity.

The effect has been to extend the sclerotic features of the European political system into the economy, rather than to have that economy breathe life into the political institutions. Consider the following three facts, which together reveal just how rapidly the European economy has financially dis-integrated, even as the euro ghosts along preventing this dis-integration from becoming an economic reorganization:

  1. First, as everyone has noticed, sovereign debt yields have radically diverged to reflect not the strength of a continental economy with a coordinated economic policy, but rather dramatic differences in national economic potentiality. Germany is safe, France moderate, the PIIGS increasingly risky. (Note both the convergence from 1999-2009, and the rapid divergence from 2009 onwards. Graph from the ECB)

  1. Second, as Gillian Tett reported in May, cross-border private lending has seized up. An essential feature of eurozone financial integration had been the willingness of banks to make loans in one country backed by assets from another. Lending to Greek consumers were matched by German funds; lending to Spanish borrowers covered by French assets. Now, as Tett observes, “banks are increasingly reordering their European exposure along national lines…the fracture has already arrived for many banks’ risk management departments.”  Banks now demand that any loan to a particular country be backed by funding from that country. Where the economic strength of Germany thus facilitated borrowing, speanding and investment in weaker economies, it now subtracts from that same provision of credit. Given the economic contraction, Greece, Spain, Italy now have fewer good assets to put up against loans that now has to be backed nationally. This “asset-liability matching” is an indication that banks are already treating the european economies as breaking up, even if this break up is not registered at the level of different currencies able to register these different economic potentials. An April ECB report on financial disintegration notes that the standard deviation in interbank lending rates across countries has continued to grow and fluctuate wildly since 2009, and an August report confirms continuation of the trend in various financial markets: “the pricing of risk in the repo market…has become more dependent on the geographic origin of both the coutnerparty and the collateral, in particular when these stem from the same country.”
  1. Recently, the Financial Times reported corporations have had to seek financing from the corporate bond market, because bank loans are in short supply, and that the yields on corporate bonds are nationally divergent. According to the FT, “Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs.” Further, this particular instance of fragmentation heavily favors large businesses that can sell bonds on corporate bond markets, and some countries have many more corporations with access to these markets than others. Money is going into already established avenues for investment, not new growth areas. Once again, financial markets are reflecting the fragmentation of the European economy.

In sum, diverging national bond yields, diverging bank loan structures, diverging corporate borrowing costs. The blood is running through the arteries of a foreign host.

The ECB is not so much keeping the euro alive as keeping it from dying. Public funding by the ECB is replacing private funding at the cost of sinking more and more money into going concerns, suppressing new avenues for investment. Banks are not lending to companies, they are investing in their own sovereign debt or parking cash back at the central bank. Major companies are sitting on cash hoards rather than investing.

The Euro is a zombie currency – a monetary undead, wandering around feeding off the flesh of living economic entities. Of course, there is an alternative to trying to goad skittish banks and bearish companies into investing. One could sequester savings and force investment through a massive, European wide investment plan. But that would require decapitating the zombie, or however else one finally kills the walking dead. The fetters of the EU political structure weigh too heavily on the economic forces of the Eurozone to allow such a radical act. There may be a European solution to the continent’s economic malaise, but it won’t come from the EU.


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