The Triumph of Authoritarian Crisis Management: Europe’s Tragedy Unfolds

CSIG Research SeminarNovember 13 2013

Jeremy Leaman

The EU Ship of State

• ‘We are rebuilding our common European house with set of rules that will prevent and, where necessary, correct any emerging threats to the stability of the monetary union. And we are developing a culture in which the inhabitants of this European house learn to respect the rules; otherwise they have to accept the consequences’. (Olli Rehn 2012)

• ‘The market is always right, and has to be completely respect ed at all times’ (Jean-Claude Trichet 2010).

• “Market conditions have gone progressively back to normal,” (Trichet August 2007, New York Times)

• ‘So we are accompanying the market as it progressively goes back to normal’. (Trichet, FT Interview September 2010)

Rehn: Growth through Austerity in Greece

Points of Departure 1• Normative and theoretical convictions:1. Inequalities are corrosive of civilised existence2. Unequal distribution is the primary challenge for humanity in the 21st

century (Galbraith, Wilkinson, Pickett)

3. The analysis of (unequal) socio-economic relations has to include consideration of power & interest (cui bono): historical materialism

4. Gramscian/ Neo-Gramscian analysis has strong heuristic value; unequal interdependence of hegemonic systems

5. Complex unequal interdependence requires multi-disciplinary dimension; radical international political economy supplemented by insights from other social sciences, history and cultural studies.

•

Points of Departure 2

• Empirical observations:• National and global asymmetries not reduced but

compounded by ‘market efficiencies’• Skewed Wage/ profit shares > demand asymmetry• Trade/ payment balances > chronic surpluses &

deficits >> Exchange market mayhem (Eichengreen)• Money stock out of control of central banks >>>• Nation states hobbled by corporate arbitrage• Global governance a one-eyed paper tiger

Points of departure: Scholarship

• Orthodox economics has been discredited• IR Theory has been found wanting• Heterodox political economy has been

encouraged BUT• It has only affected policy at the margins• The ‘ruined fortress’ (Cafruyny & Ryner)still stands• ‘Zombie economics’ (Krugman, Quiggins) as key

condundrum: the ‘surprising non-death of neoliberalism’ (Colin Crouch)

Points of Departure: The Machine and Us

• Our shared dependence on corporate financialised capitalism

• Bulk of household transactions processed directly or indirectly by strategic gatekeepers (banking oligopolies, water monopolies, power oligopolies, retail monopsonies)

• We collaborate within system of increasingly commodified education: rooted in exchange value

• USS investment portfolio: rogues gallery!!

Europe’s 2nd Great Depression: Why?

• Misdiagnosis• Institutional Architecture >• Pre-programmed policy preferences• False prescriptions• ‘Never squander a good crisis’ >• Crisis as vehicle for renewed cycle of disciplinary

neoliberalism ?>• rendering institutional/ cultural change irreversible?• Fundamentally perilous path

1 HSBC HOLDINGS 347.2

2 ROYAL DUTCH SHELL 331.9

3 VODAFONE GROUP 284.6

4 GLAXOSMITHKLINE 203

5 NESTLE 185.1

6 BP 156.9

7 TOYOTA MOTOR 153.5

8 SAMSUNG ELECTRONICS 150.4

9 BRITISH AMERICAN TOBACCO 135.1

10 BHP BILLITON 131.2

11 ROCHE HOLDING 127

12 TAIWAN SEMICON MANUFACTURING 125.9

13 RIO TINTO 118.5

14 SANOFI 111.4

15 MITSUBISHI UFJ FINANCIAL GROUP 108.8

16 COMMONWEALTH BANK OF AUSTRALIA 107.9

17 ALLIANZ 105

18 THE SWATCH GROUP 99.9

19 UBS 99

20 PRUDENTIAL 97.9

21 BAYER 95.5

22 IMPERIAL TOBACCO GROUP 93.2

23 SUMITOMO MITSUI FINANCIAL GROUP 92.9

24 NOVARTIS 92.6

USS Top 24 Investments: High incidence of tax avoidance/ evasion/ insider trading

http://www.uss.co.uk/UssInvestments/InvestmentsTypes/Equities/Pages/USStop100investments.aspx

Misdiagnosis: Not just sovereign debt

• Multiple crises of European political economies:1. Sectoral crisis of financial services >2. Cyclical crisis of production and trade3. Structural crisis of overdependence on

financialised capitalism4. Systemic crisis of over-consumption: limits of growth

5. European & global asymmetries: current account, demand, distribution of income, wealth & resources

6. Crisis of economics and economic governance

Casino/ Ponzi Capitalism• Exaggerated rates of return generated by:• a) privatisation of monopoly income streams (natural

monopolies with regulated RoRs)• b) public-private-partnerships with contractual

monopoly income streams• c) stagflation/ weak demand/ high liquidity (petro-

dollars) feeding off:• d) financial deregulation (exchange controls &

abolition of disincentives to speculate, e.g. CGT)• e) ‘self-regulation’ of financial services: credit rating

agencies/ banking federations/ auditors

Neoliberal Deformation of Europe• Efficient market hypothesis:myth of the virtuous circle: supply-side

relief >higher profits > higher investment > higher growth & employment. Reality: higher profits not invested in real economy >

Source: IMF Figures for Advanced Economies Where did all the money go??? >>>>

The black hole of financialisation

Financialisation & Monetarist Myths

• Hyperleveraging & Interbank lending rendered central bank control (of corporations) powerless

• Control of money stock was core objective of ECB (as for Bundesbank) – abandoned quietly

• ‘Privatisation of money creation’ (Mellor) in global ‘liquidity factories’ (El Erian, Phillips) evolved when

• Monetarist model was cemented immutably into Europe’s policy architecture!!! >>

• ‘Design Faults of Monetary Union’ (Arestis/ Sawyer)

Deformation of European Economic Governance

• Asymmetry of supranational monetary and national fiscal policy

• Asymmetry of EMU convergence criteria• Neglect of key imbalances between MS:• Current account asymmetry• Productivity and Skills disparities• Sectoral disparities• Real wage growth (c.f. fall in German real wages)

EU Current Account Asymmetry 2002

UKSp

ain

Portuga

l

Greece

Poland

Italy

Hungary

Czech

Republic

Slova

kia

Romania

Irelan

d

Estonia

Lithuan

iaLat

via

Cypru

sMalt

a

Slove

nia

Luxe

mbourg

Denmark

Austria

Belgium

Finlan

d

Netherla

nds

Sweden

France

German

y-40

-30

-20

-10

0

10

20

30

40

50

-29.2

-23.8

-11.6 -10.2-5.9 -5.6 -4.9 -4.4

-2.1 -1.6 -1.3 -0.8 -0.8 -0.7 -0.4

0.1 0.32.5

4.6 5.9

12 12.1 12.3 12.5

19.2

42.7

Current Account Balances in € Billion 2002 EU27

Wider disparities 2011

Italy

FranceSpain UK

Greece

Poland

Portugal

Romania

Czech

Republic

Finland

Cyprus

Lithuania

Latvia

Malta

Slovakia

Slovenia

Estonia

Ireland

Hungary

Luxembourg

Belgium

Austria

Denmark

Sweden

Netherla

nds

Germany

-100

-50

0

50

100

150

200

-50.3-37.5 -37.5 -33.5

-21.1 -16 -11 -6 -4.5 -2.2 -1.9 -0.5 -0.2 -0.2

0 0 0.5 1.1 1.4 3 3.7 5.915.5

27.2

52.4

147.7EU Current Account Balances 2011

N.B. Record German trade surplus 2013

Trade Balance Averages: North & South Europe

-8

-6

-4

-2

0

2

4

6

8

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NORTHD

SOUTHH

External imbalances pre-programme problems of debt-financing

Net External Assets, N & S Europe

-60

-50

-40

-30

-20

-10

0

10

20

30

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SOUTH

NORTH

EU27 Per Capita GDP 2009-2012

Bulgaria

Romania

Latvia

Hungary

Poland

Estonia

Lithuan

ia

Greece

Portuga

l

Slova

kia

Czech Rep

ublic

Slove

niaMalt

a

Cypru

sSp

ain Italy

France

United Kingd

om

Finlan

d

Belgium

German

y

Denmark

Netherl

ands

Swed

en

Irelan

d

Austria

0

20

40

60

80

100

120

140

Source: Eurostat; 2009: blue column; 2012: red

Real Unit Labour Costs 1995-2007

90

92

94

96

98

100

102

104

106

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Germany

South

Eurozone outside Germany

Real Wage Growth EU27 2000-2008: Evidence of ‘Wage Dumping’

Romania

Latvia

Estonia

Lithuan

ia

Hungary

Bulgaria

Czech

Republic

Slova

kia

Slove

nia

Greece

Irelan

d

Britain

Poland

Denmark

Finlan

d

Sweden

Cypru

s

Netherla

nds

France

Luxe

mbourgMalt

aIta

ly

Belgium

Spain

Portuga

l

Austria

German

y

-50

0

50

100

150

200

250

300

350

400

331.7

188.5

132.5

104.4

66.751.9 49.1 48.1 40.3 39.6

30.3 26.1 19 19 18.9 17.9 12.8 12.4 9.6 8.1 7.9 7.5 7.2 4.6 3.3 2.9

-0.8

Regional Unemployment Disparities

Core-Periphery Youth Unemployment

CP Long-term Unemployment

Asymmetrical Non-Recovery EU27, 2012 2008 = Basis Year

Greec

e

Latvia

Sloven

ia

Hungary

Portugal

Lithuan

iaSpain

Roman

ia

Irelan

dIta

ly

Nether

lands

Denm

ark

Bulgar

ia

Cyprus

Finlan

d

United K

ingdom

Czech

Rep

ublic

Luxembourg

Estonia

France

Belgiu

m

Austria

Germ

any

Malt

a

Slovak

ia

Sweden

Poland

Eurozo

ne-25

-20

-15

-10

-5

0

5

10

15

-21.57

-10.27

-8.34

-6.33 -6.22 -5.78-4.86 -4.84 -4.47 -4.39 -4.02

-2.91 -2.74 -2.43-1.66 -1.4 -1.17 -1.06 -0.7

0.321.32 1.78

2.65 2.84

5.116.16

12.95

-1.42

A New Great Depression?

UK Economy 1930-1935

UK Economy 2008-2012

Hysteresis: Permanent Scar in EU

• “Hysteresis” effect – permanent economic damage that will not be repaired even if there is a full recovery. ‘Austerity could well leave an economic and social scar across the eurozone’

• (Wolfgang Münchau, 24 Feb 2013, Financial Times)• C.f. Gregg & Tominey 2004: ‘wages scar’ left by

youth unemployment• The real ‘human capital’ of (younger) educated

citizens had/ has a lower exchange value than fictitious financial assets

Structural Youth Unemployment EU27 & EA17 2000-2012: Permanent ‘scar’

Why? >>The Logic of Starvation• If intellectual and institutional starting points are

wrong, chaos is pre-programmed• a) primary cause of crisis = sovereign debt• b) sovereign debt distorts credit market

(‘crowding out’) >• c) consolidation imperative overrides other

preferences (Maastricht; SGP 97/2005; Fiscal Compact)

• d) Relentless structural adjustment programmes in ‘delinquent’ states > CHAOS, FRAGMENTATION

Chanellor Brüning (1930-32) Reborn• ‘Recovery is on track’ (Trichet 2010)• ‘Gradual recovery has set in’ (Barroso 2011)• ‘Eurozone is recovering [slowly]’ (Draghi Feb 2012)• ‘Eurozone recovery won’t begin until late 2013’

(Draghi Nov 2012)• Eurozone ‘slowly emerging from recession’ (Rehn

June 2013)• ‘Economic recovery is slow and painful’ (Rehn Nov

2013 [Eurozone growth slowed in 2013/III]• Einstein: Insanity = ‘repeating the same thing and

expecting a different result’

Martin Jänicke: ‘The privilege of not having to be intelligent’

• ‘A tank driver can be stupid and blind. In contrast to the cyclist, he does not need to adapt to the annoying obstacles of the environment. Problems are ‘externalised’: It is not the tank driver that is damaged but the environment. In the case of the cyclist, on the other hand, the problems of an adaptive method of driving are completely internalised’ (Jänicke 1986).

• >> Pro-cyclical Multiannual Financial Framework

EU Multiannual Financial Framework Feb 2013

Appropriations as Percentage of Gross National

Income

2007 2008 2009 2010 2011 2012 2013 7 Year Averag

e

Total Commitment Appropriations 1.02 1.08 1.16 1.18 1.16 1.13 1.12 1.12

Total Payment Appropriations 1.00 1.05 1.04 1.12 1.09 1.08 1.05 1.06

2014

2015

2016

2017

2018

2019

2020

Total Commitment Appropriations 1.03 1.02 1.00 1.00 0.99 0.98 0.98 1.00

Total Payment Appropriations 0.98 0.98 0.97 0.92 0.93 0.93 0.91 0.95

Table 1. EU Multiannual Financial Frameworks 2007-13 & 2014-20 ComparedSource: EU; the 2014-20 budget cycle assumes an enlarged EU from 2013 to 28 member states, including Croatia

The Paradox of the European Bicycle that became a Tank

• European Integration has been a mixed process of adaptive learning and path-dependent contradictions and intractabilities

• Process of ‘deformation’ after 1980 (Huffschmid)• Critical omissions & commissions:• One-eyed Monetary Union • Negative fiscal harmonisation (SGP – ‘Six Pack’)• Abandoned tax harmonisation (too little too late since 2008)• Unanimity principle to alter skewed policy architecture• Complacent culture of licence re: casino capitalism >>>

Effect of EU’s Depression Economics• Average real growth rate 2008-13• EU27: -0.13%; Eurozone: -0.22%• Domestic demand growth 2008-13:• Eurozone: -1.0%• Investments 2008-13, EU27: -21.6%; Ie/ Gr > -50%• EU27 Investment Ratio 2008: 21.4; 2013: 18.9• (German IR down to 18.1; Greece: 22.6 to 15.1)• Capacity Utilisation: EZ: 2011: 80.6; 2013/II: 77.3• Export-led recovery? (Intra-EU trade = 60%)

Effect of Troika and Six Pack on Peripheral States

• Fire-sale of public assets• Privatisation of natural monopolies• Weakening of resources and capacities of the

public sector• Weakening of social infrastructure: education,

health, welfare• Pro-cyclical depression of demand; • Receding prospect of recovery• Febrile electoral politics>> 2014 Euro elections

Eurostat + FT News November 2013• Industrial production down in Eurozone• Growth slowed to 0.1% in 3rd Quarter of 2013• Retail trade down in Eurozone• Eurozone unemployment up to 12.2%• Eurozone inflation down to 0.7% (> Deflation)• Trade surplus with South Korea!!• Further reduction in MAFF budget for 2014• Widened investigation into FOREX-rigging by

major banks, after LIBOR convictions

Interpreting the Tank-driver Syndrome

• Disciplinary Neoliberalism Stage Two?• [‘European Social Model … is gone’ (Draghi)]• Re-commodification of Keynesian welfarism?• The result of a ‘predatory German hegemon’ (c.f. Strange on

US ‘predatory hegemony’• The hegemony of transnational capital, willingly mediated

by powerless systems of governance?• 2008/9 Rhetoric re: tax avoidance/ evasion/ havens what

progress? A fig-leaf?• Undeniably, policy fixed on the wrong coordinates >

heading for unknown but unchangeable destination

Recovering the Cyclist’s Adaptability

• Acknowledging failure• Setting new coordinates: Sustainable, equitable

global evolution• Addressing the core asymmetries at the heart of

Europea’s political economy• Strengthening democratic participation• Mobilising public outrage: tax avoidance• Cutting financial services down to size• Resisting the commodification of social relations

An Alternative to this Europe is possible

Heterodox Views• Manifesto of the ‘Outraged

Economists’ (Economistes Atterés)http://www.atterres.org/manifeste

EuroMemo 2013: http://www2.euromemorandum.eu/uploads/euromemorandum_2013.pdf

http://www.attac.org/

Association of Heterodox Economicshttp://www.hetecon.net/division.php?page=about&side=history_of_heterodox_economics

http://wearethe99percent.tumblr.com/

Appendix: Paradigm Shift

Appendix 2: Private Debt Driving Asset Bubbles

Why debt explosion?

Leveraged acquisitions

Consumer credit

Mortgages

Hyperleveraging

Ponzi accumulation