25 November 2011

The crisis of neoliberalism in Europe (1)

Part 1 of 2
For many years progressives in the US have looked longingly to the social democratic states of Europe, and with good reason. Europeans enjoy a quality of life significantly higher than Americans, with more leisure time, better healthcare, and massively less social violence. Europe has extended this quality of life far more equitably, and has done so while producing far less environmental destruction. In fact, if the Occupy movement’s demands were actually met, the kind of society we might evolve toward would be basically the kind that Europe already has.

So as the crisis in Europe increasingly appears headed toward global catastrophe, it’s worth realizing that not only is the brutal neoliberalism of the US mired in crisis, so too is the much more pleasant version in Europe. 

In fact, beneath the high quality of life and relative equality in Europe lurk many of the same imbalances and dysfunctions that have crippled the US. And as in the US, Europe’s public debate over the crisis fails to grasp these deeper problems.

This debate falls along lines that Americans will recognize. On one side are the advocates of austerity, who see the problem as arising from the incontinent spending and slow growth of the southern states (Greece, Spain, Portugal, Italy). Their solution is government budget cuts to reduce deficits and neoliberal reforms to increase the power of capital over labor, which will supposedly spur growth and indirectly reduce the debt problem by increasing government revenue and shrinking the size of debt relative to GDP. For the austerity side, the problems in the southern economies are fundamentally structural: rigid labor markets, too much public ownership, excessively large government workforces. Germany in particular has neoliberalized its labor market far more than other European states in the last decade, and attributes its success in weathering the crisis to this and responsible spending policies. Germany also wields hegemony over the institutions of the European economy, so the austerity advocates have dominated the policy process to an even greater extent in Europe than in the US.

On the other side are those who see the crisis itself and misguided austerity policies as the forces that have made debt a concern. They argue that the eurozone’s monetary system is the main reason that things keep getting worse because the European Central Bank, dominated by austerity advocates, refuses to extend enough credit to the deeply indebted countries to allay the doubts of bond traders. As bond traders increasingly fear that the southern countries (and now even France) could default, they drive the costs of borrowing through the ceiling and threaten to make default a self-fulfilling prophecy.

For the opponents of austerity, the solution is to make the ECB a proper central bank supplying adequate liquidity to all members to prevent a run on their bonds, combined with stimulus spending to promote growth. Many agree that economic competitiveness is a real problem in the south and that labor costs need to be reduced, but that doing so through inflation would be far less destructive than forcing wages down through severe unemployment brought on by austerity. That is, with an inflationary monetary policy (which the ECB has so far resolutely refused), nominal German wages would rise (but stay the same in real terms) while nominal wages in the south would stay the same, drawing capital south. Thus wages in the south would actually fall in real terms, but without the devastating effects of outright wage deflation.

Simultaneously, an inflationary policy would devalue the euro against other currencies, stimulating the domestic economy by making exports cheaper and imports more expensive. Inflation would also reduce the debt burden on the southern countries. Advocates of inflation see much less of a structural problem in the southern economies; they argue instead that the problem lies in policy-erected blockages impairing the flow of credit and capital.

On policy grounds, the progressives clearly have the stronger argument here. If Italy or Spain had its own central bank, it would have no trouble selling its bonds. Japan, for example, has a massively greater debt burden than even the worst indebted in Europe and a two-decade failure of growth but faces no attacks from bond traders. What’s more, as has been proven time and again in the crisis (and which has been orthodox economic theory since the Depression), government austerity is always contractionary. The austerity advocates have insisted that the only solution is to force the spendthrift southern states to cut their government budgets in exchange for bailouts. But by shrinking their economies, this approach makes the debt burden a far more intractable problem, not to mention making people’s lives much worse. Only the power of neoliberal ideology has been able to overcome the massive empirical evidence that austerity will deepen the crisis.

Yet what if the austerity side has grasped part of the larger problem that escapes the inflation advocates? What if the fundamental problem with the European economy really is structural rather than a result of policy mistakes over the last three years? What if the ECB and German government converted to the inflationists’ position and in the short term brought the crisis under control, only to find themselves facing a long-term failure of growth?

Continue reading: Part 2


  1. O/T

    April -1969- by the ninth congress of the Fourth International:

    [R]evolutionary Marxists ... have provided an overall analysis of the causes of the long period of imperialist expansion consistent with general Marxist theory....

    This Marxist analysis reached three conclusions: first, that the essential motor forces of this long-term expansion would progressively exhaust themselves, in this way setting off a more and more marked intensification of interimperialist competition; secondly, that the deliberate application of Keynesian antirecessionary techniques would step up the worldwide inflation and constant erosion of the buying power of currencies, finally producing a very grave crisis in the international monetary system; thirdly, that these two factors in conjunction wuld give rise to increasing limited recessions, -inclining the course of economic development toward a general recession of the imperialist economy. This general recession would certainly differ from the great depression of 1929-32 both in extent and duration.- Nonetheless, it would strike all the imperialist countries and considerably exceed the recessions of the last twenty years. Two of these predictions have come true. The third promises to do so in the seventies.[11]

  2. The failure of political Keynesianism, and then monetarist policies to ressurect rate of profit dovetailed with a ‘we don’t know what to do so lets try 19th c laissez-faire on a world scale’ set of policies demanded by the U.S., given voice by Reagan and Thatcher in her famous statement: ‘There Is No Alternative [to a worldwide free market]‘, or TINA.

    Borders to capital flow in all its manifestations had to be everywhere broken; state owned industries had to be privatized; poor fiscal management had to be tightened and almost everywhere on the backs of the working class and poor as needed social services were cut and cut again. Debt payments, no matter how great a percentage of export earnings, had to be made if a government were to expect future access to IMF and World Bank funds.

    Neoclassical economists and their theories provided ideological justification; a sort of ‘we are all neoliberals now’ attitude infected world leaders until, in 1989, John Williamson coined the term ‘Washington Consensus’, which was very much not the consensus of those most subject to the various ‘shock therapies’.

    So, how did the world do under this set of misguided fundamentalisms?

    “Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era.” (James Crotty)

  3. Point - Simply that this crisis was/is transcyclic and that we've seen it developing over many decades. Importantly, it's heart is within an over-accumulated, falling avg rate of profit real global econ - finance has been more consequence than cause.

    cyber will be helpful - anonnews.org