‘The Eurozone has arrived at a historic crossroads’

From New Left Review:

Why has the Eurozone emerged as the new epicentre of the global financial crisis, when its origins—the famous subprime mortgages—were American? And why, within Europe, has Greece proved to be the weak link? The starting point for any adequate answer is the recognition that what we have been experiencing for the last five years, since the onset of the credit crunch in August 2007, is a single crisis of financialized capitalism. The Greek events are only a sequence within it. Despite the concerted efforts of the governments of the G20, the intervals of recovery have been no more than short-lived episodes; the political measures taken have proved powerless to overcome the strong depressive tendencies at work. The crisis has struck the heart of the financial system—the banks—but it is systemic, affecting every part of the economy: banks, firms, households, states.

Its origins lie in the massive global imbalances built up since the East Asian crisis of 1997–98, which marked the world economy’s entry into a new, inherently unstable, accumulation regime. In the West—above all in the US, and to varying extents across the EU countries—this involved the intensification of the drive for shareholder value, which set high profitability thresholds for investment and exerted intense pressure on labour, delinking productivity and wage increases. With median wage growth depressed, and growing inequalities in wealth and incomes, the dynamic demand required by the shareholder-value agenda was provided by the expansion of credit, supported by low interest-rate policies; debt-based household spending allowed consumption to grow at a faster rate than incomes and wages. In the East, by contrast, the financial turmoil of 1997 and the IMF’s subsequent ham-fisted interventions brought home the danger of relying on rent-seeking Western capital. Countries that had been burnt by the East Asian crisis—which rapidly spread to Russia, Brazil and Argentina, also affecting Germany and Japan—sought to defend their economic sovereignty by building up dollar-denominated balance-of-payments surpluses through export growth. The entry of China into the world market as a major exporter hugely amplified this trend. The historic direction of capital flows, from the West to the emerging economies, was now reversed: billions of dollars flowed from China and other exporting countries to the us, fuelling the vast expansion of credit that was further multiplied by the growth of securitization and derivatives trading, centred on the big banks.

These imbalances were equally present within the European Union, exacerbating the divergences between member states; large Eurozone banks were also laden with bad debts. In addition to this, however, the crisis exposed a series of deep structural flaws in the constitution of the European single currency.

Merkel has repeatedly stated that the banks must be made to pay, but Germany’s actions have been more ambivalent. The stress test carried out by the ECB in December 2011 revealed a critical lack of capitalization in the French and German banking sectors, as well as Greece, Spain and Italy. In order to attain the required levels of capital by 30 June 2012, the banks will try to sell all the assets they can, thus bringing the financial markets down further; and they will continue to limit the issuance of new loans. The Eurozone recession of 2012 may therefore be deeper than anticipated, exacerbating the downward trend. In all this, the power the banks exert over the governments is a major factor. Eurozone governments, and Berlin in particular, refuse to acknowledge that a hypertrophied financial system will have to be radically transformed before Europe’s economies can return to sustainable growth. Their analysis neglects the systemic dimension of the crisis and has led to a policy of ‘small steps’, in which problems are tackled as and when they arise, reduced to temporary liquidity crises caused by actors who can be punished, while the banks remain virtually untouchable. The EFSF in May 2010; the ECB’s piecemeal bond buying; the bailout loans for Greece, Ireland, Portugal, and perhaps soon Spain, conditional on surrendering executive decision-making to Troika officials; replacement of the Greek and Italian governments in November 2011; the so-called Fiscal Compact and ECB three-year loans (ltro) in December 2011; the belated ‘haircut’ for Greek debt-holders in March 2012—from the start, the solutions envisaged have been incremental, homeopathic, and have no effect other than to add more layers of debt to stricken countries, the more ‘assistance’ they are given. Above all, the German stance offers no vision of sustainable growth for Europe.

The Eurozone has arrived at a historic crossroads. A sustainable exit from the crisis will require a decisive shift in its political philosophy. When the Maastricht Treaty was signed, political leaders refused to acknowledge that in creating the euro they were changing the very nature of the European project. They thought they could make do with a currency that was incompletely constituted—that is, external to the sovereignty of the member states, yet lacking any sovereign federal body. The crisis has shattered this illusion. The euro must be constituted as a full currency, which means it must be undergirded by a sovereign power. This will require constructing a democratically legitimated European budgetary union, pooling sovereignty to determine medium-term fiscal policy collectively. The ECB’s mandate should be expanded and a broad eurobond market developed on the basis of the fiscal union, targeted at financing long-term growth. This in turn will mean addressing the underlying afflictions of the Eurozone: on the one hand, a continuous weakening of growth rates over the past four decades; on the other, a polarization between the north, where industrialization has been consolidated, and the increasingly deindustrialized south. Integration in the absence of a Europe-wide development strategy succeeded only in concentrating industrial activity in the regions where it was already strong, while the periphery lost ground. To counter this slide into long-term stagnation will require a development project capable of relaunching innovation across the whole range of economic activities, driven by investment largely anchored at regional and local level, with a strong environmental component. By correcting its own imbalances, the Eurozone will be better equipped to play a role in the ongoing structural transformation of the world economy, in which the preponderance of the West will inevitably diminish.

“The European Vortex”, Michel Aglietta, New Left Review