If you listened to Wall Street and most of the commentators in the Australian media, you could be forgiven for thinking that the problems in the European economy can be attributed to a combination of Greek self-indulgence and European social spending generally. But you’d be wrong.
Europe’s major problems are not sovereign debt and unaffordable social programs — those are just symptoms. To help cut through the verbiage, French economist Frédéric Lordon is very useful. (Lordon’s work is unknown to the English-speaking finance media, so it remains untranslated.)
As Lordon explains, the fundamental problem Europe faces is that the EU’s economic policy framework is innately flawed (French). The European Central Bank (ECB) was established in 1998 to ensure the global status of the euro through a strict anti-inflationary regime. Formally it functions in conjunction with the strict rules of the 1992 Maastricht Treaty which "forbids" member states from having annual budget deficits greater than 3 per cent of GDP and total public debt greater than 60 per cent of GDP.
The framework is rooted in a flawed ideology, as reflected in the perennial flouting of the fiscal rules. As financial commentator Mike Whitney has observed: "The nonsensical treaty basically repeals the business cycle by edict," as if it were possible to simply legislate against things like recessions, and thereby to happily sacrifice the measures needed to address them. Spain currently has an unemployment rate of 20 per cent — but the indicator of successful governance is still seen to be deficit reduction rather than unemployment alleviation.
More fundamentally, the framework presumes that economic robustness and dynamism are innate to the market mechanism — that is, it credits markets with strengths and qualities they do not have. The innate weakness of Maastricht was noticed immediately by the maverick economist Wynne Godley in 1992:
The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.
The repressive and inflexible character of the German Bundesbank, on which the ECB was modelled, was offset in post-war Germany by active industrial policy, a dimension ignored by pundits of German economic resilience. Lordon notes that, ironically, supposedly undisciplined Europe is far more constrained in dealing with economic crises than are the "respected" Anglo countries. Yet the US, as we’ve seen, simply prints money. The current move by European leaders to centralise fiscal policy (meaning only fiscal restraint), again under external pressure, will only exacerbate the innate flaws in the ECB/Maastricht framework.
The second big problem Europe faces is that it too has succumbed to the neoliberalist siren song, which has further constrained the capacity (French) of states to manage the health of their economies. Taxes on businesses and the wealthy have been cut. As Lordon notes drily of the threat: "Defiscalise me or I clear out" — or, in other words, lower my tax or I’m leaving. National finance sectors have been deregulated, laying the groundwork for the subsequent orgy of irresponsible lending and trading in dodgy instruments. Remarkably, the most dramatic transformation has occurred in Germany where the previously cautious and highly regulated financial sector has been blown open.
The system is in chaos but those responsible for the wider crisis home in — selectively — on the latest symptoms, and expect bystanders to pay for the mess.
This selectivity in finding a way out of the crisis goes further. It is salutary to note that whereas social programs are targeted for cutbacks, defence budgets are off limits. The Trident system is up for renewal in Britain, with billions due to be wasted on another symbol of Britain’s dead imperial splendour. In May, NATO’s secretary-general Anders Fogh Rasmussen "warned member governments against making deep cuts in national defence budgets, insisting the 28-nation alliance must reverse the decline in military spending if it is to meet looming security threats." Ah yes, the permanent Cold War against a fabricated enemy.
It is remarkable that nobody in English-language officialdom or academia — except for a handful of leftover Marxists — is really trying to understand the character of this finance sector driven system that currently prevails.
Certainly irrationality plays an integral role, in a way far more profound than is suggested by the now fashionable (yet essentially trivial) formulae of behavioural economics. And there’s also incompetence. And corruption. And venality.
The irrationality is a product of the system’s anarchy. But there are strategic players aplenty (Goldman Sachs as exemplar), always after the main chance, yes, but who also seek to mould the system’s imperatives more profoundly in their favour. Strategy and anarchy thus combine in perpetual flux.
Neoliberal theories celebrate this order as natural and good, and there is a natural order (of sorts) to the system, but it is far from the elegant and beneficent spontaneous order envisaged by Friedrich Hayek — that was something that only ever existed in Hayek’s imagination. It is self-reproducing, albeit through the auspices of the state.
This real world order is facilitated by the common worldview of most of the major players, although this hegemonic mentality is inconsistent with the convulsive, inefficient and destructive character of the real thing over which this cabal presides. Greek pensioners, Spanish public servants, the English unemployed and disabled — all become road kill. And worse, whole countries — Argentina, Latvia — are condemned for years to national economic decay, widespread destruction of industries and public services and jobs, with subsequent impoverishment. Meanwhile, the Greek elites’ tax evasion will continue unabated, the disproportionate role of the construction sector in Spain remains unresolved, and the engorged and disabling character of the finance sector in Britain remains deeply entrenched.
It gets worse. The observed convulsions arising from the anarchy have now been picked up and refashioned for strategic purposes for even greater gains. Thus arises what (again from the French) has been labelled a strategy of "constructive chaos", using tactics not unlike those employed in the sphere of warfare (French). English language readers would be more familiar with the related concept of "shock doctrine" coined by Naomi Klein.
The unreformed finance sector is the central vehicle for this rollercoaster. The perspicacious Lordon once more: "Save me or I’ll kill you." Or, more accurately, "Save me and I’ll kill you." A sector whose integral function in economic activity gives it a public purpose has been appropriated for entirely private ends, and with disastrous consequences.
Finally, and worse still: nothing about any of this looks set to change in the indefinite future.
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