The financial crisis: symptom and catalyst

Financial crises are endemic in the history of capitalism. They occur, according to Minsk’s theory, at the end of a period of stability during which time the meaning of risk becomes dulled: gradually, everything becomes possible, ‘this time, it’s different’, the trees grow to the sky. Debt has no limits because it is safeguarded by real or financial assets, the value of which are continuously rising. However, the inflation of assets leads to the bursting of speculative bubbles when demand, that up until now supported the continued growth in stock prices, dries up. This is what happened in the United States beginning in 2007 with the two large public mortgage credit institutions – Fannie Mae and Freddie Mac – and which culminated in the collapse of Lehman Brothers in September 2008. Spain and Ireland also experienced this with the collapse of the property market which put banks in jeopardy and led to them being bailed out by governments. In turn, governments amassed severe debts whereas up until that point their public finances were healthy. The two main ingredients of a financial crisis are, on one hand, the erroneous collective appreciation of risk and, on the other hand, a welcoming monetary policy that facilitates excessive debt. Securitisation and the use of derivatives have fuelled the illusion of a world sheltered from risk, and yet individual risk had become systemic. Speculation pushed to its climax by the leverage that excessive debt enables has done its job. Lax monetary policy and the failure of self-regulation claimed by the financial industry have constituted the two vectors of the crisis that have led us to overall excessive debt in which the western economy has become bogged down in, which heralds new dramatic developments. The financial crisis reveals a much deeper transformation of market capitalism.

Western capitalism in systematic crisis

The way in which the capitalism of western market functions changed dramatically in the 1980s was driven by three forces. The first was the revolution of information technology, the second was the advent of the global production chain with international firms and the third and final piece was Deng Xiaoping decision to integrate China, in accordance with the model of the Asian tigers (Korea, Hong Kong, ASEAN), into the global economy through manufacturing exports and foreign direct investments. The size of China and the speed at which it went from agrarian autarky to the world’s workshop have changed the scale and very nature of globalisation sought and led by the West; confusing political and industrial elites. This transformation of the global real economy has an immediate consequence: the swing of the economy towards the East and towards the BRICs (Brazil, Russia, India, China and South Africa) is now a reality.

With this, the West is losing its post-colonial rent which consisted of the monopoly over manufacturing jobs and cheap energy prices, minerals and imported agricultural products. As such, our social model has therefore lost one of its major mainstays.

Here we see two main causes of rising inequalities in the West: firstly technological progress and then globalisation. This movement will be amplified by another concurrent development with the globalisation of production: the hypertrophy of the financial industry. Finance is going to push the focus on business management to the extreme over the ‘value creation for shareholders’ by playing on stock-options for directors, but also by pushing towards the short-termism of management. Gaps in remuneration will widen within companies. Finance has seized a growing share of added-value for itself, which further worsens the inequality drift.

Behind this hypertrophy of finance we find the policies of the central banks that provide abundant, cheap, and therefore inappropriate markets with reasonable limits of debt. Those who marvel at the central bank’s creativity in dealing with the sovereign debt crisis and the under-capitalisation of banks are letting them off far too easily for their gross misconduct before the crisis: they should have known what inflating assets and the excessive debt of several systemic banks would have done; they could have taken action.

The size of China and the speed at which it went from agrarian autarky to the world’s workshop have changed the scale and very nature of globalisation sought and led by the West; confusing political and industrial elites.

The inequalities generated by technological innovation, globalisation and financial hypertrophy, upstream of debt, constitute the main factor of the systemic crisis of the western market capitalism. In fact, they are what pushed households into excessive debt in order sustain their level of consumption despite the capping of, or indeed fall in, their income.

Western capitalism is therefore in systemic crisis. What are the symptoms of this crisis? Firstly, the system no longer generates growth, although this is its logic and raison d’être. In addition to this the classic stimulus tools are no longer working: monetary policy is neutralised by the ‘liquidity trap door’; budgetary policy is stifled by excessive deficits whereas an exchange rate policy would trigger a currency war and is not desirable. Finally, states in desperate straits are looking for heterodox policies with the double risk of protectionism and a return to state capitalism. The double threat of measures against international free trade and the repartitioning of the European sector, which is already under way in the banking sector, are emerging; the opposite of what should be happening. Today, we are at that point: market capitalism keeps going. The conditions of a crisis in the crisis have been met.

Europe, the point of collision between the single and national social models

In the new context created by globalisation, the EU could reconstitute the necessary balance between markets and political power. However, it has not yet managed this because it was constructed precisely to liberate market forces, fuel growth and therefore overcome the problem of repartitioning by making the rich richer and the poor less poor.

From the outset, the EU has been a schizophrenic project: Europe’s security, in the context of the Cold War is the concern of the United States and NATO, whereas European integration is confined to the economy. This fundamental dissociation of politics and the economy sprouts the conditions of a safe drift from liberalism towards neoliberalism today. The strategic dependence on Washington and the attraction of the American production model, whose social and environmental flaws are ignored, pushed the EU to opt for a vision of the economy based solely on an increase in supply. There is no shortage of arguments: the excess of an errant Keynesianism which caused inflation and fuelled public debt in the 1970s; demographic changes which calls for an increase in employment and productivity rates, and of course, the importance of economies of scale and competition in international competition.

Those who marvel at the central bank’s creativity in dealing with the sovereign debt crisis and the under-capitalisation of banks are letting them off far too easily for their gross misconduct before the crisis.

The EU will increasingly construct its integration on a supply-side economy tightly confined to an area without internal borders through the free circulation of goods and factors as well as – a crucial and often neglected fact – without external borders for the movement of capital. However, this passive integration, guaranteed by an internal market policy, a policy of competition and an open commercial policy, is not flanked by any active policy on the same level as the Common Agricultural Policy: nor any energy, industrial, defence or research and development policy. Above all, Europe, through the single market and the single currency, is actually organising, from the moment that it rejects harmonisation, the introduction of competition between national social and fiscal models, thus burdening governments’ ability to assume their leadership role when confronted with the heavy adjustments imposed by technological progress, globalisation and the enlargement of the EU itself.

This unit of the market remains incomplete in the key areas of energy, financial services and communications. Incomplete passive integration has not borne truly European industrial or financial groups with the exception of EADS. As a result, Europe has no industrial body: it deals with large national groups. This is a serious flaw in European sovereignty. The only unifying driver of EU-27 today is the large single market, a negligible unifying principle for such a heterogeneous Europe.

This lack of political plan is part of the discord which persists between the twenty seven Member States over three major issues: the degree of federalisation, the type of social model, the margin of unity in joint diplomatic action as a last resort in terms of strategic autonomy to recognise Europe by.

However, paradoxically, it is the Eurozone that symbolises best this divorce between politics and the economy. Whilst currency is a state attribute in the same way as the army is, and the fact that it could henceforth put the Eurozone on course towards federalism, it has been returned, against all reason, to a tool to fight inflation, and entrusted to an independent agency, the ECB, constrained by a strong and strict mandate: price stability. The Eurozone is not an optimal monetary zone in the sense that Member States are subject to asymmetric impacts due to their differing economic structures – debt, energy, technology – and it is characterised by the weak geographical labour mobility as well as a rigidity of decreasing nominal salaries that slow down adjustment in cases of structural underemployment. This handicap, which is common in a number of countries – including the United State and China – is not, in the case of Europe, compensated by a strong federal budget aimed a transferring financial resources from an external country with a surplus to a country in deficit. In reality, the Eurozone, the pinnacle of economic integration, with a federal vocation in principle, is today managed by an intergovernmental process, the only modus operandi since instruments are lacking and ad hoc solutions have to be invented on sight.

The Eurozone has been an unviable construction since its origins, but its structural shortcomings have only been revealed by the crisis. In principle, it should be supported by four pillars: money, a balanced budget that is simultaneously cross border and counter-cyclical, tax harmonisation of mobile factors (company profits and financial saving) and a system of financial regulation including both centralised supervision and a centralised mechanism for resolving banking crises, banking union called for today by the governor of the ECB, Mario Draghi.

However, up until now monetary policy had not been consolidated solely by a budgetary coordination agreement, the stability and growth pact (SGP), violated by those who promoted it: Paris and Berlin when they overran the rule on fiscal deficit (3% of GDP). This SGP has now been replaced by a deal that brings together discipline – the new budgetary treaty which constitutionalises the golden rule: a ‘financial shield’, the European Stability Mechanism (ESM), aimed at countering speculation over the sovereign debt of States in difficulty. This pact, however, will remain inoperable in the event of a persistent recession and the ESM is too weak to protect the Eurozone from an attack on a larger Member State. The European Council is struggling to give the Eurozone the solid foundation that its heterogeneity requires.

Conclusion: towards a threshold of convergence

The route towards debt pooling; a Eurozone budget; a financial pillar and tax harmonisation is a long and uncertain one. There is indeed no overall view that has led to a general consensus in the EU except the fact that a two-speed Europe is now turning out to be a reality. There is no agreement on a direction or a road map. Empiricism and gradualism under the pressure of financial markets sum up the method for the most part. Yet, the European Council is directing the Eurozone towards federalism; however it is doing it so in denial and reluctantly because there is currently no federalist movement in Europe; neither in governments nor in public opinion. Necessity rules the roost.

A threshold of coherence between common policies must, however, be crossed in order to ensure effectiveness and democracy in Europe whose hold over national economies is increasingly tight. We therefore find ourselves thrown back into this double divorce of which Europe is the theatre: discrepancy between market and policy, and on the side of policy, discrepancy between kratos and demos, between power and opinion. Europe offers the possibility of once again mastering market capitalism both in and through multilateral governance based on the current level of globalisation with its new balance between advanced and emerging countries, between the East and the West, North and South.

The only unifying driver of EU-27 today is the large single market, a negligible unifying principle for such a heterogeneous Europe.

But Europe can only build a strict framework of correction and redistribution of wealth at that level if it builds its own governance around a consensus over an internal model and its projection in the world. That implies a shared vision of the geopolitical balance sought with the United States, China, Russia and Africa in particular.

The moment of truth has arrived for Europe: EU policy must reveal itself and head in the direction of the Eurozone, giving it its true nature of ‘community of destiny’ confronted with the economic upheaval and conflict of resources that is becoming a major challenge to our security.

Between a European neoliberal rhetoric dedicated to growth which is both improbable and severely non-egalitarian, and a snatched social-democracy with a version of welfare state undermined by the loss of post-colonial rent, a doctrine remains to be constructed. The European project needs direction and citizen federalism that differs from intergovernmental bureaucratic and indecipherable governance.

The challenge is re-appropriation through a citizen demos of a Europe that until now was reserved for the elite, or rather the emergence of new elites that would give up instrumentalising the European construction for the benefit of the purely economic interests. The time for citizen involvement in Europe has come and consequently, the time for policy!

 

This article was originally published in Revue Nouvelle.