Europe’s internal adjustment

With all the talk of competitive currency devaluations and international currency wars, less attention is being paid on the arresting fact that some countries within the Eurozone are achieving what many thought they could not: an internal devaluation via wages and other production costs.

A consequence of this is that some Southern European economies are regaining shares in export markets, their products cheapened by a mixture of labour market reforms and downwards pressure on wages. The FT recently reported that in Portugal exports in 2012 rose by 5.8%, with exports to outside the EU rising 20% in this period. This was Portugal’s third consecutive year of plus 5% export growth. Writing about Spain, Tony Barber suggested that a similar phenomenon was occurring in the Spanish manufacturing sector. Car companies planning to reduce production in France and Belgium are boosting output in Spain. Nissan has committed 130 million Euros of extra investment into its Barcelona plant in order to raise annual production to 80,000 units. Ford, Renault and Volkswagen have all followed suit with their own investments. Barber explains that lying behind such decisions are changes in Spanish labour laws. A reform package last year introduced by the government has loosened up collective bargaining practices, making it easier for firms to negotiate favourable terms with workers.

The ability to boost export competitiveness by internally devaluing is not uniform across the Eurozone. France has enacted its own labour market reforms but labour costs remain significantly higher there than in Spain or Portugal. Monti in Italy has been less successful in pushing through labour market reforms. This unevenness has had the effect of exaggerating the competition between countries within the Eurozone. Unable to compete with one another via national currency manipulations, competition is realized via changes in the labour market. Accepting lower wages has become a matter of national duty in today’s Eurozone.

This development has various implications. The first is that it seems parts of the Eurozone are able to achieve what we thought was only possible in the olden days of the Gold Standard: internal adjustment where the burden falls upon societies, not currencies. This worked back then because there were far fewer public expectations about jobs and welfare to challenge the harsh assumptions of Gold Standard supporters. When such internal adjustment became intolerable, it collapsed. We might have expected something similar today. In fact, the quiescence of European labour has made internal adjustment possible. In some places, it has meant hollowing out national democracy in favour of more stable, technocratic alternatives, but the single currency remains. Differences between the constraints imposed by Eurozone membership and those of the Gold Standard help explain some of the stability of the former but not all. Much is also due to weak labour militancy.

Another implication dovetails with a previous post on falling productivity in the UK. In some Eurozone member states, productivity figures have improved. In Spain, productivity is has risen by 12% since mid-2008. However, such increases have not been achieved via any labour-saving investments. There have been no marked technological developments that explain rising productivity figures. Rather, gains have been made through labour itself. This tells us a great deal about European capitalism: it is far easier to claw back price competitiveness via assaults on labour than it is to boost productivity through capital investment in research, product development and technological improvement. Paradoxically, we can say that weak labour militancy results in low incentives for firms to channel capital into labour saving technology.

The kind of internal adjustment taking place within the Eurozone is thus hardly a victory for supporters of austerity. Competiveness is boosted in short-term ways, via downward pressure on wages. There is no longer term gain in productivity that might actually leave a socially useful legacy for societies as a whole. Recessions and social upheavals in the past had the same human cost in terms of wasted lives but they came with great labour-saving inventions and other gains. European leaders are so worried about currency wars precisely because Yen and Dollar devaluations threaten to wipe away the marginal gains in price competitiveness their businesses have made. And they know that were this to occur, there would be nothing much left. Only the waste.

The end of insolvency

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.

A note on the first round of the French elections

With one of The Current Moment editors based in Paris, it is difficult not to post on last night’s first round of the French presidential elections. And after the unedifying spectacle of different politicians talking over each other for hours on end on French TV, a few ordered thoughts will not go amiss.

François Hollande, the Socialist Party candidate, has come out on top, as most people expected. With 28.63% of the vote, he was a little ahead of Nicolas Sarkozy, the outgoing president, who secured 27.08% of the vote. What is surprising is how close these two scores were. There is some variation in the scores, depending on how you round them off, but there is little evidence of Hollande having pulled away dramatically from Sarkozy. Hollande’s victory in this round is far less decisive than Sarkozy’s was in 2007. Back then, Sarkozy won the first round with more than 31% of the vote, the socialist Ségolène Royal winning just under 26%. Watching the speeches each candidate gave after the announcement of the results, there was no obvious sense of victory either way. Sarkozy even appeared to upstage Hollande by challenging the socialist to three presidential debates over the next two weeks. A typically pugnacious gesture on Sarkozy’s part, Hollande seems to have refused which puts him in a defensive position vis-à-vis the ever combative Sarkozy.

At this stage, it is difficult to tell whether the anti-Sarkozy sentiment in France will be strong enough to sweep him out of power. The results suggest that contrary to many other elections that have taken place in Europe in the course of the crisis (e.g. here on the Spanish elections), the incumbent has managed to hold on to a good deal of support. Given the apparently ubiquitous dislike of Sarkozy, his score appears rather high. We are also seeing at this stage the limits of the Socialist strategy. Their slogan – Le Changement, C’est Maintenant (Change is Now) – highlights how much they have relied upon anti-Sarkozy feeling. Their claim to incarnate change is a weak one. Figures such as Laurent Fabius – a young prime minister under François Mitterand in the 1980s – hardly incarnate change. Rather, there is in the Socialist Party a sense that it is their turn to rule: out of power since the mid-1990s, their rightful place was usurped by a victorious Sarkozy in 2007. Now, their turn – long overdue – has come. It is this kind of sentiment – less evident in Hollande than it is in his entourage – that helps fuel support for the more marginal parties.

The first round result was noteworthy perhaps above all for the high scores of the far-right Front National and the left-of-the-left party, the Front de Gauche.  Much of the campaign had been taken up by this struggle between Marine le Pen and Jean-Luc Mélenchon, the populists of the right and of the left. Polls had credited the Front de Gauche with up to 15% of the vote but Mélenchon obtained on the night 11.13%. Marine le Pen, who had often been pushed back to fourth place in the polls, came a powerful third with 18.01%. It is difficult to assess what this means for the next round. Le Pen is expected not to give any clear sign that her supporters should vote for Sarkozy and many may not vote in the second round. Mélenchon called on his supporters to vote against Sarkozy, but held back on the night from openly calling on them to support Hollande – a tortuous position to hold if ever there was one. If we judge from the feeling that prevailed on the Sarkozyste right that “all is to play for”, there is no doubt some of that bullish sentiment comes from the hope that they can win over most of Le Pen’s supporters in the second round. Sarkozy’s speech last night – making much of patriotism, strong borders and economic protectionism – was an obvious pitch to Front National supporters. And the Socialists may find themselves in an uncomfortable position of trying to secure the votes of the virulently anti-FN Mélenchon supporters whilst at the same time sending conciliatory messages to the FN vote about understanding those who are suffering in the economic downturn. Here we see the problems of the Socialist Party: both a centrist and pragmatic (and largely middle class) electoral machine, and a party with a few remaining roots in the French working class.

It is unlikely that either Hollande or Sarkozy will upset the European crisis boat after one of them has been elected on May 6^th. Hollande’s main policy on the Eurozone crisis is to reorient macro-economic governance in a pro-growth direction. This is a very general claim, easily satisfied by cosmetic measures such as affixing the term growth to new European agreements much as was done with the Stability and Growth Pact. It is unlikely that the Socialists would rock the Eurogroup boat by denouncing all existing measures and demanding a return to the drawing board. It is likely that the curious way in which Brussels-based policymaking is able to insulate itself from domestic political currents will continue. What will happen within France, however, is far from clear. The success of the FN might also spell the end of its marginal existence and its transformation into a more mainstream party. There is talk of changing the party’s name, for instance, part of a wider and longer-term exercise in rebranding. But for the moment, the focus will be on what will happen on May 6^th.

Behind Europe’s employment figures

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

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

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

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

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

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

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

Specterless Europe: What is the problem to which Europe seeks a solution?

A crisis of confidence says ECB President Mario Draghi, and just about everyone else. Confidence is lacking in the ability of eurozone countries, especially in the south, to pay back their debts. According to Draghi, as quoted in the Financial Times, “the most important element to start restoring credibility” and confidence is…you guessed it, austerity. The outlines of the new “fiscal compact” includes, first and foremost, agreement on “strong rules on public finances,” and stronger European control and enforcement of national budgets. The nature of this enforcement, and the punishments it will entail, are still in formation. The differences between Merkel and Sarkozy over the amount of budgetary control to allow national governments are familiar, though increasingly appear as the narcissism of petty differences.

After all, the underlying agreement about how to ‘restore credibility’ is striking – more Europe, more technocratic control, more budgetary austerity. There is no serious threat of exit from any national leadership, no major political or social movement directly addressing itself to the constraints of the eurozone or the imposition of austerity. The Spanish indignados have faded, Greek protesters pushed aside, with both countries electing conservative or unity governments to push through cuts. The closest thing to a direct mass challenge has appeared outside the eurozone, in the form of the one-day national strike against pension reductions by public workers in the UK.

But in what way is greater technocratic enforcement, at the European level, of budgetary limits a means to ‘restoring credibility’? After all, balanced budgets here are not ways of increasing productivity and restoring growth. The underlying structural problems in the economy not only remain but will be made worse in the short run. The eurozone is already in zero growth. Greece, as it prepares another round of cuts, revised growth downwards. Italy was already running a balanced budget before the sovereign debt worries emerged. But given 5% real interest rates, it would now have to run a 5% budget surplus – a surplus increasingly difficult to maintain under contractionary fiscal policies. Contraction slows growth, creating new need for more cuts to please creditors. Overall, then, the two major obstacles to economic growth, and thus ability to repay debts, are being reinforced: the monetary union, and fiscal constraint. From whence comes the ‘restored credibility,’ the new confidence?

What we are seeing is not what one might call ‘economic’ confidence, based on restoring economic fundamentals, but ‘political’ confidence. Measures, implemented by ostensibly neutral technocrats, are aimed at creating a new supranational political technology of social control, wherein investors in debt are given greater confidence that their claims will be given priority in any struggle over the stagnant or shrinking pie. The flash in the pan, halcyon days of the bubble, when a rising tied lifted all boats are gone. This is a struggle over a stagnant surplus. The new confidence is in who will control political apparatuses, both at the state and European level, and creditors have clearly won this round. They have barely faced a challenge in spectreless Europe.

Spain: predictable results in uncertain times

The most remarkable thing about yesterday’s election results in Spain is how unremarkable and predictable they were. For weeks, the opinion polls had been predicting that the incumbent Socialist government would be trounced and it duly was. The opposition Partido Popular (PP), lead by a seasoned PP politician, Mariano Rajoy, won 186 seats in the 350 seat assembly. The Socialist Party, the PSOE, won 110 seats. In terms of percentage of the vote, the PP’s victory was all the more striking: 44.62% of the vote for the PP, 28.73% of the vote for the PSOE. The scale of the PP’s victory was no doubt a reflection of the widespread disaffection with the governing Socialists. But beyond that, there was little in the results that indicated the scale of the economic and social crisis the country is facing. No new political formations have been thrown up by the crisis. The United Left party (IU) won 11 seats and 6.2% of the vote – not an insignificant result. But generally the smattering of small parties that won altogether 54 seats were an ideological mixture: left, right, Catalan and Basque nationalist. The Indignados movement, fueled by a widespread disenchantment with the ruling political class, did not prompt any mass withdrawal from the electoral process. Their slogan – They Don’t Represent Us! – did not seem to have much impact. The abstention rate was 28.3%: higher than in the two previous elections (2008 and 2004) but lower than in 2000.

Though unemployment stands at above 20% and the country’s ability to auction its bonds on the international market is looking shakier by the day, the prevailing sentiment in the course of the campaign was that of resignation. Rajoy himself did not propose any new ideas on how to tackle the crisis. His cryptic slogan that promised to transform Spain into the “Germany of the South” could be interpreted in a multitude of ways. His promises of fiscal rectitude and public sector reform was – in the absence of specificities – no more than a vague nod in the direction of both the markets and the EU. That an election at such a crucial time should throw up so few surprises is perhaps a fair reflection of how people are responding to the crisis. But in the case of Spain, it is surprising. After all, when the global financial crisis hit in 2008 Spain was performing well. Its government did not – contrary to Greece – run up large debts in the good times. Public borrowing was low as tax receipts from high growth rates ballooned. In 2007, its debt ratio was only 36% of GDP and from 1999 through to 2008 Spain ran a balanced budget on average i.e. its borrowing was equal to zero.

Spain’s problems today are in part the result of an asset price bubble. Whilst the government did not run up debts during the boom years, private borrowing in Spain rose rapidly as individuals were able to access credit easily via national and international channels. When the downturn struck, individuals found themselves saddled with extensive debts. Regional Spanish banks have also been left with a large number of bad loans, made to finance real estate projects that will never see the light of day. Repayment of these debts has cast a long shadow over the Spanish economy as spending power is squeezed and as banks refrain from financing the private sector.

However, this does not explain why the Spanish government is today struggling to find buyers for its bonds. That is to do with the common currency union. In a downturn, governments usually run up debts in order to pay for increases in welfare payments: with +20% unemployment in Spain, those payments are large but given Spain’s position at the beginning of the crisis it should be able to weather the storm. However, because of the common currency union, the use of automatic stabilizers is limited: Spanish government borrowing is judged not on its own terms as much as in terms of the wider dynamics of the Eurozone. The fact that these automatic stabilizers would have an inflationary effect which would reduce the debt burden in the longer term is also ruled out by the currency union. The disciplinary effect of monetary union is thus not neutral but specifically kicks in to restrain some policies rather than others. As already argued on The Current Moment, the effect is to structurally lock countries into internal adaptations through domestic wages and prices instead of adapting through a mixture of internal and external measures.

A measure of success for today’s protest movements should surely be whether or not they are able to challenge ruling orthodoxies in ways that impact upon electoral outcomes. The evidence from Spain is that up until now, protests have had no such impact.

Lessons from the European protests

We’ve posted before on the Occupy Wall Street protests (here and here). This weekend, the call for 15-O protests (Twitter-speak for 15^th October, 2011 and named after the 15th May protests in Madrid, dubbed 15-M) saw protests organized across Europe, from Madrid to Rome, London and Amsterdam. A popular graphic shows the scale of these protests.

The ease with which the protests spread shouldn’t be taken at face value. Important specificities remain. For a start, the occupation tactic is not a new one in the present crisis. The moves on Wall Street and in other US cities were preceded by those in Puerta del Sol in Madrid and Syntagma Square in Athens. Over at Lenin’s Tomb, Richard Seymour makes the point that these protests have been dominated by occupations of public places, not of work places, suggesting that people are mobilizing not as workers but as citizens (for an example, see here). Seymour also notes that a tactic is not the same thing as a strategy. The protests have some of the former but much less of the latter.

Given the duration of the European protests, some movements are running out of steam. A feeling of disenchantment was recorded in Madrid this weekend in spite of the high numbers of those out in the streets. Mobilization without a clear message has been a criticism of the protests by the media and by governments but it may be beginning to affect the protesters themselves (see here for a report along these lines on the Spanish case). It might be said about the protests that something is better than nothing and that the significance of the protests is not in their critiques of contemporary capitalism but in their existence. As Sidney Tarrow put it, this is a “we are here” movement. But mobilization in the absence of real gains leads to disenchantment, which itself becomes a material obstacle in future mobilizations.

As far as the slogans of the European protests go, three different strands stand out. One is a protest against the immediate impact of government policies. It is no coincidence that the main protest movements have occurred in those countries whose economies are facing the most serious downturns and government-led austerity measures: Greece, Spain, Italy and Portugal. Protests in Ireland have been more moderate, a reflection perhaps of the self-reliance of the Irish population and its more limited dependency on the state compared with societies such as Greece or Spain.

The two other strands are more abstract: one about fairness, the other about representation. The attack on bankers and financiers reflects a frustrated sense of entitlement: why should so few have so much? This sentiment unites protests on both sides of the Atlantic. The “we are the 99%” slogan of the Wall Street occupation was taken up directly by the protestors on the steps of St Paul’s cathedral in London, UK. In France, this same slogan has been transformed into: “they have more, there are more of us” (Ils ont plus, nous sommes plus). This is less an accurate representation of the distribution of wealth (see our critique here) than a claim about where the interests of the majority lie. The concern about representation is based on the conviction that governments have been captured by the financial elite. The main slogans of the Spanish Indignados have been: “Real democracy, now!” And “no, no, they don’t represent us” (see here for a list in Spanish of the different slogans).

As we might expect from movements that draw on an eclectic mixture of participants, these different demands sit uneasily alongside each other. Demands about improving the current situation are directed at the state and rely entirely on the state to solve today’s problems. Yet the dominant sentiment that governments don’t represent the people any more begs the question of where a ‘people-centered’ state will come from. Richard Seymour puts the cart before the horse, resolving these tensions through the deux ex machina of the Franco-Greek Marxist, Nico Poulantzas. Others ignore them in the hope that the pressure of greater mobilization will force the protestors to refine their ideas. That is unlikely. The lesson of the European occupation protests, from Madrid to Athens, is that occupation is no substitute for a strategy. Transforming the energy of the protests into an understanding of our current situation is today’s challenge.

 

 

 

Escaping the past

Wolfgang Streeck’s guest post (below) points to one of the key mysteries of the contemporary Eurozone crisis: how could those Southern Mediterranean countries, economically so buoyant from the early 2000s onwards, see their fortunes change for the worse so quickly? Today we are used to deriding them as basket cases, as the “PIGS”, yet in the last decade they were among the most dynamic economies in the Eurozone. What went wrong?

The standard answer is that national governments in these countries failed to tackle the special interests that are holding them hostage. Bloated public sectors are the obstacles to the much-needed supply-side reforms. The role of the European Union, the European Central Bank and the International Monetary Fund is, on this reading, to compel national governments to make the difficult choices and to take on these special interests. Streeck’s post suggests that something else is at work. These Southern Mediterranean economies are marked by the post-fascist social compact forged between political and economic elites in these countries and the interaction between these compacts and other European economies under the aegis of the European Union. Class compromise in Southern Europe has been achieved and sustained through economic aid from the North.

This point powerfully chimes with a theme of previous Current Moment posts: that the social, economic and political development of Southern Mediterranean societies has, for a number of decades now, been inescapably bound up with wider European institutions and policies. These countries are “member states” par excellence: their national existence expressed through the wider European framework. Streeck’s post highlights the negative consequences that flow from this: the relationship with the rest of Europe has had the effect of freezing the social development in these countries such that an indigenous nationally-oriented middle class did not develop, helping explain the poor performance of these countries today.

It is worth exploring some of the wider implications of Streeck’s argument. One is whether or not the same pattern will be followed in other parts of Europe. The social development of the formerly planned economies of Central and Eastern Europe has taken its own course. These countries have certainly evolved into “member states”, their national governments deriving as much authority from their participation in European summits as from their relationships with their own electorates. Yet some of these countries have managed to carve out for themselves their own role in the European division of labour, a consequence of the highly trained and educated workforce that existed at the time of the collapse of the Soviet bloc and the relatively low wage levels compared to Western Europe. A more difficult question is regarding the Balkans. Will European subsidies substitute for national economic development in the same way as occurred in Southern Europe? The primacy placed on national reconciliation by Northern European governments suggests that any dynamic and conflictual processes of social transformation in the Balkans, necessary perhaps if economic development in the region is to really take-off and be sustained, will be snuffed out by European elites afraid of a new outbreak of ethnic violence in the region.

Another implication of Streeck’s argument seems to be that economic development in the future for countries like Greece and Spain will only come about as a result of a fundamental process of social change, where existing class relations are radically modified. The current condition of these societies, where their existence is so firmly tied to Europe, inhibits such change. The place of national governments within pan-European institutions shelters them from the contradictions and dynamics visible at the national level. The European Union itself has customarily staved off class conflict through payments made directly to its members, to individual regions and to social groups like farmers. Instead of looking to Europe for solutions, growth in Southern Europe will only come from an internal confrontation with the social structures, relations and traditions inherited from their national past.

A plan for growth?

Guest post by Wolfgang Streeck

Several recent posts insisted that without a “plan for growth,” in particular in Mediterranean countries, the European crisis of debt, austerity and international solidarity will continue and get worse. That may well be so. But where is growth to come from? Regarding Greece, Spain and Portugal – I will turn to Italy shortly – it is not that there hadn’t been a “plan for growth” for them in the past. Accession to the European Union gave them access to a huge “internal market,” in fact the largest in the world. European Union regional and structural funds were to help them build the infrastructure they would need to make use of their new opportunities. And the Euro, once introduced, combined with comparatively high national inflation, made for very low real interest rates.

In fact in the years before 2008, Spain and Portugal especially were booming (while Germany, incidentally, was stuck in stagnation and high unemployment, due to low inflation and, as a result, high real interest rates). But as we now know, the money that was flooding the GIPS countries and that could have prepared the ground for sustainable growth and long-term competitiveness went into the wrong channels. Low interest rates and European-funded infrastructures, rather than attracting investment in internationally competitive manufacturing or services, went mostly into speculative ventures in real estate. The experience does not exactly bode well for another round of “planning for growth.”

Why was the window of opportunity in the 1990s and early 2000s missed? It seems that even the best macroeconomic conditions and the most generous infrastructural support must fail to kick off development unless there is a domestic middle class of entrepreneurs willing to make long-term investment in local industrial progress, throwing in their own fate with that of their country or region. (Ireland, because of its English language and its patriotic expatriates everywhere in the world, may be an exception.) Foreign direct investment is apparently not enough as there are almost always opportunities elsewhere for footloose capital to make more money faster. What is needed is a patriotic business class willing to tie their fortune to that of their local society – which is a tall order in a world reshaped by globalization and financialization.

Not that there was no patriotic local entrepreneurship at all in the Mediterranean. There is, for example in regions like Catalonia and the Basque country (as well as in Northern Italy, see below), and indeed these are least affected by the crisis. But where the money has remained in the hands of an oligarchy of aristocratic and pseudo-aristocratic families, very little happens. Financial deregulation has created ample opportunity for those who do not want to dirty their hands to invest in United States Treasury Bonds or in Fifth Avenue real estate, if they are not content with breeding fighting bulls or operating Korean-built ships under Caribbean or African flags and with Chinese crews. It is not all true that there is no money in Greece. Quite to the contrary, the Onassis and Niarchos family clans rank high among the world’s superrich. The problem is that they do not want to invest in their country and that they are freer today than ever to take their money abroad.

There are also good reasons to believe that the Mediterranean superrich pay even fewer taxes at home than their counterparts in Northern Europe. In an interesting way this seems related to European integration. European Union structural funds, later low interest on government borrowing under European Monetary Union, and now the transfers that are being paid in various forms to refinance the Greek and the Portuguese national debt compensate for Mediterranean countries’ inability to tax their money aristocracies. At the same time, they make it unnecessary for governments to invest in more effective tax collection. Northern economic aid has filled and still fills the gaps in public coffers caused by national money migrating abroad or avoiding to be taxed. It thereby in effect subsidizes a latent social compact under which post-Fascist Mediterranean democracies left pre-democratic quasi-feudal elites alone to allow for national reconciliation, instead of expropriating them one way or other in favor of, for example, a new entrepreneurial middle class. Note bene that Greece is among the countries with the highest concentration of wealth, in the hands of a very small number of old families.

Does this seem far-fetched? Take Italy, which is a country consisting of two countries. Northern Italy is part of the Western European heartland, in the same league as Bavaria, Austria, Switzerland or the Rhone Valley. The Mezzogiorno is Italy’s Mediterranean, much like what Greece and Portugal and large parts of Spain are to the European Union. Note how long the Mezzogiorno has had the same currency as Northern Italy, access to the same markets, the same interest rates, and in particular extensive structural aid, far above in fact what Greece and Portugal and Spain and Italy as a whole can ever hope for to receive under even the most extensive and generous European “plan for growth.” All to no avail because of an archaic, pre-capitalist social structure that for political reasons was left essentially unchanged. In fact, in a complicated story that could, however, easily be replayed elsewhere, Northern Italian support for modernization in effect enabled the old elites of the South to make sure that they remained in control and everything remained as it was, in the famous Gattopardo way.  Since there was money flowing in from the outside, nobody in Rome needed to pick a fight with those diverting the money from the inside into unproductive luxury consumption or even more uncouth activities. In fact increasingly, the outside money was diverted to buying political support for governing parties in a socially unchanged and economically stagnant Mezzogiorno, with cynicism over “growth” plans that were in reality corruption schemes growing from year to year.

It is interesting the see how categorically Northern Italians today object to further transfers from North to South. Quite a few – viz. the enormous electoral support for the Lega Nord – are even willing to let the Italian national state break up so they can keep their money for themselves. If Northern Italians don’t want to pay for Southern Italians any more, having given up hope after so many years that a “plan for growth” can be devised that really works, how can one expect German or Dutch or Danish taxpayers to agree to an institutionalized transfer-cum-economic development regime for Greece and Portugal and, very likely, others? Remember that one reason why the Italian Southern experiment with accommodating a pre-industrial power structure was for a long time politically acceptable in Italy was that it was subsidized by Northern European countries, in the form of European Union regional aid (which originally went almost exclusively to Italy). As this ran out, in part because after 1989 so many other countries began claiming assistance, the Italian North-South social compact is breaking up. Currently the hope is that Europe will pay, not just for Sicily, but for the Italian state as a whole. But unlike Northern Italy paying for the Mezzogiorno, there is no third party helping Northern Europe pay for the Mediterranean.

Economic growth is not just about macroeconomics but also about social structure. Mediterranean countries may, some nationally and some only regionally, have missed the opportunity to acquire a class structure conducive to industrial competitiveness in a post-Fordist world. Now it may be too late, both because the local money, which is still largely preindustrial money, can more easily than ever exit, and because building post-Fordist competitiveness may simply take too much time in a world whose markets are already divided up between economic power houses like Germany and China. Perhaps when Spain, Portugal and Greece broke free from fascist dictatorship in the 1970s, they would have been better advised not to follow the Social-Democratic recipes offered by the European Community: of liberal democracy rather than social and political revolution (land reform!), economic growth through admission to international markets and assisted by subsidized infrastructural investment, and in particular exclusion from power of the radical Left, Euro-communist or not, on the postwar Italian model.

With respect to the latter, it may help to remember the peculiar starting point of the trajectory that has now come to a climax: the 1970s, when Enrico Berlinguer, leader of the Italian Communist Party, under the impression of Kissinger’s putsch in Chile (1973), abstained in the middle of the decade from joining the Italian government, afraid that the same could happen to him that had happened to Allende (Aldo Moro was killed in 1978); when the Revolution of the Carnations (1974) brought a Communist group of military officers to power in Portugal; when the best-organized opposition at the end of the Franco regime (1976) were the – Communist – Commissiones Obreras; and when it was not clear at all who would take power in Greece after the military junta had to give up (1974). Promising post-Fascist transition governments accession to the European Union was above all a tool for containment: for preventing a (Euro-) Communist Mediterranean from happening. Keeping the Communists out of power meant neutralizing the most committed enemies of the old elites, which allowed for and made necessary accommodation with the latter under a policy of national unity. The hope was for a Social-Democratic kind of progress: for class compromise, liberal democracy, a social market economy reinforced by European integration, and a slowly rising middle class modernizing the new Mediterranean, while the old elites would slowly wither away. Having lured post-Fascist Mediterranean democracies onto the Social-Democratic path to stabilize their Southern rim, Germany, France and the others now have to pay the bill, in the form of unending transfers supporting ever new “plans for growth” that will again and again turn out to be, at best, plans for keeping the Mediterranean poor house of Europe from exploding.

Professor Wolfgang Streeck is director of the Max Planck Institute for the Study of Societies (MPIfG), based in Cologne, Germany. His most recent book is Re-Forming Capitalism: Institutional Change in the German Political Economy, published by Oxford University Press.

The New Left Review on the crisis in Spain

In recent issues, the New Left Review has covered the collapse in Europe’s peripheral economies: Ireland, Iceland, and now Spain. The articles provide detailed insights into how the dynamics of contemporary global capitalism have worked themselves out in these specific cases.

The Spanish crisis is described by two Madrid-based economists, Isidro López and Emmanuel Rodríguez, as a crisis of “asset-price Keynesianism”, a term they borrow from economic historian Robert Brenner. What they mean by this is that Spain’s growth, over a number a decades, has been based on the rising price of property. With home ownership extending to a massive majority of the population (87% in 2007; cf. UK and US where the figure never rose above 70%), household income has been driven above all by property values. The IMF’s figures give the ‘wealth effect’ of rising house prices in Spain as an average increase of 7% in private consumption between 2000 and 2007 (cf. 4.9% in the UK, 1.8% in Germany). This has created over time an economy oriented around the development of property by construction companies and the funding of home ownership by local banks (cajas). The legislative conditions for further building were provided by local governments and the federal government in Madrid. Over time, Spain’s demographic and social development has reflected this economic model. Immigration into Spain served to administer to the needs of an increasingly prosperous middle class. Familial ties were maintained as the basis for inter-generational transfers of wealth. Even infrastructural development has been driven by the concern to open up new land to property development. López and Rodríguez describe all this as the “financial-property development circuit” (p14).

The underbelly of this particular model of economic development is an ugly one. Most significantly, wealth effects through rising house prices have served as a substitute for alternative ways of generating rising incomes. Over the period of 2000 to 2007, average real wages in Spain fell by 10%. López and Rodríguez note that “the entry of 7 million new workers in the labour market produced an increase of only 30% in the total wage bill” (p12). Spain’s labour market is also well-known for both chronically high youth unemployment and a general precariousness marked by the prevalence of seasonal work and temporary contracts. This helps explain why the staggering rise in unemployment in Spain since the beginning of the current crisis in 2008 has not led to societal collapse or revolution. Unemployment rose above 20% in 2010, the highest in the Eurozone, but without tearing Spanish society apart.

A key point made by López and Rodríguez is that the role played by property prices in Spain is not a contingent development, spurred on by the evils of neo-liberalism. They date this growth model back to Franco, who in the 1950s had already identified the attractions of ruling over property owners rather than proletarians (p6). Spanish growth since then was focused on property development, construction and tourism. Absent from Spain’s development has been a domestic manufacturing base. Spain was then integrated into the wider European economy on this basis of partial de-industrialisation. López and Rodríguez argue that little has changed over time, with the “financial-property development circuit” only deepened and refined as Spain has won access to cheap credit through Eurozone membership. Now that the crisis has struck, there is little for Spain to fall back upon.

What is striking about the current Eurozone crisis is the inability of peripheral economies – Spain, Greece, Ireland – to consider life outside the Eurozone. They prefer the searing austerity measures over the dizzying alternative of a national strategy. López and Rodríguez’s article gives some indication of why: the economic model of Europe’s peripheral economies is entirely based upon their role within the wider European division of labour. Without revisiting fundamentally some of the assumptions made about their growth models, there is nowhere else for them to go.