From the bursting of the US property bubble, the collapse of Lehman Brothers, and the systemic threat of a global banking failure in 2008, through the first measures taken by many governments, individually and collectively, to try to head of that danger, to the current, deep-seated crisis in the Euro-zone, the theme of debt – public and private – has dominated world thinking, doings and commenting constantly, obsessively.
With serious consequences for millions; whether dispossessed hopeless home-owners in the USA, pensioners in Greece, or the more than half of the Spanish population between 18 and 30 who are currently unemployed. The “markets” are uneasy and, apparently, when “markets” are uneasy, the little people worldwide suffer.
I am reminded of nothing so much as the stereotypes of fearful, primitive, superstitious civilisations in bad adventure novels, where the natives, threatened with the outbreak of catastrophe, are convinced that they have become victims of the anger of the gods. Indeed, the analogy can be developed farther, for the general reaction of the natives in such pot-boilers is to offer ever more and ever more costly sacrifices to these angry gods, to try to propitiate them, before finally reaching the inevitable ghastly conclusion that nothing less than the sacrifice of their own children will serve to (possibly) appease the divine anger.
Substitute markets for gods in the previous paragraph and you get a description of the world of 2012.
In the past couple of months, I have intended many times to write something about this theme here. The reason I have not, up to now, is that I have a deep suspicion that most of the discussions being carried out on the subject are based on misrepresentations, subterfuges, and downright cynical lies. I am prepared to accept that many of those involved are sincere and genuinely believe the arguments they are making – but I am becoming more and more certain that most of those who really matter know that much of what they are saying is no more than platitudinous window-dressing and that they well recognise, at a deeper level, what it is really about … the retention, protection, and even expansion of power and wealth in the hands of those who have it, whatever the cost to those who do not have it.
Writing over 2,400 years ago, the famous Greek historian, Thucydides, records how the more powerful Athenians expressed their view of the world to the weaker Melians on demanding their surrender, “the strong do what they can and the weak suffer what they must.” Since then, despite all kinds of declarations of rights and facades of agreements and legality, very little has changed.
There is a conventional view of the current ongoing global crisis and, on the basis of this view, it’s fairly easy to describe what’s going on. For various reasons – to which nobody pays much attention now – speculative trading of finance products got out of control. The result was a bubble which burst, the crash of a few financial institutions and the threat of a crash in the whole banking sector in 2008. To avert this, most sovereign states intervened, providing billions of tax-payers’ money to prop up the banks and keep the whole system going (or at least limping). The new atmosphere of sobriety and financial rectitude focussed increased attention on the deficits and borrowing debts of those sovereign states – deficits which had had to be drastically increased to provide the money to prevent the banks from failing. The “markets” became increasingly nervous about the dependability of those sovereign debts, with the result that costs of servicing such debt rose steeply for a number of countries, thus putting ever more pressure on their “real” economies, which weakened their position even further in the eyes of the markets. A vicious circle.
This problem became particularly acute in , where a large number of countries within the EU had adopted a common currency, the Euro, over a decade ago. The euro had brought considerable prosperity for its members – particularly those with strong export-based economies – by significantly simplifying trade, both between its members and with the wider world. But it also created a one-size-fits-all monetary situation for the member countries and the pressures caused by the financial crisis exacerbated hidden fault-lines enormously. Countries like and could conceivably have eased their situation somewhat by currency devaluation, but such devaluation was not in the interest of other countries such as , , and, above all, . Ireland, for example, could have let some of its banks fail and default, but, as these debts were practically all held in Wall Street, the City of London and Frankfurt thus potentially putting the powerful economies of the US, UK and Germany under pressure, this wasn’t allowed either. The Irish were told to unconditionally guarantee the debts of their – private – banks and the then Irish government, terrified at the prospect of being otherwise abandoned by its international “friends,” meekly complied.
So there has been an ongoing series of frantic conferences, and bail-out measures, and stability mechanisms, and fiscal pacts, and injections of billions by the European Central Bank, etc., etc., etc. Three countries (Greece, Portugal and Ireland) have been put into a kind of international receivership and the domestic measures their partners (and the world in general, as represented by the IMF, which is one of the “receivers”) are demanding as conditions for their continual financial support, mean that their citizens – particularly their poorest citizens – are suffering badly. And the generally touted fear is that or could be next; in contrast to the three already hospitalised patients, economies “too large to fail.”
And still, despite all the measures taken so far, the mighty markets are still not impressed and the Euro members are divided on the question of what sacrificial offering might suffice to appease these gods and make them mild and gentle-mannered; even more austerity, measures to stimulate growth, Euro-bonds, the expulsion of Greece from the common currency …?
I am becoming increasingly convinced that all of this is just … pardon my French … bullshit.
I do not believe that it will be possible to solve the various problems besetting the global economy in any kind of enduring fashion using any of the various tools or mechanisms suggested, because the system is fundamentally broken. It has, in fact, been basically flawed all along, because it is based on axioms and assumptions which have no foundations, which have never applied, and which are nonetheless generally presented and accepted as being unquestionably true and self-evident.
Markets are natural and, in general, self-regulating.
The price of something is its value.
The basis of relations between people is one of exchange, with each party primarily pursuing his/her own (material) advantage.
Exchange usually makes everyone happy; everyone wins, nobody loses.
The fundamental principle of morality is that one should always pay one’s debts.
Our basic nature is one of lonely autonomy and our social relations and networks are secondary, conditional and ephemeral.
Everything is quantifiable.
Money “works” and can thus, somehow, increase itself.
Continuous growth is perpetually possible – even on a finite planet with, ultimately, limited resources.
These are the basic premises on which the so-called science of “economics” is based. They are all statements which can legitimately be challenged and, indeed, would be denied by most of us with respect to the way we live our everyday lives with families, loved ones, friends, neighbours, colleagues and communities.
How do you pay your debt to your parents, who gave you life and cared for you – not only materially – until you were able to stand on your own feet? How do you quantify kindness, or love, or beauty, or joy? Can you change your friends the way you change your socks? Is not a sincere “Thank You,” frequently a more than adequate payment for a favour/debt? Is monetary wealth really a measure of respect and regard? Do you always (or even usually) weigh up your own advantage before helping someone?
Yet, if economics – particularly the conventional economics upon which we seem to base our communal lives, as in my description of the current international debt crisis above – is an unquestionable science, then why does it not seem so easily applicable to our ordinary, real lives? It seems to me that there is a deep sort of schizophrenia present in the way we understand ourselves. If we really want to find solutions for the deep problems besetting our current global societies, I suspect this will only be possible if we find ways of surmounting this strange bifocal way of seeing things.
I am no utopian, no starry-eyed optimist. The current situation is the result of long, complicated processes, and concrete decisions will have very real effects on millions of people. Much as it might seem attractive, I don’t think we can just simply push some kind of “Reset” button. But I do see possibilities and potential for us, if we reflect on the way we see and understand things and are prepared to consider alternative ways of seeing and understanding them.
To admit, for example, that our various models of economic analysis may be deeply flawed and don’t provide us with an awful lot of good answers. To accept that economics, even as far as it goes, has very little basis in any of the basic moral principles which govern nearly everything we regard as important in our lives. To give this basic morality and decency the weight it deserves in our dealings, including our political and “business” dealings with each other, a weight far superior to simplistic “economic” considerations. To chose to do things, in the words of John F. Kennedy, “not because they are easy, but because they are hard.” But because they are truly worthwhile.
One final thought. The “Debt Crisis” can just as easily be called the “Credit Crisis.” The roots of the word credit are in the Latin word, credire, to believe. Credit is a basic fact of life, one of the fundamental things which keeps life going, on all sorts of levels. We believe each other, have faith in each other, trust each other, extend each other credit, in thousands of ways every day. Even on the level of conventional economics, trade, exchange, banking can only function at all on the basis of trust and faith. Yet, the whole world of the “markets” has abandoned this principle completely, and all those engaged in it seem to be operating on the principle that they are living in a vastly dangerous jungle, with every man’s hand raised against the other and where values like faith and trust are an immediate invitation to self-destruction. How sick is that?
It is no wonder, then, that the system is – possibly irrevocably – breaking down. Perhaps the first step forward would be to change our attitudes to all those involved in working in this area. Instead of admiring them as Masters of the Universe, or fearing them as powerful Priests in the Temple of the Gods of the Market, we should regard them with disdain and faint contempt; as sad and pitiable people, unfortunately condemned to work in an area where it is almost impossible for someone to work without losing their honour, their decency, and, ultimately, their basic humanity.
Pictures retrieved from:
[To all bloggers: Friends, you may have noticed an absence of comments from me recently on your sites. I have some kind of glitch in my Blogger account at the moment, which is making it impossible for me to leave comments. I actually can't even leave comments on my own site! Believe me, please, I'm not snubbing you. I hope to get around to doing something about it soon. Sorry!]
In the immediate aftermath of the financial meltdown in 2008, the global crisis has made an important shift. By then not the private banking sector, from where the financial crisis originally emerged from, but sovereign states face the risk of default. In order to analyse the multifaceted character of the European sovereign debt crisis, this essay focuses on its systemic causes. Contrary to the argument of popular Northern European politicians and journalists that blame the inability of Southern European states to manage deficit spending, the Eurozone crisis is firstly determined by imbalances in the European Monetary Union, and secondly by imbalances in the global political economy. This paper argues that the vast amount of sovereign debt is therefore not the result of weak Southern European nations, but of inherent structural illnesses that ultimately led to the current crisis. This essay is divided into two sections. The first section examines the problems of the design of the European Monetary Union. In regard to the theory of an ‘Optimum Currency Area’ by Robert Mundell, it analyses the extent to which the EMU has failed to meet the criteria of optimised efficiency. In the absence of an adjustment mechanism for unequal development in Euro member states, the dominance of Germany as leading export nation created severe inequalities. The second section then focuses on the role of the global political economy and imbalances that were created in the ‘era of financialisation’ following the demise of Bretton Woods. The shift to neoliberalism and consequently the liberalisation of finance have led to an increase in speculation with financial assets. The ‘Global Surplus Recycling Mechanism’ – the recycling of surpluses from successful export countries such as Germany and Japan in Wall Street – has massively increased the amount of money available to households in form of debt and thus created speculative bubbles that burst during the financial crisis. The vast debt of Southern European states is therefore determined by systemic failures.
Beginning with an analysis of the systemic issues in the European Monetary Union, the design of the EMU differs significantly from Robert Mundell’s and Ronald McKinnon’s criteria of an ‘Optimum Currency Area’ (Manolopoulos, 2011). The unequal development in Eurozone member countries requires an adjustment mechanism that smoothens out imbalances between surplus- and deficit nations (Grahl, 2011). This mechanism would replace the ‘usual’ adjustment in form of currency devaluation in deficit countries against currencies in surplus countries. Because a fixed exchange rate automatically fixes competition between economic sectors of member-states (Conquest & Bruges Group, 2011), the following five criteria need to be ensured in order to adjust imbalances (Mundell, 1961).
Firstly a currency union needs to have a flexible labour market. Labour from deficit countries cannot be restricted to move to areas with more successful industries. This factor prevents unemployment to rise in deficit areas and skill shortages to occur in surplus countries with faster growing economies. Within the European Union however, labour mobility was relatively low. According to a report by the European Central Bank, “in 2000, only 0.1% of the total EU-15 population (or 225,000 people) changed official residence between two member countries“ (Heinz & Ward-Warmedinge, 2006). Furthermore most of labour mobility was due to an influx of workers from Eastern Europe rather than from Southern European countries, which are now part of the Eurozone. In contrast, labour migration between US counties was 5.9 % of its total population in 2000 (Heinz & Ward-Warmedinge, 2006).
The second mechanism for an optimum currency union is the establishment of fiscal transfers to counteract asymmetric imbalances (Manolopoulos, 2011). This includes international transfers to balance out surpluses and deficits of successful and less successful regions by a strong central government with a federal taxation system. In the EU however, only 1.24 % of its total GDP has been used for fiscal transfers (Macdougall, 1992). In the dollar zone on the contrary, the central government compensated about 40% of falls in any state’s GDP with fiscal transfers (Callinicos, 2001).
Thirdly, Mundell emphasises the importance of flexible capital and product markets (Manolopoulos, 2011). Wages and prices have to be flexible and responsive to competitive market forces. In the European Union however, especially German wages have been politically repressed for the benefit of German business with the Agenda 2010. There was an artificial redistribution from the German and European citizenry to the German business class. Most of Germany’s ‘export miracle’ was not due to intensive increases in productivity rates, but the result of extensive wage (and demand) repression. The high competitiveness of German unit labour costs compared with Spain, Italy or Greece thus created another imbalance in the European Monetary Union (Conquest & Bruges Group, 2011). Within the Eurozone however, the adjustment of labour costs is an important factor for outbalancing any productivity rise in other nations. Germany, which has been the most successful surplus-generating country of the EU anyhow thus applied a mercantilist policy and restored its own ‘productivity’ through wage repression.
Another important factor is that most of the members have shared business cycles to prevent asymmetric shocks and imbalances (Manolopoulos, 2011). This includes similar inflation rates, which are furthermore closely connected to the degree of integration of member countries. The problem in the EMU is that the inflation policies of the European Central Bank are largely influenced by the imperative of the former German Bundesbank. With the conditions of the Growth and Stability Pact many member states adopted strategies to adapt to the proposed inflation rates at the expense of high unemployment rates (Baimbridge, Burkit, & Whyman, 1998).
Finally, the degree of diversification of the member economies is positively correlated to the optimisation of currency union (Manolopoulos, 2011). Due to the fact that during recessions a region that relies on a few economic sectors can be affected more severely, this criterion needs to be ensured. Though all industrialised member states of the European Union fulfil this criterion, Greece’s economy was relatively undiversified.
The EMU is thus far from Mundell’s concept of an optimum currency union. With low labour mobility, the lack of fiscal transfers, artificial repression of German unit labour costs, inflation policies that serve the interest of surplus countries and a low degree of diversification of the Greek economy, the adoption of a single currency in the 1991 Maastricht Treaty seemed to be a fairly irrational decision. Because most of Germany’s surplus is generated by the export to other EMU member countries, those countries consequently have to run a deficit in the zero-sum-game of balance sheets. According to Eurostat, the intra-EU27 trade balance of Germany made up a surplus of 61912 euro in 2010. Spain and Greece on the other hand run deficits of roughly -11000 and -15000 euro in the same year. Because the normal adjustment mechanism of exchange rate devaluation however was not possible anymore, and because the criteria of the optimum currency area have not been implemented, the European Monetary Union itself entails significant systemic issues that determined the Eurozone crisis.
In addition, the role and policy preferences of Germany during the crisis have exacerbated its severity. The popular press and politicians in Germany have not recognised the systemic failures of the EMU and blame Southern European states for their inability to deal with deficits on the contrary. It is however logically impossible for all member states of the European Union to adopt the same policy preferences as Germany – if every country in the Eurozone relied on mercantilist imperatives, the system could not work. The Eurozone did not base on fair multilateralism between its members, but on a national hegemonic project of Germany (and France). Nationalism in the EU is persistent and still dominates decision-making processes. The role of Germany as an export country and the simultaneous lack of an adjustment mechanism have created significant imbalances within the Eurozone that ultimately determined the current crisis.
Having analysed the systemic issues in the construction of the Eurozone and the consequences of Germany as an export country, the solution of austerity does not seem to be a sustainable long-term orientation for Southern European countries such as Greece. This is the case firstly because the crisis is not primarily caused by weaknesses of corruption in Southern countries and does thus not require a mechanism to remove those supposed origins, and secondly because the negative effects of austerity – the loss of jobs and demand – seem to exacerbate the crisis rather than to resolve it: “with austerity, the automatic stabilizers in the economy that cushion an economic downturn are over-ridden and growth falls” (Carlin, 2011). As recognised by the World Economic Forum in Davos, the German-Franco axis should thus rethink those measurements and focus on long-term growth stabilisers rather than austerity. The bailout agreements signed by Greece however entail the conditionality of those policies.
Next to the imbalances created by the construction of the European Monetary Union and the role of Germany as mercantilist country there are further imbalances in the global political economy that determined the sovereign debt crisis in Europe. In the demise of the Bretton Woods system and the age of neoliberalism that emerged after, the increasing amount of global wealth that was used in the financial sector created speculation and ultimately determined the financial crisis of 2007-2009. Most of the surpluses of successful countries such as Germany and Japan were channelled into Wall Street and then bundled to cheap credit. This ‘Global Surplus Recycling Mechanism’ (Varoufakis, 2011) in fact actively looked for vast amounts of debtors. This paper therefore argues that the imbalances created in the ‘age of financialisation’ present the second systemic illness that determined the Eurozone crisis.
In the early 1970s, the global political economy experienced a major downturn due to global overproduction in relation to global demand (Brenner, 2002). The fixed exchange rate system of the Bretton Woods era began to unravel as a result of massive US debt and speculative attacks on the US-dollar. Many governments that had interlocked their financial positions with the dollar lost trust in the pillars of Bretton Woods: “by the end of the 1960s many governments began to worry that their own positions (…) were being undermined. By early 1971, (US) liabilities exceeded $70 billion, while the US government possessed only $12 billion of gold with which to back them up” (Varoufakis, 2011). After President Nixon’s closure of the gold window, the US government had to attract global surpluses to finance their balance of payment deficit (Schwartz, 2010). This ‘Global Surplus Recycling Mechanism’ thus recycled capital from the world (most notably Germany, Japan and China from 2003 onwards) in Wall Street.
These asymmetric inflows of surpluses furthermore massively increased liquidity and the availability of credit. With the era of neoliberalism and the liberalisation of finance those surpluses were then channelled into cheap credits and new financial instruments. For example, a vast amount of credit created real estate bubbles in Ireland (Finn, 2011) and Spain. Those bubbles made up an artificial stimulus by the neoliberal regime to boost employment. Debt therefore was generated in the private sector: it was thus not public debt that determined the crisis for those countries, but private debt as the result of financialisation. According to Martin Wolf, “Estonia, Ireland and Spain had vastly better public debt positions than Germany” (Wolf, 2011).
The era of financialisation – the value extension of financial means in relation to production, the increasing scope of financial institutions in regard to financial liberalisation, and the increasing range of financial instruments – determined the financial crisis and consequently the European sovereign debt crisis. The colletaralised debt obligations, repacked in the process of ‘Global Surplus Recycling’, channelled to US households and sold to financial institutions and actors all over the world, represent an era of free-market capitalism. Sovereign actors, which then bailed out private banks, make up the final stage of debtors in the recent crisis. The contagion of debt thus spread from households to banks to governments.
Moreover some politicians have accused financial markets themselves of worsening the crisis by panic and speculation about sovereign debt. The EU parliament tried to decrease speculation with sovereign debt through banning the purchase of credit default swaps (CDS) without already holding government bonds. According to a publication of the European Parliament in November 2011, “this is one of the key regulations pushed through by the Commission to tackle the financial crisis. Both short selling and CDS trading are accused of having fuelled the market volatility, with CDS trades moreover having been widely blamed for potentially aggravating Greece’s troubles” (European Parliament, 2011).
The problem with such accusations is they do not focus on the broader picture. It is indeed true that speculation with sovereign debt has worsened the situation in Greece to a certain extent. However, the actual origin is the contagion of debt in the whole economic system. One has to ask why such speculation occurs – and narrowing the answer to that question to the mere greed of some speculating actors is wrong. It is the system that lies behind such speculation, the construction of the Eurozone, and the whole global political economy.
In conclusion, this paper argues that contrary to popular press and politicians that blame Southern European states for weakness and corruption, the origins of the current Eurozone crisis are to be found in two broader systemic issues: firstly the construction of the European Monetary Union, and secondly the global political economy and the age of financialisation. This paper shows that the adoption of the euro was built on unsustainable pillars and far from the theoretical principle of Mundell’s optimum currency area: labour mobility was low in the EU; there were neither fiscal transfers from surplus to deficit countries, nor a federal taxation system; wages have not been subject to EU-wide market forces, but have been artificially repressed by Germany; and inflation policies have favoured the interest of the strongest members. Further imbalances were created by Germany as mercantilist country and surplus generator at the expense of other EU members. Austerity thus does not seem to be the right policy solution, as it oppresses demand and thus creates more sovereign debt. Furthermore, this paper argues that the second systemic issue lies in the construction of the global political economy and the imbalances created in the era of neoliberalism. The contagion of debt that spreads through the Global Surplus Recycling Mechanism – from surplus countries to households, to banks, to sovereign states – has afflicted the whole system. The massive amount of debt in Southern European countries is thus not determined by weakness, corruption, and inabilities to deal with public deficits, but by systemic failures and illnesses. Therefore, to prevent such crisis from emerging it is the system itself that needs to be changed.
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Written by: Annemarie Detlef
Written at: Hult International Business School
Written for: Andrew Wright
Date written: February 2012