The Century of the Emerging World : Development with a Vengeance [1 ed.] 9781443893619, 9781443873161

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The Century of the Emerging World

The Century of the Emerging World: Development with a Vengeance By Paul Dobrescu

Translated from Romanian by Mălina Ciocea

The Century of the Emerging World: Development with a Vengeance By Paul Dobrescu Translated from Romanian by Mălina Ciocea This book first published in Romanian by Comunicare.ro University Press, 2013 This edition first published 2017 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2017 by Paul Dobrescu All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-7316-0 ISBN (13): 978-1-4438-7316-1

To my wife, whose understanding and support have made her the co-author of all my books

TABLE OF CONTENTS

List of Tables .............................................................................................. ix Preface to the English Edition ..................................................................... x The Century of the Emerging World ........................................................... 1 Part I: One World is Rising, Another World is Falling Chapter I .................................................................................................... 10 This is the Crisis of the Developed World Chapter II ................................................................................................... 18 Neoliberalism: The Rise and Fall of America Chapter III ................................................................................................. 26 State–Development, an Antonymous Relationship Chapter IV ................................................................................................. 35 Financialization: The Name that Defines Our Time Chapter V .................................................................................................. 60 Inequality – A Rocket Falling Back to Earth Chapter VI ................................................................................................. 73 “The Cold War” of Development Models Chapter VII ................................................................................................ 81 The American Elite, Seduced by the Responsibility of Privilege Chapter VIII .............................................................................................. 86 Capitalism has become More Capitalist

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Table of Contents

Part II: The Four “Births” of Europe Chapter I .................................................................................................... 94 Europe, in a Nutshell Chapter II ................................................................................................. 110 A European Union Made in Germany Chapter III ............................................................................................... 157 Euro, the New Deutsche Mark Chapter IV ............................................................................................... 175 Periphery: The Illness that can Kill the Union Chapter V ................................................................................................ 196 Europe Needs a New Deal, Not a Marshall Plan! The Shift of the World in the Third Decade ............................................ 201 References ............................................................................................... 207

LIST OF TABLES

Table 4-1 EU improves quality of life in Europe Table 4-2 EU will be more equitable after the crisis

PREFACE TO THE ENGLISH EDITION

I owe the readers of this work several explanations. The book being now translated into English was published in Romanian in late 2013. Important events and processes have happened since then. Obviously, it is beyond the scope of this book to give a full account of these changes. Two questions arise: has this analysis stood the test of time? And: do the changes share a common denominator? The answer is affirmative for this latter issue. The social and political consequences of the crisis have taken the form of discontent, whose potential cannot be ignored. Both Brexit and the US elections have shown that discontent has reached politics and is increasingly nationally-bound. The superpower of the 19th century, the UK, and the superpower of the 20th century, the US, have signalled that they are preoccupied with their own evolution. They seem to have requested the world’s agreement to have this time for themselves, after having been focused on international problems for so long. The internal agenda will be most prominent on the states’ political agenda. Great powers will reclaim their positions as the main actors of the international stage. Let us hope this will not translate into state egocentricity. There has been a lot of talk about the rise of populism. Many explain the events above through populism. I am inclined to go with the words of Lawrence Summers, former Secretary of the US Treasury: “What is needed is a responsible nationalism—an approach where it is understood that countries are expected to pursue their citizens’ economic welfare as a primary objective but where their ability to harm the interests of citizens elsewhere is circumscribed. International agreements would be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered.”1 With the spread of this new perspective, populism will be harnessed and combated. Those who will understand this commandment of the moment will win over their citizens. It is the reader’s privilege to form judgements about the arguments in this work. My main interest was to discuss the structural problems of developed society, which are crucial nowadays – whether we talk about financialization, state, elites, or development models. 1

Lawrence Summers, “Voters deserve responsible nationalism not reflex globalism”, Financial Times, https://www.ft.com/content/15598db8-4456-11e6-9b66-0712b38 73ae1.

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The past few weeks have seen key economic actors (among whom, the President of the World Bank, the Managing Director of IMF, the Governor of the Bank of England) take a stand. Bankers around the world are genuinely concerned about the state of economy in the developed world, characterised by disappointing, modest growth, which, projected against the background of unequal distribution of revenue, creates quasigeneralised discontent. In the words of Christine Lagarde, “we see growth as too low for too long and benefitting too few.”2 The excessively unequal evolution of the world has reached the point where it affects development. The evolutions of the last decades require some examination. The time of neoliberalism, with its (almost) exclusive focus on monetarism, and disregard for the social dimension of development, seems to have come to an end. The actors mentioned above point explicitly to the necessity of rethinking the mix of monetary policies, fiscal policies and structural reforms, in order to have a more inclusive economic growth. Martin Wolf warns that “for now and the foreseeable future, we will remain in a world of monetary policy.”3 The developed world is at a crossroads and is undecided about which way to go. It is difficult to inaugurate a new development track that uses the virtues of other tracks, to rethink the paradigm that kept this society going for the last decades. A four-decade period, that shone in the early 80s, marked by the triumph of neoliberalism, is coming to a close. A new synthesis is now needed. In the President Obama’s last message to American economy, “A new future is ours to write.”4 Will the 21st century belong to the emerging world? My book has started from this premise. In the meantime, other works5 have underlined that, on the contrary, the American century is far from over. Still, my hypothesis is grounded in solid arguments. For instance, the Governor of the Bank of England, Mark Carney, pointed that the formerly significant gap between the emerging and the developed economies’ growth rates has decreased in the last years.6 In 2016 the average rate was above 4 percent 2

Transcript of IMF Managing Director Press Conference, October 6, 2016, https://www.imf.org/en/News/Articles/2016/10/06/AM16-TR100616-IMFManaging-Director-Press-Conference. 3 Martin Wolf, “Monetary Policy in a Low-rate World”, Financial Times, September 13, 2016. 4 Barack Obama, “The Way Ahead”, The Economist, October 8-14, 2016. 5 See, for instance, Joseph Nye Jr., Is the American Century Over? (Hoboken, New Jersey: Wiley and Sons, 2016). 6 Mark Carney, “The Spectre of Monetarism”, Lecture at John Moores University, 5 December 2016, https://www.bis.org/review/r161207d.pdf.

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in the case of emerging economies and under 2 percent in the case of developed economies, which clearly shows that the emerging economies are catching up. The two groups are led and symbolized by the US and China. US’s quick recovery from the crisis has not ruled out real economic and social problems. The modernization process presents China with a lot of complex issues. These two countries’ economic scope cannot be ignored, either. China’s “proportion of the world GDP growth is 32 percent. That is, in 2015 the entire planet’s output increased by $4.5 trillion, and $1.5 trillion of that was China alone—a trend repeated now for many years. Sure, the US has a larger GDP for now. But China’s proportion of planet Earth’s growth, like a car’s ability to accelerate, is what wins the race. China is to economists as Ferrari is to automotive literati.”7 This book offers a perspective from “the periphery” on contemporary phenomena. We can evaluate the modernity of various visions on development by the way they discuss periphery and its problems. Peripheries usually designate regions of lesser importance. I believe history teaches us about the importance of periphery. When periphery is in crisis, the metropolis cannot fare well. A valuable lesson in the context of globalization. December 2016, Bucharest

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Chase van der Rhoer, “China’s Economy is set to overtake the West”, http://europe.newsweek.com/china-economy-set-overtake-west-529382.

THE CENTURY OF THE EMERGING WORLD

One can conquer an empire on horseback, but one cannot govern that empire from horseback I first started thinking about writing this book when I learned the startling fact that the European Union has a financial periphery. Until then, I had believed in earnest that the very idea of a union excludes the idea of periphery. I was all the more amazed to discover that Italy is part of this periphery. Italy, a founding country of the single market, Europe’s fourth economy. If so, when did Italy become a periphery? Was it before or after it joined the eurozone? The obvious answer is, afterwards. This is how I discovered the second paradox: not only does the Union tolerate and live with periphery, but it produces periphery; it generates and maintains it. Which is not only surprising but beyond understanding. In any case, this contradicts the Union’s basic principles, which should encourage development, solidarity, cohesion, and so on. As a person living in South-Eastern Europe, I could not stop asking: if Italy is a periphery, then where does this leave Romania, or the other countries in this part of Europe? Are we a periphery or the periphery’s periphery? This is a question to ask in earnest – to know where we stand and how others (whether it is Europeans from the financial periphery or Europeans from the Union’s core) look upon us. Some time (not very long) ago, we hoped to join the eurozone. This is becoming a distant prospect and from what we can see happening in this zone, it would probably be wiser not to join soon, assuming the European bodies would allow us to. If Italy cannot meet standards, how could we? It is equally important to ask this question because it will allow us to foresee Europe’s evolution as well. The Union has its own dynamics. The eurozone is increasingly becoming the “true” EU. Two “Unions” are being born: the eurozone, encapsulating most of the Union’s energy, and the countries outside of the eurozone – some because they cannot join, some because they chose not to, and some that have not yet reached a decision. But there are some other transformations in the Union that we need to understand and make known. The core-periphery relationship, the euro crisis and the increasing gaps between economies within the Union and those at its top are various layers in a structural crisis that is pervading

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Europe. They cannot be separated. One crisis influences another; solutions are reached by solving other interrelated problems. Each chapter in this book will address one such crisis. These overlapping crises have created a much more complex situation. We cannot keep each crisis on its own floor. The EU is a unitary construction, whose floors are intensively circulated. Crises overlapped and led to this crisis, which does not come to an end. My first choice for this book’s title was, in fact, Europe’s Overlapping Crises. At one time, I realized that I could neither understand nor explain the European crisis if I did not first present the crisis of the developed world. And not only for the obvious reason that Europe is a very important part of this world and one of its symbols but also because I understood that the US crisis and European crisis share some traits. Both are financial in nature and appeared in the context of a growing trend towards the financialization of economic life. The banking crisis is at the core of these crises. Despite slight differences, things are strikingly similar: in the US the crisis emerged as a housing bubble, and in Europe as a “sovereign debt” crisis. The constant element and the real cause of these crises is the banking crisis. In fact, the “official” starting point of the crisis is the Lehman Brothers’ bankruptcy in September 2008. America being America, public opinion focused on it, but in the meantime an event nonethe-less spectacular happened in Great Britain. “By 2008, the Royal Bank of Scotland was not just Britain’s biggest bank but the biggest in the world. Its assets, at £2.2 trillion ($ 3.5 trillion), were more than 150% of Britain’s GDP”1. But it faced huge financial problems. The state gave 45,5 billion pounds, the equivalent of 70 billion dollars, to save the bank. Each Brit contributed 740 pounds (approx. 1,000 dollars). “Britain’s banking sector moved from free-market to publicly owned overnight”2. Another essential argument in support of my thesis is that there is a lot of talk about post-crisis, reconstruction, relaunch, but Europe keeps to the background of this encouraging picture. Various analyses show that this year the US will recover dramatically. The main explanation lies in the fact that the US focused on bank recapitalization, troubled asset relief, and so on. Europe will continue to have negative growth this year; the main reason being that in Europe the banking crisis has not yet ended. Consequently, I decided to divide our book into two main sections. The first discusses the crisis of the developed world and various processes and tendencies, such as financialization, the shrinking middle class, the 1 2

Mervyn King, “Leaving the Old Lady”, The Economist, June 15, 2013. Ibid.

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decline in the role of the elites, which all lead to the central question: can we still speak about the capitalist society as we understood it? Are transformations so profound that the capitalist society has changed identity? The second section of the book analyses Europe and the European crisis using the concepts developed in the first part. I owe the readers an explanation for the title of the book. A civilization’s decline starts from within. When did the developed world start crumbling? Paradoxically, with its victory in the Cold War. Last century’s last decade was a prolonged celebration of victory, and like any spectacular event, it silenced other far-reaching processes. The first such process was China and Russia embracing capitalism. Two continental countries with a rich imperial history, both opening to the world with a sort of humility (in the case of China, because of 19th century events; in the case of Russia, because of their defeat in the Cold War), both with high stakes in this game (some of them transparent, some not). After Tiananmen, China had to confront the international chill and face isolation. The recovery signal came with Deng Xiaoping’s tour to south China and the mantra he used at the time: Getting rich is fabulous! Which clearly spelt capitalism. China slowly made a full recovery. After a critical period of financial collapse, Russia recovered as well. Spanning two continents, with the same riches and geographical position but in a new attire, Russia has not changed its fundamentals. It may be the world’s “poor power” but it will never be a lesser power. For this country, the territorial loss was hard-felt but Russia may well have liberated itself. In any case, the habit of judging Russia by common standards has failed again. Russia’s rise is indisputable. The second silent but far-reaching process is the rise of the emerging world as a whole. Along with the BRIC countries, a series of countries have shown dynamic growth: Indonesia, Saudi Arabia, South Africa, Mexico, Turkey, and others. The emerging world, in fact. The evaluations of various boards show that Germany is among the most dynamic economies in the world. A study initiated by OECD on the evolution of 42 countries by 2060 highlights something significant for this analysis: in the following 40 years, the German economy will grow, on average, 1 percent annually, which is the slowest growth among the 42 countries analysed. It is true that, as a developed country, Germany cannot have high growth rates but what is of interest here is the impact: the difference between Germany and these countries will decrease, while the position of the emerging world in the global economy will constantly be on the rise. We do not wish to underestimate the huge historic event that was the end of the Cold War. We only want to point out that it was a turning point

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in history. The previous century’s last years meant feverish preparations for a new start in full force. The early 2000s started as a wild decade with unparalleled growth rates, which changed the world in a matter of years. In 2007, for instance, China’s growth rate was 14.2%, India’s 10.1%, Russia’s 8.5% and Brazil’s 6.1%1. The frontrunners and winners were the BRIC countries. At the beginning of the decade, the emerging countries’ GDP share in world output was 38%; now this share is 50% (measured at PPP rate)2. And this share will grow, hailing a new political reality: the emerging world century. The rise of BRIC countries and of Asia in general has become a fact. We tend to overlook the impact of this growth rhythm combined with size, and how important it is that the emerging countries’ platoon has been led by the world’s most populated country and includes continental countries with a long history of regional or global leadership. Striking in the last years of the decade, the crisis has been a test. A Supreme Court of the development process, the crisis passed judgement on the evolutions of the decade and of the period following the Cold War. The crisis gave passing grades to the BRIC countries, and emerging countries in general, which were all hit by the crisis but to a lesser degree. After 2009, they resumed growth. What did the crisis sanction? Firstly, excess: excessive gain, very closely related to extravagance; excessive speculation; we could even say excessive arrogance (taking gains for granted); and excessive inequality as well (American society is divided into two: the small group of the privileged and the remaining 99%, to employ the slogan used in Wall Street protests). There were many other things that the crisis sanctioned in the evolution of developed countries. Probably the most important was the developed societies’ indifference to their own future, which can be traced to accumulated debt, the frequently signalled decline of the general level of education, the state of infrastructure, the decrease in investment, the demographic decline, and so on. This means that the developed society has ceased to transfer the solid, verified premises of its development to future generations. It has even started borrowing from future generations, living at their expense, disregarding the effort they will have to make in order to pay the debts of previous generations. History, with its time-tested balanced view, cannot validate this lack of common sense. This is the great weakness of developed society: it has ceased to look to the future. Wasn’t it to be expected that history would give an answer to a society that 1 2

“When Giants Slow Down”, The Economist, July 27, 2013. “The Great Deceleration”, The Economist, July 27, 2013.

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disregards historic evolution? This year, the growth rates of the emerging countries will decrease for the first time in many years – China will grow at approximately 7.5%, India at 5%. The average growth rate among emerging countries will be 5% – a low figure compared to previous years – but it will still be double the rate of developed countries, which means that they will contribute towards consolidating the relationship between emerging and developed countries. The emerging world will become more important, and not only because of its faster growth rate. Jointly, China and India have 40% of the world’s population. And the second echelon countries – Mexico, Indonesia, Turkey – have obvious advantages in this respect. On the other hand, we cannot underestimate the fact that they have accumulated an experience of growth, and are the guardians of strategies that have been confirmed by the crisis. In short, they have a chance to be successful. Analysists usually highlight the demographic advantage of these powers, which is correct because this is the advantage that allowed them to become global competitors. What is underestimated, even overlooked, is that their evolution was guided by strategy, which was in fact a return to the early model of capitalism, the tight union between the state and the market. These countries’ development is a negative of the developed countries’ evolution: developed countries have demographic problems, emerging countries have a demographic advantage; generally, developed countries diminished the role of the state while emerging countries emphasized this role in one way or another; developed countries face resource shortages while the emerging ones are usually rich in resources or have transformed the problem of resource finding into a component of external politics (the case of China). In other words, emerging countries are better equipped for the times to come and have remarkable potential to grow. They possess advantages that do not alter with the years or decades; that is why we believe that these tendencies are meant to last. The first decade of this century must not be judged by exclusive reference to its transformations. This decade’s changes have led to longterm tendencies. In time we will understand that we witnessed transformations we did not fully grasp, and changes that have given rise to new evolutions and a new balance of power. Long-term transformations build on a gradual accumulation, which is the engine of history. We find it difficult to identify the tendency because we pay no attention to its driver: the gradual, silent accumulation. Analyses discuss whether the 21st century will be an American one, or a Chinese or Asian century. We believe it will be the century of the emerging world. Indeed, Asia is this world’s symbol. We still have to wait and see whether the symbol will

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speak in the name of this emerging world or will be only its most dynamic part, and acknowledged as such. Here are some of the evaluations made by OECD, which support our statements. China will overtake the euro area by one measure of GDP around the end of 2013 and the US a few years later [by some estimations, in 2016], becoming the world’s biggest economy. India is projected to surpass the euro area around 2032, while rising productivity and a relatively young population will also drive gains by countries such as Indonesia and Brazil1.

With the rise of China and other actors comes the decline of traditional actors. This is something that we need to emphasize because we are often tempted to project everything on newcomers and their competitive advantages. The fundamental truth, however, is that decline can only be explained through the internal factors triggering that decline. The same body projects China’s evolution in comparison with the main actors of the developed world: the US and the European Union (represented, in this case, by the eurozone). While China and the euro region each accounted for 17 per cent of world GDP in 2011, China’s share will jump to 27.9 per cent in 2030 as the euro area’s shrinks to 11.7 percent. That’s a steeper decline than projected for the US, whose share will fall from 22.7 percent to 17.8 percent2.

The more distant evolution is also instructive. China’s contribution to GDP will be little changed in 2060, while the euro area’s share will decline further to 8.8 percent, again more quickly than the US3.

These events and tendencies are comparable, or possibly more significant, with the fall of the Berlin Wall or the fall of the Soviet Empire. They will contribute to the geopolitical rewiring of the world, which is difficult to envision right now. It is the most significant post-crisis geopolitical repositioning that was not produced by the crisis. It was foreseen in the decade we refer to, accelerated by the economic earthquake of these past years, and will be consolidated by less spectacular but constant future evolutions.

1

OECD Economics Department Policy Notes, No. 15, November 2012. Ibid. 3 Ibid. 2

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The planet’s stability is fundamentally influenced by what happens on the Euroasian continent, the compact mass of land covering around twothirds of the world, with 70% of the world’s raw materials, with two-thirds of the world population, with a 60% share in world GDP. Stability in this part of the world means stability throughout the world. This is where last century’s great conflicts started. We can now foresee a great, long-lasting imbalance on the Euroasian continent. In 2030, says Angus Maddison, Asia will account for 53% of the world GDP, and the West (Europe, the US and other developed countries) for a mere 33%.1 If we leave the US aside, we will understand the magnitude of this imbalance. The European peninsula will become the less significant tip of the continent. This is the beginning of a new, great geopolitical game, where the West’s fundamental problem will be its geopolitical relevance. There are at least two consequences. First, the fate of the all-important trans-Atlantic trade agreement. Suffice it to say that, together, the US and the European Union account for almost half of the world GDP. This economic process carries geopolitical significance. The two most important powers of the developed world associate in order to maintain the liberal model worldwide. The unifying aim is not as much economic as it is political and geopolitical. The liberal political order needs to preserve a certain prominence. If it cannot preserve its global reach, it must at least preserve its prominence as a leader. In this context, it is fundamental for these powers to maintain trust and promote an active attitude: “What the US and EU need is a project to remind them of their shared capacity to shape even”2. The world’s and Euroasia’s new geopolitical data highlight the advantages of Russia’s geographical position. Stretching over the two continents, Russia can take advantage of two geopolitical combinations, Europe and fast-evolving Asia. To quote an analyst, if Peter the Great were alive today, he would move the capital to Vladivostok. In other words, he would tip the balance towards Asia, and the Pacific, where most of the 21st-century history will be written. Europe should take this as an implicit warning. In what follows, we will take a look at the major transformations that are less noticed and discussed. An analysis focused on countries, regions or continents, in ignorance of the bigger picture, has little chance of being true. In the words of Donald Sassoon, in the era of globalization, political 1

Angus Maddison, Contours of the World Economy 1-2030 AD: Essays in MacroEconomic History (Oxford: Oxford University Press, 2007), 314. 2 Philip Stephens, “Transatlantic Free Trade Promises a Bigger Prize”, Financial Times, February 15, 2013.

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and historical analyses need to be globalized as well1. Global perspective is essential in an analysis of the evolution of the EU otherwise not only does the value of our opinions decrease but our analysis also loses its geopolitical compass – which, evidently, diminishes, if not annuls, the value of our approach.

1

Donald Sassoon, Foreword to Greece, Financialization and the EU: The Political Economy of Debt and Destruction by Vassilis K. Fouskas and Constantine Dimoulas (London: Palgrave Macmillan, 2013), XVI.

PART I: ONE WORLD IS RISING, ANOTHER WORLD IS FALLING

CHAPTER I THIS IS THE CRISIS OF THE DEVELOPED WORLD

1. Why isn’t spring coming? Come to think of it, there are two crises looming over Europe, and both are crises of development models. As one of the symbols of the developed world, Europe faces the crisis of the developed countries, similar to the one in the US, but it also faces the crisis of the European development model as it was envisioned when the Union was first born. Both are crises of the development model, which makes them all the more difficult because it is the fundamentals that need to be revisited, reframed and readapted. Given this inherent difficulty, we need to be quite understanding about Europe and its many problems. The first part of this book discusses the complexity of the developed world crisis, which, in my opinion, is the first layer of what we call Europe’s overlapping crises. It is essential to examine what happens on our continent in the light of what happens in the developed world. This crisis has often been dubbed a global one but on closer analysis we see that we are in fact the contemporaries of the developed world crisis. There is no other explanation for the fact that during this “global” crisis, some countries are developing at a fast pace: China, India, Brazil, Russia, South Africa, Turkey, Mexico. Analysts have emphasized that we are witnessing an economic and geopolitical shift from the West to the East, from the developed world to Asia. This shift cannot be explained by a global crisis. In fact, we will need to accept that it is the developed world that is experiencing a crisis, not the world as a whole. In the past five years, the developed world had negative or, at best, modest growth rates. The financial crisis hit the developed world the hardest – the emerging countries were less affected, got over this difficult moment and in a year exhibited impressive growth rates again. In March 2009, Ben Bernanke declared that “spring is right around the corner.” One of the US’s most powerful personalities of all time, but especially during the crisis, the president of the Federal Reserve was

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talking to a very tense, if not panicked, America. Six months before, the Lehman Brothers had gone bankrupt, firms both big and small had closed down, there was a steep increase in unemployment and uncertainty was pervasive. All eyes were on the Federal Reserve. As Krugman says, there was another reason why this assertion spread so fast, apart from the fact that it gave hope to the millions of people who needed it badly – it resembled a line in a famous movie: Being There (1979). Asked about that moment’s economic politics, the gardener, who passed for a wise man, answered: “As long as the roots are not severed, all is well and well will be in the garden… There will be growth in the spring”1. Our problem is: are the roots severed? If not, why isn’t spring coming, or why is it taking so long to come? Six years into the crisis, the situation is very much as Keynes described it in the 1930s: “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”2. We can call it simply a recession, as Keynes does, or a slow recovery, a less significant growth of 1–2%; either way, the situation does not change much. Words cover imperfectly a reality that is becoming increasingly evident and worrying: developed society is stagnant, it cannot find its way out, and its relative decline cannot be denied any longer. Joseph Stiglitz talks about the American society as “an increasingly dysfunctional form of capitalism”; “it would be years – 2018 at the earliest – before the economy returned to full employment”3. Charles Kupchan also warns: “Western democracies have little choice but to engage in strategic economic planning on an unprecedented scale. State-led investment in jobs, infrastructure, education, and research will be required to restore economic competitiveness”4. There is not much choice and, besides, time is ticking away. Krugman even titled his book: End this Depression Now! Is this an issue of deficient administration of the system and inefficient policies, or is this an inherent problem of the model? The question we want to answer is: has capitalism evolved so much, has it transformed so rapidly, that we are talking about a reality that no longer exists? Or, in 1

Paul Krugman, End This Depression Now (New York, London: W.W. Norton & Company, 2012), 3. 2 John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harvest/Harcourt, 1964 (1936), 249. 3 Joseph E. Stiglitz, The Price of Inequality (London: Allen Lane, an imprint of Penguin Books, 2012), 1. 4 Charles A. Kupchan, “The Democratic Malaise, Globalization and the Threat to the West”, Foreign Affairs, January/February, 2012.

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Chapter I

other terms, have developed societies strayed so far from capitalism’s classic model that we are talking about two different realities? This is, in fact, our main hypothesis. We can explain the slow recovery from this perspective: treatment is being prescribed to a sick person who no longer exists, or who has little in common with what capitalist society represents today.

2. The US have won the war but lost the battle We talk incessantly about the crisis but we forget that the crisis was triggered by something; that upstream there are a myriad of decisions, options, errors and delays that can cause disaster if not noticed at the right moment and met with an adequate answer. We apologise to the reader for the following presentation of the period before the crisis, in fact the years following the Cold War. It is our attempt to answer a question that seems to be on everyone’s lips: how could this possibly happen? At the end of the Cold War, the US rejoiced unbounded dominance: in terms of reach (American power had no real rival anywhere in the world), instruments (economic, military, cultural power), and even prestige (at that moment, American power was fascinating because of the very alluring combination of economic prowess and democratic and cultural development). In no other time in history has there been such a dominant hegemonic power. To be so undoubtedly in possession of all instruments of power and then in fewer than 20 years face a crisis that questions the very position as global hegemon is a problem that cannot fail to intrigue, preoccupy and stimulate minds. One explanation has to do with the winner’s attitude – this time, the winner had not only won a confrontation but all the great conflicts of the 20th century. Ankie Hoogvelt’s words suggestively synthesize the situation at the end of WWII and at the end of the Cold War: there were winners who lost everything, except victory, and there were losers who, eventually, won everything, except victory.1 The countries that lost WWII (Germany and Japan) won the economic battle in the following decades, and by the end of the Cold War ranked second and third in the world’s economic hierarchy. England won the war but lost the empire, and became one among many powers. So did France. The notable exception was the US, which won both WWII and the Cold War. There is one more significant difference: at the end of WWII, Great Britain was exhausted, 1 Ankie Hoogvelt, Globalization and the Postcolonial World: The New Political Economy of Development (London: Palgrave, 2001).

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the natural consequence of which was the end of its empire. The US came out unscathed from the Cold War and 97 months of continuous economic growth followed. One explanation for what happened lies in the arrogance born from this triumph. In their impressive work, Empires in the World History, Jane Burbank and Frederick Cooper underline: “The past of empires displays the human costs of the arrogance of power – whether in the name of a great leader, a civilisation, or a people.”1 This time arrogance came with a limitless trust in the neoliberal vision and encouraged not only idolatry of the American model but also an attempt to promote it anytime, anywhere as a veritable development mantra. The complex debate on development was replaced by a formula (that we could easily call a dogma). Edward Luce’s confession is very instructive in this respect. President Clinton summoned Alan Greenspan, Larry Summers, Robert Rubin and Jeffrey Garten and sent them throughout the world to tell everyone what needed to be done. In fact, they were just handing out free copies of the standard handbook detailing the Washington Consensus. In utter embarrassment, Jeffrey Garten admits It didn’t really matter where I was, the theme was the same. The constant message was that we had figured it out and you in China and you in Brazil and you in Germany don’t have to reinvent the wheel. America is the model. All you need to do is be more like us... I feel genuinely embarrassed at how arrogant we were.2

More important than the attitude is what fed it: the acute feeling that evolution had reached a climax and would go no further, to mark the victory in the Cold War; the idea that everything would come under a oneof-a-kind, standard model. Yet, under all this simplicity, the idea is quite frightening. Obviously, this perspective could serve no one, not even its authors, who were promoting it through various channels. It seemed that history no longer needed everyone’s efforts to continue its evolution, clearly not those of the nation at the top of the world order. This perspective could only trigger odd, counterproductive attitudes against the world’s only superpower. History tolerates a lot but it is ruthless when faced with breath-taking arrogance. Gradually, it proves such vanity

1

Jane Burbank and Frederick Cooper, Empires in the World History: Power and the Politics of Difference (Princeton and Oxford: Princeton University Press, 2010), 459. 2 Edward Luce, Time to Start Thinking: America in the Age of Descent (Boston, Mass.: Little, Brown, 2012), 258.

14

Chapter I

pointless and ridiculous. Twenty years later, the US is fighting a lot of problems, and predictions point to the moment when they will cease to be the world’s economic leader. Where is that arrogance now? We often say they lost a battle but not the war! What if you won the war – in this particular case, the wars – but lost the battle? It is the best metaphor we could find to describe the current situation in the US. But this is not just a battle among others – it is the final battle, which should have taken advantage of the results of previously won confrontations. Forty years of utter resolution ended in premature relaxation. The fruits were not yet reaped but the winner failed to organise things in light of his values, interests and options. The winner always decides, starting from his own interests. The problem is that this time around what followed served neither the winner’s nor the world’s interests. We speak of the world because there will always be a correlation between the winner’s wishes and what the others can deliver. This relationship guarantees peace and the lasting international arrangements. Why wasn’t this significant point reached? What happened along the way? A superpower fails for more reasons than mere arrogance: instruments of power, policies and options, among other favourable factors, have to converge in order to trigger a decline. Before analysing them, let us discuss one more detail, which is at the crossroads between psychology and economic policies. Was there a peace treaty marking the end of the Cold War? There was a battle – one without weapons, to be sure, but still a battle, which had its winners and losers. History teaches us that any such battle ends with a treaty marking the end of the conflict and the conditions for peace. This time, peace was not what it was supposed to be: the losers did not know what and how much they had to pay. Nor did the winners explicitly claim damages. That was why a classical treaty was not needed. Yet what followed cannot be understood beyond the scope of this “treaty,” which may have taken the form of a document or just an idea in the minds of the winners. What did the winners have in mind? We can only suppose. From this perspective, we may say that the winners wanted the world’s “fullest” liberalization: this time, the losers were not vassals to a power but to the neoliberal doctrine. As this doctrine was illustrated by America, we can say that American interests were served. In the words of Susan Strange, “globalization is nothing but polite party talk for what in fact is a process of Americanization.”1 What the winners wanted was for the world 1

Peter J. Katzenstein, ed., Anglo-America and Its Discontents: Civilizational Identities Beyond West and East (Abingdon: Routledge), 222.

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15

to embrace the neoliberal doctrine embodied by the Washington Consensus. At its core it was the doctrine of free exchange.

3. The “ideological” America tamed the pragmatic America Tens of volumes and analyses were written about the Washington Consensus.1 For the purposes of this book, we will refer to its economic implications and the economic approaches recommended to countries around the world. In the early 90s, its seduction and fervour in many countries can be explained as such: The Washington Consensus derived its appeal from a simple narrative about the power of globalization to lift developing nations out of poverty. But rather than promote the mixed, pragmatic strategies that China and others had employed in order to develop domestic industrial capabilities, advocates of this narrative stressed the role of openness to the global economy.2

According to the same American author, this trend climaxed in 1995 when Jeffrey Sachs and Andrew Warner, professors at Harvard at the time, published an article claiming that a country’s development is solely associated with its openness towards international trade and financial flows, an idea that can be translated as: open your borders and you will develop! Dani Rodrik’s most important critique about the Washington Consensus is that it associates development solely to low tariffs and trade liberalization, with no emphasis on what he calls “development’s internal constraints” – the state of education, the health of the population, the level of debt, infrastructure development and political stability.3 This is the most difficult part of the development process. Development is always the fruit of a country’s own effort while taking advantage of a favourable context. 1

The term was launched in 1989 by John Williamson and referred to measures that should have been applied by countries in Latin America that had opted for reform and modernization. Initially, it recommended ten types of reforms, with an emphasis on deregulation, financial and trade liberalization, and so on. According to Dani Rodrik, the doctrinal traits became visible later on when the “Washington Consensus was transformed into a more doctrinaire approach, a mantra for the uber-liberalizers” (Dani Rodrik, The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist (Oxford: Oxford University Press, 2011), 164. 2 Ibid., 164–65. 3 Ibid., 171.

16

Chapter I

The fundamental error in the Washington Consensus is that it cuts away economic development from the internal preparation for development. It even invites a type of passivity, with a tint of ideology: you do not even have to strive, globalization works for you! It is significant that after several trips to Africa, Sachs revised his viewpoints and emphasized the need for a country to train its workforce, improve infrastructure, and so on. Undoubtedly, the strongest answer came from the various regions of the world that had adopted other development models. Asia opted for the so-called “export-oriented model” – the early solid establishment of high performance industries that could be competitive on the world market. Brazil, Mexico and Turkey all embraced this model. “Import-substituting industrialization” used internal markets to stimulate demand and imposed high tariffs to allow industry to develop and use the country’s economic advantages.1 Nowadays, the Washington Consensus meets with decreasing compliance. The important countries, the ones making visible progress, did not follow this model. This is not only “a declining brand” but an unreliable one under the pressure of two equally important factors: the “disappointing” results it generated where applied and the successful economies of countries that opted for other development models. Then, what did America target? We cannot ignore that the world’s ample liberalization turned developed countries, America especially, into winners. In other words, why need a peace treaty talking about (precise, quantifiable) “damages” and obligations? Although not written down, the winner’s advantage was consistent and came “naturally”; we are even tempted to say it came “in a civilized manner,” without treaties or pacts, by virtue of accepting the vision of free trade as a development engine. What could be more modern and attractive? We cannot ignore that liberalization involved the advantage for the winner by merely lowering tariffs. Delocalization, the transfer of important production capacities to developing countries with low labour costs, which became a possibility precisely because of these low tariffs, was also profitable. Liberalization involved large scale privatization at a low price. The IMF loans required the privatization of important assets. If we refer to the Romanian experience in these last 23 years, we could say that reforms visibly diminished the country’s development potential. In the early 90s, Romania had no debt and had an active, well-trained workforce in industry, energy and agriculture, all of which recommended it for a constant flow of foreign investment. Nowadays, these advantages 1

Ibid., 168–70.

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have dwindled following a visible deindustrialization process, an amassing of debts and the lack of vision regarding the country’s evolution. Privatization was often an opportunity to transfer assets from the state to private hands, after which the assets were stripped. Probably the most relevant indicator of the country’s current situation is that Romania does not have its own bank but nonetheless has opted for capitalism. Capitalism without capital… Going back to our initial question: how could the US reach this critical situation, strained by the crisis, its development model under critical scrutiny, its international prestige visibly diminished? We cannot possibly explain what happened if we do not bear in mind that at the beginning of this period, America had a series of consolidated options, so consolidated, in fact, that they could be taken as ideological options. In the context of victory, with the US as the sole remaining superpower, such visions and beliefs had the chance to develop uncensored. America ceased to be the America of which so much was expected. “Ideological” America tamed pragmatic America. In the following chapter, we wish to dwell on one of the gains preceding the crisis.

CHAPTER II NEOLIBERALISM: THE RISE AND FALL OF AMERICA

We cannot begin to comprehend everything that happened in the US and around the world without referring to the dominant ideology of the developed world over the last 35 years, namely neoliberalism. Openly embraced by Great Britain and the US, under the rule of Margaret Thatcher (1979) and Ronald Reagan (1980), respectively, neoliberalism became the dominant trend in the Anglo-Saxon world; because the US was the superpower of the capitalist world, neoliberalism had a considerable impact on contemporary society as a whole. The very start of the crisis in the US was a result of the process of deregulation, of changes in the relationship between state and market and production and consumption (with the market and consumption growing prominent) – all strong points of the neoliberal doctrine. In Michael Meacher’s opinion, the neoliberal doctrine generated a new type of capitalism, the neoliberal capitalism, now experienced by the developed countries. The essential characteristics of this system are the freeing up of markets to operate in as nearly wholly untrammelled a manner as possible, the deregulation of finance, shrinking the state to the minimum role compatible only with security and defence of the realm, privatisation of all industry and services outside this tiny central state core, and empowerment of the private sector as the driving force directing all aspects of economic and financial governance.1

Nowadays, neoliberalism has come to embody a paradox, a fact supported by the following assertions. In Joseph Stiglitz’s words, “September 15, 2008, the date that Lehman Brothers collapsed, may be to market fundamentalism (the notion that unfettered markets, all by 1

Michael Meacher, The State We Need: Keys to the Renaissance of Britain (London: BiteBack Publishing, 2013), 83.

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19

themselves, can ensure economic prosperity and growth) what the fall of the Berlin Wall was to communism.”1 In 2011, three years after the fall of Lehman Brothers, and the massive downfall of finances, Colin Crouch published a book with an intriguing title: The Strange Non-Death of NeoLiberalism.2 Neoliberalism seemed strengthened or at least dominant in the field of ideological or theoretical confrontations. A decisive portrait of the political elite in Washington was made by Edward Luce. To judge by the schooling of today’s opinion formers in Washington, including those advising Barack Obama, it would be fairer to say that the founding fathers of their minds were Friedrich Hayek, Milton Friedman, and Joseph Schumpeter, the neoclassical descendants of Adam Smith and David Ricardo. What Hamilton called the American system most US economists today would dismiss as “industrial policy” – a suboptimal allocation of resources that subtracts from global welfare. Whether it was the Bush (senior or junior), Clinton, or Obama White House, the idea of supporting strategic industries has been largely repudiated even if it was a critical feature of America when it was on the way up.”3

Luce talks about two groups: one continuing to support the trend going back to President Reagan’s time and the other seeking to impose an alternative vision. The intensity of disputes is suggested by the declaration of a businessman: “If you even whisper the phrase “industrial policy” in Washington DC today, then, within twenty-four hours, you will be stoned to death.”4 How can this paradox be explained? Is this doctrine particularly vital? Is it particularly resilient to erosion caused by the crisis? There is a natural rotation of various economic doctrines and policies in ruling national communities. Does it apply in this case? In a study on Milton Friedman, Paul Krugman points suggestively to the pendulum motion in economy. The history of economic thought in the twentieth century is a bit like the history of Christianity in the sixteenth century. Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics – at least in the English-speaking world – was completely 1

Joseph E. Stiglitz, Freefall: Free Markets and the Sinking of the Global Economy (London: Penguin Books, 2010), 219. 2 Colin Crouch, The Strange Non-Death of Neo-Liberalism (Cambridge: Polity Press, 2011). 3 Luce, Time to Start Thinking: America in the Age of Descent, 48. 4 Ibid., 50.

20

Chapter II dominated by free-market orthodoxy... Classical economics, wrote Keynes in 1936, “conquered England as completely as the Holy Inquisition conquered Spain.” And classical economics said that the answer to almost all problems was to let the forces of supply and demand do their job. But classical economics offered neither explanations nor solutions for the Great Depression... Keynesianism was a great reformation of economic thought.1

This tableau painted by a Nobel Prize holder perfectly describes truths that seem to have been ignored to this day, such as the fact that faced with a significant crisis, classical economy and its disciples have “neither explanations nor solutions.” Classical economy functions in the normal course of things. To use an analogy, it is good when the body has no serious ailment and functions normally. It regulates itself and does not need specialized assistance; it even feels such assistance an intrusion and an unwelcome interference. But when an illness occurs, can you let the body “fend for itself”? Can you reject assistance because it affects the normal functioning of an ailing mechanism? In such circumstances, classical economy is in a difficult position: it needs to explain how the perturbation occurred (and cannot do so because the demand and supply forces have been free to act), and it cannot offer solutions because the theory does not go beyond the law of supply and demand, which is where the perturbation occurred. That is why Krugman compares Keynes to Luther and asserts that he is not and must not be seen as a leftist; on the contrary, he wanted to save capitalism, not bury it. He imagined an intervention instrument to ensure the survival of the system. The Keynesian “heresy” occupied the field of Western economic thinking for several decades. A “counter-heresy” was expected in the early 70s because the evolution of economic thinking follows the pendulum motion as well. The return to position would have taken place in any case. The 35 glorious years following WWII had come to an end. There was a need for a new economic trend. With or without Friedman, the pendulum would have been displaced towards a laissezfaire policy yet Milton Friedman’s role was of major importance and reach. “The greatest defender of the virtues of free markets since Adam Smith” has a significant theoretical contribution which bears a precise name – monetarism; it is the doctrine that adds an important dimension to the economic doctrine of laissez-faire. Arguably, Friedman’s most important accomplishment, which any great author would take pride in, is 1

Paul Krugman, “Who Was Milton Friedman?”, The New York Review of Books, (54) 2, February 15, 2007.

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what Krugman calls the transformation of conventional wisdom, which he characterises as: “most influential people have been so converted to the Friedman way of thinking that it is simply taken as a given that the change in economic policies he promoted has been a force for good.”1 Neoliberalism is more than an economic doctrine; it is more of a mental shift, a change in intellectual climate and in the general atmosphere. No single man’s activity (in this case, Milton Friedman’s), however significant, could be its sole cause. The subservient adherence to this new trend cannot be imagined in the absence of a social effort by economic, political and academic fora to consecrate it – an effort suggestively presented by Colin Crouch. In 1974 the Nobel Prize for Economics was awarded jointly to Friedrich von Hayek, one of the authors of the original German Ordoliberalismus, and Gunnar Myrdal, a founder of modern Swedish social democracy. In 1976 it was awarded to Milton Friedman, a major publicist of monetarism and a professor at University of Chicago, the main centre in the world for the production of neoliberal ideas. He used the reputation of the prize to engage in a highly public campaign on behalf of monetarism. Over four decades, nine neoliberal Chicago professors were among the 64 winners of the prize.2

In the same university, the economists used by Augusto Pinochet were instructed – the so-called “Chicago boys” – called to support the wellknown dictator design a neoliberal economic policy. The reason we overemphasize this trait of neoliberalism (its being seen as orthodoxy and ideology) is that this is what explains its survival in time in one form or another. A second explanation is to be found in Crouch’s detailed analysis of neoliberalism. He draws our attention to the fact that analysts continue to treat neoliberalism as any other doctrine (a perspective that encourages a market-driven economy, with minimal involvement of the state). Crouch shows that neoliberalism has gone beyond doctrine to become a strategy in the hands of a small group of big company owners, who have become so strong that they are a third force, stronger than the state and the market. This new force dominates the classical institutions of power to the point where they dictate their decisions. Neoliberalism is nothing like as devoted to free markets as it claimed. It is, rather, devoted to the dominance of public life by the giant corporation. 1 2

Ibid. Crouch, Strange Non-Death, 15.

22

Chapter II The confrontation between the market and the state that seems to dominate political conflict in many societies conceals the existence of this third force, which is more potent than either and transforms the working of both.1

Finally, Duménil and Lévy’s contribution strengthens Crouch’s perspective by adding several important dimensions. However strong they may be, big owners cannot rule on their own. They need the abilities and prestige of the elite in the technical, managerial and financial fields. Any analysis of neoliberalism must have in view this alliance that neoliberalism serves. Neoliberalism “expresses the strategy of the capitalist classes in alliance with upper management, specifically financial managers, intending to strengthen their hegemony and to expand it globally.”2 The stress falls on doctrine rather than strategy; at the core of neoliberalism lies strategy, whose core objective is a small group’s hegemony at both internal and global levels. “The crisis of neoliberalism” shows, in fact, the social composition of this small group served by neoliberalism and its interests. So strong and consuming are these interests that the group would stop at nothing to attain them. In light of the experience of recent years, the group promoted its interests even at the price of damaging the financial structure and destabilizing the fundamental relationships of economic life. When new objectives are fixed, there is significant internal rethinking and redistribution. This is not just another “cloak” capitalism has put on of late. Its body and mechanisms have not stayed the same. Both mechanisms and values have changed, and this has led to a change in capitalism’s identity – even if a partial one. This frames the problem of transition, its duration, of the elements that were to constitute this society’s social configuration differently. The two authors’ harsh assessment is that “None of the urgently required tasks in the coming decades to slow down the comparative decline of the US economy can be realized under the same class leadership and unchecked globalizing trends.”3 The relative decline of the US in the coming decades is not questioned. To delay it, two things need to be changed: the current group leadership needs to be changed, if not replaced, and the current trends of globalization (which, we all understand, has ceased to work for the US) reconsidered.

1

Ibid., VIII. Gérard Duménil, Dominique Lévy, The Crisis of Neoliberalism (Cambridge, MA: Harvard University Press, 2011), 1. 3 Ibid., 2. 2

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The purpose of this book is not to analyse neoliberalism but in the absence of an understanding of this trend and strategy, we risk misunderstanding what has happened of late in the US, Europe and the world, and failing to perceive tendencies for the future. As we have noticed, the persistence of the neoliberal doctrine can be explained through the alliance between the psychological-spiritual dimension and the interests of small groups, be they big owners or the top managerial and financial elite. It is more difficult to explain that the pendulum motion has practically ceased; Hegel taught us that history has its own flow, which one can at best delay but not stop. We mention this essential thing to clearly represent the enormous tension at the level of the elites. There is a powerful struggle between the diffuse yet implacable force changing history (represented in this case by the pendulum motion) and the interest groups opposing this evolution, which could dispossess them of their present positions and privileges. We shall see whether this struggle will lead to a new trend in historical evolution, but history cannot stop for long. We are discussing neoliberalism in order to understand the economic and political behaviour of the US in the years to come. Innumerable things depend on the hegemon’s wisdom from now on; in a way, more things than when the hegemon clearly dominated all fields. A power or a superpower’s rise and decline can be mainly explained through internal causes. We believe that this is where the US will face its main challenge. At the core of the dispute will be emancipation from neoliberalism, in one way or another, irrespective of the label the themes of this confrontation will carry: health system reform, banking system reform, and so on. American political life is certainly divided. The novelty is that it is now divided into two equal halves. Elections are won by a very close margin, and many important decisions are delayed or adopted after long-lasting blockages (as the one about raising the debt ceiling). Martin Wolf believes the US is flirting with its own destruction. In its lifetime, the rational interest of the country enabled broad coalitions and transcended group or petty political interests. This is the first time such a rift will cause problems in decision-taking; we may not realise it but democratic life is closely connected to the smooth progress of decision-taking and leadership in general. This means that ahead lies a very complex period of struggles, partial breakthroughs and inconclusive results. For the US, this will be a true cold war of development models. The internal dispute will summon, on the one hand, those attached to the “traditional wisdom,” which has dominated American life in the last 35 years, and, on the other, important economic

24

Chapter II

groups preoccupied with the return to the country’s industrial policy, a strategy that turned the US into a world superpower. What is at stake in this dispute is industrial policy, as well as a debate of internal reach on the model favouring development in the context of globalization. However, a question arises which is of utmost importance sociologically. Could we return to pre-neoliberal capitalism? In our opinion, supposing “the interest group” Duménil and Lévy talked about could be replaced, the economy will not simply return to its pre-crisis ways. Capitalism itself has structurally changed. In the meantime, we have witnessed financial power ascent. Are these evolutions completely reversible? We will need to take into consideration the fact that some have already become stable and can be perceived within certain limits as normal, even though some of their effects are hard to accept. The comeback does not happen by substitution, “leaping” back several decades, but by a partial amputation of the current formula, by gradual correction. This means that the very substance of neoliberalism will perpetuate to a certain degree in any form of governance to follow. Neoliberalism settled in the US in the fertile ground created by an inheritance: the clear propensity towards “free initiative” and laissez-faire. To this was added the fact that neoliberal globalization offered to the superpower of the time the possibility of global dominance on the basis of an ideological and economic vision. This mechanism developed in its ideological angle as well. It has supporters in various countries, among which there are those who took advantage of neoliberal globalization. In the meantime, a global cloak was woven, with props in various nations – some of them strong because a class was formed that supported such a vision about globalization. Consequently, the “revolution” in the metropolis should be followed by a “revolution” in various states. If we change the perspective, however, and look at things from the angle of the world striving to develop, the periphery will no longer rise against the metropolis because the periphery’s elite has identical aspirations to the metropolis. The very relationship between the centre and periphery has changed and also, implicitly, the conditions in which the periphery can become emancipated. Although it suffers the most, the periphery is neoliberal at the top. That is why it will not revolt against the metropolis. If it does, it will merely be a revolt on one’s knees: it will negotiate the conditions of its submission but not the relationship as such. The periphery will march behind the metropolis, even ideologically. It is clear that the economic and social policies in the US in the last 30 years have been mainly neoliberal. They led to this crisis. If the doctrine as such is maintained, alongside the policies it generates, is the risk for a new

Neoliberalism: The Rise and Fall of America

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crisis not reproduced? In this particular case, an analogy with the 30s could be useful. Then Roosevelt saved the system by appealing to the Keynesian solution (Keynes recommended a way out through appeal to the state and its capacity to increase market demand). Nowadays, as we have shown, we are witnessing a still-robust attachment to the pre-crisis variant, although it should have been in evident decline if not historically exhausted. In these circumstances, how can there be an alternative or condition for a new synthesis? Will the attachment to the US and its destiny as a contemporary superpower be so strong as to conquer group interests benefitting from the advantages of “the neoliberal age”? Will America have the strength to scrutinize its past, rediscover the strengths of the model that encouraged its development and give it a new appeal? We will have an answer in the years to come.

CHAPTER III STATE–DEVELOPMENT, AN ANTONYMOUS RELATIONSHIP

Inspired by neoliberalism during the Reagan administration, the US inaugurated a new development track, which sets them apart from other developed countries and even their own history. The strengths of this model are none other than what Thomas Friedman labelled “the Golden Straightjacket”: small government, low taxes, flexible labour legislation, deregulation and privatisation1. “Small government” (a weak, liminal state) is the focal point of neoliberalism and the politics it inspired, which is why it is the first point in our analysis. Let us first mention that neoliberalism and its supporters – in theory or in practice – excel in acute formulas, which take a life of their own. They sound so natural and normal that ordinary people use them indiscriminately, as if they had some embedded wisdom. In time, they build a perspective that is hard to contradict, and even harder to defeat. With a life of their own in the public space, many such formulas continue to influence and convince. For instance, Ronald Reagan asserted from the beginning that “Government is not the solution to our problem, government is the problem”. The state can indeed become a problem, in certain contexts, under certain influences. It is good to harness the state, to stop it from becoming a self-sufficient colossus, but we cannot agree with the first part of the formula launched by the American president: that the state is not the solution. We must concede it is quite a seductive thought, and it answers our feeling that the state bothers us with taxes and fines or speed limits on public roads. The cunningness of this formula, however, is that it rides on this general feeling of discontent to attack the state. People tend to form coalitions against strong entities. This particular entity, however, is 1 Thomas L. Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000), 104–06.

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fundamental: we can have opinions against the state but we cannot dispense of it. It would be as if, tired of the limitations brought to us by various illnesses, we started fighting against our own immune system or inconvenient medical prescriptions to feed our illusions of freedom. The implications go even deeper. The formula started the attack but did not tell us where to stop. In retrospect, we can see how far it went: a fundamental instrument of social organisation and performance, the state, has been unbalanced. People don’t see that, along with freedom, the fundamentals of this freedom, which ensured development, prosperity, organisation and the rationality of social action, were also affected. When neoliberalism was hailed as the official governing doctrine (in the early 80s), there were at least two main approaches to the state-market relationship. First, the approach of classical liberalism. In a recent article, Mark Blyth highlighted the inherent tension about the state within liberal thinking. John Locke not only allowed the state to administer the inequities produced by the market but clearly showed that the state needed to be sufficiently strong “to threaten the property holders it was meant to protect”. Later, John Stuart Mill started seeing the state’s role beyond “inequalities administration”, claiming that “capitalism could not function properly in the modern world without increased state revolution”. Only in the 20th century does liberalism split into two tracks. On one, following Ricardo, some Austrian economists, notably Schumpeter, Ludwig von Mises, and Friedrich Hayek, rejected ever more firmly the state, its interventions, and its debt. On the other, following Mill, a group of British economists, included John Hobson, William Beveridge, and ultimately John Maynard Keynes, made their peace with a more active and, when needed, indebted state.1

A second and quite remarkably balanced approach is represented by Keynes, with his straightforward idea that the relationship between the state and the market is, in fact, one of complementarity. One party does what the other cannot or should not do. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the state does not make them. The important thing for government is not to do things which individuals are doing already, and to

1

Mark Blyth, “The Austerity Delusion. Why a Bad Idea Won Over the West”, Foreign Affairs, Volume 92, May/June2013.

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Chapter III do them a little better or a little worse; but to do those things which at present are not done at all.1

So the state and the private individual or company complement each other. The state does what the private sphere cannot do. And if the state does not do something, no one else will because they cannot, and so that particular activity will not get done. As a rule, an intelligent, responsible state looks into strategic problems, which cannot fall into the companies’ field of interest, for instance. A diminishing role for the state in neoliberal governments translated into unbalanced perspectives, and the last years have shown how unprotected developed societies are in these vital domains. Even if at a certain moment one party of the tandem becomes more important, an unbalance will only clog the efficiency of the whole. Both the neoliberal doctrine and the American politics of the last decades promoted a triple reductionism. Firstly, the reductionism applied to the liberal tradition concerning the state: the most radical variant was chosen and as a consequence state structures were massively destructured, which led to their diminishing role. This reductionism was applied on the main conclusion that modern history envisaged. The capitalist pattern fixed this essential relationship between the state and the market, leaving each country the freedom to find the combination between them, but nowhere was this to mean a substitution. Neoliberalism appeared in a period of crisis, when state structures may have become too bureaucratic and failed to offer a perspective to society. In this period, the statement “the state is not the solution, the state is the problem” may have sounded attractive. To maintain the same position 30 years later, when it had become clear that one of the triggers of the crisis was deregulation, a decrease in the state role, that the most important successful countries are those that managed to find a balance between the forces of the market and the forces of the state, is a sign that this approach prefers substituting, not combining, factors. In this context, Dani Rodrik reveals that a strong market needs a strong state, in the absence of which it cannot function at full speed. Markets and governments are complements, not substitutes. If you want more and better markets, you have to have more (and better) governance.

1 John Maynard Keynes, The End of Laissez-Faire. The Economic Consequences of the Peace (Amherst, NY: Prometheus Books, 2009), 28.

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Markets work best not where states are weakest, but where they are strong.1

This position about the state harmed America a lot. Firstly, America as superpower. A superpower needs to have a vision, on its own future and on the world. When the role of the state was so drastically underevaluated and the role of the market (in fact, of corporations) was so overevaluated, the fundamental trait of the superpower, that of building a coherent vision, was questioned. Without such vision, the superpower quickly loses credibility. We cannot ask a corporation to have a vision of the whole. Just as the businesses’ sole purpose is to generate profit2, the state’s mission is to build a perspective on the future. When it was postulated that healthy, true development could only happen in the presence of a weak state, very little involved in the community’s economic evolution, an antonymous relationship was built between the state and development. In our viewpoint, this was the moment that marked the decline. On the one hand, the role of the state in economy was reconfigured and gradually diminished, and on the other, development as a priority for society was no longer talked of. This was the poisonous combination that brought America as a superpower to its knees. James H. Mittelman believed that at the end of the Cold War, development theory lost its raison d’être3. Many researchers and analysts retreated to fields such as modernization, dependency, Marxism and critical theory. The zeitgeist encouraged such fragmentation. Many other phenomena were debated, but not the development process. In this way, the theoretical guidelines of social evolution were visibly weakened, and replaced by either a sort of self-centeredness or a fragmentation of public debate: everything is to be debated apart from the issue of development! It was not just a country among others that lacked this vision on development but the world’s only superpower, which should set the tone, show the world the way, and the means and the strategy to reach it. By straying from development problems, and transferring them to the market and private corporations, the US encouraged the perception that development was no longer so important, no longer a priority. At the international level, especially among countries preoccupied with their own evolution and closing the gap that separated them from the developed 1

Rodrik, Globalization Paradox, XVIII. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits”, The New York Times Magazine, September 13, 1970. 3 James H. Mittelman, Contesting Global Order: Development, Global Governance, and Globalization (London and New York: Routledge, 2011), 172. 2

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world, this generated perplexity and confusion. Where was America going? To prove how important it is among great powers to promote a development strategy, let us take the case of China. As early as the 80s, they launched a formula whose depth seemed to be lost on the developed world: Development is the only hard truth. In China’s attitude and evolution, many developing countries discovered not only important efforts but a real development creed. We all know that investment is important for hastening evolution. It is certain that there is no development in its absence. It is common knowledge that capital is equally important. Nothing can move without it. What elites should know better is that what unites investment, capital and technology and moves things forward is the idea. The Chinese not only formulated the idea but also the essential relationship between development and the social body. “The only hard truth” – a sentence that can amount to a program, structuring priorities and uttering clearly: there is no way other than development. So development must go first and everything else must yield. There is no other right way apart from development! Adopting the position we mentioned earlier, America volens nolens positioned itself in a counter-tempo not only in relation to a superpower’s duties and the expectations people have of it but in relation to the zeitgeist, and its traits. The US transferred the state’s prerogatives to private companies at a time when the state had become even more important in the development equation, at a time when this very complex equation required a special effort in developing, harmonizing and channelling effort – all this at a time when extremely complex problems appeared, such as climate change and the problem of resources, which supposes a mediumand long-term vision backed by considerable financial capacity. Finally, America adopted this development track in a period when the development model itself had suffered major changes. Sustainable development replaced extensive development and innovation became the real development engine. This requires vision and financial commitments to develop fundamental research (the true innovation fountain) and connection to tendencies that are to become a mainstay. This is what we mean when we say that America positioned itself in a historical countertempo: it failed to have vision when it needed it badly. America was underequipped in the turbulent post-Cold War time. Not only was it in counter-tempo, it persisted in this attitude, which eroded its internal strength and international prestige. America failed to render itself a service, and, as a global superpower, it failed to render the world a service as well.

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31

In this context, we need to discuss the perverse effect of the abovementioned evolutions. Because development no longer had the state’s strategic support, freedom and development were perceived to have a divergent evolution. At the global level, this seemed to translate into a sort of “specialization”: the emerging world embraced development as the supreme value while the developed world opted for freedom (or made freedom the essential criterion in assessing developments, and failed to correlate it with crucial development efforts). Some authors talk about a real “schism” between freedom and development within the developed capitalist society. The term “schism” may seem too harsh but it clearly labels the imbalance between democracy and economy, freedom and leadership, development and decision. This can prove to be a very costly imbalance if it is not diminished and finally stopped. The developed world managed a unique performance: to unite freedom and development. We often forget that – despite common misrepresentation – this binomial does not represent an organic reality. It appeared to do so because it was born in a certain context – the European context, where elites and important political bodies came to realize that they could be matched and a whole system created: freedom can stimulate development, which in turn gives a basis to freedom; that a climate of social comfort can be created where the citizen can enjoy both the privileges of freedom and the benefits of development. European (and, later, American) history and thinking do not establish hierarchies and priorities in this respect. This amounts to a superior understanding of interdependency and exemplary respect for this mutual relationship. In our opinion, this correlation is one of the most important triumphs of modern time. This does not mean, however, that freedom and development are “sentenced” to go together, that the binomial cannot fracture. Development can take place outside democracy, in an authoritarian, even dictatorial state. Last century’s inter-war experience is edifying in this respect. Germany and Japan developed – at rhythms superior to those of democratic countries – and attained performance without following a democratic route. As Azar Gat underlined, “The liberal democracies did not possess an inherent advantage over Germany in terms of economic and technological development, as they did in relation to their other great power rivals.”1 Even the rationale behind WWII victory depended on factors other than those commonly invoked, according to Azar Gat. Cold War victory was mainly explained by the low economic performance of 1

Azar Gat, “The Return of Authoritarian Great Powers”, Foreign Affairs, July/August 2007.

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former socialist countries, “the inherent inefficiency of the communist economies [which] prevented them from fully exploiting their vast resources”. The inefficiency of the system hindered Russia and China from catching up with the West during the Cold War. But something essential happened after the Cold War. Two mediumsized authoritarian powers existed in the inter-war period; at present, two authoritarian powers are on the rise, China and Russia, but this time they are of continental size. This opens a new perspective on the competition between authoritarian and liberal states. China and Russia represent a return of economically successful authoritarian capitalist powers, which have been absent since the defeat of Germany and Japan in 1945, but they are much larger than the latter two countries ever were...Ultimately... both Germany and Japan were too small – in terms of population, resources, and potential – to take on the United States. Present-day China, on the other hand, is the largest player in the international system in terms of population and is experiencing spectacular economic growth. By shifting from communism to capitalism, China has switched to a far more efficient brand of authoritarianism.”1

There are many facets to this complex discussion. In this context, it is significant to introduce another difference from the inter-war period: the state and its role in development. At that time, both the developed world and the authoritarian world had given the state an important role in development (let us not forget that the US came out of the crisis by strengthening the role of the state, increasing aggregate demand as a powerful stimulus for economic relaunch). At the moment, under the influence of the neoliberal doctrine, much of the developed world, especially the US, has weakened the role of the state in economic development. The crisis sanctioned this move and in various ways favoured a process of reinstating the role of the state in economic relaunch (economic stimuli, bailouts and so on are financial “injections” from the state to support economic reconstruction). The Chinese experience brings to contemporary minds an older idea, which is always misunderstood: it is not the state as such that is the problem but its intelligence, its adaptability, its flexibility in designing various strategies. We simply cannot understand the Chinese economic ascent, or the rise of the emergent world, without taking into consideration the state’s strategic role. Consequently, the state– development relationship needs to be rethought in the spirit of each historical period’s commandments.

1

Ibid.

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There is another issue. States all over the world look at what is happening in the world to identify formulas and accomplishments that could be followed or an inspiration for their own evolution. These countries surely look up to successful countries. The contagious force of success cannot be equalled. Speaking of success, we do not wish to say that it is the privilege of emerging countries and eschew developed countries. There are countries such as Canada, Germany, Sweden and Australia that have maintained a balance between the state and the market. They have not felt much of the crisis and its negative effects. We only wish to reveal that post-crisis we will see up high on the world’s economic pedestal those countries that survived this cataclysm and have a lot to transmit, silently. So, we are dealing with a much more complex equation than the stereotype of the relationship between capitalism and democracy, freedom and economic growth. We cannot reduce this discussion to hierarchies but where there is economic growth, social dynamics are particularly strong and exude confidence and optimism. The most mobile and palpable element impacting the population is economic growth. In its absence, the general balance can be affected. This is how we are to understand Charles Kupchan’s seemingly worried sentence: What is needed is nothing less than a compelling twenty-first-century answer to the fundamental tensions among democracy, capitalism, and globalization. This new political agenda should aim to reassert popular control over political economy, directing state action toward effective responses to both the economic realities of global markets and the demands of mass societies for an equitable distribution of rewards and sacrifices.1

The emerging world has high economic growth and is thus closing the gap with the developed world. It promotes its own development models. There are also numerous countries which, in one way or another, miming the metropolis, followed the provisions of the neoliberal Washington Consensus. In the metropolis, the tradition, the potential and the development acquisitions attenuated the effects of the crisis; in the periphery, the development premises and the process of internal preparation for robust economic evolution were affected, with mediumand long-term consequences. These countries may celebrate freedom in the future but not development, which means in fact an impossibility to enjoy freedom, the perpetuation of periphery status and diminished chances to emancipate from the yolk of underdevelopment. To consolidate 1

Kupchan, Democratic Malaise.

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freedom, you need to stimulate development. This is true for developing and developed countries alike. The developed countries have to defend and consolidate the liberal order’s most important conquest: entwining freedom and development, for their own prestige and for the good of countries that chose to follow the democratic example of the developed world.

CHAPTER IV FINANCIALIZATION: THE NAME THAT DEFINES OUR TIME

When you go “beyond” the state, you discover how crucial the problems traditionally the state’s responsibility, such as finances and money, are. The responsibility for overall money management and balance in this complex and sensitive domain belongs to the Central Bank, whatever name it might carry: the Federal Reserve, the Bank of England, the Bundesbank. These institutions are subordinated to the state. In the developed world, the crisis started as a financial crisis, and we continue to use the label “financial crisis” in an effort to suggest that we are dealing with something less serious. The truth is that a financial crisis will sooner or later take the form of an economic and social crisis (as is already the case in Europe and the US). And this crisis is here to stay. It appeared when the economic and social body fell seriously ill and will only end when the body heals. It is nothing short of a barometer, “gathering” and revealing everything about the economic and social body. The strategic change promoted in this field by governments that have embraced neoliberalism over the last 30 years has a name: financialization. This process signifies, first of all, a change in the classical relationship between the main forces behind an economy, by a decrease in the importance of industrial activities in favour of financial activities. Financial activity took the place of manufacturing as the crucial sector in a modern economy. Until recently the financial and banking activities were meant to support entrepreneurship by financing ideas and actions that could yield profit. In the last decades, the process broke loose from this classical relationship and evolved independently. Increasing in volume and importance, it developed and encouraged speculative activities, and the financial markets became a dominant force in contemporary life. In a nutshell, we witnessed a spectacular increase in financial and banking activity but more importantly a clearer tendency towards autonomy. This led to a new configuration of modern economy, even to a redefinition of global economy.

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In the context of the crisis, tens of books were published on the topic of money – financial activity, finance deregulation – as a crucial explanation for the crisis. We will not highlight the details of this debate, which necessarily contains a lot of less accessible, technical approaches. It is of more interest to us to reveal some problems whose common denominator is the influence of the financial crisis on the development of Western society; the relationship between financialization and development. For instance, we want to investigate whether the rapid evolution of the financial field could bring about the economic dynamism so much needed in contemporary society. Or whether the debt accumulated by various advanced countries has an impact on growth. Finally, whether there is a connection between the pronounced deregulation of financial activity and the performance and prestige of developed society. These questions might help us understand not only what happened but what is about to happen. Barry Eichengreen warned on the relationship between economic and financial spheres: “A country that does not grow its economy cannot continue to grow its financial markets.”1 We can talk about finances, banks and bankers but the reference system still needs to be economic development. We often fail to realize that society is a system of relationships. Rethinking the importance and tasks of this crucial factor (the state) means seeking a different type of balance; one built on new premises but still balance. This is especially true of long-term tendencies whose processes are not the work of a moment’s decision but span generations. In such cases, the role of finances, manufacturing and services becomes clear; so does the importance of preserving balance among them. Specialized analyses show that In 1750 the global value of the total output of goods and services was around $ 135 billion, at constant values. By 1950 it had risen to $4 trillion. By 2000 the rise had accelerated to $40 trillion, and it is now around $50 trillion, with some (Gordon Brown, for instance) predicting it will double to $100 trillion by 2030.2

Other authors suggest a global value of the total output of goods and services of $60 trillion. This is a huge mass. Who buys and consumes these goods and services? Can global society absorb them? If it can, everything goes well: producers cash in and beneficiaries are content. 1

Barry Eichengreen, “When Currencies Collapse. Will We Replay the 1930s or the 1970s?” Foreign Affairs, January/February, 2012. 2 Meacher, State We Need, 128–29.

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But if absorption is blocked or the beneficiary’s purchasing power decreases? Unsold goods and services automatically lead to bankruptcy, even crisis. The situation can be unblocked by maintaining the demand for such goods and services in society. Easier said than done. In specialized terms, this supposes the existence of a strong driver, of dynamic, mobile economic fields, that could create demand and contribute to the absorption of the immense mass of goods and services. Yet this opens the extremely complex file of the global balance of contemporary society (little studied, this file is mentioned at various international meetings, but we are not aware of an independent preoccupation with anticipating evolutions and finding a balance among the main social and economic fields). Capitalist society always excelled at producing better, cheaper, more goods and services. This is its strength. Its weakness lies in the other part of the equation – demand, absorption, the purchasing power of states and citizens. We are currently talking about “the golden age” of capitalism, represented by the three decades that followed WWII. In Michael Meacher’s view, we were able to experience this because the reconstruction defining that age absorbed the surplus. The driver was there (productive investment); the balance between the volume of goods and services and the absorption capacity was there. What is the current standing? The problem is that for some time two types of “surplus” have appeared: a rising surplus of goods and services (the fact that it will double by 2030, practically “tomorrow” in historic terms, should worry us more1) and, on the other hand, a surplus of money. At first sight, this might look like the ideal equation – money is all that is needed to absorb the growing quantity of goods and services – but this is where things get complicated. The financial and banking activity is entering a new stage.

1. The credit explosion Analysts usually place the beginning of the crisis in the early 80s, with the US and the UK embracing neoliberalism and the subsequent deregulation. Because the crisis started as a financial crisis, we will have 1

This simple fact will change the global equation: who will be able to produce and sell at the same time? That is why we believe that the employment rate will become the essential economic indicator. It expresses a country’s capacity to participate in a difficult work division. If demographic potential is reflected in the number of jobs, then the development strategy is realistic and shows that those fields required by the global market have been promoted. At the same time, a higher number of jobs means you produce a larger quantity of goods and services; that you rely on a bigger (internal or external) market.

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to go back in time and understand what happened in finances in the 70s, when the crisis really began. This is when the financial Pandora’s Box was opened. At that time, the dollar had gold coverage so the quantity of money on the market was reined in by the gold in the Federal Reserve. This formula prevented inflation and preserved the health of the financial system. It is equally true that it generated a liquidity crisis, with two consequences: a positive one – speculative actions were drastically and naturally limited; a negative one – because “the oil” of a dynamic economy, credit, could not be extended as much as needed. The radical change in the early 70s was brought about by multiple factors, among which one was the requests from crude oil-exporting countries for the US to give gold in exchange for the immense sum of petrodollars they’d accumulated. Others were a decrease in US gold reserve and the looming energy crisis. On 1968 the American president, Lyndon Johnson, asked Congress to eliminate the gold cover: “The gold reserve requirement against Federal Reserve notes is not needed to tell us what prudent monetary policy should be – that myth was destroyed long ago. It is not needed to give value to the dollar – that value derives from our productive economy.”1 What Lyndon Johnson announced happened effectively in the early 70s, under President Nixon’s mandate. The breakup of the parity between the main global currency – the dollar – and the gold guaranteeing its value had tremendous consequences. A “time of prosperity” seemed to follow, similar to what the US and the developed countries had experienced at the end of WWII. Money was increasingly abundant, credit was extended, prices went up and jobs were created. Few noticed that this was in fact a period of excess, overstretching secure economic relationships and, implicitly, taking unfathomable risks. The crucial problem is that risk retreated – or was encouraged to retreat – to the most fragile field of economic activity: finances. When this field is in ill health, the illness spreads rapidly throughout the economic and social body. Credit itself had the most spectacular evolution: “Total credit in the United States surpassed $1 trillion for the first time in 1964. Over the following 43 years, it increased 50 times to $50 trillion in 2007. That explosion of credit changed the world.”2 Obviously, such a spectacular expansion of credit could not take place with the money that existed in the 1

Lyndon B. Johnson, “Annual Message to the Congress: The Economic Report of the President”, February 1, 1968, http://www.presidency.ucsb.edu/ws/?pid=29104#axzz2jD15cfD9. 2 Richard Duncan, The New Depression: The Breakdown of the Paper Money Economy (Singapore: John Wiley & Sons, 2012), 2.

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market in 1968. Fifty trillion dollars’ worth of credit could not be supported by the 44 billion dollars in circulation in 1968 and covered by Federal Reserve gold.1 So the first measure was to multiply the money on the market through various means. Firstly, the Federal Reserve started printing money: “Between 1968 and 2010, the Fed increased the number of these paper dollars in circulation by 20 times.”2 Concomitantly, the banks were allowed to progressively decrease the level of reserves they were forced to maintain in order to be able to return the clients’ money at any time. Initially fixed at 20 percent of all deposits, this threshold was gradually lowered to insignificant levels, which translated into transferring important sums to credit. Finally, a third source was represented by money coming “from the rest of the world”, which in the period 1971–2007 amounted to approximately $7 trillion, covering about 15 percent of credit in the US over this period.3 This evolution forces us to acknowledge that this marks not just a spectacular increase in credit but also a change in paradigm. Richard Duncan labelled it a credit-based economic paradigm, which seemed to rekindle the hope for a new period of economic growth. Success does not necessarily invite precaution; it rather softens the rough edges, although history cautions against such hope. The Latin America crisis (1982) and the Asian crisis (1997–1998) were essentially financial crises and credit crises: smaller bubbles which, read correctly at the right time, could have warned against the big bubble that started the crisis we are still experiencing. “Bubbles,” said George Soros, “are characterized by the unsound extension of credit and leverage.”4 There was no understanding of causes, but above all there was no interest in causes, that could have prevented further bubbles. The year 2000 saw the high-tech bubble, which, unlike the others, was not generated by an unhealthy expansion of credit but opened the way for 2007. To get over the high-tech bubble, Alan Greenspan kept the interest rate “too low, too long”5 and stimulated the real-estate boom that led to the crisis in August 2007 and October 2008.

1

Ibid., 3. Ibid. 3 Ibid., 15. 4 George Soros, “Financial Turmoil in Europe and the United States”, Public Affairs, New York, 2012, X. 5 See, for instance, Scott Minerd, “Too Low for Too Long”, November 15, 2012, http://guggenheimpartners.com/perspectives/macroview/too-low-too-long) 2

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2. Dethroning the industry When we talk about financialization, we have in view the relationship between financial and banking activities on the one hand and production in all its complexity on the other. This relationship cannot be taken as a relay race. Firstly, the financial-banking activity became overweight. “The City of London is currently twice as large, as a proportion of the total economy, as the financial centres of Germany, France and other main European countries, while UK manufacturing has shrunk drastically from 26 per cent of total output to just 11 per cent by 2009, a far steeper drop than in the main competitor countries.”1 The fact that financial activity, compared to GDP, is twice as large in the UK as in other developed European states is the clearest proof that it strayed from this classical relationship where it worked to support entrepreneurship; that it has its own objectives and is taking a route that has no historical precedence. Whatever is left of the relationship with entrepreneurship is mainly symbolic. “The really essential point, which is never discussed, is that the banks focus largely on property (mortgages), overseas speculation, elaborate tax avoidance contrivances and exotic derivatives, and only 8 per cent of their lending goes towards productive and job-creating investment in the UK.”2 This move is not confined to the UK. Our analysis focuses on the UK because this is the European country that, more than a century ago, was both “the world’s workshop” and the world’s financial centre (Along with Wall Street, the City is crucial to the global financial and banking system). In the US, financial activity replaced production. The US economy has stagnated; in the last thirty years, the financial sector has become as large a share of the economy as manufacturing once held while manufacturing has declined in significance to the share of the economy then accounted for by finance. A similar story can be told of the United Kingdom.3

The situation is not much different at the global level. “While in the 1980s the total world stock of financial assets was roughly equivalent to world GDP, by 2008 it had reached a level tripling global GDP.”4 In other 1

Meacher, State We Need, 97. Ibid., 5. 3 Wyn Grant and Graham K. Wilson, eds., The Consequences of the Global Financial Crisis. The Rhetoric of Reform and Regulation (Oxford: Oxford University Press, 2012), 250. 4 Ibid., 87. 2

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words, this is the fastest-growing field internationally, which shows that this is a new growing force that will take advantage of the scope of the global arena. Any discussion about financial markets today needs to have this transformation in mind. This is a two-pronged process. On the one hand, financial activity emancipates itself from the classical equation; on the other, once it seizes the first position, financial activity fights to impose its own vision and values to crown its effort, to reconfigure all financial and economic activity in light of its own options and interests. Here is an example. Until recently, the wages in industry and energy were the highest in the revenue pyramid. In the mid-90s, wages in finances and real estate caught up. Nowadays, in the US, the UK, and France, they are significantly higher than wages in industry and energy. In Germany, the situation is different, with wages in industry and energy at the top. It is easy to make a correlation given that Germany has preserved its manufacturing and supported it, inclusively, through the wages in the field, to which were added the prestige associated with high wages and the social importance of the field. Financialization not only generated a change at the top in favour of finances but marked a change in values and prestige, which confirmed the fact that finances are more important than other economic fields; so important that their demands need to be met. The gates were opened wide for unrestricted profit obtained quickly. Probably the main characteristic of this period was the practical suspension of the idea of long-term processes. Nothing so definite as a “decree” or a “law” was needed but it is a fact that long term has become undesirable. How did this come about? The suspension of the last regulatory measures for banking, outlined in what was called the GlassSteagall Act1, occurred in 1996. This led to a total deregulation of banking. Then, President Bush decreased high revenue taxes. As money was plenty, speculation, derivatives and no-guarantee credits flourished. In modern history, capital accumulated what Darwin called “acquired quality”, the special ability to sense profitability. This is second nature to finances. Without precise rules, with plenty of money and the promise of rapid profits, the financialbanking system became a sort of El Dorado for profit-hungry entities overnight. Bankers needed to be included in this process, which led to gigantic bonuses, fabulous wages, and stimulus packages for managers who either cut expenses for future evolutions or bet everything on rapid 1

A law adopted immediately after the Great Depression of 1929–1933 and meant to regulate financial-banking activity.

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gains. Martin Wolf remarked on the surprising evolution of the monetary system: “The essence of the contemporary monetary system was the creation of money, out of nothing, by private banks’ often foolish lending.”1 Under the circumstances, who was interested in the long term? To explain why these things happened in such a short time, we need to see what was missing. First, the state, with its regulatory instruments. The exact type of regulatory activity can be questioned but not regulatory activity of finances as such. Then, society’s immune system, which should have kept a balance and a care for tomorrow. Profit obtained under regulatory constraints is a great accomplishment as it develops dynamic, exploratory attitudes and does not allow routine to settle. Unrestrained profit becomes a monster that, in the long run, will turn against its producer. Developed society may have obtained high profits in this period, although this profit may have been distributed only among certain social segments, but the same society is short of instruments nowadays and lacks long-term perspectives. In other words, despite its obvious advantages, it seems poorly equipped for tomorrow. Despite the gains, there are so many risks that the losses will surely be greater than the fabulous gains made over the last centuries. The unspoken costs of carelessness are decline and even collapse.

3. The attitude towards industry – as serious as the attitude towards heart disease The secondary effect of “the crowning” we talked about is that industrial activity was pushed into the background, not as the result of a strategic intention but as a consequence of the fact that the financial field offered higher, faster gains. Capital prefers those fields that ensure higher profits. The economic landscape of the developed world is not homogeneous. Beyond the global tendency, there are considerable differences, and this highlights a very precise fact: many countries did not fully adhere to the basic principles of neoliberalism or assumed them selectively. The very diverse economic strategies led to different results and caused changes in the top of world industrial powers. See, for instance, the UK, the neoliberal forerunner par excellence, a label justified by the development of financial activity in this country and the dramatic decrease of manufacturing. At the moment, the UK does not count as one of the important mass producers in the automobile industry, 1

Martin Wolf, “The Fed Is Right to Turn On the Tap”, Financial Times, November 9, 2010.

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although it still produces luxury brands such as Bentley. Whenever I introduced this topic to British interlocutors, a significant silence followed. While some said: “Thatcher convinced us”, others were satisfied to say: “We are among the first world producers of engines” (in other words, we have preserved crucial fields, technological breakthroughs, the elite sector). Some elaboration is needed here. If we follow this logic, we can safely assert that the developed society has lost a lot in the last decades. Crucial fields are those producing highly complex products that very few countries can accomplish. The argument holds true today, but will it hold tomorrow? Two perspectives are possible. Firstly, can a society of 60 million people produce only highly complex products? Not all the population will have the necessary training. The professional training will be similar to any other reasonably developed country’s. What are the medium- or low-qualified people supposed to do? One possible answer is that they will go into services. But can services absorb such a large workforce? What we wish to signal is that this perspective lacks a social dimension and is excessively elitist: only highly complex things are of interest to us. In our opinion, the structure of manufacturing must follow the population’s structure one way or another, otherwise the future decades might produce large masses of people with low or no qualifications at all, which will seriously harm the country’s evolution and competitiveness. Competitiveness is not built exclusively on the results obtained by the overtrained or overqualified. The second perspective considers the evolution of countries that tomorrow might produce what seems totally inaccessible today. Who can guarantee that tomorrow Hong Kong won’t produce similar engines? Or even more competitive engines, with the added benefit of a cheaper workforce? For sceptics or those who prefer traditional, standard answers, we will refer briefly to the race for the supercomputer. The supercomputer increases computational capacity and facilitates correlations, discoveries and the rapid identification of evolutions, even in weather forecasting. This is a technological but also highly symbolic race whose ultimate prize is prestige. It is as serious as heart disease. So far, all the stages of this long-distance competition have been won by the US (in 1964, 1983, etc.). In 2013, something so significant occurred that the Financial Times devoted a whole page to the topic.1 The new model (we will not go into the technical details) will have a computational capacity per second of 1018, 1,000 times more powerful than existing machines. This is obviously a technological and scientific 1

Chris Nuttall, “Battle of the Speed Machines”, Financial Times, July 10, 2013.

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race where Americans have undisputable strengths, but the Chinese cannot be underestimated either. The race has an important financial dimension, which is where the Chinese have undisputable strengths. The competition is all the more significant because Europe, Russia and Japan have also joined in. Because we mentioned the financial dimension, let us say that the EU has three projects underway, supported by a financial effort of 2 billion dollars, India has allocated the same sum, and Japan 1,1 billion dollars. According to the Financial Times, the race should come to an end around 2020. Addison Snell, a high-tech analyst quoted by the journal, claims that by the end of this decade, the Chinese could launch such a computer “made entirely out of Chinese technology”. A decade ago, this would have been inconceivable. Today, an analyst in the field makes such an assessment and we reproduce it here as a warning, in support of the position that we expressed in the dialogue with those who believe that a monopoly can be preserved on the complex products made in the UK. We are not referring exclusively to information technology or the automobile industry, a “queen” of an industry, an interface of high-tech with the computer. Great Britain was acknowledged throughout the world as “the queen of the sea”. To rule the seas, you need to have a fleet. Great Britain ruled the seas because throughout the 19th century it had the world’s largest fleet, carrying about 40% of the tonnage carried across the oceans. In 1938, this percentage was lower, about a quarter of the world tonnage. Nowadays, the British fleet is a shadow of what it once was, with a mere 0,005% of the world maritime transport tonnage.1 If we refer to the steel industry, the decrease is less sharp but, since 1972, the number of employees in this field has decreased ten times.2 Everybody was surprised by the privatization of British Rail in the 80s, and not only because there is a tradition of state-owned rail transport. Railways are “a big system”, needing a “big owner” that does not fragment the system and exploit its advantages. On the other hand, rail transport has a strategic significance, which we usually associate with the state. Not to mention that the UK was the first country to build a modern railway system, an extraordinary accomplishment during the Industrial Revolution. Today, 20 years after its privatization, 95% of the respondents in a national poll3 agreed to renationalizing rail transport. A 2011 report quoted by the same author shows that taxes on British Rail are 30% higher

1

Meacher, State We Need, 179. Ibid. 3 Ibid., 193. 2

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than those in France, the Netherlands, Switzerland and Sweden, which Meacher puts down to “fragmentation costs”. If liberal perspectives had been applied at the same rate in all developed states, a homogeneous economic landscape would have resulted. As it is, various countries have yielded to various influences, or have refused to adopt this perspective altogether. The developed world’s economic landscape is diverse, especially in what regards the relationship between manufacturing and services, including financial services. Some countries opted for “competitive services”; others for “competitive industries” on an international level. David Sainsbury1 proposes such a tableau, inspired by previous research2, and shows that the countries that embraced a field (industry, for instance) do not occupy the same top position in services.

4. Attempts at breaking out of the neoliberal constraints A thousand questions come to mind when reading this data. Two sets are of particular relevance. Can finances play the role of world economy driver, which could amplify the capacity to absorb the growing volumes of goods and services? Specialists consider three facts could play this role of development engine. New technologies and the spread of computers have contributed a lot to increasing absorption capacities, but not to the desired extent. The second factor is the increase of military expenses, which might explain why in 2008 the US military expenditure was double the sum spent in the mid-90s. Because industry was pushed into the background, the economies of the developed capitalist states became increasingly dependent on a third factor, financialization, as the main driver of growth and increased absorption capacity in the context of stagnant investments over the last decades and the full deregulation of financial activity.3 Finances offered

1

David Sainsbury, Progressive Capitalism: How to Achieve Economic Growth, Liberty and Social Justice (London: Biteback Publishing, 2013), 143. 2 The comparative research by David Soskice, “Divergent Production Regimes: Coordinated and Uncoordinated Market Economies in the 1980s and 1990s”, in Continuity and Change in Contemporary Capitalism, ed. Herbert Kitschelt et al. (Cambridge: Cambridge University Press, 1999). 3 The climax of this process was represented by the repeal in 1996 (or 1999, in other sources) of the last regulations in the Glass-Steagall Act adopted in 1930, which forbid investment and speculative banking. It is significant that the repeal (and, implicitly, the dawn of the financial debauchery) happened during Bill

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big gains and attracted a lot of capital. Financial industry, exotic derivatives and bubbles flourished. No one questioned the viability of investments. There was also the added pressure of money resulting from the unprecedented expansion of credit; financial regulations were suspended: all this resulted in the most toxic product: rapacity bubbles. There was enough money, travelling the world, generating gains, but no practical projects. Money met money in a speculative exercise, involving a limited segment of society. In fact, demand and the population’s real purchasing power collapsed. Demand is the real driver of development and growth. In the financialization paradigm, when the driver collapses, excess consumption and/or various bubbles will substitute the driver. Bubbles are engines of growth as well because they increase demand, but this is a constructed demand, not a real one. Unless these engines are kept in check, the burst can be disastrous because real money circulates without real demand. It is as if someone decided to borrow money without being able to pay it back. Money was spent to build houses, for instance. Houses are always in demand. The bubble appears when too many houses are built and there is no demand for them. At this point, everything is artificial. Houses will not sell. Credit will be given for buying goods that ignore the real demand. In the context of financialization, the bubble becomes a natural product of the paradigm. If the bubble had not burst in real estate, it would have burst in another field! Engines are still needed to increase demand. Yet these engines work not only to increase demand but also, and mainly, for the profit of those who project them and make them work. They are speculative in essence, just like pyramid schemes. The intrinsic logic of financialization is that asset values increase artificially. Sooner or later, there is bound to be a return to the asset’s initial value. This marks the collapse. The payers who joined the game in its early stages win. Losses are registered in the burst stage: the many from the bottom of the pyramid, those who joined the game later, are the ones who lose. Then the game starts over in another field, but will lead to similar results. The engines partially solve the need to absorb money surplus through speculative gains. Crises are expected to be cyclical from now on – financialization will facilitate them. The way out is to break out of the paradigm of the last 30 years by reinstating the equation between manufacturing and finances. The similarity between two trajectories over the last decades is striking to me:

Clinton’s mandate, which speaks volumes about the continuity of the neoliberal attitude, irrespective of a Democrat or Republican administration.

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as the state was replaced by the market, so manufacturing was replaced by finances. Two fundamental relationships were perturbed. Both the crisis and the confusion around the globe are connected to these fundamental tendencies. In the words of Dirk Bezemer, “In the UK, the relative volumes of home mortgages and of lending to property and financial businesses have tripled since 1990 to a level of 98 per cent of GDP, up from 33 per cent in 1990. Lending to non-financial business was 25 per cent of GDP in 1990 – as it is now”1 Things are not much different in other countries. Lending no longer creates added value or stimulates productive activities but creates debt. Because this type of lending evolved rapidly, so did the enterprises facilitating it. That is why, according to Bezemer, “banks hinder and hurt the economy more than they help it. Economic growth now requires a shrinking financial sector.”2 To illustrate how necessary would be such a measure, he appeals to a suggestive comparison: “We cannot reduce our bread consumption and expect all bankers to stay in business. If we want to bring down our debt levels, we cannot avoid shrinking the financial sector. Both bread and debt are valuable to society, but there are costs to overproduction.”3 Three important perspectives have lately drawn our attention as they speak about efforts to quit the financialization paradigm. The first comes from the US president. In the 2012 State of the Union Address, Obama says explicitly: “No, we will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits. Tonight, I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values. This blueprint begins with American manufacturing...”4 The report gives the example of the three large automobile producers: General Motors, Ford and Chrysler. Barack Obama confessed that when these producers were “on the brink of the abyss”, important voices claimed that they “had to be left to die” (see here the fetish of the market’s role). The president opposed this view and gave an 85-billion-dollar bailout to these firms, which are now top world producers. Barack Obama’s preoccupation

1

Dirk Bezemer, “Big Finance Is a Problem, Not an Industry to be Nurtured”, Financial Times, November 4, 2013. 2 Ibid. 3 Ibid. 4 “State of the Union 2012: full transcript of President Obama’s speech”, guardian.co.uk, January 25, 2012, http://www.guardian.co.uk/world/2012/jan/25/state-of-the-union-address-full-text.

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with reinvigorating American production emphasizes the constant decline of manufacturing in the US after WWII. The second position comes from the former governor of the Bank of England, Mervyn King, who gave an interview to Martin Wolf when he stepped down. This is an important moment in the life of a financial personality and this last official interview is particularly significant. We will only add that nuance is a trait of intellectuals and especially of the British banker. Cash is fundamental to the day-to-day running of the economy. At the same time, it’s the asset that you move into when you have no idea what to do. That is why our monetary economy is so unstable... I’m always struck when I speak to not just ministers but people who work in the Treasury that it is actually quite difficult to produce the investment projects. It’s very easy to spend money but in a way that maybe doesn’t add to the real gross domestic product.1

This is a very deep but bitter perspective. The monetary economy is so unstable because there is no project, no clear idea about what we need to do, and there is no perspective. The causes of the crisis lie in the banking sector but are to be found equally in the political and strategic sectors. Contemporary developed society seems to be out of breath because perspective is missing. Finally, we would like to invoke Michael Meacher’s position, not necessarily because he was a minister and held various official positions but because his observation is quite acute: “The deliberate abandonment of industrial strategy during the neoliberal era on the grounds that the market automatically knows best must rank as the biggest economic blunder in post war history.”2 Let us add that a country that has implemented a policy of deindustrialization soon faces difficulties. Deindustrialization affects the development equation; in the first place, the population’s qualifications (but also the loss of the vital market, which closes down perspectives in an essential field for the future, manufacturing). Services are very important because they create jobs and preserve revenue, but they cannot be a great driver of growth and nor can they ensure the professional qualifications required by an innovation-based society. India’s experience is relevant in this respect. While it relied on its own services development, it made important progress but its growth rate was not bigger than 4–6%. When it

1

Martin Wolf, “Mervyn King Has Lunch with the FT: Interview Transcript”, Financial Times, July 5, 2013. 2 Meacher, State We Need, 180.

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invested in manufacturing – probably under the influence of Chinese evolution – the growth rate was 6-9%. The figures speak for themselves. A country cannot have big development potential if it relies exclusively on services. Services are important, but they are not a driver.

5. State–banks: a relationship betrayed whenever was needed The state’s position in the developed countries is curious and questionable. Neoliberal doctrine gives the state a secondary position. As an active actor, as the geometrical privileged place for strategic decisions, it is visibly reconfigured and marginalized. In exchange, the crisis has brought into the limelight an alternative role: the intervening, supporting state, which safeguards companies (and especially banks) in difficulties. In this novel position, the state has not been criticized or targeted. Is anyone aware of protests from neoliberalists against the numerous bailouts the state offered to companies and banks? We are not. The state was equally important before the crisis because it introduced deregulation. Whenever such an important measure is initiated, we need to ask ourselves who benefits from it. Nowadays we know that the main beneficiaries of deregulation are the financial or business circles. The state was good because it appealed to privatization, which meant, in fact, a political decision in favour of important capital holders. The state was also important because it stimulated the development of credit. When the credit extends, the main beneficiary is the credit holder himself. Finally, following neoliberal prescriptions, the state retreated to an essential field: development. It relinquished its traditional role to inaugurate a new growth equation. While China and many other Asian states appealed to the model of export-based growth and Turkey and Brazil discovered the virtues of the internal market in increasing demand and stimulating growth, America turned to consumption. Stimulating consumption above payment means leads to deficit, and then loans to cover that deficit. This is how the US debt appeared and grew: by making this model permanent and embracing a lifestyle that Americans had not experienced previously: living above your means. An incomprehensible phenomenon appeared: the US and Great Britain delocalized their production (in search of profit in the context of the existence of a very cheap workforce) while China and the Asian countries managed to delocalize their demand (by moving it beyond the border to the developed countries) – so the developed country lost everything (except immediate access to cheap products) and the developing state gained everything (market, production capacity, the possibility to

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qualify the workforce). The foreign exchange reserves of China and other Asian states were created in this way. So was the developed state’s debt, at the other end of the continuum. The state was good, especially during the crisis. To refer to the American experience, the government (through its specialized bodies) granted fiscal stimuli at very low interest rates; it initiated more rounds of quantitative easing, which means, in fact, printing money; it pumped out billions of dollars for bailouts, a direct financial support to corporations and banks. Although no one can give a certain answer, the US’ or Europe’s financial effort is roughly estimated at 20% of their GDP. This huge sum adds to the previous debt and thematises a crucial problem: what is the debt’s impact on development? This is a difficult question to answer because it needs more clarifications. For instance, why did these countries accept the process towards indebtedness? A debt that materializes in a manufacturing facility, for instance, signals that there are guarantees towards procuring financial sources for paying the debt; a debt made for consumption is radically different. The country’s economic capacity and the amount of debt are also to be considered. One thing is for sure: debt affects development. A man carrying a burden cannot run as fast as one carrying none. There are intense debates in the literature on this theme, rooted in the thesis formulated by Reinhart and Rogoff1 in a book with real impact in the field of public dialogue. Based on an impressive historical panoramic perspective, the book claims that large debt influences development. The authors also build a correlation: when public debt in a developed country exceeds 90% of GDP, there appears a new stage of slow growth (1–2% of GDP) that may last around 20 years. In this context, it is interesting to see the reactions to the book. Two years after it was published, the Financial Times published a series of papers on the thesis, among which one was authored by Martin Wolf, the chief economics commentator. Foreign Affairs joined the debate. All interventions sought to dispute the claim. These perspectives need to be understood in the context of the huge amount of debt in developed countries, which is unlikely to decrease in the following period. We cannot take sides but we cannot avoid some comments either. Experience shows that whenever specialists debate a technical issue, it needs to be translated into the language of common sense, which never fails. Debt does affect development, and large debt affects economic 1

Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009).

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growth to a larger extent. Whether the threshold is correctly placed at 90 percent is for specialists (and history) to decide – it may not be a rule but the threshold is a warning signal. When a country’s debt is almost the size of its GDP, economic performance cannot be similar to a state’s with similar economic capacities carrying no such burden. For instance, the US pay annually into their debt a sum equivalent to their defence expenses. History has taught us that no country can support two defence budgets over the years. Niall Ferguson seems sceptical as well: high growth cannot happen in large-debt circumstances. The English historian gives the example of Great Britain after the Napoleonic wars. Back then, the country’s debt amounted to 250% of GDP.1 Several decades were needed to decrease the debt to 25% of GDP, an effort guided by financial discipline, judicious policies and a balanced relationship between reserve values and lent money values. We cannot ignore the fact that behind this reputed policy were two grand processes that contributed to its success: the Industrial Revolution, which materialized into the railroad boom (which ensured the driver of growth), and the impressive extent of the colonial empire, with all the accompanying advantages. To conclude, we would point that it is also relevant to know why the debt was made if we are to understand the relationship between debt and economic growth. A debt made for investment is widely different from a debt made in view of consumption. As far as we know, most of American and developed countries’ debt was accumulated in view of consumption, which makes reimbursement problematic. In our view, very rough times are ahead, and developed countries will show a less attractive, less hopeful face. After agreeing to open its internal market to Asian production capacities, and agreeing recklessly to become the favourite delocalization destination of Asian demand, the US will have to find a way to recover. American financial instruments will be fully used. The US recovery effort will get redistributed one way or another. Powerful Asian states will not be affected because of their huge foreign exchange reserves. Redistribution will mainly affect states in financial difficulty, and the EU may be part of the process. Great Britain had the advantages of the Industrial Revolution (there is no such technology available today that could revolutionize everything and create demand) and an empire, which has ceased to exist. We may also retain the idea of a financial empire fed by the “exorbitant privilege” of having the main exchange and reserve 1

Niall Ferguson, The Great Degeneration: How Institutions Decay and Economies Die (London: Allen Lane, an imprint of Penguin Books, 2013), 146.

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currency, the dollar. In this context, the state’s relationship with banks becomes crucial for developed countries.

6. The rise of the financial-political complex Consequently, the state spared no effort in supporting the private sector even though the problems it faced often correlated with mistakes, errors and poor management. Financial flows were directed towards the banks, which posed two major risks. The first was that the banking crisis could turn into a financial crisis. Niall Ferguson was right to assert that “Public sector deficits have helped to mitigate the contraction, but they risk transforming a crisis of excess private debt into a crisis of excess public debt.”1 On the other hand, saving the rich became a commandment. Referring to Joseph Stiglitz’s comment on the proposal by US Secretary of the Treasury Timothy Geithner that banks’ toxic assets be bought with public money, Robert Boyer said that this is yet another example of privatizing gains and socializing loss, a kind of socialism for the rich.2 In the previous chapter, we talked about the impact of public debt – made mostly for banks – on development. In this case, debt’s painful impact is distributed evenly and its effects are visible in time. But there is another impact: the direct effect on the citizen. It is true that the state intervened to help banks and corporations – but the citizen is or should be the state. The money lent, in fact offered to firms and banks, is eventually paid by the citizen. We speak about the state’s debt but in fact this is a citizens’ debt and they are the ones who will pay it, sooner or later. When various analyses pointed to the money spent by banks and the state’s effort to recapitalize them, a problem became clear. Without being consulted, the citizen was faced with a payment contract for himself and his descendants (who may not have been born yet). The citizen feels betrayed by his own representative, the state, which should protect him. Nobody questioned the opportunity of the state’s intervention, the various forms of financial help. After the financial “fire” was extinguished, the things that came to light could only ignite public conscience. The banks spent fabulous sums in various schemes, but also gave unimaginable bonuses. In the next context, it was pressing to answer the following question: in fact, what is the citizen paying for? Waste, speculation, even irresponsibility. It was equally painful to find out that 1

Ibid., p. 3. “Transformations et diversité du capitalisme. Entretien avec Robert Boyer”, Esprit, November 2009, 20.

2

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the state had embraced the banks’ cause without second thoughts. This state, a good debtor, who paid the bill but failed to identify the guilty parties, who preserved the same relationship with the banking system as if nothing had happened, showed its true colours: a captive state, confiscated by the banking system; a state for whom covering up what happened in this system was not just a priority, but a commandment. In fact, it developed a new relationship with financial power. The Economist synthesized this phenomenon as “the rise of the financial-political complex.”1 Traditionally, the banks played the role of intermediary (channelling the funds from those who save to those who need funds, from small depositors to big companies and investors); hence their vital importance for the functioning of a capitalist economy. According to the above-mentioned journal, this role is obsolete. There was a phase when the banks no longer gathered money from small deponents but from the market, and channelled it towards various interested parties, who did not collect money directly from the market because banks managed to obtain funds at a lower price. After 2007, this tendency was reversed. The bank loans became more expensive than the corporations’. In the new context, banks identified a new field. They became a sort of intermediary between states and their own central banks. This way, banks became the main actors of the bonds market, benefitting from loans at low interest rates from the Central Bank and purchasing bonds from governments at a much higher interest; or, with money borrowed from the Central Bank, lending to governments at higher interest rates. From any angle, it is clear that the relationship with the government is crucial. Banks are now mainly connected to the state, not the market. They preserve their role as intermediaries not between private entities that need each other to start a business but between states. In fact, a new couple is formed: state–banks. The market’s presence in banking activity diminishes, which results in the diminished contributions of banks to economic activity. Banks abandon their activity as intermediaries and engines for the economy or, at best, push it into the background. From sources of economic vitality, they become instruments for blocking economic activity and/or for increasing costs. Because of this vicious tandem, states can only become poorer, and the cost burdens the citizen rather than the state. The race to profit destroys the very source of profit, which is a real economy. The role of capital as a controlling instrument is exacerbated. This is the seduction carried by the discovery that the state 1 “The Nationalisation of Markets: The Rise of the Financial-Political Complex”, The Economist, May 20, 2012.

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cannot declare bankruptcy. Yet states can become insolvent. In any case, “banking systems are incredibly reliant on implicit or explicit government support.”1 We were surprised to discover in the Financial Times a note written by a reader on banks and their activity. It is true that the note is signed by Dan Coffey, a professor of economics at Leeds University Business School.2 Dan Coffey signals a remark in the third volume of Capital about credit. According to Marx, capital exploits “industrial capitalism” just as industrial capitalism exploits “industrial work”. Obviously, Marx could not have been aware of this new dimension of bank investments or of their new function, that of intermediary between states. We do not fully share Marx’s vision. In classical capitalism, banks played a role and, consequently, had the right to hold part of the profit. In the current stage, the banks’ real role has diminished dramatically and the formal, parasitic role has increased. In this sense, Professor Coffey is talking about the unexpected fulfilment of the Marxist prophecy. We would also signal an aspect that is usually disregarded. In classical systems, the bank had a more important role than simply lending money. “The industrial system” used the capital borrowed from banks but the capital holder had the crucial roles of analysing the soundness of the project (to see it if granted the loan) and supervising the investment (a necessary, justified control as the capital owner). So the banking and industrial systems formed an economic couple. No one could doubt the banking system’s control and supervision functions. In the current stage, who controls the money route? In the classical system, the bank did not need to be controlled or supervised because its own money (or money from small depositors) was involved. Nowadays, the source of money is not clear. Most of it, especially after the crisis, comes from the state, so it is the citizens’ money. But who controls the use of money coming from the state, which is, in fact, public money? Control cannot be exercised because we are living in an age of deregulation! This is a new facet of financial power: uncontrolled but controlling power. All this fed an extremely critical attitude towards banks, which became a symbol of waste, of expense without precautions for a country’s financial wealth. Banks gradually started being perceived as the root of the crisis, which led to a sizeable reaction. Sometimes the analysis focuses on the impact of fabulous wages and revenues in banking over social inequality. Inequality did not appear for technological reasons relating to 1

Ibid. Dan Coffey, “Where Marx Excelled at Anticipation”, Financial Times, November 15, 2011. 2

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skills and qualifications but is correlated to Wall Street activity. This is the perspective proposed by James K. Galbraith, who underlines that: In recent decades in America, economic inequality increased. This was, however, not some general social process, widely spread across the structures of pay and income. It was, rather, mainly due to extravagant gains by those in finance and in the leading sectors of the day: information technology in the 1990s, and the military and mortgage booms of the 2000s. What is astonishing, however, is how few people actually enjoyed the income gains.1

The author is especially discontent that these few people became very rich in very limited spheres of social activities. As long as the process took place in the IT field in the 90s, it was tolerable because of the understanding that the spread of technological advances would benefit the entire society but “in the 2000s, where growth was driven first by war and then for a few brief years by abusive mortgage lending, the saving grace is harder to see.”2 Much more radical is Charles Ferguson’s position, visible in the title of his book, Predator Nation. In Gillian Tett’s words, Ferguson frames the problem of responsibility in a very precise equation of the guilty parties: “The twenty-first century financial elite has raped the United States’ political and economic system and the rapists need to be punished... the sins of finance not only created the last boom-to-bust cycle but also are fuelling the broader decline of the United States.”3 Charles Ferguson’s discontent comes from the fact that nothing significant happened to change this situation. The bankers before the crisis are the same after the crisis, most often in the same positions. What is the citizen, who is to pay the bill of financial collapse, to understand? As of early 2012 there has still not been a single criminal prosecution of a senior financial executive related to the financial crisis. Nor has there been any serious attempt by the federal government to use civil suits, asset seizures, or restraining orders to extract fines or restitution from the people responsible for plunging the world economy into recession.4

1 James K Galbraith, Inequality and Instability: A Study of the World Economy Just Before the Great Crisis (Oxford: Oxford University Press, 2012), 148–49. 2 Ibid. 3 Gillian Tett, “Fixing Finance, Wall Street and the Problem of Inequality”, Foreign Affairs, July/August 2012. 4 Charles Ferguson, Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America (New York, NY: Crown Business, 2012), 1.

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“The rise of the financial-banking power” is a systemic problem. We will not be able to understand the new configuration of power if we do not insist on the connection between financial and academic power. For instance, Charles Ferguson names several illustrious academics who in one way or another supported the ascent of the financial system, who failed to signal misdemeanours in part because they had economic advantages or were in a conflict of interest: Martin Feldstein, Larry Summers, Frederic Mishkin, etc.1 In politics, the change is more radical, where interconnections speak about a new structure of power and a new identity of developed capitalist society, where financial power plays a much more important role than in classical capitalism. It is the very heart of economic system and, consequently, of the social and political systems. We understand the anger and disappointment that materialized in Ferguson’s protest. Even if measures were taken late, if ever, social reaction is here to stay, and this will prove to be one of the most important costs of the current crisis. Social instability will accompany the developed capitalist society. We will discuss this process in a separate chapter. Charles Ferguson’s book is one of the most radical positions in literature, equalled, even exceeded, by the US prosecutor general’s comment in front of the Congress committee on the managerial activity in one American bank: Too big to jail. Mervyn King shares the remark with the readers, which signals at least a partial agreement, and yet he feels he must delimit his own position: “those are his words, not mine.”2

7. Bankers, bankers, bankers The reaction to the savage incorrect criticism against bankers has not ceased. Bankers have been painted in dark colours; “banker” has come to designate people who have turned rich overnight, the expression of inequality. In the long run, this will completely discredit a key actor in capitalist society – this is the logic behind recent reactions. Distrust in bankers’ activities can be costly. Mark Findlay quotes an opinion focusing on the costs of this hypercritical attitude against bankers. The entire edifice of capitalism is based on capital – which is really just another word for confidence. Wealth is created because people who have capital, or confidence, expose it to risk. If people believe your confidence to be authentic, the risk you take is likely to be small. But as soon as

1 2

Ibid., 245. Wolf, Mervyn King Has Lunch with the FT.

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people think you are bluffing, they panic – and panic destroys wealth faster than confidence can ever increase it.1

Bankers themselves do not share this ruthless criticism. At the World Economic Forum in Davos in 2011, JP Morgan CEO said: “I just think this constant refrain‚ ‘bankers, bankers, bankers’ – is a really unproductive and unfair way of treating people...people should just stop doing that.”2 The debate touched on the problem of crisis as well. Crises are cyclical; they cannot be completely prevented and controlled despite all efforts. Consequently, given the reality, what is the point of being so critical towards bankers? They did what they had to do. The process is too complex for hasty generalizations and decisions. Two approaches attract attention. Mark Buchanan’s provocative book3 includes a declaration made by Jean-Claude Trichet, the president of the European Central Bank during the crisis. When the crisis came, the serious limitations of existing economic and financial models immediately became apparent... Macro models failed to predict the crisis and seemed incapable of explaining what was happening to the economy in a convincing manner. As a policy-maker during the crisis I... felt abandoned by conventional tools. In the absence of clear guidance from existing analytical frameworks, policy-makers had to place particular reliance on our experience...In exercising judgement, we were helped by one area of the economic literature: historical analysis. Historical studies of specific crisis episodes highlighted potential problems which could be expected... Most importantly, the historical record told us what mistakes to avoid.4

The author seems to be saying that given that the support available to important decision-makers is so unsecure and relies on intuition and fragmented analogies, should bankers be considered so guilty as they appear at first sight? The projection of the financial system seems rather the explanation, not the account, of what happened inside the system. Buchanan starts from an investigation that specialists at the Bank of 1

Mark Findlay, Contemporary Challenges in Regulating Global Crisis (London: Palgrave MacMillan, 2013), 182. The opinion belongs to William Leith, and was made in a review of Paul Krugman’s book, The Return of Depression Economics and the Crisis of 2008. 2 Apud Findlay, Contemporary Challenges,184. 3 Mark Buchanan, Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics (London: Bloomsbury, 2013). 4 “Address at the ECB’s 2010 Central Banking Conference”, quoted in Buchanan, Forecast, 220.

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England made on how the architecture of the financial system influences the instability induced by leverage levels, the ration between liquidities reserves and the banks’ loan capital. Banks were identified in the network that could become in all probability “epicentres of the funding crisis”, just as other banks are more inclined “to spread financial distress”. In any case, it was surprising to find out that problematic banks fell into the category “too big to fail”, such as Goldman Sachs, J.P. Morgan, Citibank, etc. This invites the conclusions of the research reproduced by the author: the modern financial system seems to be almost designed for systemic trouble. Buchanan’s work is an attempt to transfer the results from other fields, such as psychology and meteorology, to the fields of economics and crises, which might prove useful. For instance, says the author, markets sometimes act like weather: a heatwave can generate a storm.... Anat Admati, professor of Finance and Economics at the Graduate School of Business, and Martin Hellwig, director of Max Planck for Research on Collective Goods, warn against the mythology created about the complexity of banking activity, meant to keep this activity away from public debate and opinions. The myth of complexity is carefully maintained so that critical opinions can be immediately denounced as incompetent. Most of these claims are like the emperor’s new clothes. Our purpose in writing this book is to demystify banking and explain the issues to widen the circle of participants in the debate. We want to encourage more people to form and to trust their opinions, to ask questions, to express doubts, and to challenge the flawed arguments that pervade the policy debate. If we are to have a healthier financial system, more people must understand the issues and influence policy.1

The starting point in their approach is the sad finding that, in fact, nothing has changed. Do not believe those who tell you that things are better now than they had been prior to the financial crisis of 2007-2009 and that we have a safer system that is getting even better as reforms are put in place. Today’s banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us to recent crisis.2

1

Anat Admati and Martin Hellwig, The Bankers’ New Clothes. What’s Wrong with Banking and What to Do About It (Princeton, NJ: Princeton University Press, 2013), 2. 2 Ibid., XI–XII.

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The conclusion is that another crisis can appear at any time, that society’s immune system has not become better and that this prolonged status-quo will only protect bankers’ circles and bonuses, and works for the beneficiaries of the system. In this respect, the title of a recent book’s first chapter is significant: “The crisis that didn’t change much of anything.”1 Specialised analyses insist on the value of bailouts granted to banks and the economic and social implications of this financial effort, made in fact by citizens, a fact we discussed earlier. Sir Mervyn King reveals another aspect of the same financial initiative. His viewpoint coincides with Admati and Hellwig’s. Martin Wolf requested his opinion about bailouts, knowing that it would be upsetting. The answer is conclusive: “We’re five years on, and still we’re debating about how we’re going to restructure the banks, which have been receiving so much support. This should have been done a whole lot earlier.”2 It is quite obvious that the relationship between society and banks is asymmetrical. Society pays, but banks cannot give a convincing answer five years on, and nor are they likely to. Despite deregulation, in this new position banks are part of the broader process of financialization, the hard core of the neoliberalist order. It is difficult to imagine that bankers will embrace any change and real reform that will take away their prerogatives, advantages and newly conquered position. Any realistic analysis will have to consider the bankers’ interests, which do not encourage the reform that society wishes or imagines. Five years on, society still does not have an answer. After keeping silent, which might be a sign of repentance, banks and bankers are back, introducing themselves as the best specialists. In fact, this is an attempt at preserving the status-quo, where it is not clear whether the financialbanking power has harnessed neoliberalism or whether neoliberalism uses the new power to reach its aims. At the moment, the two forces have rediscovered each other and have inaugurated a lasting cohabitation period. The new financial-political complex is a reputable, dominant force of this time. We will not be able to understand the current evolutions if we do not take this important influence into consideration.

1

Philip Mirowski, Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown (London and New York, NY: Verso, 2013). 2 Wolf, Mervyn King Has Lunch with the FT.

CHAPTER V INEQUALITY – A ROCKET FALLING BACK TO EARTH

1. “Why we are proud that we are Americans” In an article that generated real interest because it talked about “the inevitable superpower” – China – Arvind Subramanian wondered about US evolution and its capacity to revert negative tendencies: “Its economic future inspires angst: the country has a fiscal problem, a growth problem, and, perhaps most intractable of all, a middle-class problem.”1 The question is why the middle-class problem is the most difficult to solve, more difficult than the huge problem of debt and the problem of regaining competitiveness, which is what ensured the American superpower rise in history. We are not aware of the author’s answer. But we will advance an opinion because there is so much talk about the pervasiveness of social inequality in America and the developed world and about the disappearance of the middle class. We remind the reader that this decade cannot be evaluated through its processes but through the tendencies and evolutions it triggers. Such a field, where consequences are more significant than the present status, is the field of social inequality in the developed world. In this particular case, consequences are more important than facts, although the facts are spectacular in their sadness. Firstly, a distinction is necessary between a country’s social and economic problems. The interplay between these fields is sometimes ignored, because analysts are preoccupied with numbers and quantifiable facts and tend to underestimate people’s feelings, reactions and perspectives because they are imponderable. Nonetheless, they are equally important.

1

Arvind Subramanian, “The Inevitable Superpower: Why China’s Dominance Is a Sure Thing”, Foreign Affairs, September/October 2011.

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What holds a society in place? Along with tradition and culture, individual appraisals. We tend to ignore that each individual is a tiny evaluation centre, giving grades and making appraisals, all spilling into a reaction that gathers years of evaluation on the country’s evolution and the performance of its governing bodies. Street protests are the exemplification that this evaluation has reached a critical point. On an imaginary scale of discontent, there follows revolt and then open war. While protest requests negotiation, revolt requests that guilty parties resign. Higher up is the decision to leave the country, which shows profound disappointment, fed by lack of perspectives and hope. Sometimes this decision is transferred onto children. I cannot forget the words of a Romanian artist who had won a great international prize. Asked by the report whether he intended to leave the country, the artist answered immediately: “Not me, but my daughter’s luggage is at the door!” An individual’s attachment to a society is fed by this appraisal. Millions of evaluations make up this connection. It is difficult to evaluate the contribution of individuals’ attachments to a country’s progress. It is equally difficult to evaluate the trust generated by the confidence that society is fair and protective towards its citizens. Because these feelings cannot be quantified, they are usually underevaluated. In reality, they are the strongest link, which ensures cohesion. Just as we tend to ignore that economy is partly psychology (in the absence of trust, credit does not circulate), we forget that GDP ranks higher if it translates into the social and mental comfort of a country’s citizens. This correlation made the evolution of American society a model for many countries. In this model, the focal point of social balance was the middle class. So important is middle class for capitalism, that these two notions have become equivalent. The existence of the middle class ensured stability and an essential source of vitality. Decades of evolution led to this point. We cannot claim that the middle class is the result of strategy but rather the consequence of American pragmatism, the effect of the search for balance, the meeting point of policies, the crowning of a social contract stating that citizens must derive benefits from results obtained together. In the matter of revenue distribution and redistribution, America excelled. It found a balance, distribution and social mobility mechanisms, possibilities for ascending on the social scale; it created the conviction that society cared for and rewarded everyone. This is what fed the pride, the attachment, the contentment of being an American – this regenerative feeling of belonging to a strong nation caring for its citizens, rather than the impressive GDP or PPP levels or the scientific breakthroughs that turned America into an innovation hub.

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GDP size is important, and was America’s aspiration throughout history. The greatness of the country lay in the wisdom that poured the power of its economy onto its citizens, which fed the citizen’s trust and pride of belonging to the American nation. A particular approach to GDP, 45 years old and not frequently encountered nowadays, is of particular interest to our theme, and a vivid example that not all old things are obsolete and not all novelties are conquests. In March 1968, Robert F. Kennedy said: Our gross national product now is over eight hundred billion dollars a year, but that gross national product – if we should judge the United States of America by that – that gross national product counts air pollution and cigarette advertising and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm, and it counts nuclear warheads, and armoured cars for the police to fight the riots in our cities. It counts the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learnings; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.1

2. “We have empty homes and homeless people” The last 30 years has seen major changes in income distribution, which translated into changes in America’s social configuration. At first, it went unnoticed, probably because credit developed rapidly, and then noguarantee credit was stimulated, which made Americans believe they were richer. In fact, statistics show that a new tendency is in place in this field. The wonderful profitable American economic machine did not work for the many but for a few. The average American’s income stagnated. 1

Robert F. Kennedy, “Remarks at the University of Kansas”, March 18, 1968 (transcribed from the original recording), http://www.jfklibrary.org/Research/Research-Aids/Ready-Reference/RFKSpeeches/Remarks-of-Robert-F-Kennedy-at-the-University-of-Kansas-March-181968.aspx.

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Several sources talk about the same social reality. “The top one percent of house-holds had obtained only 8.9 percent of the total income generated in the US in 1976, but by 2007 this has increased to nearly 25 percent”1; “Median incomes in the United States have been stagnating in real terms since the 1970s.”2 Inequality pervaded the distribution system. The GDP increased, so did the society’s wealth, but income started being distributed differently. Most of this new wealth went to owners, but the part for the workforce remained the same. In other terms, “the rich have been creaming off a giant share of productivity growth.”3 Flagrant, worrying social inequality was in place. Obviously, the first social category affected by this evolution was the middle class itself, decreasing in numbers and importance while inequality was increasing. We are not talking about an increase in the gap between the rich and the poor but the gradual erosion of the middle class. It became increasingly clear that American society was divided. In social life, battles were fought by the middle class, and won by its force, homogeneity and determination. The debate on inequality became prominent as well. An essential moment in this debate, which signalled the gravity of the situation, took place when the great specialist and “social intellectual” Joseph Stiglitz joined in. He fixed the process and the tendency in one single figure: the 1% in the title of an article published in Vanity Fair: “Of the 1%, for the 1%, by the 1%.”4 The percent made history and the author signalled that protestors in Spain or Northern Africa were using this data to justify their demands. Probably the most acute interpretation of the American reality is synthesized in the main slogan of the Occupy Wall Street movement: “The 99 percent”, which expressed not only the reality of the suffering but the real target of the protest: the 1 percent who are the main beneficiaries of last decades’ evolutions. Timothy Noah coined this social reality the great divergence: “The gap between the 1 percent (mostly nonfinancial business executives and financiers) and everybody else.”5

1

Raghuram Rajan, “The True Lessons of the Recession: The West Can’t Borrow and Spend Its Way to Recovery”, Foreign Affairs, May/June 2012. 2 Francis Fukuyama, “The Future of History: Can Liberal Democracy Survive the Decline of the Middle Class?”, Foreign Affairs, January/February 2012. 3 Robert Skidelsky, “Inequality is Killing Capitalism”, Social Europe Journal, http://www.social-europe.eu/2012/11/inequality-is-killing-capitalism/. 4 Stiglitz, Price of Inequality, XXXIX. 5 Timothy Noah, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It (New York, London: Bloomsbury Press, 2012), 198.

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Although the numbers refer to the situation in the US, they are valid for the entire developed world. Le Monde Diplomatique published an interesting analysis, “Tyranny of the One Per Cent.”1 The developed society’s increasing polarization tends to become pathological and diminishes the attractiveness of the social model. “Thirty years ago the Walton family, who own the giant Walmart corporation, had a fortune 61,992 times greater than the median US income. Today it’s 1,157,827 times greater. The Waltons have amassed as much money as America’s 48,800,000 poorest families.”2 Last year, the Bank of Italy said, “The ten wealthiest individuals have as much money as the poorest three million Italians.”3 This data shows the severe decrease in the number of the middle class (an essential social segment in the initial organisation of capitalist society), and the unprecedented increase in the number of the poor. The world’s richest are 1 percent, but this percent dominates economic life and the state itself. Eventually, this led to the transformation of the social model itself. In this changed form, the model no longer inspires equity, which is fundamental for social cohesion, and no longer exhales seduction, so important for a country that in history was called “the middle class country”. If America’s power and prestige are affected in the long run, this influence will come from the unequal social model, which tends to become a fixture in America and the developed world. There is a competition to express America’s inequality in poignant labels. Some analysts calculate using families – 1% covers approximately 160,000 families – but 1% of the population holding about a quarter of the country’s wealth is no longer an accurate number; 0,1% of the population is now the significant number, comprising the richest 16,000 families, the top banking, financial, managerial circles and the top asset owners. The richest Americans’ income in 2009 was 97,000 dollars a month, more than double the sum back in 1992.4 Sometimes, the discussion focuses on wealth, not on income. As unequal as the distribution of income is in the UK, the distribution of wealth is even more unequal. Whereas the top 1 percent capture about 14 percent of all income, they hold fully 28 percent of total personal wealth. And the concentration of wealth has been increasing in recent years, almost

1

Serge Halimi, “Tyranny of the One Per Cent”, Le Monde Diplomatique, English Edition, May 2013, http://mondediplo.com/2013/05/01tyranny. 2 Ibid. 3 Ibid. 4 Stiglitz, Price of Inequality, XII.

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doubling since 1988, when the top 1 percent held just 17 percent of total wealth.1

It is difficult to stop desiring gain. The edifying numbers presented by Timothy Noah are worrying. Greed does not stop in the face of the huge suffering brought by the crisis to large segments of people on a small income. We have often heard it said that the current economic recovery is a weak one. And so it is, for the most people. But it isn’t for the 1 percent. In 2010, fully 93 percent of all income gains went directly into the pockets of the 1 percent... the distribution of income gains remained similarly lopsided at least through 2011.2

Society has not recovered, the economy faces difficulties, unemployment is high, people are fighting to pay their debts to banks. Luxury shops, on the other hand, recovered completely and are faring better than before the crisis. “They were more than recovering – they are zooming.”3 Polarization is a tendency but intense polarization has led to a pathological situation. The figures above are edifying. The situation signalled by Stiglitz is the truly alarming one: “We have empty homes and homeless people”. This evolution is simply irrational. On the one hand, we have an acute social need (homeless people); on the other hand, there is the possibility to meet this need (empty homes). What is missing is the connection between them, which is what social leadership should do. The country has a serious leadership problem. In what follows we will not insist on data and situations that illustrate discrepancies but will try to prefigure some of the consequences that sooner or later will mark their presence.

3. Towards a Waterloo of liberalism… Something curious is happening. We continue to use the same notions and categories, such as capitalism, liberal order and so on, but when we take a closer look, we realise that this is a different sort of capitalism. The workings and objectives of capitalism modify the very nature of the system. It is confusing that institutions are in place that might feed the idea 1

Linda McQuaig and Neil Brooks, The Trouble With Billionaires: How the SuperRich Hijacked the World (and How We Can Take It Back) (London: Oneworld Publications, 2013), 248. 2 Noah, Great Divergence, 197. 3 Ibid., 198.

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that in fact nothing fundamental has changed. David Boyle warns that “The middle classes can no longer trust their existing institutions, political or financial, to look after their interests, because they are dedicated to looking after the interests of a different class altogether (our emphasis). So this is a political battle which lies ahead.”1 The evolution of the developed capitalist society towards inequality is transforming the pillars of this society – liberalism and democracy, which are interconnected. Sometimes we fail to perceive that the middle class gave capitalist society its fundamental traits, and its members its typical behaviour: entrepreneurship, the drive to economize, the attachment towards activities that produce value. It represented the value-laden depository of society, modelling convictions and behaviours. That is why we can talk about the civilization of middle class, which coincides to the highest degree with the civilization of capitalist society. When middle class numbers dwindle, this raises an essential question: what will be the social and political basis of liberalism? This doctrine appeared in order to support and promote the interests of “the entrepreneur”, who defines the middle class. Liberalism’s social basis was represented by the existence of this class, which was the main cordon sanitaire against the spread of the Marxist left. Francis Fukuyama was right to assert that “When much of the developed world succeeded in creating middle class societies, the appeal of Marxism vanished.”2 If the social basis of a political force or organisation decreases dramatically, then, by the force of things, the democratic institutions that instil life into this organisation decline as well. In any case, their future will be uncertain and secondary to the dominant elements of social evolution, which will cut a new way for themselves. Neoliberalism can be perceived as the successor of old liberalism, dressed in its doctrinal parents’ clothes when walking down the street but changing when entering state institutions. From a political perspective, the measures adopted in the last decades show that neoliberalism, contrary to its political father, liberalism, has preserved the rhetoric of free initiative but drastically reduced its scope to the high circles of ownership, management and financial power. With all its political and behavioural configurations, the middle class has been confined to textbooks and an oratorical motif in politicians’ discourses. The middle class has not only decreased in number but, as the value depository of society, modelling behaviours, has been confined to the background. 1

David Boyle, Broke: Who Killed the Middle Classes? (London: Fourth Estate, 2013), 304. 2 Francis Fukuyama, Future of History, Foreign Affairs, January/February 2012.

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Rarefied, the middle class is no longer represented politically. There is a direct link between neoliberalism and privileged social segments. The middle class is under the influence of various pressures. Part of the overqualified members of the middle class rose to upper class but most are forced by the social trend to go down the social hierarchy and integrate into lower class. On the one hand, there is a representation void in liberal professions and middle-income people, affected by the crisis of the last years; on the other hand, a silent discontent about their lower social status is mounting. That is why many members of this class will be attracted to protest movements, irrespective of their source. The “99 percent” slogan of Wall Street protests is aimed at building a new identity for the developed capitalist society, based on the clear delimitation of the 1 percent, not of the middle class. This is an acknowledgement that the 1 percent represent a “superposed layer” with no real social raison d’être, a social segment that has very large profits, despite the fact that it produces nothing, and has restrained society in a straightjacket. At the same time, we should ask in earnest what is happening in this social space that was formerly the space of a compact, strong middle class. Which perceptions are dominant? People feel affected by the measures taken by the 1 percent; they perceive injustice and abuse. We have grown accustomed to speaking about the crisis rhetorically. At the beginning of the crisis, in the US, unemployment reached 10 percent, people were chased out of their homes, graduates could not find work, living standards decreased dramatically. This discontent had to find a political expression and benefit from political action. The institutions representing the liberal order proved useless at protecting citizens; moreover, they integrated into “the new order” and supported measures that affected the middle class. The Tea Party wing of the Republican Party, which declared that they supported a regulatory state, aimed to protect average people from the abuse of financial speculation. This position announces a tendency. Politicians feel that the average people need protection, and there is a gap they could fill between the oppressive state and the victim citizen. At the moment, the right wing’s intent to bridge this gap sounds like populism, borrowing heavily from the leftists’ arsenal – the regulatory state, selfproclaimed as the protector of the injured citizens. We have already referred to neoliberalism’s political and doctrinal substance. We only wish to add that neoliberalism assumed innovation by attacking the state and promoting deregulation, actions that were not confirmed by social evolution. “The global financial crisis that began in 2008 and the ongoing crisis of the euro are both products of the model of

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lighted regulated capitalism that emerged over the past three decades.”1 Our question is whether there is a “a plausible progressive counternarrative” coming from the left? Fukuyama was right to remark that the discourse of the left was merely a pleading request to return to the former “welfare state” of the 70s. It is clear that neoliberal discourse will have little impact in the immediate future. The left seems incapable to produce a historical answer. Classical liberalism, affected by its close connection to neoliberalism and the disappearance of its social basis, is in a free-fall. The main problem is not how to stop the inevitable decline but how to prevent what Guy Verhofstadt called “the Waterloo of liberalism.”2 There is an advancing force telling people what they want to hear: a stronger state, protection against banks’ and financiers’ discretionary measures. The political gap we mentioned calls for this political force, but seems that it will not be filled by the left, in a wise, healing rotation, but by right-wing populism. We should think about the echo of such a discourse in Europe, where sovereign debt will be paid off in years, with great effort and privations. There is a major risk that Europe will become populated by lesser populist dictators, interposed between state and population, engaged in a declarative defence of the population from the abuse of the state that they represent.

4. Populism: a possible substitute for democracy The same conclusion can be reached at the end of an analysis focused on the impact of inequality on democracy. The problem that a dwindling middle class raises for democracy is very suggestively expressed in the title of a recent book: Ruling the Void.3 The subtitle is even more edifying: The Hollowing of Western Democracy. Democracy and its workings have been a favourite topic for analysts, who have deplored the citizens’ disengagement, semi-sovereignty and the political decisions founded on criteria other than those associated with “popular will”, over the last halfcentury. In the meantime, the process has evolved to a sort of reversed perfection. … a half-century later, it seems that even semi-sovereignty is slipping away, and that the people, or the ordinary citizenry, are becoming 1

Ibid. Guy Verhofstadt, Ieúirea din criză. Cum poate Europa salva lumea (Bucharest: Comunicare.ro, 2012), 229. 3 Peter Mair, Ruling the Void. The Hollowing of Western Democracy (London, New York: Verso, 2013). 2

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effectively non-sovereign. What we now see emerging is a notion of democracy that is being steadily stripped of its popular component – easing away from the demos.1

To summarize, in the last decades, it has been openly or implicitly acknowledged that popular participation is modest, that public debate has lost its edge and that parties have strayed from their aims, but it has been repeatedly underlined that despite these cumulative weaknesses, democracy still works for the citizen. Despite straying from the citizen, it still serves the demos. The citizen may not participate directly, may not have control over decisions taken in his name, but the citizen still benefits from the syncopated functioning of democracy. Democracy thus borrowed a new legitimacy as governance bringing wealth and material comfort to citizens. This justification has ceased to work; democracy not only strayed from the demos but no longer serves it. Representing the demos was replaced by serving the demos and functioning for the demos; now even this last argument has been perverted to functioning in the name of the demos but serving somebody else. This is the drama of modern democracy: it has ceased to acknowledge who it really serves. The disappearance of the middle class is a thunderbolt for democracy because the rhetorical appeal to demos is cynical since the demos has suffered most. The middle class has been divided – the small fraction of overqualified individuals has moved to upper class but most now belong to the growing number of the lower classes of modest income and uncertain status. We are probably too close to these events to fully grasp their significance yet it is correct to say that people will be discontented and revolted. Capitalist society has become the privileged space of hostility and will continue to be so. There is a thin line between indifference and hostility. More often than not, indifference is a failed hostility. If we were to choose between citizen indifference or revolt, we would certainly opt for the latter. Although extremely inconvenient, harrowing and costly, it hastens towards a solution. Indifference is to democracy a pervasive lethal virus. Sooner or later, the citizen will come to a paralyzing conclusion: democratic bodies are no longer relevant. What will keep democracy alive will be the fear of the unknown. But various alternative discourses have already started to appear. A disappointed citizen will choose a discourse of promise – the less founded, the more attractive. Promise is the drug of hopeless lives. Populism has become a substitute for neoliberalism, the surviving form of a radical right wing, little open towards the declining democracy and middle class. 1

Ibid., 2.

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5. The middle class moves to Asia Few problems are as devastating as flagrant inequality, with its special power of stimulating public debate and helping to coalesce a state of mind. Chrystia Freeland1 describes an experiment by an economist at Duke University in 2011. He showed a group of people the distribution of wealth in the US, where 20% of the population have 84% of wealth, and in Sweden, where the wealthiest 20% have 36% of total wealth, and then he asked them to choose their favourite model. A total of 92% of the respondents chose the Swedish model. The researcher added another question: what would be the ideal distribution? Answers depicted a model where the richest 20% have no more than 32% of the total wealth – a fairer model than Sweden’s, from students in a country where inequality is customary. This is proof that social reaction goes beyond what would have been considered acceptable before the crisis. Larry Summers says that wealth created by economic growth was distributed so unequally in the US that for the first time since the Great Depression the debate focuses on distribution rather than growth.2 The situation may be different now but it expresses the same psychological reality. When one – a person, family, state – is preoccupied with the distribution of what already exists rather than the growth of what is to distribute, the future is bleak. Distribution is crucial, and its source is growth. The priority should be to produce more, and better. At the same time, we can see how defiant distribution is if people have forgotten about growth. This is not an omission but a natural reaction. Why care about growth if distribution is unequal? These reactions are highly edifying. The middle class have every right to doubt things will return to normal. This could only happen if the evolutions that led to the strangling of the middle class were reverted. The middle class has been severed by the system inaugurated 30 years ago, with the agreement of the middle class. In the words of David Boyle, these actions amount to a hollowing out of our economy, of businesses reduced to financial functions that outsource everything, of local institutions closed down or reduced to a pathetic dependence of banks reduced to speculative machines, and behind them the swirling sound of a global middle class competing for shrinking rewards. The kind of economy that required the 1

Chrystia Freeland, The Rise of the New Global Super-Rich and the Fall of Everyone Else (London: Allen Lane, 2012), XII. 2 Apud Freeland, The Rise, XIII.

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middle classes barely exists any more. The kind of society that supports them is being eroded.1

A second problem is the organic relationship between inequality and instability. There is no stronger factor stimulating instability than a growing inequality, which triggers discontent for an increasingly richer fraction, while the majority pay the costs. James Galbraith used a very suggestive metaphor to describe this relationship. The deeper issue with inequality of this type is surely instability. That which rises like a rocket above the plain also eventually falls back to earth. And the problem with the trick of generating prosperity through inequality is simply that it cannot be continually repeated... bubbles are no longer a plausible way to generate economic growth.2

The dwindling middle class triggers a lot of problems of crucial importance, among which is the impact of contemporary technological revolution. Another is the higher skills required by economic activity. Some authors attribute the decrease in middle class income to the efforts made by society for increasing competitiveness and decreasing social costs. In other words, high levels of competitiveness and exports translate into the cost of lower income, which is understandable, to some degree. This is what Germany did, for instance. Yet the question is why these efforts must be made at the expense of the workforce and the middle class, and not by the employers who are equally interested in increased competitiveness and should have the same contribution as employees. From this perspective, it is relevant to mention a position that illuminates the changes in the system of distributing a newly created value between profit and wages. While visiting Bucharest at the end of 2011, Étienne Davignon, the president of the Egmont, said that in the last 30 years, newly created value took the road of profits, not wages. This new distribution mechanism favoured capital, and not work. This is the source of the decrease in middle class income and the exorbitant increase in employers’ income. It shows that employers do not consent to participating in the effort for increased competitiveness. Finally, we should note that the number of the middle class are decreasing in the developed world but increasing in emerging states. According to the OECD, “between now and 2030, 80% of the growth in middle class spending will unfold in Asia and, by 2040, China and India

1 2

Boyle, Broke, 285. Galbraith, Inequality and Instability, 148–49.

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alone will account for half of what the global middle class spends.”1 Taking into consideration the binomial between the middle class and capitalism, this new tendency appears increasingly significant. The Asian world “stole” not just technological advances and management but also the defining element of the model: the middle class. A strong middle class translates into social stability and enterprise; in other words, capitalism by the book. “The migration” of the middle class is a signal whose consequences are still to be deciphered. It is not worth fighting over words. America’s real performance is that it succeeded where others failed: “a better future for many”. In fact, this feeds any society’s strength. The question is who will manage to make this happen in the following period. The developed society has high hopes of for an economic relaunch, which would influence significantly the distribution and make a better future for many possible. Arvind Subramanian does not give good news in this respect: “Even a 3.5 percent growth rate, which would be well above current expectations, may not be adequate to maintain confidence in the US model, which is based on the hope of a better future for many.”2

1

Edward M. Kerschner, Naeema Huq, Asian Affluence: The Emerging 21st Century Middle Class, Morgan Stanley Smith Barney, June 2011, http://www.morganstanleyfa.com/public/projectfiles/35257b34-b160-45e4-980d8bca327db92b.pdf. 2 Subramanian, The Inevitable Superpower.

CHAPTER VI “THE COLD WAR” OF DEVELOPMENT MODELS

1. The need for a development GPS We are about to step on mined ground: the development model of various countries. What does the model mean, after all? It is an experience translated into a structure of correlations and lessons learned. The cornerstone of the model is success, but not all success translates into a wide acceptance of the model. It takes long-lasting success and theoretical explanations of the mechanisms that feed this success for others to take over and further develop the model. In today’s world, there are several models of capitalism. Some researchers have been tempted to say that with the rise of Asia, a bipolar order will come into being: on the one hand, there will be the Atlantic development model; on the other, the Asian one. Yet these are families of models, with clearly-delineated subdivisions, for instance, the Renanian model within the broader Atlantic one. Dani Rodrik1 talks about two development patterns followed by emerging states: the export-oriented development in Asian states, and the importsubstituting industrialization promoted by Brazil and Turkey, for instance, which develop internal markets to stimulate growth. Bipolarism preferentially associates the model with the particularities of the geographical region, and not with specific development experiences that have or should have a broader potential applicability. The model is nothing more than a theoretical guideline assisting a country in its development effort, a sort of development GPS. If the evolution is constant and spectacular, then every other country wants to follow the guideline and put to use that particular combination of factors that could stimulate growth and lead to similar success. Strategic orientation accompanies any development process. But can we discuss a unique, standard model that might ensure the best results? Obviously not, because the patients are very different, and so are contexts. We will then have to agree on the fact that in the end it is the 1

Rodrik, Globalization Paradox, 168–70.

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combination of each state’s premises that is decisive. In other words, the quality of a development strategy is essentially given by the subtle dosage of various development factors that ultimately ensures the most robust, sustainable growth. Influences, experiences and lessons learned can come from anywhere: however, synthesis is essentially unique, and starts, or should start, from the particular data of a national community. Referring to Germany’s ascent in the second half of the 19th century, Paul Kennedy lists three fundamentals in the development of an economic power: high profile companies (standing for a competitive industry), powerful universities (high knowledge) and, indispensably, the support offered by significant demographic growth.1 The US benefits from all of these prerequisites. And yet, this country is in decline. In the end, it is the combination of these factors that is decisive, the capacity to take notice of what can ensure or at least support growth. How did Turkey develop? Or Mexico? They did not benefit from all these prerequisites and yet they oiled a mechanism that ensured their impressive development. There is a lot of talk – and rightly so – about globalization and its impact on contemporary development. Indeed, globalization changed the very context of development. But it did not replace the need to synthesize. In other words, the mere existence of prerequisites does not rule out a legitimate search for answers to these questions: what do we do with these premises? How do we put them to good use, to our country’s advantage? Globalization has changed the economic environment but has not yet given an answer to the uncomfortable question of each state’s place in the fast- moving world system. As with any other thing, globalization is neither fully positive or negative. It can become advantageous or not, depending on each national community’s effort to take advantage of the new context created by this process – a situation dubbed by a Chinese student in a metaphor so characteristic of the Asian culture as: “Keep the windows open, but don’t forget the mosquito screen. This way you get the fresh air but you also keep the bugs away.”2 America’s fundamental problem at the moment is that the neoliberal model it shared with the UK in the 80s and later, after the end of the Cold War, which it promoted internationally, had already visibly declined before the crisis and was seriously affected (prestige-wise) during the crisis, a truth spoken out loud three years ago: “One of the main

1

Paul Kennedy, The Rise and Fall of the Great Powers (New York: Random House, 1987), 210. 2 Rodrik, Globalization Paradox, 138.

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consequences of the crisis has been to discredit Western views of development.”1

2. The confrontation between “capitalisms” The dispute over models will grow to have a broader scope and impact. Emerging countries have the obvious advantage of having passed the crisis test, which validated the measures, policies, options and model they embraced. The neoliberal model, on the other hand, was heavily criticized during the crisis. Because it is supported by the world’s superpower, it will continue to have considerable influence but the debate over developed models has already started and will be more intense in the following years, especially in countries wishing to intensify their own development. The liberal order is here to stay. It fed a fierce competition between various types of capitalism. In the following years, the economic hierarchy at the top will be important because it will reflect variants of capitalism. The real battle will be, on the one hand, to superimpose capitalism over its neoliberal model, and on the other, to break this juxtaposition and promote a fluid version of capitalism, a variable model of various combinations between the state and the market, the two fundamental conquests of modern time. One of the most thrilling confrontations will take place between “capitalisms”. The time has come for the two symbolic powers of the developed world, the US and Europe, to take historical decisions. The US will have to decide whether neoliberalism will continue to be its doctrine; Europe will need to take a firm stand on the European Union. The developed world’s place depends on these decisions. Another important point: models cannot be imported like goods. They need to be adapted to contexts to succeed. We cannot talk about the import or export of models (unless the receiving partner is part of the inert periphery that only mimes preoccupation for its future); we can, however, speak about exchange, influence and transfer, about ebullience around models. Archetypal patterns develop into a myriad of forms that benefit development. In this context, we want to raise the problem of China. In another book2 we showed that what is happening in China is a true historical experiment, which we have difficulties understanding because we use concepts that were built on different historical realities. We risk 1

John Williamson, “The Impact of the Financial Crisis on Development Thinking”, Max Fry Annual Lecture, University of Birmingham, October 13, 2010; http://www.iie.com/publications/papers/williamson20101013.pdf 2 Paul Dobrescu, Viclenia globalizării. Asaltul asupra puterii americane (Iaúi: Institutul European), 2010.

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misunderstanding what is happening in the most populated country in the world. Even developed capitalist societies (America, especially) have changed so much under the influence of neoliberal perspectives that categories and notions built on the realities of classical capitalism are no longer very useful. In fact, in neither case do we have the theoretical framework for understanding this new reality, nor do we strive to build one. Even if we could talk about two types of capitalism, the Atlantic and the Asian, and imports and exports were possible between the two, the question still remains – what kind of cultural exchange could take place between the two since they are no longer covered by reality? In one case, classical capitalism has been replaced by neoliberal capitalism; in the other, classical socialism no longer covers the realities of contemporary China. What we see now is an autistic perspective on economic reality, on similar developments and the need to anticipate and guide economic and social evolutions. What is the role played by the debate on the most important contemporary theme – development? Is there a debate or do parties merely mime it? To understand the consequences of this autistic perspective, it is enough to look at the fragile position of the US towards China’s economic success. Various official positions emphasize China’s communism. We do not wish to discuss the truth of these positions but it is highly inconvenient and highly ironical for the US to be overtaken by “a communist country”. The US’s arch-enemy, the former Soviet Union, the symbol of communism, would rejoice in this unexpected historical revenge. Referring to Deng Xiaoping’s political perspective, Alan Greenspan’s characterisation of China is closer to the truth: “Deng Xiaoping, confronting Marx’ fall from favour, bypassed Communist ideology and rested Party legitimacy on its ability to meet the material needs of over a billion people.”1 When Deng asserted that “development is the only hard truth”, the strategic register changed radically. Ideology may not have been discarded but it was surely pushed to the background, and development became an overarching credo. So far, China has been the most obvious example of a successful historical experiment. Many other perspectives are possible. Yet for the US, it is inconvenient to refer to China as “a communist country” – a country that will soon overtake the US in terms of PPP.

1

Allan Greenspan, The Age of Turbulence, Adventures in a New World (London: Penguin Books, 2007), 300.

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3. What is the address of the financial markets? Globalization has promoted a new actor; in fact, the main international actor: financial markets. Special circumstances in a country lead to nervousness in financial markets, and special measures are needed to calm them down. It is financial markets that fix standards, and, whether content or tense, are the guardians of the contemporary world. Sometimes they are upset, sometimes are unharnessed; sometimes they may attack and weaken a country’s currency or contribute to downgraded country ratings. In other words, they make the order. A specialist once humorously asked what the address of these financial markets is. What is the power of a chief of state, no matter how important, in front of this heavy concentration of interests that have a kind of monopoly over the essential ingredient of a capitalist society: capital? Being financial in nature, these markets can have no other objectives than profit and efficiency. They start from these criteria to model the world; they fix standards that reflect such economic constraints. Prosperity, middle class, stability and balance are secondary, sometimes negligible, concerns. Powerful states, which probed into the interests and aims of these markets, were able to manage them. Such states understood they faced a tough choice: either mobilize and use their assets or end up being ruled by them. Few states asked themselves this question; fewer still managed to come up with a long-term answer – in other words, a strategy adapted to the particularities of the moment. Rather than oppose financial markets or fix completely different objectives, these states anticipated evolutions and started modernization processes based on prudent estimates and efficiency. They built their own model that integrated those criteria, alongside objectives incorporating the vision of the national communities. They had spectacular progress because they deliberately sat this difficult exam. The states that asked themselves these hard questions succeeded. Let us not forget that neoliberal globalization expresses the interests and the vision of the US. States in a robust development process are powerful not because they are large (which they were several decades ago) but because they problematized, understood this new context and developed strategies as a result. Analysts often refer to BRIC states. We should not forget that they are followed by countries (such as Turkey, Mexico, Iran, even Poland) that have an imperial past and have grown accustomed to examining contexts and promoting their interests in unfavourable circumstances. The quality of such problematization is more relevant than the countries’ size. A state’s or a region’s economic power cannot be built on worth, although it

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incorporates a lot of worth. A lasting power cannot rise without the strategic guidance offered by vision. In great battles, the winners are the strategies and the determination that supports them. On the other hand, the resigned states, who believe that their own strategies are no longer needed, add to the numbers of states at the world’s periphery, with no chances of recovery, which feed on discontent about the present state and a severe self-inquiry. The world periphery is made up of countries that do not ask such questions, and trail behind developed countries, content with their inert existence.

4. The rehabilitation capitalism’s initial formula All countries rejoicing economic success had in common the rehabilitation of capitalism’s initial formula. When the market seemed to guide contemporary development, and being capitalist meant supporting exclusively the overarching role of the market, these countries rebuilt capitalism in its initial form, which ensured their success. The recovery we mentioned earlier comprised, beyond the relationship between the state and the market, the policies promoted by capitalist countries in their earlier history. What is less known and less said in analyses is that during their rise, both England and America were protectionist, defended themselves against competition and used the state instruments to reach dominant economic positions (England fought with capitalism in the Low Countries, and the US with capitalism in England; for most part, the US has a mercantilist history). They became promoters of free exchange when they reached the top and the new doctrine answered their needs. As early as 1840, German economist Friedrich List became aware of this change in Great Britain’s economic perspectives, which worked for itself but was totally disadvantageous for states that aspired to rise in Europe’s economic hierarchy. Great Britain pushed down the ladder to prevent others from catching up with it.1 In other terms, what BRIC and other countries did was pick up the ladder and put it in the right position to take them to the top, just as their predecessors had done. They emulated a historical experience that was embodied in the development model of a rising economic power. The true battle is fought for “the ladder”. Will it be placed in the right position for others to climb or will it be pushed aside? China’s merit is that it repositioned the ladder. Other countries will fight to climb it. In the matter of models, it is less important whether the 1

Apud Ha-Joon Chang, Samaritenii cei răi. Mitul liberului schimb úi istoria secretă a capitalismului (Iaúi: Polirom, 2012), 23.

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countries mounting the ladder will be from Asia, Africa or elsewhere – the ladder’s position is important in the model, not the particular countries climbing it. It is not wise for the model to carry the names of those countries that used the ladder for their own development. This would mean that geography, worth and availability would be in too close a relationship with the model. They may be important elements but they cannot substitute the model. A closer look at emerging countries would show that they avoided submitting themselves to the neoliberal caveat of unreservedly embracing free exchange. They developed national policies for encouraging various fields of economic activity; they granted subventions and stimulated alternative paths to contemporary economic imperatives. The fact that the strategies led to success is obviously the best counterargument to the evolution theorized and encouraged by neoliberalism. Countries have always faced difficult decisions and constraints and been called to imagine ingenious solutions. The much more complex present context should not be underestimated; nor can it be ignored that nowadays China does what Colbert did in France during the reign of Louis XIV. At a time when mercantilism, the founding philosophy of market economy, was in its early stages, the Sun King’s finance minister understood that you need to sell more than you buy in order to make money (in today’s terms, a trade surplus). He initiated protectionist measures for industry development and founded new industrial branches (he is the one who stimulated the French perfume industry). In a word, he encouraged the production of export goods, taking this as the foundation of a community’s prosperity. This is indeed a historical gain that some developed countries now believe they can disregard. Contemporary life is undoubtedly complex, but this complexity is all too often used as a pretext not to go to the root of all evil and admit to one’s mistakes. The developed world’s decisions are anything but strategic: delays, half-truths, indecisiveness, confusion and hazy perspectives are the words of the day. The crisis started in the developed world ten years after the Asian “flu”. The Asian countries made painstaking efforts to get well (South Korea urged its citizens to sell their jewellery to enable the country to pay off the IMF debt). In fact, this crisis turned Asia into the power centre it is today. Crisis taught the countries in the region two essential things: first, to save in order to build a currency reserve and end IMF dependency; and second, to consider export important, which helped build the exportoriented development model. Both teachings are acutely significant for Europe. Apart from Germany (with its right reaction), Europe failed to

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learn these lessons from the Asian experience. Asia’s crisis ended firmly – Europe delayed its reaction and contracted IMF debt. While East Asia deIMFd (and is starting to build its own IMF), Europe IMFd itself. Asia has its reserves; Europe is debt-ridden, a problem that will put a burden on its future development.

CHAPTER VII THE AMERICAN ELITE, SEDUCED BY THE RESPONSIBILITY OF PRIVILEGE

A question has risen repeatedly these last years: what is happening to American elites? It is widely accepted that American society is in crisis – but not the crisis that started several years ago, which uncovered many weaknesses in America. The crisis we are talking about is that which is visible in the educational system, in delays, in infrastructure wear, in distrust and vague perspectives. No one doubts American society has excellent top specialists; that one of its paramount objectives was to attract the most talented persons in the world.1 Nor does one doubt that America used these talents and rewarded them. We may not be aware of the full extent of America’s use of these talents; we may say that the crucial moments in American history were decided by elites: great politicians, creators, inventors, artists. America tolerated eccentricity, saw it as part and parcel of value and left the individual free to cultivate the most useful part of his personality. That is why America means values, tumult, competition, and a dynamism that does not allow for routine to settle and become rooted. It means rhythm, trepidation, conquering the world of tomorrow. America defined itself as a country without prejudice, exploring the future without forgetting the past but always looking forward to tomorrow. This meant well-trained specialists, devoted to their community and attached to a cause. The elites that made America rise are not anywhere to be seen now. The literature in the field is quite rich. In what follows we will meditate on Isaiah Berlin’s discussion on the birth of intelligentsia.2 Russia always sent young people for training in the West. Back in Russia, 1

So important is this aim that, starting from changes in the Migration Law, Pilar Marrero argues these changes severed one of the roots of American dream and consequently titles her book Killing the American Dream: How Anti-Immigration Extremists Are Destroying the Nation (London: Palgrave Macmillan, 2012). 2 Isaiah Berlin, The Power of Ideas, a selection of essays edited by Henry Hardy (London: Pimlico, 2001).

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they gathered to discuss Western civilization, feeling “they were almost foreigners in their own land”. Intelligentsia appeared in the mid-19th century (around 1860–70) when these intellectuals educated in the West discovered they had a moral duty towards the others who had not been so fortunate. This duty did not translate as compassion but as actions aimed at helping the country rise. In time, a new stage of this moral duty appeared when Russia’s intellectuals felt like “citizens of a State within a State.”1 This is when inevitable tensions appeared between critical intelligentsia and the establishment. The more inflexible the official resistance, the more critical and determined the intelligentsia, turned now into what Isaiah Berlin calls intelligentsia militans.2 When he talks about intelligentsia, Berlin is talking about the elite, in fact, which means training, competence, performance, qualities rendered valuable through involvement, attachment and a sense of duty towards a community. The leap from being an intellectual to becoming part of the elite is conditioned by two interconnected things: qualifications and an association with a social creed, a moral duty, a type of social engagement. From this perspective, we may say that the label “passive elite” is a contradiction in terms. Isaiah Berlin puts the transformation of intellectuals into the elite down to engagement. What if engagement (social or of a different nature) does not exist? Then a country only has valuable intellectuals, not elites. There is another equally uncomfortable issue: what if the process of turning intellectuals into intelligentsia is reversible? In other words, can elites who have stepped down from responsibilities and social engagements not be demoted to mere intellectuals? A recent critical analysis by Mark S. Mizruchi on the American corporate elite insists on the duality of this process. In his view, the most important issue is the impasse that has been reached, and the rigidity of those who want the nation to follow their own extreme visions. Among the roots of this situation is a lack of leadership at the national level. This lack of leadership resides not in the absence of visionary political figures, but rather in the abdication of responsibility by a group that in earlier decades played a constructive role in both presenting solutions to national problems and in maintaining a

1 2

Ibid., 105. Ibid., 108.

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moderate cast to our politics: the leaders of large American corporations, the group I call the American corporate elite.1

We might wonder whether there are no more contenders to elites or whether among elites there are people who evade or abdicate from the group. Whatever the truth, these interlinked processes led to the obvious result of a dwindling American elite. Mark Mizruchi puts it down to abdication from an elite’s mission; whether it takes place in earlier or later stages is less important since the result is the same. Until recently, the corporate elite were united in a project going beyond corporations’ interests – caring for the well-being of society. The most obvious example is this elite’s reaction to the defiant launch of the first Soviet satellite in the late 50s. It was this elite that proposed a programme to American leadership and implemented it (some representatives of the group later became ministers). It is true that the official reaction was prompt and adopted a programme that had solid financial support from the state. The author does not idealize the activity of that elite but the dominant idea is that it was quick to address critical issues beyond the company and participated in their solution. Nowadays, the elite has relinquished these claims, and society no longer benefits from the support of some of the most qualified groups of specialists. “This abandonment, I suggest, is one of the primary causes of the economic, political, and social disarray that American society has experienced in the twenty-first century… The corporate elite that exists today is a disorganized, largely ineffectual group… the group is only a shadow of its former self.”2 This lasting situation coincides with the instatement of neoliberalism. “The American corporate elite has been a model of ineffectuality since at least the 1980s.”3 There is a paradox here. At first sight, we might be tempted to explain everything through a marginalization of corporations, a weakening of their political influence. On the contrary, says Mark Mizruchi, their political power is significantly larger now, at the beginning of the 21st century. But corporation leaders seem to be short-sighted, unable to see beyond their own corporation. They even disregard the problems in their own field of activity. Specialists are now increasingly parochial, and unable to access the elite. “Unlike their predecessors in earlier decades, they are either unwilling or unable to mount any systematic approach to addressing even 1

Mark S. Mizruchi, The Fracturing of the American Corporate Elite (Cambridge, MA: Harvard University Press, 2013), XI. 2 Ibid., 4. 3 Ibid., 285.

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the problems of their own community, let alone those of the larger society.”1 At the root of these attitudes are many causes. Previous elites were active, engaged, and had leadership and vision, which have ceased to exist. This should raise some questions. People often ignore essential truths, with disastrous consequences. Mark Mizruchi appeals to the research of well-known sociologist Digby Baltzell, who wrote a study about the different historical trajectories of Philadelphia and Boston.2 Boston was more successful because the Puritans who settled there accepted their mission as elites, promoting clear values and visions for the evolution of the city and the region. On the other hand, the Philadelphia Quakers were excessively preoccupied with the problem of equality, which led to “an excessive level of democracy and a vacuum of leadership.”3 The relationship between leadership and democracy, between decision and debate, is fundamental to the US and for the developed world in general. This was signalled a while ago by Lippmann4 and if the balance tips towards leadership, this can endanger evolutions. In any case, Baltzell’s idea is still relevant: “The extent to which that elite is willing to act responsibly, with concern for the general welfare, is an indicator of the strength and vitality of the society.”5 We mentioned the analysis of neoliberalism by G. Duménil and D. Lévy earlier, and in this context underlined the explanatory value of an “alliance” between employers and management for the success of neoliberalism, especially in banking. This alliance can help us better understand what is happening with the American elite. Important things are at stake: higher revenues for a “privileged minority” comprising elite segments. When this became a cemented alliance, the raison d’être of the elite was annulled. That elite cannot be criticized; it cannot represent an alternative and an alternative viewpoint because they overlap official viewpoints. At best, it can become a perverted elite: holding the elite’s place but no longer working in the spirit of an elite’s classical values. This is a very important moment in the evolution of elites and the debates around them. Elites can cooperate with power; they can contribute to 1

Ibid. Edward Digby Baltzell, Puritan Boston and Quaker Philadelphia: Two Protestant Ethics and the Spirit of Class Authority and Leadership (New York: Free Press, 1979). 3 Mizruchi, The Fracturing, 285. 4 Walter Lippmann, The Public Philosophy (New York: The New American Library), 1959. 5 Mizruchi, The Fracturing, 285. 2

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designing and implementing various programmes or strategies. What is novel here is that this junction is fed by an objective that does not engage the community as a whole but a very small group of interests, a privileged minority built on pecuniary reasons. Great capitalist employers and superior management are united by huge gains that can only be obtained through “alliance”: “The greater concentration of income in favour of a privileged minority was a crucial achievement of the new social order.”1 This way the relationship of the elite with community and its engagement to make this community rise dissolved in the much more attractive form of bonuses and fabulous gains. What is dramatic is not that the elite handed in its resignation but that it failed pitifully by cultivating and fuelling its privileges. This is reminiscent of the interpretations of the roles of the elite in the final period of former (Roman, Spanish, Ottoman, Habsburg) empires when they looted treasuries to accumulate resources for themselves. Cut away from the communities’ interests and needs, liberated from the social engagements that define elites, they started taking care of their own privileges, and are a factor in hastening decline. Elites are the most fragile and important product of a society – so important that in order to understand a country, you look at its elites. The first investigation is into their training and competences but, although important, this still does not explain them. It is their attachment to the life of the community that turns intellectuals into elites. All the chapters about the US and the developed world could be comprised in a few pages dedicated to elites. Their behaviour signals what happens in a country. In this small droplet, the elite, an analyst can hear the entire ocean, the nation. To return to the US, intellectuals are numerous; the problem is that some of the elite have quit and now defend their own interests. This announces fragmentation, and even dissolution. Is this a reversible tendency?

1

Duménil and Lévy, Crisis of Neoliberalism, 8.

CHAPTER VIII CAPITALISM HAS BECOME MORE CAPITALIST

Let us revisit our character’s line: “As long as the roots are not severed, all is well and well will be in the garden… There will be growth in the spring”. Our question was: are the roots severed? We can now give a definite answer: yes, the roots are severed! That is why recovery has been so very slow and when spring does come (following the signs that it is, indeed, around the corner), not all roots will sprout. Another question is: are the roots severed or are the policies wrong? We believe this is mainly a problem of the roots being severed. Since the crisis has affected the entire developed world, this is a systemic problem. Policies just aggravated it. The fact that the crisis is not uniformly spread in the developed world is ample proof of that. Still, this is the crisis of the Western world so the explanation must lie in the state of its roots. Politologist Sheri Berman has something essential to say about post-war capitalism. The postwar order represented something historically unusual: capitalism remained, but it was capitalism of a very different type from that which had existed before the war – one tempered and limited by the power of the democratic state and often made subservient to the goals of social stability and solidarity, rather than the other way around.1

Although the term was preserved, it covered different content, another type of capitalism. We could call it a tamed capitalism, closely related to the prolonged crisis before WWII. Capitalist politics could not ignore the realities that eventually led to war and generated two radical responses: the extreme right in Germany and the extreme left in Russia. We cannot understand post-war capitalism’s new identity if we do not take into account the powerful influence of socialism in the aftermath of the war. It is this particular context that led to the capitalist state’s engagement in solving social problems, promoting economic policies, reevaluating the 1

Apud Ghideon Rose, “Making Modernity Work: The Reconciliation of Capitalism and Democracy”, Foreign Affairs, January/February, 2012.

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importance of social problems in governance and assimilating strategic tentative planning. Karl Polanyi summarized all these transformations quite simply: “laissez-faire was planned.”1 Back in the 60s, Maurice Duverger remarked that capitalist society survived because of that bit of socialism it had. Now that we are further down the road, we may say that this was capitalism’s politically intelligent and historically valid move. Survival of the fittest is a fact in crisis and normal times alike. As long as there is a competition, you need to stay fit. After WWII, the term “capitalism” was preserved but it failed to incorporate what had been gained during the post-war period: the presence of the state and the importance of social problems in macro governance. We are yet to grasp the full implication of losing one’s competitor: socialism. Capitalism was left to cherish its position. Capitalism ceased to worry about its own future and evolution. This very concentration on its perspectives after WWII explains, in part, it’s victory. On the other hand, after the Cold War, capitalism borrowed something from socialism: it was self-understood that capitalism carried the key to the world’s evolution because this development model had just won a competition. But there is a lesson that winners do not always seem to grasp: evolution does not stop at the winner’s gates. After the Cold War, capitalism ceased being alert because it did not have any real competitors. In an attempt to dominate the world and preserve growth, the West was no longer precautious about selling its advantages. The West impregnated the East and gave life to its potential. And now, the West can no longer deal with the competition. The East’s potential cannot be stopped because it has united with modern technology and organisation, which were the West’s main exports throughout globalization. Now, the West is being conquered by its own exported achievements, accompanied by fierce allies: a cheap labour force, thriftiness, discipline, impressive availability for effort and even sacrifice. How can capitalism face this challenge? As far as we can tell, in the current paradigm the developed world’s chances will be slim unless there is a technological breakthrough. The emerging world rose spectacularly by taking over models the developed states had embraced during their own ascent, so the emerging world made allies with the developed world’s past. We were curious to find out if the developed world had imported anything from the emerging world’s development experience. So far the West has exported a model but has imported nothing. In the meantime, the emerging 1

Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Massachusetts: Beacon Press, 2001), 147.

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world has been very active and open to taking over and assimilating experiences. Its behaviour is also very similar to that of capitalism after the war. The developed capitalism is quite opaque about development models, whether it is about the way they are applied in the emerging world or about its own past and evolution. If you do not permanently reevaluate your past, you diminish your chances of building a durable future. One of Niall Ferguson’s books ends with a relevant phrase: “Today, as then, the biggest threat to Western civilization is posed not by other civilizations, but by our own pusillanimity – and by the historical ignorance that feeds it.”1 So the decline started from within, and was hastened by the fact that there is no historical awareness of one’s own civilization and advantages and the need to protect and consolidate them. The same is highlighted by any other perspective. The question most frequently asked in literature is how the West will react to the rise of the rest. In our opinion, the West needs to address its own decline first and then give an answer. If it just retaliates, it will take the wrong turn. An answer to one’s own decline is fundamental both for one’s own redress and for facing the rise of the rest. The latter will only happen if the former does. Developed capitalism closed in on itself. Capitalism became more capitalist in an attempt to become purer and truer. This process always carries risks, and we have in view not the action as such but rather the context. When you close in on yourself in an acutely competitive context, you are bound to discover primarily acts of resistance and fight. When the context is less defiant, we are no longer talking about a process of rediscovery but one of political scholastic elaboration. The resurfacing elements are not bad in themselves but they are promoted as absolute truths to the detriment of others, which is why this has not been a selfawareness approach but one of ideological purification: the state has been pushed aside, market values have been turned into a fetish and social problems have been underestimated. These are all components of a different model, promoted as a guarantee for success. This is another type of capitalism: neoliberal capitalism. In many respects, developed capitalist society no longer resembles classical capitalist society. Neoliberal doctrine changed its classical vectors dramatically. Capitalist society was forwarded by a fundamental idea: it produced prosperity for the many and entwined prosperity with (personal or group) merit: work, success, organisation and swift reaction. 1 Niall Ferguson, Civilization: The West and the Rest (London: Allen Lane, Penguin Books, 2011, 325.

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The promptest reaction ensures success does good work. Capitalism was promoted as a system that creates wealth for all nations and all people. That is why it was embraced in good faith by leaders and the average person alike. Unexpectedly, we could even say paradoxically, at the dawn of the crisis, it was Russia’s and China’s voices that were the most powerful, reasserting their option for capitalism. What were the chances of that? The option for capitalism as a system of organisation was accompanied by severe criticism of the US, its financial policies and its use of the dollar’s privileged position in speculations. Reproach came from many powers of the world like Germany and Brazil (its former president, Luiz Inácio Lula da Silva, even said that the crisis “comes from the blue-eyed boys”). Let us discuss three issues. First, the capitalism that developed based on the neoliberal model does not resemble classical capitalism any longer. It is a far cry not only from post-war capitalism but also from prewar capitalism. It is structured along different strategic axes. Its main structural trait is internal inequality. We need to emphasize here that, indeed, capitalism has always promoted inequality in the sense that it closely associated wealth with value, capacity, results. People are not equal when potential, engagement, availability and results are involved. Yet nowadays what was formerly natural and acceptable – revenue inequality – has become pathological and has generated strident, outrageous inequality. “Since 2007, 93 per cent of the value added produced in the United States has been appropriated by 1 per cent of Americans; the remaining 99 per cent have had to make do with the remaining 7 per cent of the value added.”1 The corollary of this tendency is the worrying decrease in middle-class numbers. The middle class was not only a symbol of capitalism but the guarantee of social stability and progress, the elite’s strategic reservoir, all of which are prerequisites of success. When we talk about change on strategic axes, we have in view another fundamental transformation. Any society intends to develop and unite this essential process with the epoch’s defining traits. The modern epoch has coupled development with technology, production and, lately, innovation. As we can notice, all are facets of what specialists call manufacturing. The essential transformation promoted by neoliberal capitalism is the promotion of a new couple: financialization – development. In other terms, the transformation of finance in development’s main propeller towards a new direction: financialization. From this point on, 1

Zygmunt Bauman, “150 Years of German Social Democracy”, Social Europe, Occasional Paper, October 2013.

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everything got reconfigured: resources were no longer directed towards manufacturing but towards finances. There were reasons for this move at the beginning: there was higher, faster revenue, which was very tempting. Slowly, the classical domain of manufacturing fell second (not only in terms of funds for manufacturing but also in terms of wages: in the US, UK and France, the highest wages are in finances and banking while in Germany, design and industry were high on the list). Finances not only attracted more resources but evolved based on speculation, facilitated by the deregulation process begun in the 80s and perfected after the Cold War. The crowning of financialization was represented not so much by finances taking over control but by profit becoming the almighty power of the moment. Something similar happened to inequality: profit has always been an essential motive in capitalism but once financialization gained a higher profile, it turned into an obsession. And we are talking here of the aggravated form of profit: overnight profit, which is the best measure of speculative activity. Profit results from production, from trade, and it is therefore planned in advance. Overnight profit is the undoubted sign of psychosis and disease. This illness’s first victim is the end of perspective. If you can have overnight profit, without effort or organisation, what is the use of perspective? Capitalism went astray because, with financialization, the essential dose of rationality and balance accompanying capitalist evolution disappeared. We do not realize we are at the dawn of capitalism’s new epoch, where financial markets play an essential part and the group that has the power to decide is represented by the financial-political complex. We are far from understanding the impact of this phenomenon. Based on current evolutions, we can go as far as to say that the impact will be greater than we can envision at this moment. To echo Raymond Williams, who, back in 1974, said that television changes everything, we can say that today financialization changes everything. This is not just a new form of organisation but a new attempt at domination. The second problem worth highlighting is, in fact, a paradox: all crises led to transformations, and determined change and major reconfigurations. The crisis that started in 2008 did not lead to any major change: everything stayed as it was before the earthquake. It is true that we had massive bailouts, both in the US and Europe, and five years later we do not have disastrous results, but they are not encouraging, either. This blockage seems to be reemerging. Although the interest rates stay extremely low (to stimulate investments and economic progress), the rise is timid (1–2 percent), falling into what specialists call “technical recovery”. This

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amounts to growth but not a relaunch. From among the six most powerful world economies, only Germany has improved its performance before the crisis – the US values are slightly higher than those before the crisis, and France, Japan, the UK and Italy are lower. At this year’s Davos meeting (the first not to focus on financial calamity), Christine Lagarde warned that, despite visible growth, a relapse into the difficulties faced by the developed world economies can not yet be excluded. We were quite surprised that even in the early days of the crisis, talk about the consequences of a financial crisis was avoided, even though a financial crisis involves extended recovery. Later on, there was no serious talk about the real causes of the crisis, which are to be found in the financial-banking system but also in the power shift brought about by liberalism. It is quite striking that crisis has affected neoliberal economies. Can we not find here grounds enough for a cause-effect relationship, or at least influence? If one of the roots of the crisis was the financial and banking system, was it treated? A complex regulation system has been introduced in the US (the Dodd-Frank Law) but not in Europe, and, in reprisal, the banks have been recapitalized with public money, or their debt has been transferred to the public debt. Finally, the treatment itself was to stop the bleeding, which meant, in the words of Guy Verhofstadt, “a mix of subventions and fiscal facilities, guarantees and capital injections which stimulate purchasing power.”1 A relaunch means the relaunch of the economy itself, restarting the stalled economic engine, which requires a comprehensive investment programme. Indeed, the state injected a massive monetary flow, a true financial tide, but, as an analyst remarked, the high tide raises the ships in the port on the condition they exist. Consequently, no matter how massive, financial flows move what is already there. This means that economic activity as such is still the priority. In the end, financial activity cannot move much faster than economic activity. The third problem embodies another paradox: neoliberalism, the leading ideology before the crisis, did not ebb away; on the contrary, it strengthened its position during this economic turmoil and is presented as the only option to follow in the next period. “There is no alternative” is the mantra of the day. Colin Crouch himself associates the dispute between social democracy and neoliberalism with the confrontation between Polish cavalry and German tanks at the beginning of WWII.2 The inherent 1

Guy Verhofstadt, Ieúirea din criză, 108–09, our translation from the Romanian edition. 2 Colin Crouch, Making Capitalism Fit for Society (Cambridge: Polity Press, 2013), 187.

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defensiveness of such assertions is, psychologically, part of the neoliberal hegemony. Zygmunt Bauman also signals that “the bourgeois imaginaire has triumphed”; it managed to spread beliefs such as GDP growth is a cure-all, happiness correlates with the number of supermarket visits and consumption increase and so on. “The misfortune of today’s social democracy is that there is no alternative vision, no ‘utopia’”.1 A fact acknowledged by Gerhard Schröder, who underlined that there is no socialist or capitalism economy but only a good and bad economy: “I give in, I have nothing to say. We are all in the same camp – we are all aiming towards a good economy.”2 Looking at the evolutions post-Cold War and this terrible crisis, we believe that the capitalist society needs to be legitimized again – economic re-legitimization by relaunching growth and praising economic success; social re-legitimization by radically changing the distribution of wealth (capitalism without a middle class cannot last because no type of organisation fractured in half can); and finally, development model relegitimization by prioritizing development. Development is imperatively necessary to advanced societies if they want to preserve their lifestyle and the relevance of their model. We do not know whether Gerhard Schröder was right or not; what we do know is that any political commitment, be it left or right wing, needs not only a better economy but also a better society. You cannot have one without the other.

1 2

Bauman, 150 Years. Apud Bauman, 150 Years.

PART II: THE FOUR “BIRTHS” OF EUROPE

CHAPTER I EUROPE, IN A NUTSHELL

1. The succession of “different Europes” Among Europe’s numerous contributions to world history, one of the most important is the development model based not on the potential of a country but the potential of a geographical region. This is where the first economic region of the world came into being, and its model has spread worldwide. There are a lot of development regions and free-trade areas in the world nowadays. The evolution of European integration is proof that this is a successful model. With the establishment of the single market back in 1957, the region became increasingly prosperous, a fact visible in its growth rate, superior to the countries wanting to join the single market – see the edifying example of Great Britain. There is another unique trait in the EU that is generally less discussed. The EU had four births – two of them official and two of them not, but no less important. Each marked the appearance if not of another Europe then of a different one. The first goes back to 1951 when the European Coal and Steel Community was established, which led to the creation of the single market and the European Union. The project of the six became a success because it stimulated growth, promoted a democratic system and allowed the rise of a new global power. The Union’s desirability is linked to all these accomplishments. The second official birth is the signing of the Maastricht Treaty in 1992 and the establishment of the single currency. This was Europe’s crowning and rebirth. Suffice to mention that the value of the euro at the beginning was bigger than the dollar’s, and the significance of having a second exchange and reserve currency in the world. The euro was a real challenge for the dollar. The second world power created its own currency – an instrument that turns an economy into a power (together with other elements such as defence capabilities). Halfway through the crisis of the developed world, there came the euro crisis, which changed the Europe we live in. There are two unofficial births as well. The first is the German reunification. Through this political process, Germany, already the most powerful economy in Europe, became all the more powerful. Europe’s

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engine consolidated its position as the single most important power on the continent. We simply cannot understand the Union’s decisions without considering Germany’s position. Most of the times important decisions had to be made, Germany had the last word or, in any case, the most important word. The reality is that analyses have generally not focused on the impact of Germany’s reunification on the Union. There have been intense documented debates about the reunification and the establishment of the single currency as a response to Germany’s rise.1 This is the way to understand the European nations’ agreement on the single currency, which meant dropping their national currency – a fundamental element in a country’s historical evolution and identity. There were high stakes in this decision: to counterbalance Germany and create a financial structure that would integrate it. Was this a good answer, 15 years ago? Was it enough? There is a second unofficial birth: the massive enlargement in 2004 from the Europe of the 15 to the Europe of the 25 (and later on, the Europe of the 28). Was the enlargement necessary? Geopolitically, definitely. The Union reclaimed the continent, an action which will undoubtedly continue. As long as the Union was extending its most developed perimeter, there were no major problems. When it reached regions in a different development stage, problems emerged. First, the problem of periphery, the Union’s long-term illness, a problem which is quite paradoxical in view of its declared aims. The convergence between the crisis and the single currency led to an alarming extension of periphery and the emergence of a new reality and a new concept: financial periphery, which includes Italy, the eurozone’s third economic power, a founding member of the single market. The birth of periphery redefines the Union’s life and frames differently one of its founding ideas: solidarity. What meaning will solidarity carry from now on? Because Europe will need to pay attention to gaps between member states’ development levels or else face a serious problem within, eroding desirability and internal stability; at the same time, Europe will have to measure up against other world powers, which involves competitiveness, focus on economic prowess, and so on. This

1

For instance, Daniel Cohn-Bendit remarked in a discussion with Guy Verhofstadt: “That is the reason why the common currency was launched, to connect Germany to Europe and avoid it being tempted by a “Sonderweg”, a solitary road full of dangers. We agreed on German unification in exchange for European development. Without this political constraint, the euro could never have been born. It was a phenomenal integrative leap” (Daniel Cohn-Bendit and Guy Verhofstadt, Trezeúte-te, Europa! Manifest pentru o revoluĠie postnaĠională în Europa (Bucharest: Comunicare.ro, 2013), 97.

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tendency can run counter to the substance of solidarity. How does Europe tackle this problem? Chinese cultural traditions tell us that the first sign of wisdom is to call things by their proper name. We believe that the EU has stopped doing that. This disease always breaks out in history when great powers fall. Studies in the decline of empires talk about this shared ailment: powers stop looking reality in the eye. This reaction appears when reality is no longer convenient and the temptation to avoid, even distort, reality and the truth is all the more luring. Is this true of the EU as well? In our opinion, it is, but with a twist. The EU is about to be drowned in its own rhetoric. Each power constructs rhetoric, a system of slogans encapsulating many ideas about that power. The US has its own rhetoric, its standard answers, fixing standard interpretations. Nothing new so far. The problem is that, in the case of Europe, the use of slogans is too frequent. Problems are no longer called by their proper names, made clear, and delimited in the search for solutions. Slogans and rhetoric are used instead of finding explanations and identifying solutions by looking reality in the eye. The rhetoric mediates the relationship with reality. When a problem is ignored or the answer postponed, the appeal to rhetoric is upsetting. The average person knows reality because he lives with it! And he becomes aware of the fact that the answer does not reflect reality or his own expectations. By undermining trust, the excessive appeal to rhetoric is killing the Union. In a recent book, John McCormick signals the imbalance between intellectuals’ critical appraisal of the Union and the average person’s trust in the European construction: “we find the discussion about Europe mired in a toxic stew of pessimism, denial, hesitancy, myth and scepticism ... there has been such a conspicuous gap between the supportive sentiments of so many ordinary people and the critical positions of so many opinion leaders.”1 We partially agree with this view. Especially with regard to the birth of the euro, opinions generally ignore the rationale and the context behind this strategic decision. At the same time, we cannot underestimate the impact of procrastination, which has become a sort of interface for Europe, another name for European politics. In the subtitle of his book, David Marsh points to what has lately become a trait of the continent: How the Euro Crisis Could Be Solved – and Why It Won’t Happen. Admit it or not, the Union is in a deadlock. The real root of this situation is not the euro crisis or any other crisis but the fact that Europe hesitated when it confronted sovereignty. It was equally attracted by the 1 John McCormick, Why Europe Matters: The Case for the European Union (London: Palgrave Macmillan, 2013), 7-8.

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supranational and many other temptations wrapped up as “national”. We need to highlight from the start that this is not a tension between the supranational and the national. What is really tearing Europe apart is not equal forces pulling in divergent directions. This is a two-pronged distortion. Some years marked an alienation of various countries and leaders from supranational values, especially European values, yet this is not something to confess, and then those countries and leaders take refuge in the national rhetoric, which for the moment offers a kind of justification and convenient shelter. In reality, there are many other temptations hidden under the national label. In our opinion, the source of the blockage is not so much the divergent supranational and national forces but the distortions and unspoken, unassumed intentions. It is true that the Union works at the confluence between state power and supranational prerogatives. This is where everything works out and gets blocked at the same time. All the problems that Europe faces are sooner or later affected by this blockage. Then, the appeal to rhetoric is inevitable. Aren’t there solutions; isn’t there perspective? The confession of Jean-Claude Junker, the president of Eurogroup, is significant: “We all know what to do, but we just don’t know how to get reelected after we have done it.”1 This is just another facet of the contradiction we were talking about: the same blockage but seen from a different perspective. Everybody realizes that Europe is in a difficult position, which will not be overcome if the essentials do not change. In 2013 there were elections in Germany. Could Angela Merkel appeal to profound, potentially painful reforms several months before the elections? In 2012 there were elections in France. Painful reforms were not an option there, either. Two years ago, there were elections in the UK. What we see is that Europe can no longer find the right time for reforms. We admit that the problem of sovereignty is both complex and sensitive but it is difficult to accept that there is no shared decision on the election schedule to allow for more space for decisions. But maybe current European leaders no longer have their hearts set on the Union’s evolution. If this is true, then there is only one solution left: that decisions be taken with the crises’ gun to the head.

2. The crisis may have started here, but settled in Europe! Before analysing the impact of each of the four births on Europe, we need to sketch the Union’s problems that are likely to influence its future, 1

Apud Thies Buettner and Wolfgang Ochel, eds., The Continuing Evolution of Europe (Cambridge, MA, London: MIT Press, 2012), 128.

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starting from the Union’s objectives as a political organisation. At the beginning, the Union had two objectives. The first aimed at ensuring the four freedoms: the free circulation of goods, money, persons and services. It was an overarching focus on internal policy, seeking to avoid conflicts and promote peace on the continent. Along with the development model, the 1951 founders launched another fundamental idea: there is no better way to avoid future conflicts than to stimulate mutual investment, which makes conflict a nonsense. The less highlighted second objective was to reassert Europe as an international power. Several years after the war, leaders could not be forthright about this objective. Sixty years later, this “external” objective represents the crowning of the “internal” development of the Union. Any discussion about the Union brings to mind the A4-sized paper that Angela Merkel has in her purse with three numbers on it: 7, 25 and 50; 7 is the percentage of Europe’s population in the world; 25 its weight in world GDP; and 50 the weight of its social services’ expenses. As The Economist said, it seems that for Angela Merkel this piece of paper has the same significance as the fragments from Hayek’s book, The Road to Serfdom, that Margaret Thatcher carried on her.1 Irrespective of Angela Merkel’s political career, we must admit that these numbers synthesize to perfection Europe’s situation. The German chancellor asks the audience in important meetings to consider these numbers and see whether Europe can go on like that. This is the question that Europe needs to ask itself, first of all, and then come up with a practical answer. Any discussion about Europe needs to clarify its perspective to avoid overlapping analyses and confusion. In this book, we focus on the continent’s evolution in an increasingly competitive international context. In this context, the question is whether Europe can maintain its position as a significant world power. This status is a result of internal performance, of national and European efforts. Europe’s international status gathers all these results in a simple formula: the European pole of global power. John McCormick invites readers to see the full half of the glass but this only encourages a limited perspective on the present, because it focuses on the previous generations’ efforts to turn Europe into what it is today. Unfortunately, our generation does not do the same. International data and hierarchies speak for themselves. Europe carries a paradox, an unsolvable problem in any cell. Each of Europe’s births changed Europe. Europe is a 1 “Germany, Europe’s Reluctant Hegemon”, The Economist (Special Report), June 15–21, 2013.

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half-way construction, a fact that ripples through the Union’s structures. Germany’s rise, the appearance of a periphery and the fragmentation have all influenced the functioning of every cell. Who fixes a vision for Europe and its future is a question without an answer at the moment. This seems to be the Union’s nature. Jean Monnet anticipated this when he mentioned in his 1978 memoirs that “Europe would be built through crises” and would be “the sum of their solutions.”1 The crisis created complex problems, showing that the world’s focal point is moving slowly but inexorably towards the East. We do not yet realise how many things the crisis has highlighted. At the beginning of the crisis, Germany’s Minister of Finances, Peer Steinbruck, could still look at it from a distance, believing it to belong to another continent: “an American problem”, a product of “American greed” and inadequate regulations that would cost the US its “superpower status.”2 That was when Europe believed the crisis would never reach it. Yet Europe has become the privileged place of the crisis, which now endangers its status as a world power and the lifestyle that Europeans have become used to. Angela Merkel’s position is nothing like Steinbruck’s. She sounds the alarm: “The next few years will decide whether or not we can keep up with the rising emerging countries and the best industrial countries in the world. I believe we have to tell people in our countries again and again: If we don’t do it ourselves, nobody on the outside will step in to help us maintain or increase our prosperity.”3 The difference is easy to see. The crisis changed the international context, which became more competitive. What is Europe’s reaction? According to John McCormick, the EU economy is still the first in the world, with a higher GDP than the US or China. The OECD shows that in the next 15 years the EU will hold a modest place and then sink lower. The cardinal question to ask is what will Europe’s relevance be then. The US will recover sooner than Europe, that is for sure. Europe will have to react to the rise of the emerging world before it is too late. It is instructive to refer to an exchange between two officials in the 70s after the US had ceased to convert other countries’ dollars into gold. A European diplomat, discontent with the situation, protested. The reply is memorable: the dollar is our currency, but it’s your problem. If the 1

Apud McCormick, Why Europe Matters, 12. Apud Joseph P. Quinlan, The Last Economic Superpower: The Retreat of Globalization, The End of American Dominance, and What We Can Do About It (New York: McGraw-Hill, 2011), 9. 3 Alan Crawford and Tony Czuczka, Angela Merkel: A Chancellorship Forged in Crisis (New York, NY: Bloomberg Press, Wiley, 2013), 191. 2

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exchange concerned the crisis, with the European diplomat contending that the crisis started in America, the answer would be similar: The crisis may have started here, but settled in Europe! Low immunity and indifference to the signs of the illness made Europe the privileged place for the crisis. As with any major issue in today’s world, crises travel and settle where they find good ground. At the beginning, the financial crisis was carried by the vehicle of financial markets. Crisis is now comfortable in Europe because the financial markets have not calmed down.

3. Europe, the new Eden of financial markets Discussions about the states and the world nowadays fail to signal the importance of a new crucial actor: capital markets. The term is widely used but there is no clear representation of the impact these markets have on states, their leaders and their peoples. These markets change the financial data of our lives. Banks may be the intermediaries for citizens, firms and the state but behind them are the capital markets, which take into consideration the country’s trust and debt levels to establish interest rates. Financial markets hold the money, and consequently have the real power. Things have evolved into a multi-layered system. Beyond banks is now the shadow banking system formed of hedge funds, pension funds, speculative stocks and so on. Hedge funds, for instance, represent approximately 30 percent of all transactions on American financial markets.1 Another advantage for them is that they are not regulated. Banks have known a period of deregulation, which came against the background of traditional regulation (see banks’ clear operating rules). The components of the non-banking financial system are much freer, a paradox given that the volume of transactions on deregulated financial markets is approximately ten times larger than in the banking system. Then follows the layer represented by rating agencies, which should ensure the functioning of an economy’s immune system and warn against dangerous tendencies, offering real information on the economy for investors. The crisis showed a worrying thing: these agencies gave higher ratings to questionable investments, misleading investors and thus playing an unfortunate role. Having made this mistake before the crisis, they tried to correct the error by applying standards that were too severe during the crisis. The main product of globalization and financialization, financial markets judge everything through the perspective of their own interests. 1

Verhofstadt, Ieúirea din criză, 93.

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When financial markets point to a state’s high social expenses, they do not say that public health or education expenses need to be lowered but that production costs are high and general competitiveness low; as a consequence, export capacities decrease, which points to future problems and a dangerous confidence level. Interest rates will have to be higher to address this uncertainty. If the country needs loans, precautionary measures are needed and interest rates will be higher. In terms of country ratings, we have seen lower ratings for France and the US, which points to problems and the need for prudence. Every country needs money so everyone needs capital markets. There is a similarity between the capital market approach and the spirit of neoliberalism. Capital markets do not talk about social dimensions or the state’s public expenses. Acting as a true neoliberal vector, they tacitly see the state as independent from its social obligations. Yet the state needs to recalibrate these problems, even abandon them, because to solve problems, it needs money, and the financial guillotine is unforgiving. Its criteria model the world. Just like individuals, countries have debts and pay interest rates and need money every day. The banks are the oxygen of everyday life and economy. We may agree or not about financial markets’ actions, criteria, approaches and, ultimately, their perspectives. But they – or their criteria – cannot be avoided when money is needed. The only solution is prevention. A state should not reach the point of needing money or it will have to find an efficient way out without sacrificing community values and options. A loan carries the creditor’s implacable rules. The crisis is here to stay because sovereign debts have appeared. Citizens’ debts seem a joke compared to the state’s debts. Banks can have too much of a good thing – houses or cars. The state can get to the point where it cannot pay its debt, but cannot go bankrupt either. States need to keep borrowing. It must be the dream of financial markets to indebt nations. This is one of the main reasons why the crisis settled in Europe. To this is added the banking crisis itself, which has a certain magnitude in Europe although it is little spoken of. The combination of these two elements makes the EU a privileged terrain for the crisis, and a real Eden for capital markets.

4. The different timetables of recovery In one of the most relevant books about the crisis, Carmen Reinhart and Kenneth Rogoff warn that the recovery following financial crises implies a severe contraction of economic activity and puts a strain on

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state’s resources.1 This is what distinguishes financial from cyclical crises. Roger Altman signalled that the European timing for recovery was different from America’s.2 The American author uses two essential arguments. The climax of the American crisis was 2008–2009. Various measures were taken to inject financial resources into companies, and banks resorted to massive restructuring. Two or three more years of effort and resettlement would follow “but after that, US economic growth should outperform expectations.”3 In Europe, the climax was 2012, “when the sovereign debt and banking crisis hit the continent in full force, that the eurozone confronted problems comparable to those that had afflicted the US economy in 2008-9.”4 Consequently, the crisis worked on different timetables. In the meantime, Europe experienced two economic ailments: sovereign debt and the banking crisis. These two particularities put together account for the recovery’s different timetable. “Europe is still in the midst of its financial crisis. If historical logic prevails there, it will take four to six years for strong European growth to materialize.”5 It is a positive thing that there is an open discussion about post-crisis, about the duration of recovery and growth. Such discussions were unimaginable two years before. Whether significant economic growth (over 2 percent) will take place in one or three years from now is less important than the fact that there are signs of recovery. A recovery at a different pace: according to IMF evaluation, in 2013 the US economy will grow by 2%, Japan’s and Great Britain’s by 1%, and the EU’s by -0,2%.6 The idea of a different timetable for the European crisis is broadly correct but it needs some nuances. Statistic data builds a clarifying explanation. Roger Altman shows that 2009 was very difficult for Europe but financial systems did not implode as they did in the US: “There were severe problems in Ireland and the United Kingdom, but capital markets did not revolt against Europe as a whole, and thus there was not a large fiscal or monetary response.”7 A moment is of particular significance. 1

Carmen Reinhart and Kenneth Rogoff, De data asta e altfel (Bucharest: Editura Publica, 2012), 19. 2 Roger Altman, “The Fall and Rise of the West: Why America and Europe Will Emerge Stronger from the Financial Crisis”, Foreign Affairs, January/February 2013. 3 Ibid. 4 Ibid. 5 Ibid. 6 Martin Wolf, “The Perilous Journey to Full Recovery”, Financial Times, January 30, 2013. 7 Altman, The Fall and Rise.

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In 2009, Europe’s economic contraction was more severe than in the US. EU-27 and eurozone average GDP dropped by 4.3%, compared to 3.5% in the US, according to Eurostat. In 2009, even though financial systems did not implode as they did in the US, they were seriously affected. For instance, according to IMF evaluation, European banks were attracted to the American system of subprime loans, and the total loss for eurozone banks in the period 2007–2010 was 630 billion dollars, relatively close to American bank loss at 878 billion dollars.1 We cannot imagine that national and European governments were not aware of these losses. European countries’ governments were not passive. The American Federal Reserve bailout had a correspondent in Europe, the bank loans guarantees. Such financial engagements totalled 28% of Eurozone GDP, a figure that is perfectly comparable to the total value of Federal Reserve engagements (26% of American GDP). What we wish to underline is that the recovery’s “different timetable” is down to Europe’s delayed reaction correlated to another process: the transfer of the treatment applied to the crisis from the European to national level. The coupling of these two tendencies meant that the European reaction was delayed until the summer of 2012, when the euro crisis was so severe that it threatened the EU. A change took place in July 2012, marked by the decision of the European Central Bank through the voice of its president, Mario Draghi: “I’ll do whatever it takes to save the euro.”2 In fact, we have two climaxes in the European crisis. The 2009 moment, which was left ailing in the absence of convincing answers at the European level and which made the crisis worse, erupting again in 2012. It was only then that Europe gave its answer.

1

International Monetary Fund, Navigating the Fiscal Challenges Ahead (Washington: IMF Fiscal Monitor Series, May 14, 2010). 2 Brad Plummer, “Here Comes Mario Draghi to Save Europe… Right?”, The Washington Post, July 26, 2012. Although this is how the remark travelled the world, Mario Draghi’s declaration was literally: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” (“Verbatim of the Remarks made by Mario Draghi. Speech by Mario Draghi, President of the European Central Bank, at the Global Investment Conference in London: 26 July 2012”, http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html).

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5. “Either we modernize ourselves or capital markets will modernize us” The explanation that Roger Altman gives to the economic boom that usually follows a financial crisis is based on the role played by capital markets. Not just major financial crises, like this one, but smaller crises, such as the Asian crisis, “followed the same pattern, with capital markets rejecting the old order – and then inducing major economic restructuring.”1 It is clear that capital markets represent the modelling force behind restructuring, which gives the tempo of transformations. We do not wish to underestimate the role of capital markets but we need to underline that good political leadership should anticipate and prepare what tomorrow will be pressing and compulsory, even from the perspective of capital market constraints. This responsibility of political leadership was visible at times, invisible at others. Here are two examples that we believe conclusive. In 2003, long before the crisis, former German chancellor Gerhard Schröder launched an ample document detailing Germany’s modernization and restructuring imperatives, which he characterised as follows: “Either we modernize ourselves, and by that I mean as a social-market economy, or others will modernize us, and by that I mean unchecked market forces which will simply brush aside the social element.”2 Here we have a modernization process that starts from the constraints of capital markets. Very importantly, such constraints were anticipated and integrated in a broader project, and society was given time to prepare so as not to be taken by surprise. If such a strategic answer was possible at a national level, why was it not possible at the European level? The requests of capital markets were considered in Germany but Europe was surprised by the action of these markets, which came to model its existence. When the crisis started, Europe seemed to prefer the background of the political and economic stage, which was occupied by the leaders of national bodies. This saw the visions of those states on the crisis transposed into solutions. George Soros took a firm stand on this issue. The euro crisis has its origin in German Chancellor Angela Merkel’s decision, taken in the aftermath of Lehman Brothers’ default in September 2008, that the guarantee against further defaults should come not from the European Union but from each country separately. And it was German 1

Altman, The Fall and Rise. Gerhard Schröder, “Agenda 2010 – The Key to Germany’s Economic Success”, Social Europe Journal, http://www.social-europe.eu/2012/04/agenda-2010-thekey-to-germanys-economic-success/.

2

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procrastination that aggravated the Greek crisis and caused the contagion that turned it into an existential crisis for Europe.”1

A quick look shows that the four years from the German chancellor’s declaration to the adoption of measures at a European level by the European Central Bank represent a long, costly historical detour, which revealed that the Union can only be saved by measures taken at the Union level. They may come from nations but they need to be adopted and applied in the EU. This discovery was aided by pressure from southern countries, which plunged deeper into the crisis, by France’s worsening economy and the threat that what was happening to France would spill over to Germany. George Soros’ position may be controversial but the following viewpoint rings true, coming from the Union’s bitter experience: “The only way that Europe can escape from this trap (contagion effect n.n.) is by acting in anticipation of financial markets’ reactions rather than yielding to their pressure after the fact.”2 The lingering question is why Germany anticipated this but did not transfer the valuable experience to European level. Germany anticipated, but Europe was caught unawares. In Germany, the objective formulated by Gerhard Schröder and continued by Angela Merkel3 was assumed while at the European level, the markets were left to model realities, with obvious supplementary costs. Germany’s vision, which allowed it to be more powerful, was not paralleled by Europe, whose lack of vision was obvious through successive delays. The crisis did sanction delayed reactions, which merely mime interest.

6. “German ants” feed not just “European grasshoppers” but their own banks as well In the summer of 2012, Sebastian Mallaby made a surprising declaration. Since the start of 2007, the ECB has purchased financial assets totalling 1.7 trillion euros, expanding its portfolio from 13 per cent to over 30 per cent of the Eurozone’s GDP. That means that the ECB has printed enough

1

George Soros, “Germany Must Defend the Euro”, in Financial Turmoil in Europe and the United States: Essays by George Soros (New York: Public Affairs, 2012), 118. 2 Ibid., 119. 3 Apud “Voters Versus Creditors: Market Discipline Works When Other Controls Fail”, The Economist, November 19, 2011.

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Chapter I money to increase its paper wealth by an amount exceeding the value of eight years of Greek output.1

We were surprised by the financial effort. When saving a country is at stake, there is no money, but there is money for banks – and if not, it is printed. This idea made us consider the real situation of banks in Europe, which we might not be aware of. At the beginning, not even the most knowledgeable professionals realized the proportions of the disaster. They were taken by surprise by the speed and magnitude of the effort to recapitalize banks. For instance, shortly after the bankruptcy of the Lehman Brothers (September 2008), Ben Bernanke talked to an American official, telling him that the Federal Reserve was about to stabilize AIG at a cost of 80 billion dollars. The official asked if there was enough money for that. The Chair of Federal Reserve said with complete confidence that there was 800 billion dollars. “In fact”, says Mallaby, “by December 2008, the Fed had extended fully $1.5 trillion in emergency financing to markets, dwarfing the $700 billion bailout fund authorized by Congress through the Troubled Asset Relief Program (TARP)”. Things were similar in Europe. For much of 2011, Europe’s political leadership bickered about the details of the European Financial Stability Facility (EFSF), a TARP-like bailout fund with an intended firepower of 440 billion euros. Then, one day last December, the European Central Bank provided 489 billion euros to the continent’s ailing banks, and in February 2012, it repeated this stunt, effectively conjuring the equivalent of two EFSFs out of thin air through the magic of the printing press.2

There is data that shows that money was printed later as well. At the peak of the euro crisis, in the summer of 2012, when Mario Draghi said openly, “I’ll do whatever it takes to save the euro”, money was badly needed. The fact is that the recapitalization effort made by the US and Europe was somewhere around two trillion dollars. “For the first time ever, the Fed owes more than $2 trillion in US debt.”3 German unions recently launched a programme for the Union’s economic relaunch called “A Marshall Plan for Europe”, an initiative that needs consistent financial support. To prevent a negative answer motivated by the lack of money, the 1

Sebastian Mallaby, “Europe’s Optional Catastrophe”, Foreign Affairs, July/August 2012. 2 Ibid. 3 “New Record: Federal Reserve Owes More Than $2 Trillion in US Debt”, August 20, 2013, http://rt.com/usa/fed-reserve-two-trillion-747/.

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authors of the plan openly asserted “the costs of stabilising the banking system have reached €2000 billion.”1 All this shows that Europe was massively touched by neoliberal influence, materialized in the deregulation of banking activity, the permission for various financial artifices, and so on. There is no other way to explain the debts and the need to recapitalize banks. From this viewpoint, we might say that the illness spread to both sides of the Atlantic. It is an Atlantic illness. What differentiates the illness in the US is that it was quickly identified and rapidly treated. “America recovered before Europe not just because it has been less austere, but also because it rapidly sorted out its banks so that they could lend again.”2 America was quicker to recover: “Output in America has surpassed its pre-crisis peak and is growing; the Eurozone has yet to make up the lost ground and is shrinking. Or joblessness: it stood at 10% on both sides of the Atlantic in 2009, but it has now fallen below 8% in America whereas it has shot above 12% in the euro zone.”3 Luigi Zingales changed the perspective with which we analyse banks, at least for German banks. Standard analyses routinely employ the standard argument of creditors (mostly Germany) who have to help debtors, which argument circulated under the expression “German ants feeding European grasshoppers”. The German citizen and taxpayer had to support the waste or idleness of other countries. Luigi Zingales asserts that if there is anything the German taxpayer needs to fear, it is his oblivious contribution to paying for the waste in German banks, which the state subsidized openly, “such as Germany’s bailout of several Landesbanks after the American subprime-mortgage crisis.” So did France with its own banks. German taxpayers have paid dearly for German banks’ mistakes. In 2008, when the Landesbanks were found to be full of American subprime mortgages, the German government bailed them out with a €500 billion ($650 billion) rescue package at its taxpayers’ expense. In 2010, when German banks were badly over-exposed – to the tune of $704 billion – to Greece, Ireland, Italy, Portugal, and Spain, European taxpayers and the ECB helped them to bring most of that money home. The biggest threat to

1

Michael Sommer, “A Marshall Plan for Europe”, Social Europe Journal, May 22, 2013, http://www.social-europe.eu/2013/05/a-marshall-plan-for-Europe/. 2 “The Sleep Walkers: In the Eurozone, Desperately in Need of a Boost, No News is Bad News”, The Economist, May 25, 2013. 3 “Hobbling Behind America: The Euro Zone’s Long Road To Recovery – Or Decline”, The Economist, May 25, 2013.

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Chapter I German taxpayers is not southern European profligacy, but their own country’s banks.1

This idea is important for several reasons. It shows the involvement of German banks in US-like speculative actions. Analysts talk about a 25 percent European involvement in US subprime toxic assets.2 A second problem is the enormous advantage of banks in Germany and France, which benefitted from such subsidies, compared to the banks in other European countries. A bank in Portugal will not be able to enter into a fair competition with banks from the powerful Germany or France. A more detailed talk is necessary about the creation of the banking union, which needs to operate with European money and institute mechanisms that do not differentiate between banks based on the country of origin. In Europe there are intense talks about the banking crisis but little is known about this crisis or the size of toxic assets or debts. Recapitalization or the “healing” of the banking systems is talked of but there is no exact data on the scope of this phenomenon. In the US there was transparency, even though it involved huge efforts by the American state. The DoddFrank law for regulating banks’ activity was adopted. There is no such transparency in the Union, which only amplifies fears and suspicions. For instance, the Financial Times recently published data on the European South banking debts which might generate fears: “The European Central Bank has already provided extra refinancing credit to the tune of 900bn Euros to commercial banks in countries worst hit during the crisis. The total debt of banks located in the six countries most damaged by the crisis amounts to 9.4 tn euros. The combined government debt of these countries stands at 3.5tn euros.”3 So, the debt of the commercial banks is almost three times higher than the sum of the sovereign debts. The European crisis brings to mind the sovereign debts. In the words of Jürgen Trittin4, we tend to forget or underestimate the fact that these debts were created by paying the banks’ toxic assets or their risky 1

Luigi Zingales, “German Banks on Top”, July 18, 2013, http://www.projectsyndicate.org/commentary/germany-s-taxpayers-finance-german-banks--mistakesby-luigi-zingales. 2 Joseph E. Stiglitz, “Lessons from the Global Financial Crisis of 2008”, Seoul Journal of Economics, 23 (3), 2010, 321–29. 3 Hans-Werner Sinn and Harald Hau, “Eurozone Banking Union Is Deeply Flawed”, Financial Times, January 28, 2013. 4 “Exclusive Interview: Jürgen Trittin On Angela Merkel’s European Policy And The Future Of Europe”, Social Europe Journal, August 3, 2013, http://www.social-europe.eu/2013/03/exclusive-interview-jurgen-trittin-on-angelamerkels-european-policy-and-the-future-of-europe/.

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investments. The crisis is deeply rooted in the banks, and banks will feed the crisis more than we are aware of.

CHAPTER II A EUROPEAN UNION MADE IN GERMANY

1. The power shift from Brussels to Berlin To understand the rise of Germany, we need to understand first the context of this process: Europe no longer keeps time with itself or the world. For some time, Europe has been out of tune, which has wasted all previous accumulation. It comes as no surprise then that it is difficult to identify any constancy in the Union’s behaviour. Simon May’s words are quite relevant in this respect: “The fall of the Berlin Wall, the resurgence of Germany and the deepening weakness of France have changed everything.”1 The continent’s strategic axes have simply changed. Europe is a showcase of unfinished business, delayed response and abandoned trends whose time is ticking away. Against this unstable background, we can identify a spectacular shift. What in global terms is a shift in power and influence from the West to the East is in European terms a power shift from Brussels to Berlin. It has been accelerated by the crisis, but not created by it. Consequently, if we want to understand Germany’s rise, we need to identify the causes of this power shift as well as its consequences. This is not just a process in a series of common processes but the most important tendency at the European level. This is a truth which does not go unspoken at different levels: in informal discussions, in analyses or in the press. For instance, on the 3rd of February 2011, when Angela Merkel went to Madrid, La Vanguardia wrote: ‘Spain, with the capital in Berlin’. Allowing for various sensibilities, we believe this title could appear in any publication in Portugal, Italy or Greece. It comes as no surprise then that the title: “The EU, with the capital in Berlin” has already been used. Rachman Gideon

1 Simon May, “The Passionate European’s Case for Leaving the Union”, Financial Times, January 17, 2013.

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welcomed his readers to Berlin, the new capital of Europe.1 “Forget Brussels. Berlin has the real power!”, the title on the opening page of the newspaper, is not just journalist slang. An opinion poll by Harris in June 2013 showed that 88% of Spanish respondents, 82% of the Italian and 56% of the French declared that Germany’s influence at the European level is too high.2 Like it or not, the rise of an important economic power in Europe is the Union’s main problem. Any serious discussion about the euro will have to consider, if not follow, the German viewpoint. Any debate in the news about a bailout will mention that Germany’s position is essential because this country is the main EU funds contributor. From now on, the important European decisions will go through the German filter. It has been said that the future Europe will be more and more visibly made in Germany. Several years into the crisis, Europe’s first financial power has gained an influence that was unthinkable three to four years before. In fact, Germany has a decisive say in Europe. In any case, in many capitals of the world the question: “Where is Europe going?” has become synonymous with: “What do the Germans want?”3 And this is something completely unusual in the Union’s history and gives ground to the many fears expressed by Germany’s prominent intellectuals. We all remember Thomas Mann’s address to German students in 1953 to fight “not for a German Europe, but for a European Germany”, a slogan used during the German reunification. This is a good illustration of what Timothy Garton Ash called a “variation” in the formula: “A European Germany in a German Europe.”4 This discussion touches upon Europe’s new hegemon and less auspicious events in Germany’s history. Fears and warnings are frequently expressed in this dramatic debate. Germany’s economic boom is nothing compared to the boom in interpretations on the country’s new European role. Such interpretations are so diverse and radical that they confuse even the well-informed reader with unrealistic questions. The approaches range from the documented analysis of Germany’s rise to signalling the rise of an economic Fourth Reich, a sort of economic Nazism. To make matters more difficult, Germany’s position towards Europe has changed as well. 1 Rachman Gideon, “Welcome to Berlin, The New Capital of Europe”, Financial Times, October 23, 2012. 2 Apud Timothy Garton Ash, “The New German Question”, The New York Review of Books, August 15, 2013. 3 “Germany, Europe’s Reluctant Hegemon”, The Economist (Special Report), June 15-21, 2013. 4 Ulrich Beck, German Europe (Cambridge: Polity Press, 2013), VIII.

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Let us remember here that in one of his rare public appearances, Helmuth Kohl, the chancellor who was the architect of German reunification and witnessed the disappearance of the German Mark and the introduction of the euro, criticized Germany for drifting away from former ethos and warned that if Germany did not find its external policy compass, “the consequences would be catastrophic: the basis of trust would be lost, insecurity would spread, and in the end Germany would be isolated.”1 To make matters more difficult, in answering hegemony accusations, Germany declines any readiness to lead: “Germany has neither desire nor capacity to be Europe’s leader. The pivotal country on the continent has a sense of responsibility but not of a duty.”2

1.1. Germany’s power comes in part from others’ weaknesses There are three distinct stages in Germany’s attitude towards Europe in the last 23 years: before the crisis, during the crisis and in the upcoming period. A detailed analysis shows that Germany’s economic power is not so great and nor is it very far from European realities. Germany’s population is 16% of EU population and its GDP is 20%, which are still impressive numbers but cannot qualify Germany as the hegemonic power. Germany has its weaknesses. Current evolutions would take Germany to 60 million people in 2030 compared to 80 million at present. High population ageing rates would see a worrying ratio: one active person against one pensioner.3 The country’s positive economic evolution represents a magnet especially for the populations from Central and Eastern Europe, which means that such critical demographic moments may not occur or may be delayed. The research university was built as a model in Germany: however, Germany has just one university among the 50 top universities in the world, which means that research and development have not found a proper place in this country’s development. Despite healthy economic growth, Germany – and Europe in general – has staked its place on traditional industries. Europe as a whole is not one of the world’s IT powers. In the last decades, disruptive innovation (breakthroughs in technological evolution) did not take place in Europe or Germany. How can we explain Germany’s power, the international prestige of its products and of the country as a whole? Prestige can be derived from 1

Crawford and Czuczka, Angela Merkel, 176. David Marsh, Europe’s Deadlock: How the Euro Crisis Could Be Solved – And Why It Won’t Happen (New Haven and London: Yale University Press, 2013), 2. 3 Ash, The New German Question. 2

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accomplishments whether they happen as innovations or sporting success but also from things well done, from solid organisation and the careful foundation of strategic options. Germany has such prestige: less spectacular, but solid. Fed by cool-headed strategy, hard work and rationality, Germany’s evolution has something implacable about it, stimulating the perception that it will be stronger in the future, which adds a lot to its current power. Any analysis of Germany’s success has to consider the general context, the fact that its power is fed by contrast to the times – France has economic problems,1 Great Britain has the added problem of the Brexit, Italy is in major financial distress. Germany’s power is bound to be on the rise. Globally, the rise of emerging powers is the catchphrase of the day, yet among developed countries the competition is less intense. Japan has gone through its second “lost decade” and is engaged in a significant financial effort to restart its own economic engines. The US is about to relaunch its economy but the volume of its debt will influence the country’s evolution for years to come and will affect the state’s capacity to support innovation and new fields, which is what made American power great. It is well known that Germany decided to give up producing nuclear energy and develop renewable and green energy instead. In 2050, renewable energy will represent 80% of the total electric energy in the country, compared to 22% now. “Bavaria now has more photovoltaic capacity than America, with only 0,7% of its land mass.”2 Germany’s power and the viability of its decision were highlighted during the crisis. Germany being little affected by the crisis is a confirmation from history and amplifies the country’s accomplishments. In mid-2013, output among the seventeen members of monetary union was around 2 percent lower than before the 2009 slump. Yet this masked widespread divergence between the stronger countries like Germany, where the economy has grown by an overall 3 percent over this period, and the hard-hit (and previously most imbalanced) states such as Greece, where the economy is down nearly 25 percent, and Ireland and Italy, Spain and Portugal, where declines vary between 4 and 6 percent.3

1

“We have to pretend that we are treating France as an equal partner”, declared a German official. 2 “Germany, Europe’s Reluctant Hegemon”, The Economist (Special Report), June 15–21, 2013, 10. 3 Marsh, Europe’s Deadlock, 4.

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Germany’s social context is vastly different from other European countries’: “Unemployment in 2013 is 27 percent of the labour force in Spain and Greece, 17 percent in Portugal, 15 percent in Ireland, 11 percent in France and Italy – but only 6 percent in Germany and the Netherlands.”1

1.2. The Berlin consensus A power cannot rise exclusively through hard work and involvement. They are undoubtedly important but they become valuable if they are projected against timely options before others realise their importance. A power rises through time-confirmed options. After reunification, Germany had such options. It is also significant that Germany is the largest exporter among developed countries, has one of the lowest unemployment rates and its general balanced evolution has gained the respect of both developed and rising states.2 This shows that the decline of the developed world correlates not just with objective data and evolutions but also with risky policies and strategies, resembling a historical experiment whose significant examples are Germany, Canada, Sweden and Norway. Germany’s current power comes from its financial power. While the world is feverishly looking for liquidity, Germany has a financial surplus. In European power games, this surplus turned Germany into the continent’s main creditor. Its power and influence cannot be detached from this central role in finances. The surplus can be explained through its option for exports, which, in turn, could not have been sustainable had it not been preceded by its option for industry. Industrial activity represents 24% of German economy.3 Compare this to Great Britain. According to the Financial Times, manufacturing’s share of the British economy “fell from almost a fifth in 2000 to about a 10th in 2010”. Business investment “fell to the second-lowest position among advanced countries.”4 This is clearly a matter of vision, of strategy shared by the main political forces in the country. Analysts generally make two mistakes when discussing Germany’s evolution. The first is that they underestimate the importance of vision and structured approaches to important issues 1

Ibid., 5. The title of an article published in Foreign Affairs (July/August 2011), authored by Steven Rattner, is particularly significant: “The Secrets of Germany’s Success. What Europe’s Manufacturing Powerhouse Can Teach America”. 3 Nicolas Berggruen and Nathan Gardels, “The Next Europe toward a Federal Union”, Foreign Affairs, July/August 2013. 4 Sarah O’Connor, “UK Trade: One-Way Traffic”, Financial Times, August 22, 2013. 2

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such as development strategy. Everything falls into place in Germany’s development strategy. It matters little that this is the result of German culture and its tendency to explain the world and progress through comprehensive systems, or the needs of a disciplined people to put some order into its prospective efforts. We cannot fail to remark, however, that German pragmatic strategy has been applied composedly, gradually, at a time, hailing shock strategies. It is the coherent vision and strategy that is remarkable in Germany’s current evolution, which made analysts talk about the Berlin Consensus, materializing German vision on development, in stark contrast to the Washington Consensus. A second mistake would be to apply general standards to Germany’s evolution. Many years after reunification, Germany had difficulties, and Europe’s engine seemed to malfunction. In fact, Germany was engaged in overcoming the difficult moment of former DRG assimilation. We are not aware of the financial effort involved in this process but it is in the range of billions of German marks. Despite the huge financial effort, the political parties did not propose fundamentally different options, and the nation strived to attain this greatly significant national objective. The first decade of this century is no less significant. Social-democrats launched Agenda 2010 in 2003, a programme meant to modernize Germany and produce lower labour unit costs. Social expenses were rescaled. Despite economic growth, wages were practically frozen to ensure a general competitiveness rise. When the Christian-Democrats came to power, they took over this programme of real, structural modernization. Germany’s transformation into a global competitor cannot be understood without taking into account the profound reforms of this century’s first decade. In the 90s, France had lower costs per unit but the last decade saw a reverse, and the launch of the Agenda 2010 programme by Gerhard Schröder is an essential moment in this process. This is the supreme accomplishment: the country seems to be ruled by a single party carrying the name of German interests. What the crisis did was show how much the developed world had strayed from a constant development track. It severely sanctioned the risky abandonment of balance and precaution. A step back in history shows that Germany today does not have the glamour of 1900 Germany with its demographic growth, prestigious universities and extremely powerful companies (for that time). One hundred years have passed since the dawn of WWI, a good moment to meditate on the significance of this event. At the time, Germany was at the peak of its power, with a strong hold in the fields that make a power great: economy, military, culture. Used wisely, these advantages could have turned this into “a German century”, in Raymond Aron’s words. We all know what followed. After the unification

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and the successful exam of the crisis, Germany has a second chance. The question is how it will use it. Today, Germany has a well-performing industry, a powerful export trade and a financial surplus. The contrast with the rest of the developed world is all the more relevant. Germany’s evolution is poignant if projected against the context of the developed world’s abdication from any society’s central issue – development. The public space of the developed world has been populated with theories and trends while the problems of development itself have become secondary. What was the development model projected by the developed world for itself and the developing world? Last century’s 60s, 70s and 80s were dominated by debates around development. After the Cold War, these debates practically ceased, only to be replaced by postmodernism, multiculturalism, gender studies and so on; all important to be sure but secondary to the main concern of development. It is to Germany’s indisputable merit that it turned the problem of its own development into a main concern materialized in a model. The liberal model born in Europe and embraced by the US, Canada and so on places the unity between freedom and development at the core of capitalist society. Analysts generally ignore that this tandem appeared in a historical context but is not compulsory for the evolution of countries or regions.1 When development problems become secondary, when the importance of freedom over development is exacerbated, an imbalance is inaugurated that can suggest a hierarchy between freedom and equality and freedom and development, which does not announce anything good. Freedom cannot find a better support than development (becoming illusory in its absence), just as development (as the support for equality) cannot find a more generous accomplishment than freedom. Because it maintained development problems in the foreground, Germany implicitly contributed to the consolidation of this tandem, which is essential for the liberal model of social evolution. Finally, another imbalance of the last decades is between state and market. The exacerbation of the market’s virtues and the minimization of the state’s role and responsibilities have favoured deregulation, which 1 Azar Gat’s idea in this respect is edifying: “The reasons for the triumph of democracy, especially over its nondemocratic capitalist rivals of the two world wars, Germany and Japan, were more contingent than is usually assumed. Authoritarian capitalist states, today exemplified by China and Russia, may represent a viable alternative path to modernity, which in turn suggests that there is nothing inevitable about liberal democracy’s ultimate victory” (Return of Authoritarian Great Powers).

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eventually led to the crisis, and aggravated processes such as social polarization, the decrease in the number of the middle class and so on. Germany was influenced by the neoliberal vision as well but the balance it preserved in fundamental problems and options kept it away from excess. Today, through its chancellor’s voice, it issues one of the most powerful warnings against the diminishing role of the state: The world has still not fully learned the lessons of the devastating financial crisis of 2008. Never again can such irresponsibility as happened then be allowed to repeat itself. In the social-market economy, the state is the guardian of order. People must be able to have faith in that.1

This very special context, where Germany’s power is all the more highlighted because of the contrast with the situation of countries that inaugurated evolutions that do not keep time with the moment, is also a major risk for Germany because it can stimulate a type of ad-hoc exceptionalism and self-indulgence, which may eventually affect or even compromise Germany’s second chance. Indeed, this country passed the exam of the crisis successfully, and is now a prestigious European power. The European exam follows, which is equally important. It will show what Germany really wants – will it evolve for itself or will it be a true leader for Europe? If the first, it will become a factor in deepening the crisis. It could become a source of others’ consumption but also a source for an increase in production and competitiveness. This is the exam of Germany’s model, not of its generosity. Germany will become a leader if it builds a shared, assumed model that will lead to Europe’s rise. The current paradigm, where Germany is mainly concerned with its own development and its main export is the need for austerity, may turn it into an increasingly strong state but not Europe’s leader.

1.3. Was “more Europe” meant to be a counterweight to “more Germany”? It was difficult to predict that German reunification would in time give birth to German power. The European answer to this announced process was “more Europe” as a counterweight to “more Germany”. Synthesized by François Mitterrand, the rationale and the political movement it inspired were correct. The question is whether there was, indeed, “more Europe” and how it was materialized. The introduction of the euro 1

“Merkel’s New Year’s Message”, video: http: //www.bundeskanzlerin.de/Content/DE/Artikel.

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represented the expression of a European effort to integrate Germany. We will refer to this “second birth” of Europe, as we have previously called it, in the next chapter. For the moment, we only want to point out that this measure was not followed by the strengthening of the other pillars of European construction: monetary union, financial union and political union. The euro was left somehow in mid-air. The truth is that after the introduction of the single currency, premature relaxation characterised the Union, similar to the US relaxation after the Cold War. There were some reasons for this self-indulgence. Throughout the postwar period, Germany affirmed its attachment to European values and correlated its own policies with European values and perspectives. A European Germany represented a sort of confirmed process, a materialized belief, to which we must necessarily add the personal attachment of former chancellor Helmut Kohl to European construction: “Kohl was proEuropean for choice. Angela Merkel is pro-European for necessity”, remarked Romano Prodi.1 In this way, at the European level two concomitant processes took place that were unequal and not necessarily convergent. The rise of German power was a reality; it developed a well-established economic and financial power regionally and globally, while “more Europe” became mainly a rhetoric motif. Especially after the start of the euro crisis, Europe’s generous roof hosted other key actors: national states, which recovered some of the former European conquests (compare, for instance, the power of Delors to Barroso’s power). “More Europe” was permanently invoked but always delayed; a formality and at times an insignificant formula. The reality is that the problem raised by German unification for the European Union was not discussed seriously from a multilateral perspective at the European level. It is true that events developed fast. In the early 90s, three changes represented challenges for the Union, which required strategic answers: freeing East Europe from socialism and Soviet dominance, Germany reunification and the fall of the Soviet Union. The answer to German reunification was to anchor it firmly in European structures. With the introduction of the single currency, the European Union considered that historical pressures have, if not disappeared completely, at least diminished. This is when an overoptimistic selfperception was installed. It is instructive in this respect to look back at the objective fixed through the Lisbon Strategy that the Union would become world’s most competitive economy by 2010. 1

Apud Crawford and Czuczka, Angela Merkel, p. 175.

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In fact, the pressures did not disappear: in the medium-term, the most important pressure for the developed world appeared: the rise of emerging countries, which will dominate the world by the mid-century. Had this pressure been perceived in time, the European answer should have been of a different nature, and implemented faster. In reality, the developed regions of the world, Europe included, were uncoupled from these visible tendencies. In Europe, internal evolutions accompanied this uncoupling, such as the rise of German power. Paul Kennedy revealed that the in the second part of the 19th century, “Germany had arisen right in the centre of the old European states system”, right under Europe’s nose (unlike Japan’s rise, which took place in geographical semi-isolation). At the same time, German power was quick to assert itself, which took everyone by surprise.1 The current rise of German power was produced in the same geographical circumstances, with Germany a member of a new continentwide political organisation, the European Union. Its rise was as surprisingly fast as it was in the 19th century. People learn very little from history. When a power rises twice in modern history (the second part of the 19th century and after WWII), it is expected it will rise a third time, after reunification. Where were classical European powers in the first decade of this millennium? Not that they should have “opposed” the German power rise but they should have observed this process, and seen whether some of Germany’s measures and orientations were valid for themselves or for the Union as a whole. In the last decades of the 19th century, Great Britain hesitated to develop chemical industry, as Germany had done. This was one of the vectors of Germany’s rise in that period. After the Cold War, Germany promoted an export-oriented economy and manufacturing, and made the decrease of labour unit costs a national priority. Europe was passive in the face of this process, as if it concerned the rise of a power somewhere in the Pacific and not in the very middle of the continent. In fact, Europe was struck by political paralysis. Now, the continent is facing a full-fledged evolution. When the most important power is on the rise, the Union changes, and the relationship of that power with the whole becomes crucial. In Europe’s case, the fears about the rising power’s possible hegemony are fed by historical experiences, going a long way back. The Economist published an article in 2012 about possible similarities between the fragmentation and disappearance of the Holy Roman Empire of the German Nation and EU’s position nowadays. Any analogy must be prudent, but one remark deserves attention. .

1

Kennedy, The Rise and Fall, 209–10.

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Chapter II The problem was that Prussia became so powerful that the empire could no longer discipline it. While it cooperated with Austria, as Germany and France have done in the EU, the duo maintained order. But once Prussia began putting its own interest above the empire’s, even fighting against Austria, a far-sighted observer could have seen the beginning of the end.1

The flying geese theory, launched in the middle of the last century by Kaname Akamatsu, speaks about the relationship between the regional leader and the countries in that region. The leader experiments with technologies and strategies which it then transfers to others. At this point, it is not important to discuss the viability of this theory in Europe. Two issues are significant: the theory clearly points to the leader’s responsibility towards “individual runners” in that flock; at the same time, because the runners benefit from a serious of advantages (technologies, advanced management methods, concrete support in general), the model develops a sort of group solidarity. The states in the region are interested in the leader’s success, and the leader in its turn is responsible for the success of its experiments and their transfer for the progress of the other runners. For the European Union, the idea of solidarity, of preventing widening gaps, is fundamental. The Union cannot simply live divided by gaps and torn by divergences because it will cease being a Union. In a recent book dedicated to this theory, Walter F. Hatch makes the following remark about Germany. In 1989, Germany convinced the European Union to create two programmes: PHARE and INTERREG, which were meant to stimulate transborder connections and cooperation. In the mid-90s, Poland and the Czech Republic received more than half of the INTERREG funds. Like Japan in Asia and the United States in Central America, Germany has come to dominate FDI flows into Central Europe, supplying about 30 percent of the foreign direct investment received each year by the Czech Rep, about 25 percent received by Hungary, about 21 percent by Slovakia, and 20 percent by Poland.2

The difference is that the EU was already constituted at the moment of Germany’s reunification. The data above can indicate a preference or the establishment of a circle of German influence within the Union. Germany,

1

“The Holy Roman Empire: European Disunion Done Right”, The Economist, December 22, 2012. 2 Walter F. Hatch, Asia’s Flying Geese: How Regionalization Shapes Japan (Ithaca and London: Cornell University Press, 2010), 254.

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as the dominant power of the continent, seems to project the vision of concentric circles, with Germany in the middle. The French National Geographic Institute made the following evaluation. In EU-15, the Union’s geographical centre was in France. The 2004 extension, with new member countries in the East of Germany, saw the move of the Union’s geographical centre towards the East, from Belgium to the Rhyne. The adhesion of Romania, Bulgaria and Croatia placed this centre somewhere closer to Berlin.1 So Germany is at the Union’s core geographically as well. The extension of German influence towards the West, where it hits the hard rock of France and other developed countries, is much more difficult, teaches history. The natural space of German power expansion is still Central and Eastern Europe, which is the best laboratory for examining the nature of Germany’s European policy. Countries in the first line, Germany’s immediate neighbours (the Czech Republic, Poland, Slovakia, Hungary) are the new European power’s space of immediate geopolitical interest. The circle formed by Romania, Bulgaria, Croatia and states in the region united by the Danube is in the background. These states will visibly be the object of the geopolitical dispute between Germany and Russia. Because we are from this region, we cannot fail to mention that Central and Eastern Europe have variable geopolitical importance. When Germany and Russia are weak, Central and Eastern Europe almost do not count. But when these powers rise, so rises the importance of the region as the natural expansion space of both Germany and Russia. The expansion may be desired or contested at times but it is surely felt and will continue to be so in the next years (not decades). But at the Danube’s mouths meet not only Germany and Russia, or European powers and Russia, but the EU and Russia, with the EU categorically led by Germany.

1.4. The German “accidental empire” There are two crucial moments in Germany’s evolution before the crisis, both of which remodelled the country’s attitude and gave it a new direction. We have already referred to the first: the launch of Agenda 2010, which represented the starting point for turning Germany into a global competitor. The second took place in 1994. United Germany was making efforts towards paying the costs of unification, and raising the former DRG to the status of powerful state; in these circumstances, it kept its attachment not only to the Union but also to its federal direction, 1

Crawford and Czuczka, Angela Merkel, 178–79.

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prefigured by the Maastricht Treaty. The most relevant proof is given by Jacques Attali, who confessed that the year Germany proposed “fiscal federalism” for the Union, France made, in Attali’s words, “the terrible mistake” of refusing it.1 In our opinion, this refusal triggered a debate within the very exclusive circles of German elites and raised questions about the evolution of their own country, especially since Germany’s economic potential had become increasingly important and it needed guidance and strategic orientation. The federal direction could represent such an orientation, a philosophy that was not shared by France in that crucial moment. In the meantime, Germany abandoned this objective, which today seems to it an undesirable solution. Germany always works with a vision, and we may well consider it a national trait. It needs to know where it is heading, what finality its modernization effort would have. The French refusal not only failed to give a direction that Germany badly needed but also revealed the European uncertainty and indecisiveness. We believe this to be a crucial moment, when the rising German power started taking into consideration alternative variants. From that moment on, the German machinery started being clearly focused on national aims, which were not necessarily those of Europe. Germany’s development track is of particular relevance. If we were to object to one thing happening in the first decade of this century on the European political scene, it would be Germany’s European behaviour. Germany acted with remarkable soundness and impressive mindfulness, but for itself. We are not aware of a German position raising the issue of the Union’s evolution and strategic options. We know of the position of former president of Budesbank Axel Weber, who talked about Germany’s option for manufacturing, complementing European countries’ option for services: “a move to Germany specializing in industrial activity, leaving other countries to be strong in services.”2 We have raised this problem because it sheds light on the current state of affairs. Germany’s results do not come out of the blue. Certainly, they can be explained through vision, but also effort and sacrifice. German workers’ wages were deliberately raised only moderately, to meet low costs per unit. Now, Germany is tempted to resort to a type of attitude export. We have suffered; so will you! On the other hand, German competitiveness is an accomplished fact. Germany’s growth sources are placed within the country but also abroad, to wherever its impressive 1

Jacques Attali, “Understand Germany”, December 10, 2010, http://blogs.lexpress.fr/attali/2010/12/12. 2 Apud David Marsh, The Euro: The Battle for the New Global Currency (New Haven and London: Yale University Press, 2011), 279.

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exports go. Germany’s request, formulated directly and indirectly, for each country in the Union to have a balanced current account or even a surplus is useful but hard to imagine in practice, especially in the context of Asian countries’ formidable surplus. Martin Wolf was right to remark: “Is everybody supposed to run current account surpluses? If so, with whom – Martians?”1 Is Germany successful because it managed to avoid other countries’ weaknesses and unilateral approaches or because it had its own model? The comfortable answer would be that Germany is successful because it followed its instinct and had respect for its own tradition. The more problematic answer, which is more difficult to prove, is that Germany had a strategy. The novelty is that the strategy was not built immediately, deliberately, but was born gradually. Its root was soundness, which is also a strategic projection. Germany’s own vision was built on careful answers, which included its own interests, to the problems raised by Germany and the EU over the last two decades. In other terms, we might say that their strategy was a result, rather than a starting point; in any case, it was developed on the go. Rarely talked about, it was followed with remarkable consistency.2 How did Germany get to dominate Europe? “By accident” is the surprising answer of Ulrich Beck. Well it happened somehow by accident. Germany has actually created an “accidental empire”. There is no master plan; no intention to occupy Europe. It doesn’t have a military basis, so all the talk about a “Fourth Reich” is misplaced. Rather it has an economic basis – it’s about economic power – and it’s interesting to see how in the anticipation of a European catastrophe, with fears that the Eurozone and maybe even the European Union might break down, the landscape of power in Europe has changed fundamentally.3

1

Apud Blyth, Austerity Delusion. This evolution highlights the similarities between Germany and China. Both turned export into a priority. Both developed the industry and manufacturing, which turned China into “the world plant” and Germany into “Europe’s plant”. Both applied gradual reforms and took prudently the bumpy road of radical measures. This similarity inspired an article, Germany: Europe’s China, to which we will refer in what follows (Paul Dobrescu and Mălina Ciocea, Germany: Europe’s China, Romanian Journal of European Affairs, vol. 13, no. 2, June 2013). 3 Ulrich Beck, “Germany Has Created An Accidental Empire”, Social Europe Journal, March 25, 2013, http://www.social-europe.eu/2013/03/germany-hascreated-an-accidental-empire/. 2

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Indeed, we cannot say that the European power distribution is the result of a deliberate project. It is rather the consequence of the juxtaposition of three essential factors: the rise of Germany, a confusing period in the EU, which was so preoccupied with its expansion that it did not consolidate its internal decision mechanisms and leadership, and the crisis, which consolidated Europe’s de facto situation. The turmoil produced in Europe by the rise of Germany was followed by the earthquake of the crisis. Germany is the beneficiary of these successive radical moves. Not even the most optimistic Germans could have imagined in 2007 the power shift in 2013, one more confirmation that history rewards the industrious, prudent nations. What did Germany forget? What it has always forgotten, if we are allowed to say so: that there are others in the world. No one denies Germany’s efforts, exertion or merits. One component of Germany’s rise is anchored in its own effort, another in the existence of the Union, of the euro and the single market that the Union offered the German production machine. Germany knew how to use this new context better, in a more intelligent way than other states. But results must never be disconnected from the favourable context that caused them. This is where Germany’s major mistake lies, which might lead to a European reaction with medium- and long-term consequences in terms of European unity, and feelings of belonging and solidarity, which are fundamental for a successful Europe. In other words, if Germany does not evaluate correctly the context and impact of its position in Europe, it is possible that the rise of German power will not work as a favourable element in consolidating the European development model. That is why it is essential to understand Germany’s attitude during the crisis, which will allow a correct representation of Germany’s position and the Union’s evolution in the next period.

1.5. Hegemonic interests passed for national interest Complex, even perverse, was the impact of the crisis on the EU. After all, what does a crisis show? It confirms an evolutionary track. This did not happen with the EU because its track did not meet specifications and was not functional. It was not the track that was questioned but the fact that construction had been stopped midway. The crisis conveyed this idea imperatively: finish off the building or it will be very vulnerable! Evolution must cut a way and if the European track did not work well, it turned to the alternative national track. At the moment, the construction is not ready partly because Germany opposes this for financial and economic reasons. As a result, the national becomes the Union’s main option, which

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needs to be approved by European fora. This is not a misleading path. The European fora may approve but they are not the ones to decide. The decision is taken at the national level and the finishing touch is added at the European level by national representatives. The European Council is “a union of national interests”. Confirming the track followed by Germany, the crisis revealed the importance of the national and asserted Germany’s position as the European leader, even though the model was not fully tested. The loser may have been right but history is oblivious to anything but success. Where do we want to take the Union? This is a question that Europe needs to answer in earnest. And it has not, for years. The absence of a strategic answer is the root of Europe’s crisis. Several years into the crisis, there is still no decisive answer. Like it or not, we will have to accept that we are dealing with the crisis of the development model built in Europe after WWII. The supranational integration model proposed by Europe was successful at the time. Paul Krugman was right to say that: “For some sixty years, Europe has been engaged in a noble experiment, an attempt to reform a war-torn continent with economic integration, setting it permanently on the path of peace and democracy. The whole world has a stake in the success of that experiment, and will suffer if it fails.”1 It would be difficult to establish whether the development model promoted by the six, and later by the nine, fed the rise of European power or whether it was the idea of Europe’s reinstatement after the war that stimulated and generated the European integration model. It is certain that the European model and European power are organically interrelated. The decline of one leads to the decline of the other. The paradox lies in the fact that the model can collapse after it has produced results and the Union has become a world power by integrating new nations and economic progress. It is a shock that there is no preoccupation to preserve the relationship between the model and the power it has created, although it is quite clear that Europe will be able to maintain its position as a significant power only if it consolidates its own development model – especially since new centres of power have emerged worldwide, which will challenge the existing ones. Then how can we explain Europe’s feeling of relief, even guilty joy, at drifting away from the model that ensured its success? Such attitude can only be explained in this specific context: the existence of an unconfessed alternative, where the Union will be preserved but will gradually become estranged from its founding values because it will be given new content. The return to what historians call small statism, in a 1

Krugman, End this Depression, 167.

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world of giants and continent states, is Europe’s way of dying. Don’t the Union’s leaders realise that Europe cannot preserve its status as a global power unless it consolidates the model that enabled its rise? This hypothesis is hard to access. The real confrontation eating into Europe is not between the federal versus the national perspectives but between the federal and the national powers who want to undermine this construction. The European Union is weaker, economically and strategically; it seems to have lost its will to retaliate. The rise of a strong Germany is a great chance for the Union (let us consider where the Union would be today with a weak Germany). At the same time, Germany leading Europe as a hegemon is a huge risk. Hegemony and the European spirit are opposites. “If Germany becomes a hegemon, this is the end of the European dream.”1 Some time ago, Wolfgang Schäuble, Germany’s Minister of Finances, expressed his viewpoint in an article published simultaneously in several European capitals, whose title does not need further commentary: “We Germans Don’t Want a German Europe”. The subtitle runs: “Germany has no taste for shaping others in its image – but we want a European Union that can compete.”2 This statement is not to be ignored. Germany is a financial power or, in any case, its financial power created special instruments for intervention and influence during the crisis. And the Minister of Finances and the President of Bundesbank symbolise this power in Germany. The essential statement is The idea that Germans want to play a special role in Europe is a misunderstanding. We do not want a German Europe. We are not asking others to be like us. This accusation makes no more sense than the national stereotypes that lurk behind such statements… We want to put Germany at the service of the European community’s economic recovery – without weakening Germany itself. That would not be in anybody’s interests.3

The key phrase here is, in our opinion, “without weakening Germany”. No one has this interest. But Germany’s interest is transformed into the supreme court deciding on European problems. How can a German forum (for instance, the Constitutional Court in Karlsruhe) judge the opportunity of a bailout? The reply is readily available: no, the Constitutional Court does not judge the opportunity of a bailout but the constitutionality of the German financial contribution towards that bailout. But since the German 1

Dobrescu, Spre un nou Tratat, 10. Wolfgang Schäuble, “We Germans Don’t Want a German Europe”, The Guardian, July 19, 2013, http://www.theguardian.com/commentisfree/2013/jul/19/ we-germans-dont-want-german-europe. 3 Ibid. 2

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contribution is important, the German Constitutional Court has the decisive say on the bailout. Do you see the paradox? Germany does not want to lead Europe, but it does. And the weakened Europe wishes, even asks Germany to be active (in other words, to lead). This is what Poland’s Minister of the Exterior pointed out movingly: “I will probably be the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear its inactivity. You have become Europe’s indispensable nation. You may not fail to lead: not dominate, but to lead in reform.”1 Germany’s second chance is closely connected with its European mission, which is essential at this moment. When we say that Germany can save Europe, we do not think about German contributors’ money being used to cover other countries’ debts but an involvement in hastening European construction, in starting Europe’s most important and eagerly awaited process – economic growth. It also means avoiding hegemonic (we would say imperial) temptation passing for national interest. We do not fear an assumed hegemonic role but a hegemonic role hidden under the label of national interest. This would feed the double dissimulated discourse, the already accredited practice in the Union of not calling things by their proper names. This would accelerate the Union’s involution. The EU is weak and its reactions are not those of a superpower. It seems surrounded, swamped, by the uncertainty, the oppression and powerlessness of the periphery it has created. The EU is confusion in the making, expecting to be led by a hegemon. This is Germany’s test: will it contribute towards healing the Union or will it profit from the Union’s state?

2. Crisis helped us understand Germany better The landscape of the European crisis is dominated by two elements: the crisis and its accompanying consequences on the one hand, and the interpretations of the phenomenon and the accompanying decisions on the other. The confrontation between interpretations and discourses on the crisis is not less important or instructive. No less important, because decisions are taken based on the interpretations given to the crisis. No less instructive, because the interpretation gives the key to the values and unspoken intentions of the interpreter.

1

Radoslaw Sikorski, “I Fear Germany’s Power Less Than Its Inactivity”, Financial Times, November 29, 2011.

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Any crisis contains two dominant elements; in Europe’s case, things are complicated because interpretations are based on a national, eurozone or Union level, and may not be congruent. National interpretations vary widely, as official interpretations vary in relation to dominant ones. Multiple interpretations translate the nature of approaches, interests, values and perspectives. Obviously, we will not be able to catalogue the multitude of interpretations at the European level. We will focus on some of Germany’s interpretations of the crisis. Since Germany is the financial power of the eurozone, such visions constituted, in fact, the substance of European orientations and decisions. In other words, they became the dominant discourse, the official discourse at the level of the eurozone and the Union – official because it was assumed repeatedly in the eurozone and it constituted the main source of measures taken to end the crisis. A review of French (quasi)-official positions highlights the differences in interpretation from German positions. A community can be better understood by looking at its reaction to a difficult situation. A crisis can be seen as an extraordinary situation in which people, communities and nations show their real nature. From this perspective, the crisis helped us understand Germany better.

2.1. Experience or austerity export? It is true that Germany passed the test of the crisis successfully, and did not face serious internal problems because of the crisis. Its real problem was the European crisis: the euro crisis, the sovereign debts, the birth and expansion of a financial periphery. Germany reacted in no other way than it had been taught by its recent history. What it did at home, it recommended to countries struck by crisis. This experience export reveals Germany’s attitude during the crisis, with its highs and lows. Germany offered financial support to countries in difficulty after long talks, on one condition: to reduce budgetary spending, to apply structural reforms, to become more competitive; in other words, to follow Germany’s development model. At first glance, such behaviour is not objectionable. Former Chinese president Hu Jintao urged the Union “to put their own house into order” when the Union turned to China for financial support. Germany used the same incentive when asked to provide help to its neighbours. Angela Merkel’s mantra, solidarity in exchange for solidity, means the same thing, remarked Quentin Peel: “Berlin will stand

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by its Eurozone partners” but only if they “put their own house into order.”1 This was a necessary step towards solving the crisis. A debt cannot be paid by making a larger debt. Recalibrating expenses is the first measure in the face of financial problems, especially when social expenses are much larger than in other regions. A crisis is always the result of the juxtaposition of one’s own mistakes and an unfavourable context. Internal mistakes are never missing. If this is broadly a crisis’ equation, then one’s own efforts must be present in solving the crisis as well, for symmetry’s sake: the generator of the crisis must contribute to solving the problem it created. This is a complex issue that needs to be discussed in detail. The reduction of labour unit costs is one of Europe’s crucial problems – firstly because there are gaps among countries. If a country has low labour unit costs, it is more competitive than countries whose costs are higher. Such differences are important in the case of countries having their own currency. But in such cases as this, states have this supplementary instrument – they lower the value of their currency for export to become more competitive. In the case of a single currency, the gap between various labour unit costs automatically translates into a trade deficit. Because Germany lowered these costs considerably over the last decade, it has a clear trade advantage over other European countries. The trade deficit of southern countries equals Germany’s trade surplus. This gap is preceded or sustained by the gap between labour unit costs. Germany’s trade surplus with the rest of EU member states from 1999, the year of the adoption of the single currency, to 2011 is more than one trillion dollars2 – an enormous amount. Due to timely measures, Germany has a trade hinterland at its disposal, a problem that needs to be addressed. The problem of labour unit costs is equally important in the competition with emerging countries, the alternative centres of power of contemporary world. If the European economy does not become more competitive, Europe will occupy a marginal position in terms of power and prosperity. Illusions do not serve us here, and this is the moment to correct this evolution. It is obviously difficult to imagine that Europe’s labour unit costs will be even marginally similar to China’s, but they need to decrease. Let us remind the reader of the numbers on Angela Merkel’s piece of paper: 7, representing the European population; 25, the percentage of Union GDP in world GDP; 50, the percentage of social expenses in world expenses. Sometimes, the reserve towards Germany is a critique of the 1

Quentin Peel, “Do Not Expect a Merkel Win to be Europe’s Game Changer”, Financial Times, August 26, 2013. 2 Ash, The New German Question.

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mirror carrier. Crisis and its consequences cannot be stopped without facing Europe’s real problems. The German model has been confirmed by the crisis. A model has several components, which form a structure and synthesize a community’s priorities and advantages. What can be held against Germany during the crisis is that it did not export its whole model but only some of its components, such as lower labour unit costs. A component was exported but not the concepts that guided Germany’s rise. From the comprehensive model, a dimension was chosen, which was turned into the main “export product” of the German model. Austerity was a condition rather than the main force behind the country’s rise. This can raise the question of whether Germany works with two distinct models – one for its own development and one for the others. Germany’s efforts for modernising the former GDR come to mind. It seems improper to judge the opportunity of this effort from the outside since it was FRG’s option to advance the money yet there is a huge difference not in the treatment but in the model and modernization process. A country facing difficulties cannot benefit from the massive support given by FRG to GDR. The question that can be raised, however, is whether countries affected by crisis can redress themselves economically without support from the outside. Judging by what has happened so far, the answer is preponderantly negative. Structural reforms need certain conditions to work. In this respect, Gerhard Schröder, the chancellor who initiated Agenda 2010, mentioned that: “Structural reforms can only work in conjunction with a growth trajectory”1 to ensure the measure’s acceptability. When Agenda 2010 was first applied, Germany was growing. To support the structural reforms involved, Germany failed to meet the eurozone budget deficit limits. Even though its export capacities were not what they are now, Germany had a powerful industry, which could provide the finances needed for the restructuring process. Synthesizing these differences, Martin Wolf underlined Germany experienced a mild recession in 2003; today’s vulnerable countries are suffering depressions. Germany’s largest account deficit was 1.7 per cent of GDP in 2000, those of today’s crisis-hit countries are far larger, with those of Greece, Portugal and Spain more than 10 per cent of GDP. Germany did not have huge debts and had no difficulty in financing itself; today the vulnerable countries have huge debt overhangs and much difficulty in financing themselves. Before the crisis, the world and the 1

Berggruen and Gardels, The Next Europe.

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Eurozone economies generated strong demand for Germany exports; today’s vulnerable countries are pursuing adjustment in a period of chronically weak demand.1

Applied in isolation, without the support of the model’s components and in the context of the crisis, austerity cannot lead to results; moreover, it can become an aim in itself and transform into continuous austerity. Sebastian Mallaby stated an essential thing: partly because of German conditions, the eurozone countries facing financial problems applied restructuring measures that led to a lower deficit. But this failed to lead to economic growth, which was the real aim of these measures. As GDP did not grow, the debt-to-GDP ratio, the real indicator of an economy’s health, did not get decrease; on the contrary, “Over the past year, the eurozone has indeed cut deficit sharply, but the debt-to-GDP ratio has worsened. Germany needs to accept that aggressive austerity programs are neither politically sustainable, nor economically wise.”2 The fact is that eurozone countries faced with difficulties did not manage to redress their economy significantly. Partial accomplishments do not stand for solid processes that could encourage optimism: “In the most recent quarter, Spain’s GDP was 7.5 per cent below its pre-crisis peak; Portugal’s, 7.6 per cent; Ireland, 8.4 per cent; Italy’s 8.8 percent, and Greece’s, 23.4 per cent.”3 Economic growth will be slow to come. We cannot fail to acknowledge the opportunity of austerity and the need for balanced approaches. The time that has already passed shows that austerity can generate negative effects, even rejection, if not coupled with other measures and components of the model. The aim is economic growth, which has not yet re-appeared in Europe. For the southern countries, the situation is bleak. If the Italian and Spanish economies unexpectedly started growing at 1.5% a year, they would reach pre-crisis growth no earlier than 2017 or 2018.

2.2. The Hellenization of the discourse on the crisis So instructive is the Greek crisis that, had it not taken place, it should have been invented. If the Union had intervened from the start, the Greek crisis would have cost several tens of billion euros. Today, the country’s debt is over 150 billion. Money was found (in fact, printed) for banks and other institutions. We mentioned earlier that it was probably not justified 1

Martin Wolf, “Germany’s Strange Parallel Universe”, Financial Times, September 25, 2013. 2 Mallaby, Europe’s Optional Catastrophe. 3 Wolf, Germany’s Strange Parallel Universe.

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for the Central European Bank to intervene rapidly and pay Greece’s debt. Nor is it natural to let a country amass so much debt that it will never be able to pay. A sad record has been reached: a small country’s crisis (at 2% of European GDP) has been transformed into the large crisis of “sovereign debts”. The interpretation given to the Greek crisis is highly significant. Even for a modest economist, the explanation that Greek debt comes from “overconsumption” and “waste” is hard to accept (Greece’s overconsumption is, within certain limits, real but it does not represent the main cause of this country’s public debt). Paul Krugman even calls this explanatory formula “distorting narratives” – stories that blur the truth. Why was there so much insistence on waste and overconsumption as sources of the debt when in fact the main source is the unequal competitiveness of eurozone economies? In our opinion, Greece was a shooting range for testing strategies of presenting the crisis and its causes. Not for treating crisis but for explaining it to the public opinion – an approach that cost quite a lot of money. The distorting narratives did not stop here. They continued into the “Hellenization” of the European discourse on the crisis. The presentation of the Greek crisis became a sort of explanatory pattern for crisis in the Union, even though the situation in Ireland or Spain was completely different. In this way, the solution seemed obvious and was presented in moral terms, well pointed out by Paul Krugman: nations face problems because they have made mistakes and must recover through suffering.1 Only recently have we come to realise that strategies are needed that address not one country or another but the EU as a whole. From a European perspective, debt no longer seems such an important problem. A recently published book launched a suggestive formula: Greece as a debt-producing plant. Debt, say the authors, must not be perceived as a sum of money that you owe to someone. It is an element of a domination strategy characteristic of the financialization era. It cannot be comprehended unless framed in a broader geopolitical context: this is the formula reproducing dominance without the intervention of a force. This strategy, which relies on the existence and growth of debt, needs certain conditions to function. Firstly, it needs what the authors call compradora bourgeoisie or “internal political tools”, the segment that needs to take decisions in agreement with foreign capital interest; then a decrease in the country’s production capacities so that the country would need to indebt itself. In the meantime, the population needs to live under the impression that the 1

Krugman, End This Depression, 179.

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country “modernizes” (modernization being this strategy’s mantra), that it benefits from an upcoming period of prosperity: “Technically, there is no doubt that the debt crisis in the periphery was triggered from outside the periphery state.”1 Several things from this analysis are worth mentioning. The crisis of a periphery state cannot be understood unless internal causes are addressed, which the authors do in detail: for instance, the state’s low capacity of accumulating during growth, of adopting anti-cyclical measures during the crisis, the incomprehensible tolerance towards financial indiscipline during economic growth, and corruption at the top consisting not only of embezzlement but also of lack of vision for the country. This all took place in the context of mounting pressure from international capital, including its capacities and instruments for dominance. Crisis, debt and lack of perspectives are inevitable in this context. The two authors’ insistence on the acceleration of tendencies to disintegrate Greece’s productive basis says, in fact, that the country no longer has internal pillars; that immunity against external pressures decreases quickly. The enormous expense of buying arms is an added pressure in the case of Greece. According to the Stockholm International Peace Institute, Greece was the world’s fifthlargest arms importer between 2006 and 2010. It paid over 3.3 percent of its GDP for this expense while France’s military expenses were at 2.7 percent of GDP, Portugal’s at 2 percent, and Germany’s at 1.4 percent. The provider was also changed: because the US was considered a supporter of Turkey, Greece imported arms from France and Germany, which explains why these two countries have such a large share in Greece’s debt. The form taken by “modernization” during financialization is also instructive. Independent of various interpretations, modernization has always meant development, real change, the diversification of possibilities for a community to use its potential. Greece’s “modernization” was completely different: “From 1994 to 2009 the Greek economy lost almost 40 per cent of its competitiveness despite the fact that GDP growth remained relatively good.”2 There was a type of growth but it was based on debt. There was a type of prosperity but it was fed by speculative actions rather than the “real economy”. The landscape in Greece before the crisis suggests a huge operation of economic dislocation: the scope of the real economy became smaller, marginal, to make room for a speculative economy. 1 2

Fouskas and Dimoulas, Greece, Financialization and the EU, 145. Ibid., 161.

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The relatively wealthy picture of the Greek economy before the current crisis was not because of the improvement of the real economy, but rather to the speculative, rentier and consumerist activities of the new business and middles classes, coupled with the recycling of European/German financial surpluses in the country’s account and banking system. In other words, as elsewhere in the West, especially in the US and the UK, the growth registered was debt-driven, whereas the disintegration of the domestic economy from mid-1990 onwards went hand in glove with the relative growth of comprador together with financial elements – substantial increase of imports of financial products...1

Reading of Greece, thinking of Romania … Against this background of heated debate on debts and their role in the current crisis, a German author, Ulrich Beck, made a shocking declaration: “The EU crisis is not a debt crisis.”2 At least in Europe’s case, the overemphasis on economic causes hides political causes, which are crucial in this particular case. The problems of debt – budget deficit, gaps – are extensively discussed in public debates but deep down are the problems of solidarity and measures, which need to be taken at the European level. What has been done so far? Bailout was granted belatedly. A country in difficulty was given money, but it was left to manage the crisis on its own; apart from the money, it did not feel the Union’s support. Not to mention the fact that because Greece is indebted to French and German banks, the bailout goes to French and German banks, not to Greece. Growth cannot appear in these circumstances.

2.3. What is more important, money or the European model? At the core of the European crisis are two interconnected problems: the euro crisis and the sovereign debt crisis. We will treat the euro crisis in a separate chapter. The particularities of the European crisis cannot be comprehended unless we understand the source of sovereign debt. The sovereign debt crisis is a product of the economic and social turmoil started in 2008. In 2006 and 2007, there was not much talk about this new reality and concept. With 2008 events cascading, the sovereign debt crisis became a burden. There is a substantial connection between the two phenomena: the causes that determined the crisis are also the causes of the sovereign debt crisis, other names for the public debt that various countries amass. At the 1 2

Ibid. Beck, German Europe, 20.

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top of countries with a big public debt are Japan and the US. Germany and France have significant public debt as well. Yet nobody talks about American, German or Japanese sovereign debt crises. Sovereign debt is made or guaranteed by the state. The US borrows from the Federal Reserve and Japan borrows from the population so these are internal loans. Representing loans made or guaranteed by the state from the external market, sovereign debt is a frequent phenomenon: most states are in debt. “Sovereign debt” is one thing; a “sovereign debt crisis” is another. “Sovereign debt crisis” is used to refer to countries facing economic, financial and credibility problems: countries (mostly from southern Europe) that are hugely in debt without any guarantees that the debt can be repaid. The sovereign debt crisis carries an implicit warning: these are insecure countries, which demands heightened prudence from investors. Another implication is that “sovereign” debt belongs to every inhabitant of the country. Another warning is that this debt needs to be paid. Sovereign debt crisis is a label on these countries’ future. Highlighting the sovereign character of the debt is an invitation: since it involves the whole country, its roots are not important. This crisis stems from several causes. One is signalled by Étienne Davignon, president of Egmont Institute: until several decades ago, the newly created value was quasi-equally shared between work and capital (wages and profit). A major change happened within this vital mechanism for social balance: capital took the larger part of newly created value, which resulted in lower value for work. Two systemic answers addressed the critical problem of the employee. The American answer was to facilitate access to credit: a credit explosion was targeted at the employee. Fed by tradition, the European answer was to increase social expenses; the state supported health and education costs and gave indirect support to the employee. When the state could no longer support such financial efforts from its own revenues, it borrowed, and the accumulation of successive loans represented part of “sovereign debt.”1 The crisis meant supplementary expenses by the state and, consequently, an increase in sovereign debt. The state had to guarantee certain loans, support certain firms in difficulty and so on. Crisis forced states to address various situations, which increased their expenses and required bigger loans. Consequently, the size of sovereign debt became unprecedented. The banks’ debt played the essential role in the sovereign debt crisis. The recapitalization effort increased debt and created the 1

I have discussed this in the article “O lume bolnavă sau doar ipocrită?” in Paul Dobrescu, Lumea cu două viteze. Puterile emergente úi Ġările dezvoltate (Bucharest: Comunicare.ro, 2013), 124.

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context for one of the most controversial financial operations: the state took over banking debt. These banking dark holes were so large that states had to borrow beyond their solvency ratio, which started the sovereign debt crisis. Consequently, at the core of this debt is the banking crisis. Yet this is rarely talked about. Why? To the two trillion euros was added the recapitalization effort of European banks, made at both European and national levels. No precise figures exist, which is also significant: it seems that the effort to recapitalize the banks is being doubled by the effort to make this operation less visible. No one contests the usefulness of the state’s saving intervention; banks are a crucial element for the economy to function. If the banks are blocked, so is the economy. In this sense, the priority given to banks is another name for priority given to the economy. From this perspective, the declaration of Hans-Olaf Henkel, former president of the Federation of German Industries, is correct: “We must rescue banks, not countries”. In other words, it is impossible to have healthy economies with unhealthy banks. The effort is justified, and it was made in the US, as well, without significant voices contesting the opportunity of the action. In Europe’s case, two added dimensions further complicate the situation and give its characteristics. Let us put aside for the moment the fact that Europe’s reaction to the banking crisis was slow, delayed and not transparent, in opposition to what happened in the US. The US is on the road to recovery while Europe will have to wait for a while (the clearest proof of banks’ health is the general recovery process). Coming back to PIIGS countries, it is important to establish which banks we are referring to. Two types of banks are involved in the sovereign debt crisis: the local banks, which carried toxic assets and made risky loans, and which the state intervened to save; but there were foreign banks as well, mostly German and French, which held a large part of the states’ debt. Coming back to Hans-Olaf Henkel’s declaration, we understand that banks need to be saved, but which banks? Local or foreign banks involved in these countries’ economic and financial processes? A possible explanation would come from carefully examining European actions in the early years of the crisis. Germany’s and France’s approaches to the crisis on the one hand and the financial markets’ approach on the other partially overlap. All these parties made their own banks’ interest a priority. The main concern of both states and financial markets was the reimbursement of the debt, not a solution to the crisis. If the latter variant had been embraced, the truth would have come out sooner that the reimbursement of debt involves an economic relaunch, a situation where paying back the debt is a secondary effect, without added

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social costs. Since paying the debt became the most important concern, the effort led to collective poverty, a decrease in collective prosperity and lower trust in the EU and its de facto leader, Germany. To understand the situation better, let us see things from the perspective of countries facing a sovereign debt crisis. They experienced their own trade deficits, recapitalized their own banks and paid the debt to foreign banks in the context of a plummeting economy and high loan costs. In late 2012, Mario Draghi launched a warning that helps us understand the situation in southern Europe countries. In October 2012 the Central European Bank launched Outright Monetary Transactions a programme that enabled it to buy bonds from countries in financial difficulties. German parliamentarians and leaders had different reactions, and the president of the Central European Bank, “a Prussian from southern Europe”, took the opportunity to debate the rationale of the initiative with over a hundred members of the German parliament. The main issue was how to maintain loan rates (the costs of loans by various companies and employers) within certain limits. “Interest rates do not have to be identical across the euro area, but it is unacceptable if major differences arise from broken capital markets or the perception of a euro area break up”, said Draghi.1 In other words, the interest rates are different from country to country, which is natural. The difference becomes unacceptable when the level of interest rates varies depending on the spectre of economic or euro downfall. Since this spectre is much more threatening in southern countries, their interest rates are higher (in Greece, several times higher than in Germany). “And the only way to do so was to establish a fully credible backstop against a disaster scenario” under the form of OMT.2 This rational viewpoint appeared five years into the crisis, when countries facing problems did not feel the Union’s support. Some may remind us of the bailouts. But most bailouts went to European banks holding the debt of the South. This situation cannot last long because it generates resentment and doubt about the Union’s future. Few people ask about the mounting doubts of the average European. Even though the banking root of the sovereign debt crisis is little discussed, even hidden, it does not follow that it will not impact society. When one’s mistake is paid by others, there will be consequences. Neither history nor people will fail to notice this injustice. Things like this have happened before but as far as we know, at no time in history did one group 1

“Draghi Braves Berlin Bear Pit to Defend ECB’s Bond-Buying Scheme”, Financial Times, October 25, 2012. 2 Ibid.

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dislocate such an important part of a society’s wealth and then make society recover the loss (in the case of empires, other peoples were called in to pay the debt). This time, the same people pay. This is a very serious economic problem because developed European society has amputated its potential, engaging it in risky businesses: that is the explanation of its difficulties now. There is also a very important social and moral problem: the perpetrators preserve their positions intact. No guilty people were identified, no sanctions were given, no penalties were paid. The system continues to work and no one perturbs His Royal Highness, the banking system. There is another equally serious problem. In history, crises led to relaunch and regeneration¸ which is not just economic in nature but moral and trust-related. The crisis stands as proof that trust is the main economic category – not money, not raw materials, not other components. In the absence of trust, these components cannot start moving. The fact that the banking system is unscathed raises a fundamental trust issue in relation to the system but also to political class and society as a whole. The crisis illustrated that the state is not only the power instrument of national communities but the promoter of the interest of financial powers, which needs to have consequences on a social, political and moral plane. The situation in Europe strikingly resembles the one in the US, and both express accurately the particularities of the new stage of developed capitalism: neoliberal capitalism. Five years after the bankruptcy of Lehman Brothers, most analyses signal the lack of measures against those who produced the disaster: not just this bank but the whole banking system. Some even speak openly about the death of accountability. Society cannot preserve trust or regenerate after a crisis if the guilty ones are not held accountable and the burden of debt is carried by innocent people. Developed society was not particularly enthusiastic before the crisis, either. In the early 90s, American economist John Kenneth Galbraith talked about a culture of contentment, the content majority preferring short-term public inaction, despite alarming effects, to preventive longterm action, starting from the idea that the long term will never come. In a satisfaction-oriented society, the privileged do not think and act for their long-term interests but in order to defend their immediate comfort and contentment.1

1 John Kenneth Galbraith, The Culture of Contentment (Boston, Mass.: Houghton Mifflin Company, 1992), 224.

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Since then, contentment has consolidated. We might say that resignation and love of comfort have become dominant. Developed society seemed to want nothing special, and was happy and content with what it had already: the desire for transformation and change was at its lowest. Against this background, with the added disillusion created by the crisis, this lack of accountability of the banking system will encourage an ill-omened resignation, which will affect social cohesion and inaugurate dangerous centrifugation tendencies. What is it like to be born with a debt inherited from parents, for which the parents are not guilty? This feeling will weigh a lot in the future of developed societies, more than we are aware of at the moment. Unfortunately, when the effect of the gradual erosion of trust becomes visible, it will be too late.

2.4. Europe cannot, Germany won’t! A question might rise: why discuss the problem of banks in a chapter dedicated to Germany? For several reasons. Firstly, because German banks are involved in the start and evolution of the sovereign debt crisis; but, most importantly, because we are talking about Europe and everything, especially financial problems, is associated with Germany. Social perceptions point to Germany as the final decision-maker taking into account its interests. Slowly but surely, Germany appears as the location of a rising financial empire. At the core of this perception is the rationale that Germany uses double standards: a social model for itself and a export neoliberal model for other European countries. Double standards are characteristic of imperial attitudes, creating privilege. Specialists hotly debate how to solve the sovereign debt crisis. Most of them, American analysts among them, plead for transforming these countries’ debt into European bonds, for the Union to take over the debt: “The most plausible route to debt reduction is to create a eurozone bond, so that part of the debt of the crisis countries can be replaced by debt issued by the whole region.”1 George Soros has a similar viewpoint, speaking about the need to consolidate countries’ debt into a “real debt” at the European level, guaranteed by the eurozone economy. In other words, from now on, debt should not be correlated to individual countries, which would lead to different interest rates and different reimbursement rhythms, and would make financial markets nervous and fearful. The consolidated debt would mean more solid guarantees and would alleviate the burden on countries in difficulty. 1

Mallaby, Europe’s Optional Catastrophe.

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Creditor nations, Germany especially, are reticent about this solution, and it is unlikely their position will change in the immediate future. A long-term financial blockage is looming, with significant political consequences: maintaining, even widening, the gap between creditor and debtor countries. That is why it is important to understand the rationale behind Germany’s position. Taking over the debt at a European level means guaranteeing it at a European level as well. Some southern countries have reached their solvency limit. Money can be found for loans to these countries; the question is who guarantees the reimbursement. Transferring debt at a European level would mean that trade surplus countries would be involved in reimbursing the debt of countries in difficulty. In absolute terms, Germany has the highest trade surplus, so it would be the main force guaranteeing, even paying, the reimbursement. This is the core of the financial dispute: Europe cannot, Germany won’t! Both positions are justified. There are numerous critical voices against Germany, but that does not necessarily mean they are right. The fundamental question to ask is whether gains will be bigger than losses if debt is consolidated at the European level. In other words, the eurozone will either grow or become weaker, weakening Germany as well, creating a mediocre Europe. This is a difficult question to answer. It is certain that in the following period, Germany will be prudent, and a full banking union will be slow in the making. The more visible the economic recovery of the South, the more significant the steps towards creating a Union. The slower the process, the more prudent the steps. A question needs to be addressed: isn’t the delay in the South’s economic recovery the best pretext to delay a monetary Union? At the moment, Germany is interested in strengthening Europe (so that it needn’t credit it) but not in its rapid recovery, because this would diminish Berlin’s advance. George Soros believes that “this is not the result of some evil plot”. Germany would be a victim of the Bundesbank position, which, in its turn, is the supporter of an “outmoded monetary doctrine”, justified by the traumatic experience accumulated by the country in the inter-war period when it was fighting inflation. Germany cannot forget the experience of inflation, and strives to maintain inflation at modest levels even during recession. This option makes the situation of periphery countries more difficult. The first consequence is that investors migrate to safer places – to Germany or northern countries. Wealth is distributed along the Rhine, the Main, the Danube, and poverty and suffering towards the south, feeding growing tensions. In political terms, Germany would only lose.

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As time passes, there will be increasing grounds for blaming Germany for the policies it is imposing on Europe, while the German public will feel unjustly blamed. This is truly a tragedy of historic significance. As in ancient Greek tragedies, misconceptions and the sheer lack of understanding have unintended but fateful consequences. In the long run, a eurozone permanently divided between debtors and creditors is politically unacceptable. The debtors are bound to revolt sooner or later.1

2.5. The exorbitant double privilege Germany seems less sensible to social problems, absorbed as it is in its economic advantages, which it is bound to use. Whether we like it or not, Europe does not have too many variants because it needs Germany badly (even though it is aware of Germany’s advantages from the Union). For instance, Arvind Subramanian talks about Germany’s “exorbitant privilege”. It is well known that the formula was launched by Valéry Giscard d’Estaing in the 60s, when he was France’s Minister of Finances. The French dignitary referred to the enormous advantage the US derived from the fact that capital markets perceived America as a safe economic space and consequently directed capital flows there. This translated into enormous benefits for America: low capital costs (according to official evaluations, 80% lower than other regions in the world). This was the “exorbitant privilege”, a formula that stayed in the history of economic thinking. It had a disadvantage, though. Migrating to America, capital was interested in keeping the price of the dollar up because this maintained the price of financial assets. In the crisis, this turned to disadvantage and had a cost, which no one doubts nowadays. Just like the US, Germany benefits from an “exorbitant privilege” derived from the single currency and the economic reality in Europe. This time, however, we can speak about a double privilege, without the costs incurred by capital migration towards America. In the case of Germany, exorbitant privilege has come without this cost, owing solely to the currency union. Weakness in the periphery has led to capital flowing back to Germany as a regional safe haven, lowering German borrowing costs. But, yoked to weak economies such as Greece, Spain, and Portugal, the euro has also been much weaker than the Deutschemark would have been. In effect, Germany has had the double 1

“Germany Must Lead or Leave: George Soros’ Plan to Save the Euro – Part 3: How We Got Here”, Spiegel Online, September 11, 2012, http://www.spiegel.de/international/europe/george-soros-on-the-euro-crisis-germany-must-lead-or-leavea-855270-3.html)

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At the surface the discussion may employ economic terms: (sovereign) debt, deficits, budget cuts, etc. Deep down are strong undercurrents carrying geopolitical tendencies. The first level is represented by differences of financial philosophy between Germany and world financial markets. Germany cannot agree to mounting inflation; it is also very careful about deficits; moreover, it cannot allow imbalance. “We spend what we have” seems to be the fundamental law of its financial behaviour. All this sets Germany apart from America’s financial philosophy, which tolerates inflation, even stimulates consumption-based growth, and feels comfortable with deficit and debt. There is a deeper level concerning the role of financial debt in the near future. Until recently, Germany had a type of consensus with the policy of financial markets; so much so that it seemed to be the European representative of these markets. Germany’s attitude towards Greece or Spain was no different from that of the financial markets. As Beck remarked, “brutal neoliberalism to the outside world” was what made Germany identify with the attitude of the financial markets. In the last year, the attitudes diverged once market interests reached the German border. These markets’ fundamental interest is to place capital and create debt. This is what financial markets live on – loans – and Europe has become the privileged place for this type of placement. Asia, at least dynamic East Asia, does not absorb debt. Japan’s public debt may be 200% of GDP but it is contracted from the population. The countries that suffered during the Asian crisis, including South Korea, created their own currency reserves. The sovereign debt crisis illustrates two things: the map of Europe’s vulnerabilities and the fact that these vulnerabilities were felt by international capital. For some time, Germany kept saying “austerity” but the IMF has changed its attitude: “stimulate economy”, which means financial input and supplementary expenses – further debt, in short. There is money but guarantees are missing, and these guarantees cannot come from debtor countries. It is then understandable why it is important to transform the debt of various countries into “a real debt”, a European debt with European guarantees. This is not merely a conflict between financial 1

Arvind Subramanian, “Three New Lessons of the Euro Crisis”, Project Syndicate, August 21, 2013, http://www.project-syndicate.org/commentary/what-theeurozone-crisis-has-taught-economists-by-arvind-subramanian.

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philosophies. This is a poignant geopolitical conflict, played with banking and financial instruments. Germany will continue to say “austerity” even though there is no relaunch in countries affected by the crisis. Germany wants to limit debt not for these countries’ sake but to restrict access to financial markets and prevent the continent’s dominance through debt. The larger the debt, the more pressure on Germany to consent to creating European bonds. Whether Germany opposes to protect itself or keep the continent available for German dominance is for history to tell. For the financial periphery, it does not make much difference as it will stay an object of dominance. The same is true of the European model. In any variant, the model will be preserved, although it might have a different content. Both forces will use the European model for their own purposes, which means that initial values will slowly disappear. They will be maintained rhetorically, more as a sign of identification or for public consumption. In fact, it becomes increasingly evident that initial values have become weaker and may even disappear. One more thing is worth mentioning: the countries affected by sovereign debt crisis share a continent with Germany; they share an interest with financial markets though hopefully a fleeting one: the debt. In any case, the spectre of continent dominance looms over the horizon. Will Germany or financial markets dominate the continent? Germany’s “European test” can be doubled by another test, which might prove more serious: avoiding an all-out confrontation with the financial markets – a power whose capital is larger than global GDP.

2.6. Lack of reforms or already made reforms? The crisis is portrayed as the result of a lack of reforms but little reference is made to the policies that led to the crisis. Only half-truths are said. Lack of reform always worsens a situation, makes it chronical and facilitates the crisis yet the crisis as such is the product of measures, policies and orientations. When we talk about the crisis, we should normally discuss about what led to it, not just what eventually favoured it. The crisis was not generated firstly by the lack of reforms but by the policies that were applied. When the emphasis falls on the lack of reforms or the insufficient promotion of reforms, there results a narrative about the crisis that does not touch on fundamentals – the reforms made and that were revealed during the crisis. This is how the cause is hidden and the focus is moved onto the reforms that need to be made – lack of reforms, not already made reforms; actions we need to take from now on or actions that created the context and generated the crisis.

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If the accent falls on the reforms which are to be made, then the fundamentals of the policies that led to the crisis remain untouched; fundamentals that, in Huw Macartney’s opinion, are neoliberal in nature.1 Then, the answer to the crisis will be modelled according to fundamentals, to the root of economic policy. That is why structural reforms and austerity, the two components of the European answer, are of neoliberal inspiration and they will, in fact, consolidate Europe’s evolution from before the crisis. There is a type of continuity, rarely noticed, through which the post-crisis answer consolidates the premise that led to the crisis. This way, the answer is an extension, even an intensification, of the project of framing Europe’s evolution into a neoliberal vision. In fact, an answer needs to be found to the question: what reforms were made at the European level to solve the crisis? The reforms, few as they were, are related to austerity, to a decrease of public expenses, are of a neoliberal nature. The sovereign debt crisis is much more talked about than the banks’ crisis. It can be associated easily with the idea of waste, and spending beyond your means. The answer would be to cut these “enormous”, “oversized” expenses. The crisis is reduced to the issue of unwise expenses requiring measures. In a word, the crisis is not placed in its natural environment: the policies that led to the crisis. Huw Macartney goes even further, considering Germany a “monetarist power”, a sort of IMF correspondent at the European level. It is difficult to find an explanatory frame for Germany. Germany was different from the US before and after the crisis. Before the crisis, it continued the industrial policy and limited the expansion of the financial system, unlike the US and Great Britain. This is how Germany was less affected by the crisis. The fundamental difference is that ordoliberalism is dominant in Germany. Ordoliberalism is different from neoliberalism from at least two perspectives. The essential preoccupation of German liberals was to protect competition from unwanted results which it could produce itself. For instance, they were very interested in the US antitrust law, which made it impossible for the person or company winning the competition to institute control over competitors, to “swallow” them, altering the real aims of the market. German liberalism’s answer was different from the American one. It was not unleashed markets that represented the solution but rules and laws that protected the competition from unwanted negative consequences. As this concerns the law, competition and rules, the state has an important role to play. This is 1

Huw Macartney, The Debt Crisis and European Democratic Legitimacy (London: Palgrave Pivot, 2013), 67.

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where the second difference occurs. The state needs to ensure respect for the law and, consequently, the market’s workings. In this context, German ordoliberalism admits the state’s intervention not only for the rule of law but also for ensuring the balance between the rights of labour and the rights of capital. The social-market economy – a development model embraced by German political actors – materialized this preoccupation. During the crisis, Germany was closer to moralising neoliberalism. As we have shown previously, Germany’s attitude towards Greece and southern countries is no different from the IMF’s or other financial bodies’. Lately, Germany’s attitude has been more serious than theirs. Germany overemphasizes austerity. Under the enormous pressure that is the result of a delayed relaunch, international bodies have started abandoning their old positions in favour of more nuanced approaches to austerity. Policies applied so far are being re-evaluated and, in this context, the importance of austerity is re-evaluated. Germany keeps to its viewpoint and continues to give the same recommendations as it did three years ago. The fact that such a gap between north and south can appear within the Union is the best proof that the Union does not work. Its bodies might be important but they are connected to any society’s fundamental process – development. It is true that the crisis revealed major differences in countries’ economic strategies and policies, which existed before the crisis and justified accumulations made under the EU’s nose. We are right, then, to assert that, from the perspective of development, European institutions were preponderantly decorative. Development happened nationally; strategies were made by national bodies. Europe’s economic map shows national governments’ performance, and the counter-performance of the Union’s institutions. At the moment, “more Europe” is required. But such a request must be preceded by an essential clarification: more Europe for what? What is the vision for Europe? Otherwise, more Europe might be needed for a growing inefficient bureaucracy. This reminds us of the delicate situation in which economists and bankers find themselves – they now tell us what needs to be done, that they know how to do it, but they could not foretell the crisis, and even produced it. We are forced to speak about the legitimacy of requests as well. At the moment, European bodies are not in the most appropriate position to request more attributions. They are part of the crisis, and can be another source of blockage. If Europe wishes to maintain its living standards, it needs to look carefully at the wave of competitiveness coming from the emerging world. If it does not, it will not be able to preserve its lifestyle or its status as a

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world power. Angela Merkel warned openly and insistently against this danger. Could Barroso have formulated such a warning? Probably not. This is how Europe fared: Angela Merkel feels entitled to speak for Europe, but not Barroso! Why was the Union such a favourable terrain for the crisis? After the US, it was the Union where neoliberal policies were most present. Not homogeneously – neoliberalism in the Union was à la carte neoliberalism. The South appealed to a consumption-oriented development model, creating debt early and gradually; the North was more reserved despite a predominant social-democrat doctrine. The South appealed to servicesbased development; the North preserved industry and manufacturing. In the south, the state was not only weaker but was further weakened by corruption, and was tempted to tolerate and stimulate speculation; the North preserved the state’s role and even used its power to develop strategies and promote real modernization processes, and reduce labour unit costs. Sweden’s example is as instructive. A real symbol of social democracy, Sweden initiated vast reforms to increase competitiveness and reassess social expenses in the 90s. Today, Sweden’s evolution is appreciated because of this comprehensive process, initiated at the right time. In our viewpoint, the distribution of the crisis in Europe expresses with some fidelity the map of neoliberal influences present in Germany and the northern countries. Deregulation and the banking crisis were felt here as well but they were compensated for to some degree by the existence of a powerful and intelligent state, which prevented deindustrialisation. Thus, the northern countries had the means to pay, and the instruments to face the crisis. If these were the causes, then the crisis can be solved by severing these roots. Among the means must be diminishing consumption and waste, indeed, but they must not remain the sole means. Unfortunately, the sovereign debt crisis benefits from this one-way treatment, which will not lead to significant results. This is the recipe promoted by both Germany and the financial markets, which decided that the priority should be paying debt, not stimulating the economy of the debt-affected countries so that paying debts would be a secondary, although compulsory, consequence. This offers a glimpse into the future of the countries facing a sovereign debt crisis. This debt appeared under the nose of the Union and international bodies – through their help in many respects; paying this debt cannot be left to those affected countries alone. The Union must lend a helping hand, which in this particular case means the northern countries (Germany, especially).

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2.7. Requiem for solidarity The year 2013 saw the adoption of the Union budget for 2014–2020. The multi-annual financial framework synthesizes best a community’s priorities, and how these priorities are “covered” by financial guarantees. One possible perspective is Europe’s strategic option: being a federation or a collection of states (a mere single market). All analyses dedicated to the crisis in Europe acknowledge that Europe is a half-way construction, which explains many things. The Union has a single currency but not a single financial policy (not to mention political union). The recently approved budget does not give any hints about the Union’s fundamental problem. The answer can be gleaned from data. An essential characteristic of a federal organisation is the existence of a strong budget that can support the federation’s objectives, a type of development that might bring states (regions) closer. For instance, “The American federal budget accounts for some 24% of GDP; the Swiss one is roughly 12%. The EU budget, by contrast, amounts to just 1%.”1 In the new multi-annual project, this percentage is again diminished (which carries some significance). A more detailed analysis shows that the economic stakes of the debate on the budget are relatively low – just 1 percent. The annual economic value of the budget is modest, yet the 7-year sum is larger; at almost one trillion euros, a vastly significant sum. How does the Union want to use this sum during the crisis? What are the multi-annual financial framework’s real objectives for the next seven years? Federal organisation periodically thematises the ratio between the federal level and its components (in this particular case, national states). The crisis has shown that the only way to maintain Europe united is to emphasize federal organisation. In our opinion, debates on the budget and their results have confirmed the rooted tendency of the last years, which translates into the renationalization of political and strategic decisions. The national direction, which became visible in the period preceding the crisis, has been firmly established over the last five years (when efforts to solve the crisis were made mainly by member states, not the Union), and is prevalent during recovery. The day the multi-annual financial framework was adopted was a sad day in the life of Europe: the day Europe’s options were dictated by national interests – powerful states’ interests, to be more exact. The title the Financial Times used for the editorial on this topic is

1

“Autumn Renewal? Having Survived a Difficult Month, the Euro Zone Is Grappling with Its Taboos”, The Economist, September 15, 2012.

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significant: “EU hawks win long-term budget cut.”1 Europe’s powerful states confiscated the European decision. The lack of preoccupation for solidarity is revealed by several facts. Firstly, a highly symbolical gesture. The final decision on the EU budget gave satisfaction to Great Britain, which pointed out that it did not have Europe’s federal evolution at heart. Obviously, Great Britain could not decide on a diminished budget on its own. It was supported by net contributors, Germany among Germany them, which, however, did not say it openly and instead chose to hide behind Great Britain to reach this aim that could not be declared openly by the real regional leader. Were these states victorious? Rather, the federal idea was defeated, with the collateral victory of eurosceptics. Some may say that the fact that Great Britain was victorious is a matter of money: the UK and many of the northern countries simply wanted to contribute smaller sums, which may represent a short-term advantage for contributor countries but is obviously a disadvantage for the Union and its development. These sums reflect an unacknowledged desertion from the idea of solidarity and its materialization. This is where Germany and the UK met. The multi-annual financial framework carries two meanings: the main focus is on the national dimension of the European evolution, and European problems were quasi-automatic transferred into the background. When the Union’s budget is given a percentage and the debate touches on what further cuts are needed, it is clear that federal life and the idea of solidarity do not take centre stage. Solving the crisis and recovery become essentially national problems. The Union’s life from now on will be composed of attempts at agreement among national interests, against the increasingly vivid background of the domination of German interests. The money was distributed in a questionable manner from the perspective of the fundamental value of any federal organisation: decreasing gaps and harmonious evolution. On the whole, cohesion funds (which express availability for solidarity) have decreased to the limit of survival of cross-border projects, another formula for reducing development gaps between north and south, and west and east Europe. The current budget creates the conditions for gaps within the regions. Let us take the example of Romania, which received 33 billion euros in the period 2007–2013. Our country became an EU member when the budget had already been adopted, which resulted in the promise that in the following multi-annual framework, Romania would be compensated with a larger sum of money. In the same period, Poland received 66 billion 1

Financial Times, February 9/10, 2013.

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euros, double the sum received by Romania, and was a champion of absorption. The difference in funds (over 30 billion euros) is still big, and became bigger because of Romania’s low absorption rate. In the 2014– 2020 multi-annual framework, Romania received almost 40 billion and Poland 106 billion, so almost three times more, a situation that can be attributed to different negotiation capacities, but this would justify several billion at best, not tens of billions. If Romania had a low “negotiation capacity”, our question is where the Union’s principles were when the budget was distributed. Anywhere else in the world, budget distribution takes “negotiation capacities” into account, but in Brussels’ case, the principles of solidarity, fundamental for the existence and viability of federal organisation, have become secondary. They were neglected in favour of budget cuts and distribution of funds. The difference between Romania and Poland in the period 2007– 2020 is over 100 billion (in distributed sums; the numbers are even higher in absorbed sums), a sum large enough to kick-start a country. One possible argument is that the population is different. The sum per capita in the 2014–2020 multi-annual framework is 1080 for Romania and 1890 for Poland – almost double. Such differences invite new gaps. Any federal organisation seeks to diminish gaps, not amplify them or institute new ones. “Austerity-minded EU governments led by UK and Germany prevailed over freer-spending counterparts to secure the first reduction in the bloc’s long-term budget.”1 This is how the Financial Times characterised the debate on the Union budget in the European Council. Austerity represented the dominant tone in the answer the European politics gave to the crisis, especially the crisis in the southern states. If “waste” were the cause, then reducing waste and promoting austerity should lead to solving the crisis. Yet this did not happen. What we wish to say is that this was yet another hypocrisy. It was not austerity that led governments in establishing the budget but austerity was invoked to cover the real motive behind the budget decisions: priority given to each country’s development, and not to the development of the whole, as well as wealthy countries’ low availability to help countries in difficulty. But irrespective of reasons, such a decision delays the relaunch of the Union, which is already visibly behind other developed countries. This is the Union’s fundamental problem. The Union’s results will be those of its members in the following years, especially the northern countries, which is a problem for the EU’s fundamental values. 1

Financial Times, February 9/10, 2013.

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It is often ignored that one of the fundamental reasons for the Union is to form a new development pole, to face the superpowers of the moment, which at the beginning were the US and the Soviet Union and are now the US, China and other emerging countries. The EU’s international economic weight and credibility have visibly diminished. It is slow in perceiving that it does not have and does not apply a unitary strategy to maintain or even amplify its international role. Angela Merkel underlined repeatedly that the Union needs to watch the rise of emerging countries more attentively. “Emerging economies were closing the gap and Europe couldn’t rest on its laurels: This is my credo and this is what motivates me.”1 Which is correct and timely but the multi-annual framework perceived this strategic issue as secondary, which shows clearly that, in Germany’s vision, the increase of European competitiveness will be the result of individual efforts. While continent-countries rise, Europe is fragmented into nation-states and this diminishes the force of its economy, which is what turned it into a world power in the first place. The Union’s historical counter-tempo will be extremely expensive. It seems that Europe no longer has the courage to face reality. All this avoidance contributes to worsening problems in Europe. Untreated these can lead to the marginalization of the continent and its development model, which generated so much hope. Among the gaps in the EU, one will add to the causes of European decline and decrease in credibility – the gap between declarations and actions.

2.8. Do not stray away from the industry because you will lose your way … The EU needs everything the developed world needs – a comeback to what propelled it and turned it into a world power: industry, manufacturing, a focus on complex products. The US have already taken big steps towards returning to their industrial tradition – Europe has not decided yet, just as it hasn’t taken a decision in so many other situations. “Sacrifice, yes. Cuts, yes. Then the Promised land”, Italy’s prime minister said recently.2 Europe will have a future if it goes back to its own past in an attempt to identify strengths and outline the perspective on its own evolution. It needs to revisit the more distant past of the modern age,

1

Crawford and Czuczka, Angela Merkel, 176. “Charlemagne: Waiting for Angela. The German Chancellor Has Big Decisions to Make, But Will Take Her Time”, The Economist, September 28, 2013.

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closely linked to technological revolution and breakthrough. Going back to a much closer past is necessary, as well. The rebirth of Europe is correlated with the development model it launched in 1951. We should never forget that the recovery of the West can be traced back to the support offered by the US after WWII, materialized in the Marshall Plan. The US financial effort was 171 billion dollars (at 1989 dollar value; in the meantime, the dollar has gone down). France got 45 billion, Italy 20 billion, the UK 38 billion and West Germany 20 billion.1 Since this was a 10-year plan (1945–1955), the American contribution meant 17 billion dollars every year. The result was “a historical triumph”. In a way, more important than the financial effort and the availability was the fact that this money – a huge sum at the time – was directed towards real economy: rebuilding infrastructure, modernizing companies, building new production units (and creating new jobs). It is not the sums as such that were important but their destination. The Marshall Plan embodies the truth that money must move real life. This is how Europe’s recovery started. That is why the circuits formed during the bank-bank financialization need to be circumspectly analysed. If the spirit of the Marshall Plan had been preserved, the crisis would not have happened, or would not have taken these dramatic, long-lasting forms. There is something in the US initiative that is usually overlooked by analysts. Why was the Marshall Plan adopted? Obviously, the first reason was to help Europe. But the US wanted to help themselves as well. In supporting the development of West Europe, the US wanted to support the rise of an economic partner. You cannot enter a competition where there are no competitors. Such teachings are extremely relevant nowadays. The evolutions we see today at the European level, dividing the Union into creditors and debtors, affluent and poor countries, raise serious problems from the perspective of the EU’s founding political and economic values. In a divided Europe, neither the North nor the South can truly make use of their potential. This is what The Economist recently revealed: “When American leadership shored up a vulnerable West Germany half a century ago, it was in the interests not just of Germans but of Americans too. Now it is Germany’s turn to lead its weaker allies, for their sakes and for its own.”2 It was a surprise to discover that the idea of a new Marshall Plan for Europe was launched not by various power circles within the EU but by 1

Zbigniew Brzezinski, “Beyond Chaos: A Policy for the West”, The National Interest, No. 19, Spring 1990. 2 “If Europe’s Economies Are To Recover, Germany Must Start The Lead”, The Economist, June 16, 2013.

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unions (German unions, to be more exact). This shows that in German public space there are various perspectives on and approaches to Europe and its evolution. On the other hand, the fact that unions have started to be preoccupied with Europe’s evolution helps us get an idea about the modesty of politicians’ preoccupations, be they European or not. We can read in the German unions’ project a type of reaction, an answer, even exasperation, that the issue of development is not at the top of European preoccupations where it belongs. What is this Marshall Plan 2 about? An economic stimulus plan, an initiative meant to promote what proved decisive during the crisis: investment as a means to stabilize and modernize the economy. The authors of Marshall Plan 2 have read carefully the lessons from the first, not only because it helped rebuild the West but because this was a stepping stone towards European integration. They realize that integration moves forward, but also that disheartening youth unemployment (in 2012, average youth unemployment was at 24%, and in Spain and Greece, above 50%) calls for “a new direction”. A new political strategy that would incorporate both short-term and long-term perspectives would start from Europe’s chronic demographic illness and the continent’s resource depletion. That is why German unions talk about an investment and development programme over a 10-year period (2013–2022), a true offensive of modernization spreading throughout the EU. Because the countries hit by the crisis cannot support such a programme themselves, joint efforts are the only realistic solution. The main problem of such a programme is financing, especially since Marshall Plan 2 would need 260 billion euros annually. In ten years’ time, this would amount to over 2 trillion euros (slightly over 2% of EU GDP). Anticipating the authorities’ unfavourable reaction, the authors underlined something that should get us thinking. Given the high investment required, one could easily dismiss our plan as being unrealistic but it is important to keep in mind that the costs of stabilising the banking system have reached €2 000 billion. So why shouldn’t it be realistic, and much more promising, to mobilise about the same sum to invest into education, innovation and decent work in Europe over a period of several years?1

There are several essential things to consider with respect to this initiative. We generally equate wealth with money. When we think of wealth in all its forms (prosperity, abundance, good living), we rarely 1

Ibid.

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consider its source. Money is its manifestation but the source is to be found elsewhere. In the early days of mercantilism, William Petty, the English theorist of this trend, said: “Labour is the Father and active principle of wealth, as lands are the Mother”. Labour is the equation’s perennial element. At the time, land was the main source of wealth. In the meantime, things have changed. We may get back to labour and land but it is compulsory that we add labour and industry, labour and research, labour and innovation. Is Marshall Plan 2 realistic or not? We would rather not express a viewpoint. We only wish to point out that to recapitalize the banks – for mistakes in banking – a total of 2 trillion was spent in the eurozone. This money could not be found, however, for the very source of money and prosperity. Do we have a name for a society that does not take care of the perennial source of its prosperity? Can it have a prosperous future? Judge for yourselves! A second problem is jobs, which, in our opinion, are the most comprehensive economic indicator. It is true that jobs are generally seen as a societal problem, and whoever brings this into discussion is quasiautomatically labelled a leftist. In an increasingly competitive world, preserving and consolidating jobs represent the most vivid illustration of the realism of economic strategy and true leadership. This is the most serious test of leadership in any firm or country. Job preservation means the validation of your economic option by the market. You are competitive and produce something that society needs. Let us not deceive ourselves! True competition nowadays is competition on the job market. And this is a competition that European society has every chance of losing. Europe’s demographic decline and its high unemployment, one of the highest in the world, are signs that this is a region that forgot to be preoccupied with its own future. When it started drifting away from industry and manufacturing, the European elite should have known that Europe would not only become less dynamic but would also get dangerously closer to chronic unemployment. The alternative is always services, one might reply! Indeed, but services can never be a national alternative. It is excellent that services development is encouraged, yet when production is replaced by services, a social monoculture is being built. To sell bread you first need to produce it! We do not know whether the Marshall Plan 2 is expensive or not; what we can say is that unless the Union can use its declining workforce, its future will not be too appealing. The global distribution of employment represents the most reliable map of various policies’ realism, of economic and political performance. No other indicator is as relevant as this key indicator reflects performance and stability. This is the true confrontation between the emerging and

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developed world. The emerging world has its own advantages. It has an abundant qualified and (most importantly) cheap workforce. The developed world is like an obsolete army – with well-instructed but few aged soldiers. Instruction does matter but when an army is strengthened by successive hoards of soldiers, it is hard to challenge it. India has its hardships, and here is another myth busted, proclaimed a publication. Hold your horses, was our thought. This year 250,000 engineers will graduate in India. If they happen to fail, another cohort will follow. People forget that India has reached a critical mass of specialists, who are bound to produce solutions because they badly need to. The developed world has no other choice but to specialize in complex technologies in a field of some tradition, where it would be difficult for other countries to challenge their performance. For the moment, at least, the emerging world is less prepared to break into these fields. This is one of the few chances the West has got. Innovation is indeed the developed world’s advantage, but it is closely related to modern industry and the improvement of existing technologies. Cutting innovation away from production is a losing bet. Innovation can essentially contribute to improving performance but it is not an option for solving the problem of unemployment. Once more, developed society must turn back to its own tradition in those fields where it can be successful because its position in the future hierarchy of the world, and its wealth, depend on the success of this option.

2.9. “No experiments!” The process of the German power rise is in full development; the new stages to follow may have unpredictable evolutions yet some considerations on the future Germany could be useful. It is largely believed that after the elections, Germany will change its position radically, and will be more flexible and attempt to solve the blockages of the Union and the Eurozone. Prudence is required. After the elections, Germany will maintain its position and the same predictable evolution, governed by the dominant features that have become part of the public conscience: saving and stability, high performance and maximum precautions towards various trends and experiments, behaviour adopted in Konrad Adenauer’s time. Two constraints will have to be taken into consideration. Germany transformed national interest into a gatekeeper of its important decisions. It will agree to any change at the European level unless it negatively impacts German interests and options. In other words, European interest will have the value of a complementary criterion. These

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constants of the German position will be justified and re-evaluated repeatedly but the positions will be maintained. A second constraint is Germany’s European vision, the stable point of which is turning the continent into a competitive force in the contemporary world. This supposes efforts to reduce labour unit costs, improve performance and so on. It is certain that Germany will not take any steps back. The problem is not the correctness or the opportunity of the objective but the means and their impact on the average citizen’s opinion about the Union. Maintaining the Union within parameters announces a medium- and long-term risk for Europe: the decline of its real power, including the living standards. A harsh regime to increase competitiveness, on the other hand, can lead to the situation that Jürgen Habermas signalled: “What unites European citizens today is the Eurosceptic mindset that has become more pronounced in all of the member countries during the crisis, albeit in each country for different and rather polarizing reasons.”1 In fact, trust in the model has decreased dramatically. Romano Prodi, twice the prime minister of Italy and president of the European Commission between 1999 and 2004, considers that in the long run, Germany will be increasingly connected to Europe: “I think we need Germany, but Germany needs us more than we need Germany.”2 We are to understand that Germany’s position will become more flexible in the next period, which we doubt. Now and in the medium-term perspective, Germany will continue to be a significant export economy. Despite the lack of data, it is not hard to suppose that Germany will have its own geopolitical strategies, apart from the Union’s evolution. The best argument is probably that this country avoided having enemies and tense relationships with countries all over the world. It did not join the second intervention in Iraq, and has probably the most moderate position on conflicts in the region, not to mention the special relationship it has built with Russia. In other words, in its foreign relations Germany promotes a pragmatic applied vision that is similar to China’s. At the moment, Europe needs Germany more than Germany needs Europe, especially financially. Europe’s difficulties are more serious than at first sight. The question is not who needs the other more but how these two entities see their future and how important a future together is for them, and what efforts they are willing to make to preserve this future. Common points do not seem to be very clear at this point. Europe – especially countries affected by the crisis – seems reticent about its future 1

Jürgen Habermas, “Democracy, Solidarity and the European Crisis”, Social Europe Journal, May 7, 2013. 2 Crawford and Czuczka, Angela Merkel, 175.

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efforts, and Germany seems tempted to forget too easily, too quickly, that “many of the loans that enabled the southern Europeans to spend extravagantly were made by German banks, which are among the main beneficiaries of German-financed bail-outs.”1 Nor does it seem to doubt its measures and choices for Europe. Germany’s medium- and long-term projections seem to under-evaluate the significance of rising continent-countries, especially East Asia, which is visibly dominated by China. Whoever believes that Asia will not compete with developed countries, even in traditional fields, is wrong. It is highly surprising that current political judgements do not see China’s rise for what it is. Ten years ago it was unimaginable that China would compete against the US in one of its “privileged” fields – high-speed computers. Today, China has a real chance to be the top competitor in this field, which is significant economically, technologically and symbolically. Consequently, Germany will not be able to avoid Asian competition, and cannot rely completely on its competitive capacities in the traditional field of complex machinery. Berlin is right to address the problem of competitiveness because this is the only solution to preserving European power. To attain this objective, the concern for preserving the Union’s unity is at least as important as the increase in competitiveness. With Europe, Germany has another global significance. It would be a strategic error for Berlin to believe that in the long run it could join the global game with continental-sized countries on its own. Germany, as a regional power with global perspectives (encouraged by export indicators), is challenged by several risks, among which is entering the (allegedly) known territory of global powers and losing its way. Germany’s second chance at the moment is “Germany’s European test”: to contribute to the rise of the continent, at a time when Europe badly needs it, rather than attempt a rise on its own. History (especially Germany’s history) teaches us that chances need to be used wisely.

1

Berggruen and Gardels, The Next Europe.

CHAPTER III EURO, THE NEW DEUTSCHE MARK

1. The euro, the scapegoat for Europe’s illnesses The distinctive sign of the European crisis is that it is made up of several “overlapping crises” whose communicating levels led to a problematic conglomerate that is difficult to read. The euro crisis reproduces the model: the same overlaps, and multiple influences and intersections, with one difference: in Europe’s case, no one doubts the model, officially speaking; the emptier the model, the weaker the allegiances, the more invoked and supported at a rhetorical level. In the case of the euro, this translates into an open criticism of the decision to introduce the single currency. The euro is held responsible for Europe’s problems; so much so that it seems that the Union would not have had a crisis had it not been for the euro, which is entirely false. The euro has become the scapegoat for the crisis. The problems with the delayed construction of the European Union and the postponed harmonization of various countries’ interests, with the visibly neglected consolidation of solidarity, are put down to the single currency crisis. But this line of argument will discourage the progress of the EU and, furthermore, erode one of the pillars of Europe: the existence of the single currency. A clear analysis needs to make a distinction between these intermingling perspectives. The first refers to the preponderantly technical problems of the euro. Any coin needs economic and institutional conditions to function, and this also holds true for the euro. Numerous experts seem to have concluded that the introduction of the euro was a mistake. It is then absolutely necessary to analyse the reasons for its introduction. It is true that many things have been left unclarified and unfinished in this process, but it is also true that the single currency was not adopted overnight, or under pressure. The euro has very important geopolitical determinations, and answers very precise objectives for asserting European power and directing the Union towards federalism. Another essential track of analysis concerns the relationship between the European crisis and the euro crisis. Indeed, at the core of the European

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crisis is the euro crisis, which illustrates the crisis of the half-way European construction, the crisis of unfinished projects (the single currency being one of many), the crisis of competitiveness gaps among European economies, and so on. In this context, the euro crisis is the vehicle that the Union used to travel in, in Europe and the world. It does not cover, however, the dimensions of the crisis; nor does it explain all of the EU’s problems in the last years. Contemporaneity is, if not superficial, snug: if complex problems are “wrapped” in an “explanatory pill” (in this particular case, the euro crisis), then the public is relieved and happy with the explanation. We will then have to distinguish between the euro crisis and the Union’s crisis. Indirectly, the euro is paying for the rise of Germany, which would not have come so far, so the argument goes, without the euro crisis. This is true to a great degree. Germany’s role as the significant European power was built during the euro crisis, when it used well the context of a possible collapse of the euro to impose its conditions on countries in need of finances. There was no talk about German power in 2006; today, it is on everyone’s lips. The argument is that the existence of the single currency is to blame for this change in the Union power balance. A fallacy, obviously, which diminishes Germany’s real merits and, on the other hand, unfairly holds the euro responsible. The euro crisis came with the banking crisis. The discussions about debt, insolvency and collapse tempt analysts to believe that the banking crisis is down to the euro crisis. Europe’s banking crisis would have taken place with or without the euro. The banking crisis was the foundation of the developed world crisis. It was an extremely important dimension in America’s crisis, where there is no euro. Talking of influences, we may say that the banking crisis was the foundation of the euro crisis. We should avoid treating the euro as a scapegoat; otherwise, we will not be able to identify and treat Europe’s illnesses and the Union’s crises.

2. Euro and the European pole of power The clearest explanation for an event is often its history. The problem of the single currency was raised in the late 50s in the context of efforts to build the single market. It became poignant in the 70s, when the gold standard was abandoned completely. The countries that had dollar reserves and wanted to exchange them for gold from American authorities, among which was France, had losses. This gave impetus to the idea of the single currency. In this respect, France’s interests coincided with Germany’s, who was also discontent with the “games” the Americans were playing

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with their own coin, which at the time was the single most important exchange and reserve currency. An attempt was made in the early 80s, which failed just like the one in the 70s for the same reason. The existence of a single currency requires a redefinition of sovereignty: national governments no longer have the same freedom to adopt various measures when national currency ceases to exist. In fact, this is what led to the euro being severed from many of the institutional structures that a currency needs. The problem of the single currency was raised vocally in the early 90s, in the fast-changing Europe. Germany’s reunification was a fact, the Soviet Union had collapsed, and the EU had to develop a vision on Central and Eastern Europe and its own evolution in this new context. The Maastricht Treaty created the conditions for creating the monetary union, an essential step being the introduction of the single currency. After being launched in electronic form in 1999, the euro was effectively in use in 2002. The historical moment of euro introduction deserves some attention. The sociological and geopolitical grounds of this decision are worth mentioning. Many analysts speak about a historical haste to create the single currency, which has some correspondent in reality but a fundamental truth is neglected: the coin is the expression of a community’s power. The Union had become an economic power, which entitled it to have a single currency similar in force to the dollar. It is not insignificant that the problem of the single currency was raised successively every decade since the creation of the single market. When the EU was more clearly defined geopolitically, having recovered most of the continent, and its economic power was similar to that of the US, it was normal for the single currency to be an acute problem. The rising power, China, will focus on the transformation of its coin into a relevant currency. Right at that effervescent moment, Fred Bergsten, former councillor to President Bill Clinton, acutely pointed to the significance of the initiative to launch the single currency, which changed the configuration of international finances, creating the conditions for the appearance of a new bipolar order that would replace America’s hegemony dating back to the end of WWII. The historical equivalent would be the greatest change in world finances, only comparable to the moment the dollar became stronger than the pound in the inter-war period.1

1

Fred C. Bergsten, “The Coming Dollar–Euro Clash”, Foreign Affairs, March/April 1999.

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Economic, geopolitical and political reasons were the foundations of the single currency as a significant stage in the European construction. To give precedence to some over others will only result in a deformed image of the significance of this measure. Most authors writing about the euro crisis, and most eurosceptics, see as the main cause of today’s crisis the political reasons behind the single currency, denouncing the prevalence of symbolic rather than economic rationale. The more I read, the more I understood that the single European currency was not really about economics at all. The real truth, sometimes admitted on the Continent but always denied at home, was that it was overwhelmingly a political project. Facts had to give way to the vision of a united Europe and economic logic was not relevant unless it served this purpose.1

The rationale is that the political reasons prevailed, and this is what brought us here. Without the haste of the early days, and with better preparation, the crisis would have been avoided; the existence of the single currency endangered the existence of the EU. Undoubtedly, political arguments were of paramount importance in introducing the euro. Joschka Fischer, Germany’s former Minister of External Affairs, even asserted that the euro introduction was not only the crowning-point of economic integration, it was also a profoundly political act, because a currency is not just another economic factor but also symbolises the power of the sovereign who guarantees it.2

In fact, an essential element is forgotten in the discussion about the introduction of the single currency: we employ two different images of the continent; we have two Europes in mind. The Europe then was on the rise, was optimistic and full of possibilities; the Europe now is tired and resigned, and seems to refute the foundations laid fifteen years ago. Two Europes led by two generations of leaders, dissimilar in scope and intensity of attachment to the European project. The will to make a project triumph is essential in political projects. It is surprising that it is not resources but availability and will that are lacking today. Equally significant is that the euro was adopted in the Union’s federal age, a time when it was still believed that the evolution of the European community targeted the creation of the United States of Europe. One of 1

David Heathcoat-Amory, Confessions of a Eurosceptic (Barnsley, South Yorkshire: Pen & Sword Politics, 2012), 75–76. 2 Apud McCormick, Why Europe Matters, 61.

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the paradoxes of European construction is that the foundation is federal, but the upper layers cut loose from the constraints of the foundation and follow (national, global, hegemonic) values that are different from the initial federal aims. In this context, the euro is a hindrance. In our opinion, the euro is in fact an anchor of the European project. Without its existence, the Union would probably not have been a union. We must be grateful to predecessors who introduced the euro, even though the euro crisis was very difficult. This is the price to pay for preserving the construction, even though it has strayed from initial values, especially solidarity. It is essential that the European construction and the development model it embodies survive. While the construction is still standing, it will be a reminder of the initial values and intentions.

3. The incomplete currency The moment the euro was created is very important. This is where to find most of the mistakes and errors that finally led to the crisis; some were perceived then, others were discovered later, when the crisis hit Europe. It is certain that the launch failed to describe in detail the (economic, institutional) conditions under which the single currency functioned, establish stages, fix priorities and give details about engagements. From the beginning, analyses by experienced central banks (such as Bundesbank or the Bank of England) showed that a monetary union could last with “a type of political union”. The day before the Maastricht conference, Helmuth Kohl underlined that without the concomitant evolution of political union alongside monetary union, the latter would remain “a sand castle”1 so there was the conviction that the hasty introduction of the single currency required a series of concrete steps that would support the euro. Other authors highlight some of the other mistakes that were made when the euro was first introduced. For instance, George Soros underlines that the single currency benefitted from the existence of a central bank, but not a treasury. The Union had a right to issue coin, but the fiscal policy (establishing and collecting taxes) was left to the states. A fracture was introduced at the very core of the Union’s federal construction, between the fiscal and the monetary actors. There was a sort of explanation, an excuse: the architects of the single currency considered that political will 1

“Discourse by Helmuth Kohl in Jouy-en-Josas, on 3 December 1991”. Apud Stephen Haseler, Super-State: The New Europe and Its Challenge to America (London: I. B. Tauris, 2004), 90.

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would raise this essential pillar for the existence of the single currency. But when such important decisions are at stake, the measures that support them cannot be left unattended. Such unchecked evolutions in the sensitive field of finance will only push the possibility of accomplishing these objectives further away. Positions and focuses can change in time. In politics, what is valid today can be less convenient and even undesirable tomorrow, which is exactly what happened in the Union. From this perspective, David Marsh was right to remark that the monetary union’s accomplishment was one of the objectives that guaranteed the functioning of the euro: “The sobering reality, fifteen years after the euro’s birth, is that not one of these objectives has been fulfilled. In some ways, Europe appears further away than ever from realising them.”1 There is a deficiency in the design, a hidden one, of which architects were not aware in the beginning but which became apparent during the crisis. From the very beginning, the euro was protected solely against excess from the public sector. The private sector was not even taken into consideration. The Maastricht Treaty contains provisions only for public deficit. The reason is clear in George Soros’ answer: the architects of the euro “laboured under the misconception that financial markets can correct their own excesses, so the rules were designed to rein in only public-sector excesses...The excesses, however, were mainly in the private sector.”2 This attitude is very instructive. The formula is easy to recognize: “Markets can correct their own excesses”. The same formula dominated US politics, fed bubbles and lastly triggered the crisis. This is the key phrase of neoliberalism, a position that postulates the market’s superiority over the state. It is surprising that the Maastricht Treaty, which founded the new historical phase in the Union’s construction, took over this position. There are authors who label this treaty “neoliberal”. Although this position is difficult to share, this particular provision is obviously neoliberal. The problems the euro is facing at the moment come from the private field, especially banks. The debt from this private field has been taken over by the state, which has led to sovereign debt. The public debate is focused on sovereign debt, which induces the perception that the state is guilty. It is true the state made debts, but it did so in order to save private banks. The state served the private sector and represented an instrument for saving the banking field. The state’s behaviour in countries facing sovereign debt is 1

Marsh, Europe’s Deadlock, 14. George Soros, “True Europeans Now Need a ‘Plan B’”, in Financial Turmoil in Europe and the United States: Essays by George Soros, (New York: Public Affairs, 2012), 112.

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similar to the American’s state behaviour; both attitudes fed by neoliberalism. The euro crisis is fed by the banking crisis, the crisis of the sovereign debt, the crisis of competitiveness gaps. The euro crisis gathers them all, like a river gathering streams. It is not the river’s fault if the streams are polluted. The financial, economic and political crises add up to the euro crisis. Ignoring this reality will delay Europe’s relaunch. The single currency supposes a homogeneous economic region, or at least one without disparities. The currency is a standard measure, which applies to all, equally. If states have similar potential, then the currency can launch positive processes. If, however, a unique measure is applied to different economic realities, then the result is unequal performance, which in time leads to gaps. The GDP of the wealthiest region in 2008, Inner London, represented 343% of European GDP per inhabitant (EU 27), while the GDP of the poorest region, Severozapaden, in Bulgaria, was 28%.1 So the ratio between the richest and poorest region was approximately 1:12. The top four regions in 2008 were all from early EU members. Consequently, this is a sign not only of amassed wealth but also of a constant development rhythm. In other words, gaps are preserved and widened. Such gaps can also be seen in emerging economies, such as China, India, Russia and Brazil, at 1:8 ratio between richest and poorest regions.2 The US and Japan are characterised by a more uniform distribution of wealth. In the US, the richest state is only twice richer than the poorest, and all states’ GDP per capita is higher than the average European GDP per capita.3 Could we conclude that the currency shouldn’t have been introduced? In our opinion, this conclusion would not be correct. But a substantial convergence policy favouring closing the gaps among states should have been promoted. The main solution for economic disparities is the solidarity policy, supported by an appropriate budget. The Union’s actions here are hard to understand. The budget for the next seven years is even lower, which says a lot. 1

“GDP per inhabitant ranged from 28% of the EU27 average in Severozapaden in Bulgaria to 343% in Inner London, Eurostat news release”, February 24, 2011, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/1-24022011-AP/EN/124022011-AP-EN.PDF. 2 European Union, Investing in Europe’s Future. Fifth Report on Economic, Social and Territorial Cohesion, Communication from the Commission, November 2010, p. 6. 3 “Economic Downturn Widespread Among States in 2009, BEA news release”, November 18, 2010, http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm.

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Our question is where were the Union’s ruling bodies? If they failed to understand the particularities of the new economic context, why did they not when Germany had a new start? A sad conclusion can be drawn: European bodies are not coupled to the Union’s most important problem – development. The Union itself was created to promote a new development model. Its leadership fails to see the new tendencies that dominate the European community’s economic evolution. In our opinion, the fact that competitiveness gaps appeared in the EU without generating serious debates and measures shows the real state of the European construction. The Union has become a fiction; a kind of roof over national projects and policies, allegedly national projects and various interests but not European interests. It is striking that these plans and policies are presented as “European” in values and aims. From a great political project, the Union has become a sort of label that the new national, regional and global actors are careful to show, just as the rising bourgeoisie bought nobility titles as a form of legitimation. The Union serves as justification for various projects with unknown objectives. Indeed, it is devoured from the inside by forces that use European rhetoric and pretexts. The real problem is their aims, which at the moment are difficult to understand and do not follow the classical road of the European construction and its values. If there is a viewpoint everyone shares, it is that the introduction and rise of Germany after reunification are related. No important author refutes this. “The Euro was designed to shackle Germany.”1 Indeed, right after the reunification, there were febrile preoccupations for firmly anchoring Germany to the European structures of the new economic power, which is a sign that European powers were taken by surprise by the process of reunification, which took place so quickly, and were looking for an institutional formula that would integrate Germany. The introduction of the single currency was the answer to this challenge. Without this political constraint, the euro would never have been born.2 It is quite ironic that only eleven years after the introduction of the euro, Germany has come to have the decisive word in the very structures that were meant to integrate it; that, far from shackling it, the euro was the most appropriate context for the rise of the German power. A paradox – which needs to be explained. How did Germany come to perform so well? How did the initial project become its very counter-project? That this is highly ironical is mentioned by an author from the UK, a country that has 1 2

Marsh, The Euro, 277. Cohn-Bendit and Verhofstadt, Trezeúte-te, Europa!, 97.

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always been more prudent towards Germany and Europe: “It was a great irony of history that the EU, set up to keep German power in check, should end up with Germany holding the future of Europe in its grasp.”1 Predictable German attitude and willpower explain its evolution, while the unpredictable evolution of the EU has a role in the continent’s withdrawal from its project and from an awareness that is all the more necessary in the context of problematic tendencies and evolutions on its own territory. Let us attempt a systematization of the elements that composed Germany’s coherent attitude in this essential field, the creation of the single currency. From the start of the discussions on the creation of the single currency, Germany had a coherent, even inflexible viewpoint. This detail comes from Jacques Delors, considered “the father of euro”. He made this confession with historical value to Andrew Moravcsik, Director of European Union Program at the Woodrow Wilson School of Public and International Affairs, Princeton University, saying that he saw the single currency as a failure because he had been unable to persuade the Germans to compromise. Berlin's nonnegotiable demand in exchange for monetary union was a European central bank that would be even more independent in its design and even more anti-inflationary in its mandate than the old Bundesbank. No provision was made for fiscal transfers or bailouts among European states.2

Can we talk about a carefully planned German plan that could favour the current situation, a scenario draconically followed over the years? This is rather the attitude of a country that knew you can treat lightly any other field but finance. Currency is the synthesis of economic activity. Well used, it can help economic development; badly used, it can worsen the economy and overburden society. This situation also teaches us about a country that learns from history and does not forget what it learns, irrespective of pressure. As we have said, Germany is oversensitive about inflation, an attitude fed by the trauma it lived through in the inter-war period. We may even admit that this oversensitivity has changed into an obsession. But Germany does not consent to making concessions to measures that might trigger the inflationist spiral, and its caution makes it over-securitize banking from any kind of influences, including political

1

Gavin Hewitt, The Lost Continent: The Inside Story of Europe’s Darkest Hour Since World War Two (London: Hodder and Stoughton, 2013), 17. 2 Andrew Moravcsik, “Europe after Crisis, How to Sustain a Common Currency”, Foreign Affairs May/June, 2012.

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ones. That is why Germany had precise requests when the problem of the single currency was raised: to establish the European Central Bank in Frankfurt, to protect the activity of the Central Bank from political influences (the American Congress is more powerful over the Treasury than the European Parliament is over CEB), and to reduce the possibilities for raising inflation. From the perspective of the current situation, CEB can be openly criticized for not having the instruments of any other central bank. It cannot purchase bonds from a state in difficulty, but needs to appeal to other structures, such as Outright Monetary Transactions. This complicates things, stimulates the bureaucratic path of decision-making and delays the adoption of decisions in a field where promptness is essential. Furthermore, we will have to remark that negotiation over the euro was a real battle, and that the German style of banking management was the winner. This is not just a matter of strictly professional provisions but of Germany promoting provisions that in the last run protect its own interests, as David Marsh remarked: For the first time since WWI, Germany will place these interests before those of Europe or of the members from the euro periphery, who were hit hardest by the evolution of sovereign debt.1 The euro was introduced, but the responsible bodies did not care for its functioning or its economic impact at the level of the eurozone. The Union should have done that, but in fact it was Germany who took care of things with the first serious study on the possible impact of the single currency on the continent’s economic configuration. Until the euro was introduced, any European country could appreciate or depreciate its currency to influence competitiveness. Now this is no longer possible. The euro has the same nominal value throughout the eurozone. If the value of the currency cannot be influenced, what else can be done? Something crucial: to influence the value of the goods measured by the currency. The measure (the currency) is unique, but what is being measured can cover and express different economic performances: cheaper or more expensive, newer or more classical, better or worse quality. If you cannot influence currency, you can work on the competitiveness of the product. This is what Germany did. Agenda 2010, launched by Gerhard Schröder in 2003, followed just that strategy: a decrease in labour unit costs, an increase in competitiveness, an increase in exports. Germany understood this, but other countries did not. When the same currency applies to different economic realities, this can result in devastating results 1

Marsh, The Euro, 286.

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for the least performing economy. The reality is that the single currency represents a sort of economic “leash”. The existence of the single currency creates a new economic context where success belongs to highperforming economies. The winner takes it all. When the euro was introduced, a totally different situation was created. Let us admit that the other countries did not understand the new context. They should have taken the hint from Germany, however. They may not have made the same competitiveness leaps as Germany but they could have certainly decreased the existent economic gaps among them. When the creation of the euro was decided in 1992, the premise was overoptimistic: that European economies would evolve in convergence. It did not happen. The initial competitiveness differences became wider as a consequence of different policies applied throughout Europe. Thus, Germany and the northern countries had more comparative advantages, associated with their own economic performance and the timely options for preserving production capacities. In this way, the introduction of the single currency and the standardization of the exchange rate applied to an increasingly different economic reality could contribute to – but not determine – the appearance and amplification of the gaps between north and south. Against this background, the single currency worked according to the law of soap bubbles: the competitive actor will become more competitive; the weak actor will become weaker. In other words, it generated a spiral of commercial deficit. The powerful will benefit from the surplus of preceding years and evolve differently; the weak will first have to cover the previous deficit and be sentenced to delays. The problem is that these are objective tendencies that cannot be managed with shortterm measures. Bailouts are granted to insolvent countries, but the situation is likely to occur again in the future. At the moment, Europe suffers from an illness that has no easy cure: division. Equally important to economic division is resignation, the fact that people can consider, at a point, that whatever they do, they cannot escape periphery, which will carry the stigma of underdevelopment whatever the people’s actions. In this respect, it is significant to quote Alexis Tsipras, who urged Greek citizens to stop worrying about the fact that they would be cut away from the European financial system if they rejected austerity because they do not reap the fruits of the system.1 Inequality sneaks in easily at the periphery and it is difficult to defeat.

1

Quoted in Christopher Caldwell, “It’s No Surprise We Don’t Care About a Lift in the Dow”, Financial Times, March 9, 2013.

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The introduction of the euro was considered the epitome, not the starting point. Half-measures and delays in the introduction of the euro started processes and tendencies that were the opposite of the initial intentions. We have assessed elsewhere that the euro was a type of special vaccine which was to produce great positive effects, but in a body which was little prepared to face adverse effects and use the positive ones. So it is not the vaccine which should be judged. As any vaccine, it has good and bad parts. The vaccine is relevant for a particular body and its susceptibility. It is not the vaccine which should draw our attention but the social body which is about to receive it … Unaccompanied by measures, the euro played the role of the virus. Vaccine turned into virus. Instead of consolidating the Union’s basis, it eroded it. Instead of decreasing gaps between states, it contributed to their amplification. Instead of promoting the consolidation of solidarity, it made it weaker and fed an attitude: each for oneself.1

4. The fractured pillar of the banking union What is not solved in time comes back with a vengeance! This is how things happened in the Union. The difficulties came from the least expected area, the private one: “But government borrowing was less of a problem than irresponsible private sector borrowing, which – encouraged by low interest rates – generated an economic boom fuelled by debt in Spain and Italy”2, with the added difference that banks, whether local or foreign, had an interest everywhere. For instance, French and German banks were involved in Greece and Spain, a German pension fund was involved in Ireland, and so on. As we have shown in the chapters on Europe, what happened in the Union during the banking crisis resembles strongly what took place in the US: transferring debt into the public debt, states making efforts to recapitalize banks, and so on. For Europe the numbers are low. The day after the Greek crisis started, Angela Merkel admitted that the solution to the problems generated by banks lies within each country and not in the Union as a whole. In other words, each country needs to take care of its own banking system. It must be said that financial markets failed to give this declaration its due, until Greece could not honour its debt. George Soros considers that 1

See our article “The Euro from Vaccine to Virus”, in Lumea cu două viteze. Puterile emergente úi Ġările dezvoltate [Two-Speed World. Emerging Countries and Developed Countries] by Paul Dobrescu (Bucharest: Comunicare.ro, 2013), 155– 67. 2 McCormick, Why Europe Matters, 62.

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the German chancellor’s position is the starting point of the euro crisis, of the Union’s tendency for disintegration. Without ignoring the American author’s interpretation, we read Angela Merkel’s position in another way – as proof that the German government had a relatively exact image of the debt in Greece and other eurozone countries. We do not know whether the German government’s preoccupation was to avoid the Union’s engagement in crediting this debt. It is more likely that as the main creditor country, Germany wished to spare its own resources, which was later confirmed. That the information of the German government could come from their own banks involved in these countries is another problem, but we cannot doubt the realism that governed the evaluation of the debt of European countries and banks. This does not mean that the neoliberal provisions in the Maastricht Treaty do not reappear under several forms during the crisis. In this respect, George Soros is right to reveal that, although the crisis highlighted from the very beginning that financial markets cannot correct themselves, European authorities continued to use this principle. For instance, they treated the euro crisis as a fiscal or budget crisis, although this was true of Greece only. The other countries in Europe suffered the consequences of banking problems or of competitiveness gaps that upset the balance of payments.1 Because the complexity of the crisis was not grasped from the beginning, a standard explanatory pattern was applied, which resulted in delayed support measures (not the best choice, obviously). At the moment, the mistake in the Maastricht Treaty is to be corrected through the provisions that will lay out the foundations of the monetary union. From this perspective, the assessment made by Germany’s Minister of Finances, Wolfgang Schäuble, in the summer of 2012, when the euro crisis was at its worst, marks in our opinion a departure from neoliberal approaches. The key lesson of the crisis, one sadly confirmed by the recent Libor scandal, is that self-regulation and light-touch supervision just do not work in the financial sector. Without adequate rules and careful policing, the interests of individuals and those of the system will invariably diverge. Left to its own devices, the market will self-destruct.2

1

Andrew Duff, “Maastricht Treaty Tested to Destruction”, Financial Times, December 5, 2011. 2 Wolfang Schäuble, “How to Protect EU Taxpayers Against Bank Failures”, Financial Times, August 31, 2012.

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This is the essence of the project called the Banking Union. Launched in 2012, it is an important project for the future but has nothing to do with solving the crisis as such. It is a construction within a construction that answers future needs, not present ones. This presents a virtue and a defect at the same time. In normal times, we would have talked about virtue only; nowadays, current problems are so important that they will have to mobilize most of the Union’s energy.1 For no other reason, pressing problems question the very existence of the Union. At the core of the banking union will be a single supervisory mechanism, which will function at the level of CEB. In other words, CEB will have the right to check and intervene in the approximately 6,000 banks from the eurozone. This does not mean that each bank will be evaluated (which is still the prerogative of national central banks) but that this mechanism creates the possibility for CEB to exercise direct control on any bank at any time. The supervision mechanism is the first step; it will be followed by what Wolfgang Münchau calls “a common bank recapitalisation policy and fund, a single resolution mechanism and, ultimately, a single deposit insurance scheme.”2 The third and, in a way, the most important thing is the overall significance of this measure. It confirms the eurozone as the true European Union. It will have its own banking regulation mechanisms, its own budget, its own bank recapitalizations (in the new context, the European Stability Mechanism will be able to recapitalize banks without indebting the states where those banks are located). In a word, the eurozone will represent the Union. Those outside the eurozone will be by force of things powerless members of the Union, irrespective of their economic and political prowess. The UK will find itself in this situation as well. Angela Merkel’s warnings were clear in this respect: “It would be wrong to think of the banking union as an extension of the single market. It is best to think of it as a part of the hard-wiring of a monetary union.”3 Why would it be wrong to think of the banking union as an extension of the single market? Because then all EU countries should be part of it, as they are part of the single market. This is an important detail: in the first phase at least, the banking union will comprise only the eurozone member states. In a way, the eurozone dislocates the Union – it usurps it, takes away some of 1

As John Maynard Keynes remarked, the long term is misleading – in the long term, we will all be dead. Apud Paul Krugman, OpriĠi această depresiune – acum! (Bucharest: Editura Publica, 2012), 33. 2 Wolfgang Münchau, “Banking Union Will Not End European Crisis”, Financial Times, October 21, 2012. 3 Ibid.

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its aura. Increasingly, when we speak about the Union, we will have in mind the eurozone because this is the area with regulations and precise rules inclusively in finance and banking. In fact, this initiative is a very important step towards a federalist evolution. In Münchau’s opinion, this is “the biggest act of political integration in Europe since the creation of the European Economic Community 55 years ago. I believe that they will be even bigger than the euro itself because they are a significant encroachment on national sovereignty on several levels.”1 In fact, the hierarchy of various measures and initiatives is not the most significant thing at this point. For us, it is indeed relevant that we finally have an initiative that plans to regulate banking activity, helps the euro become functional and adds a new instrument of a federal nature to the European construction, which is absolutely necessary for the future, even though the conditions of its application are still to be clarified. At the moment, the European construction is slanting. Any construction needs at least three pillars to resist. The one represented by the monetary policy is fractured because not all EU members are eurozone members and they do not use the single currency. The pillar represented by the banking policy is also fractured because a vision about the banking union is in the making and will only be applied in future years. The pillar represented by the fiscal policy does not exist at the European level because it works at the state level. Some measures have been adopted concerning the level of debt, the limit of deficits and so on, which are definitely timely; but the European construction needs more than just provisions and recommendations. It needs policies and decisional capacities, in fact, political and managerial substance, to support the construction. It is a wonder not that the European construction is slanting but that it does not fall to the ground.

5. An uncomfortable construction “A stateless currency”, everybody’s currency (but no one’s in particular) is what the euro is today. It has a central bank that does not have the power other central banks have: to give loans, intervene to support a state, issue bonds. It is not integrated into a coherent financial power (the financial arm functions at the level of member states). It does not have the right to issue solidarity bonds, as does any state. To judge the euro, we first need to look at the state that supports it: a half-way Union, 1

Ibid.

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which is neither a federation nor a confederation. The currency could only reflect the failures and half-ways of the Union. The currency reflects the state. Things will not change soon because the Union will not change. The real blockage is at the political level. Analysts merely look at the eurozone and pass judgements, but the major decision-making belongs to the politicians. If the banking union were invested with precise responsibilities and turned into a “full union”, it would certainly challenge state sovereignty. Obviously, this would not be approved by chiefs of state and government, members of the European Council, the main centre of strategic decision-making of the Union. The debate about the euro crisis brings to mind the words of a great French economist, Jacques Rueff; current analyses do not insist upon them although they perfectly describe the current situation: “Europe shall be made by the currency or it shall not be made.”1 Europe’s past is national. It is Europe that consecrated the nation as a form of political organisation, and it is here that the concept was best illustrated. The greatness of this tradition weighs hard. No one can reproach France because it does not consent to stray from the value called sovereignty since the history of the world thrived on the French nation’s rich traditions. Any important nation in Europe has the same past. At the same time, if the current organisational model proves invalid, Europe’s chances of facing the rise of continental countries are nil. This is Europe’s fundamental problem. It needs to choose between the respect and love for “the parents” and the duty towards “children”. This is why Rueff’s words are important: they show a way that does not put sacred duties head to head and, at the same time, paves the way towards unity. The federal direction for Europe will be salvaged, if possible, by this special economic seed, the single currency. We cannot say that the euro will save the political project of the United States of Europe but the existence of the single currency forces decisions for the Union’s federal evolution. In what way is the euro an element that favours or accelerates the federal construction? The cost of giving up the euro is very high. In strictly economic terms, it is cheaper to save the euro than to give it up. To this are added important political costs. Saying “no” to the single currency means saying “no” to the European construction. Few countries could assume such a risk. The euro represents an uncomfortable inheritance. The single currency was projected from the beginning as a fundamental element of the federal construction. In the meantime, especially during the 1

Apud Emmanuel Mourlon-Druol, “The Euro Crisis: A Historical Perspective”, June 2011, http://www.lse.ac.uk/IDEAS/publications/reports/pdf/SU007.pdf.

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crisis, the Union strayed away from the federal path. It is obvious that in the new context, federal elements, especially the single currency, become uncomfortable. Foundations always announce the form of the construction. It is possible to change the construction when it is half-way up but it is extremely costly economically and politically risky. In any case, Germany cannot assume this initiative. In this context, the attitude towards the euro shows clearly the real attitude towards the European constructions. Among the many reasons to be grateful to European leaders in the early 90s is that they established the single currency, going way beyond the demands of the time and projecting a way towards federation, just like a river flows into the sea. But it would not be right or wise to blame the single currency for all the problems in Europe. This approach would lead to nothing good. The euro crisis is real, but it expresses the crisis of the Union, of the European construction and its economy. In the last instance, the euro crisis expresses a crisis of the vision on the Union. We are witnessing a blockage in the Union’s general evolution, which we could put down to the euro crisis as well. The single currency is the truthful measure of the Union’s state. The euro crisis affects the image of the European pole of power. The paralysis and the indecision that dominate Europe are extremely costly at a time when other regions are turning into threatening financial forces. No one is willing to wait for Europe to recover. We have already mentioned that one of the reasons for introducing the euro is related to the geopolitical changes after the Cold War. The prolonged crisis of the euro worked in favour of the dollar, which came out more solid and powerful. Great capital holders are tempted to make reserves in dollars, rather than euros, after this prolonged crisis, which was not the case in the first years after the single currency was introduced. The euro crisis weakened the political position of the Union. It is often underlined that Germany, for instance, exports outside the Union. The same is true of France, Italy and others. This is rather an expression of Europe’s capacity for high-performing production. But the crisis of the euro affects it anyhow, just as the UK, with its massive trade with the Union, is affected even though it did not adopt the euro. So there is a joint interest in working for the consolidation of the currency. We hope that the Union as a whole (in fact, member states – our trust in the Union was shattered by the crisis) understands another important thing: no significant world power is interested in the EU recovering quickly from the crisis, although official declarations might claim differently. The longer the crisis lasts, the less relevant Europe will be as a global pole of power. The other significant powers seek to make the

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competitor weaker. The significance of the European crisis must be examined from this perspective as well. The more prolonged the European crisis, the more visible Europe’s real decline. It is a risky and costly illusion to believe that the decline of the construction is compensated for by the rise of national actors. We may say, with the wise man: why does history repeat itself if people still fail to learn from it?

CHAPTER IV PERIPHERY: THE ILLNESS THAT CAN KILL THE UNION1

1. Global periphery, European periphery If we took a good look at what happens in the EU, we could synthesize it as follows: the periphery questions the construction. “The periphery debt crisis threatens to engulf the core in huge bank capital shortfalls and fiscal liabilities, trapping both in protracted stagnation.”2 The subsequent question is: which periphery? Usually, periphery means the margin, where things are less clear and the rules are relaxed. Traditionally, the periphery had a geographical connotation. It coincided with the Third World, and it stretched over continents: Africa, Asia, South America. The planet had a simpler design: the core (the West, the developed world) and the periphery (the rest). There were also areas in transition: semi-peripheries and semideveloped areas. For some time, there has been talk of a periphery in Europe as well; not only in Europe but also in the European Union; not only in the European Union but also in the eurozone. Most analyses on the relationship between the metropolis (the core) and the periphery start from the idea of periphery emancipation and development. In short, they claim that the periphery processes the messages coming from the metropolis in answer to certain contexts. The emancipation of the periphery is closely connected to the quality of this processing. In fact, the relationship can be seen as competition: the core wishes to preserve its position (including its advantages), and the periphery to put a stop to dependency (disadvantages). That is why this relationship has often been read as one between exploiters and the exploited. Leaving aside various disadvantages and obstacles, the 1

A preliminary version of this chapter appeared in the Romanian Journal of Communication and Public Relations, vol. 14, no. 2 (26), 2012, pp. 11–27, under the title “The Emergence of Two European Public Spheres. Centre vs. Periphery”. 2 Arnab Das and Nouriel Roubini, “A Blueprint for an Amicable Divorce Settlement”, Financial Times, April 3, 2012.

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exploited (be they persons, groups or communities) have to be aware, have to take advantage of favourable circumstances, have to stay away from deceptive visions. One of the fathers of the centre-periphery theory, Immanuel Wallerstein, pinpointed this objective fact: “Generally, being involved in deep conflict, the exploited are more acute about the nature of the present state. It is in their interest to have the correct perception, in order to expose the leaders’ hypocrisy. They are less interested in ideological deviation.”1 The power shift from the West to the East cannot be understood if the explanatory virtues of this process are ignored. There is a message from the metropolis, given a shape in globalization. Nowadays, few people doubt that globalization was designed from the very beginning to serve the interests of the developed world; America especially. “Globalization was supposed to have played to the advantage of liberal societies ... In contrast, Brazil, India, Turkey, and other rising democracies are benefiting from the shift of economic vitality from the developed to the developing world … China is proving particularly adept at reaping globalization’s benefits.”2 There are many other explanations for the massive rise of emerging countries. One of the most valid is their historically adequate answer to a new development context. In this way, the strategic reaction from the periphery took the metropolis by surprise. What would be a periphery in the EU? Willem Buiter3 suggests a precise criterion: fiscally and competitively weak countries. In this perspective, five countries would represent the periphery: Greece, Spain, Portugal, Ireland and Italy. It is true that the author also mentions a soft periphery, including three more countries: Belgium, Austria and … France.4 These are countries that have barely been struck by the riptide of 1

Immanuel Wallerstein, Sistemul mondial modern (Bucharest: Meridiane, 1992), 11. 2 Kupchan, The Democratic Malaise. 3 Willen Buiter, “The Terrible Consequence of a Eurozone Collapse”, Financial Times, December 8, 2011. 4 In the article “The Driver and the Passenger” from 15 October 2011, The Economist asserts that “France’s fragility now directly affects the euro crisis. It has the biggest debt and deficit ratios among the euro zone's AAA-rated countries, and its banks are dangerously exposed to southern Europe... [it] has not run a budget surplus since 1974. France is the weakest of the strong, or the strongest of the weak”. This comment gives a key to understanding the behaviour of France during the euro crisis, as well as the political debates and positions in the Hexagon, which can be deciphered through this financial reading. At the end of 2012, France went from triple A to AA1. Among the reasons was low productivity, as well as an increase in public debt, now reaching 90% of GDP compared to 22% in 1981.

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the financial crisis. Paul Collier explores a unique view. He talks about a differentiation process worldwide, where countries are conceptually framed in categories that better describe their economic status. As a rule, the world was divided into developed countries and developing countries but this latter category had become so vague, comprising China and India along with Chad and Afghanistan, that it could no longer be used. The necessary reconceptualization led to the term emerging countries, comprising states with a certain development rhythm and perspectives. The differentiation process is now reaching developed countries. Within this group there are states rising economically but also states facing visible problems. They simply cannot be part of the same category. Quite possibly, we are in the early stages of a second great divergence between those developed countries that can continue to prosper in competition with the emerging market economies, and those that are set to decline. For symmetry of language, I will refer to them as the submerging economies. The most obvious candidates for the new category of submerging economies are the Southern European countries: Italy, Spain, Portugal and Greece.1

What do these submerging economies have in common? Firstly, the fact that they have been declining for the last five years; more visibly in the last three years. So this is a well-established process, which is not likely to disappear with the crisis. The decline is associated with joining the eurozone without an adaptation of the economy or an increase in economic competitiveness. Such a process cannot be stopped because there is no robust internal or European political incentive to approaching the problem of decline with the right instruments. At the same time, through its social consequences, especially unemployment, decline will generate instability, which, in turn, will feed economic decline. Europe’s submerging economies are not just a fleeting phenomenon but a sad reality that will leave a trail in the continent’s evolution. Collier’s analysis is also important because it hints at the dynamics of development; conceptualization is visibly behind the real evolutions. Fracture is present in the developing and the developed world alike. Economic hierarchies will continue to change. In this context, let us remind the readers of Dani Rodrik’s viewpoint: he talkks about a global division, the result of which is the replication of the centre-periphery model. 1

Paul Collier, “Europe’s Submerging Economies”, Social Europe Journal, March 11, 2013, http://www.social-europe.eu/2013/03/europes-submerging-economies/.

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Chapter IV The world economy soon split between an increasingly industrial core and a largely raw materials-producing periphery. Globalization played the parts of both Dr. Jekyll and Mr. Hyde in this. It enabled new technologies to disseminate in areas with the requisite preconditions, but also entrenched and accentuated a long-term division between the core and the periphery.1

At the surface, globalization seems to ensure a sort of social homogenization and similar experiences. This perception is fed by shallow homogenization. In fact, when considering the roots of development, the lasting factors, we can detect a long-term division between centre and periphery: despite a dynamic of centre and periphery, with countries switching categories, the bynome as such is preserved. The world continues to be organised along the same patterns. What changes sometimes is the hierarchy at the top. Until recently, we thought that Europe was guarded against these processes, but the very continent that started modern development is now targeted by the phenomena it helped generate. The fact that this sad division between centre and periphery is installed at the very heart of the Union, in the West, a symbol of developed world, in countries that saw the rise of modern society (the Renaissance in Italy, geographical discoveries in Spain and Portugal) is an extremely worrying sign. It is firstly a vote of no-confidence against development policies and the continent and, secondly, a fair warning that the process of power redistribution favoured by globalization does not take into account historical success but present performance. The latest global evolutions seem to hail darker times, and Europe does not appear to be getting the hint. In the face of rapid evolutions, you cannot be caught unawares because costs will rocket.

2. “Multi-speed Europe” erodes the Union In the summer of 2012, when the euro crisis reached its climax, discussions on peripheries focused mainly on the identification of a way out for countries facing problems, especially Greece, which had become the symbol of the Union’s financial periphery. A Grexit involved a lot of complications: from costs to prestige. Alternatives appeared. According to Alex Stubb, the Finnish Minister for European Affairs, certain states did not need to leave the eurozone: “I don’t see some countries dropping out, but I see countries inside losing their influence.”2 What was envisioned 1

Rodrik, Globalization, 139. Quoted in Peter Spiegel, Alex Barker and Joshua Chaffin, “Call for Triple A ‘Power Core’ in Eurozone”, Financial Times, November 17, 2011. 2

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was a repositioning of power influences within a concentric structure, with the six triple A countries in the middle, the power core of the Union, with an important say in euro economic problems. No new rules or new institutions would be needed. It was common sense to believe that: “A country that is not triple A rated is not going to be the best one to give you advice on your public finance.”1 This way, a multi-speed Europe would become a reality. The Finnish minister saw three concentric circles of influence in Europe: a Europe of the six triple A countries (the core), the eurozone and then EU-27, circles of influence that coexist rather than exclude each other. The periphery of the eurozone is a paradoxical concept. The periphery of the continent would be more acceptable. But a Union has its rules, constraints and standards. The existence of a periphery in a Union raises questions: how was it allowed to appear and continue, why did affluent, important countries face great financial difficulty, why their leaving the eurozone become a possibility? How much responsibility do they carry, how much of this responsibility is carried by the Union? Can the Union be absolved of the illness growing inside it? However, much is brazenly discussed of late about the different speeds of European countries, ignoring the fact that they are talking about disparities. But this effort of identifying various speeds carries something positive: after all, Europe needs to be read as it really is, not how we would like it to be. Different speeds are an expression of countries’ thoughtful policies. Nevertheless, uncorrelated, unsupervised speeds leading to disparities indicate Europe’s growing illnesses and suffering, which tend to become permanent. Analysts explore the effects of these differences – real influence, power positions, and so on – but there is little preoccupation with harmonizing these speeds. Whether we like it or not, the different speeds indicate a weak Union. From the Union’s perspective, the speeds leading to disparities can be perceived as a disease eroding the vitality of the whole. The Union should be the first to be interested in harmonizing speeds and decreasing disparities.

3. Greece – the debt-producing mill Throughout the book we have discussed the north-south divide in the Union’s life, the fracture between creditors and debtors, the role of the euro in creating these problems, the real role of the single currency and, equally, its imaginary guilt, and the disparities in economic competitiveness 1

Ibid.

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within the eurozone, which turn into trade deficit. All these problems explain the appearance and existence of the periphery in Europe. In this subchapter, we wish to elaborate on the characteristics of a financial periphery compared to a classical periphery. The crisis in Greece is a necessary although much-talked about case study. In discussing Greece, said Donald Sassoon, we tackle the problem of the other Mediterranean countries left behind – Italy and Spain.1 Martin Feldstein makes an exact technical analysis of Greece’s financial situation.2 In 2011, Greece’s deficit was 9% of its GDP. In other words, Greece had to borrow the value of 9% of its GDP to be able to function as a state. The country debt to GDP was 150%. Despite heavy loans, Greece needed more. Because of its special situation, Greece could not borrow from the capital market. The only solution was to borrow from the IMF and the European Central Bank. In 2012, Greece’s bailout was 130 billion euros, added to previous bailouts. To understand Greece’s situation, it is enough to mention that interest rates reach 6% of this country’s GDP. Greece can only roll over the existing debt, but this involves increased interest rates and an increased total debt. Greece’s fundamental priority on its road to recovery would be to decrease the debt-to-GDP ratio by increasing GDP through economic growth. But Greece’s GDP is decreasing – “between 2007 and 2012 its economy is expected to have shrunk by almost a fifth”3, which makes the debt-to-GDP ratio increase automatically (to 170%, in 2013 estimates). Reducing expenses would be another way but this is limited by the force of things. Health and education expenses can only be reduced to a degree; the same for administrative expenses. On the other hand, the contribution of these cuts to decreasing debt-to-GDP ratio is modest. The real measure of this dramatic situation is the unemployment rate, which reached 17% in 2011, 19% in 20124 and 20% in 2013. In reality, unemployment in Greece reaches 27% of the active population. Throughout Europe, unemployment is so high that it affects economic recovery. This triggers economic problems (fewer taxes) and very dangerous social problems (instability and the imminent risk of extremist movements). In short, this is a hopeless situation. Some observations are necessary: within the classical periphery, domination is not so severe. Moreover, the European financial periphery 1

Sassoon, foreword, XVI. Martin Feldstein, “The Failure of the Euro”, Foreign Affairs, January/February, 2012. 3 “Europe’s Achilles Heel”, The Economist, May 12, 2012. 4 “Greek Economy to Shrink 5%”, Financial Times, April 25, 2012. 2

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has constraints derived from the existence of the euro. In history, states in crisis had another instrument: the decrease in the value of the national currency, which made its products more competitive. This way export was stimulated, triggering economic growth. Greece cannot use this solution because the euro does not have a fixed exchange rate. Many authors, Martin Feldstein among them, claim that Grexit is the only viable solution otherwise Greece will have to borrow endlessly. Greece will become a debt-producing mill.1 Greece’s situation before the crisis is relevant to the highest degree. Greece’s public debt doubled between 2000 and 20092 but this increase in debt was not caused by the modernization of production capacities; it was made based on consumption increase. In other words, this is the neoliberal vision at its purest, where consumption-based growth is a supreme value. In the meantime, from 1994 to 2009, the Greek economy lost approximately 40% of its competitiveness, even though its GDP increase was satisfying.3 This illustrates that Greece’s current situation was “prepared” in advance through deficient internal policies, but also economic perspectives Greece is not necessarily guilty of. Even though partially true, the thesis of Vassilis K. Fouskas and Constantine Dimoulas, that debt is not only an economic category but also a geopolitical notion, is backed by some strong arguments. The problem here is that when a country becomes weak economically (irrespective of influences, contexts and beneficiaries), it is the same country that pays. Fouskas and Dimoulas underline that part of responsibility for Greece’s situation is closely associated with the neoliberal policy influence and geopolitical calculations in the area immediately after the fall of socialism, which gave Greece a certain role in the region. The problem is that nowadays Germany does not consent to contribute to paying for the economic policy mistakes to which Greek authorities and other foreign fora contributed. This is how Greece has to face its debt on its own. What we said about the situation before the crisis is valid for what happened during the crisis. Indeed, it is necessary to remark on the Union’s and IMF’s preoccupation with aiding Greece financially. From the three actors contributing to creating debt in the financial periphery, only states are still on stage. The Union is in the most delicate position: apparently, it seems to be making efforts towards aiding the states but, in reality, it is ensuring that banks get their money back. This raises a dangerous question: who does the Union represent? Judging by its 1

Martin Feldstein, The Failure of the Euro. Fouskas and Dimoulas, Greece, Financialization and the EU, 158. 3 Ibid., 161. 2

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behaviour of late, it seems that the Union’s balance tips towards banks. We have mentioned the current significance of the Marshall Plan, which gave large sums of money for Europe’s economic recovery, thus contributing to its post-war rebirth. The distance between the destination of the financial support given by the Marshall Plan and the current bailout is in fact the distance between two distinct epochs. Europe’s post-war objective was represented by the recovery of a real economy and the money followed this destination, which ensured a relatively rapid, longlasting recovery. Nowadays, banks and their capital are the destination, and the real economy must serve this purpose. This is the distinction between the international economic order then and the financial order today. In the former, the banking system served the economy; in the latter, the economy serves the banking system. In fact, we are witness to the rise of a new economic and social construction, with the banking system at its core. All great social subsystems, including the political, serve this system. During the electoral campaign, François Hollande warned that “finance must be in the service of the economy to create wealth and not to enrich itself on the real economy.”1 These welcome critical stands against the banking system have become a rarity, even in French officials’ positions, although much was expected of the new French power for the Union’s reformation. If the Union does not re-establish normal relations between banks and economy, between banks and political values, then it will undermine its own foundation. The more it seeks to serve the banking system, the less accepted it will be, and it will come across as oppressive. Once more, the effort made by the IMF, the European Central Bank and the EU to lend money to Greece is laudable. But some questions arise. The first and most important is the destination of these immense sums. Greece is, after all, a small country. Why cannot successive bailouts improve the situation? The fact is that the money did not go towards the real economy but towards paying previous loans. If loans have been used to pay off loans, why does the debt increase so much? Unpaid loans lead to high interest rates. A spiral is created: the country borrows money to pay off previous debts but interest rates increase because deadlines were not met and, consequently, the interest rate increases, so does the loan, which requires a new loan, and the end of the nightmare is nowhere close. A loan can be paid off either by cutting down expenses (and directing savings towards paying off debt) or by borrowing in order to establish a 1

Quoted in Hugh Carnegy, George Parker and James Blitz, “Hollande Warns of EU Fragmentation”, Financial Times, March 1, 2012.

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business or make a profitable investment with which to pay the initial debt. The essential link here is a working economy. When borrowed money goes back to the banks that gave the previous loans, how can debt decrease? This is the fundamental problem: banks (including special banks such as the IMF or the European Central Bank) give money which they later take back. A new banks-banks circuit is established, which rules out the real economy. The appearance of sovereign debt shows the special relationship between metropolis banks and states at the periphery. Banks gave loans easily, trusting governments’ solvency. Where was the Union when these debts were created, when the Maastricht Treaty deficit limit was exceeded, when expenses rose above sustainability? The Union was the roof under which such operations took place, which led to sovereign debt. The fact that the Union failed to prevent and intervene makes the problem of sharing responsibility acute for the situation of the periphery, which now threatens the Union; responsibility should have been shared between the states, the banks giving the loans, and the Union. The problem is all the more acute now when the effort of recovering from the crisis is all down to states facing difficulties. States alone cannot do this, no matter the effort. The Union’s presence is absolutely necessary for two reasons: to help states and to fulfil its duties as a Union. We do not wish to underestimate the banks’ importance for the economy. The Union’s responsibility is not to take a stand in favour of either banks or states but to find a convenient way out for both parties. Otherwise, Greece can only perpetuate and aggravate its condition and die a slow death. Greece’s evolution is important because it shows the hopeless situation of the eurozone periphery and of the periphery that has not yet joined the eurozone – the Central and East-European countries. This European periphery no longer has the periphery’s fundamental right: to process policies and messages from the centre, to imagine solutions, to identify ways out of the crisis. Classical periphery had this right and carried the hope of emancipation, at least theoretically – financial periphery can only follow the rules of the financier. The Union’s responsibilities are all the more serious because it needs to give the periphery some evolution perspectives.

4. “Economy is half psychology” In the mid-19th century, after the unification of Italy, a visionary politician inspiringly diagnosed the priority of the moment: “Pur troppo

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s’è fatta l’Italia, ma non si fanno gl’Italiani.”1 (“We made Italy, now we need to make the Italians”). Europe is not far from this. The building of the Union was a priority. Irrespective of its previous names, the Union had a chance that few realised: it was successful. Economic success fed the European construction but it also fed a kind of solidarity. For a moment, “togetherness” seemed to offer Europe and its countries a more promising road. The European countries started to understand that together they fared better. That is what convinced the United Kingdom to join the Union after years of hesitation. The same was true of the inhabitants of various countries. Being European was more advantageous, more convenient than being just German, English or Finnish. In this respect, we can speak about the European public sphere as a quasi-natural process. Because the Union was successful, the European public sphere developed and stimulated an increasingly visible tendency: the Europeanization of national public spheres. One of the gains of debates over the Union is the postulate that the European public sphere has a specific dynamic, following the evolutions in the Union, the debates and the interpretations about this new reality. In any case, we agree with Thomas Risse that the European public sphere does not fall from heaven and does not pre-exist outside social and political discourse. Rather, it is being constructed through social and discursive practices creating a common horizon of reference and, at the same time, a transnational community of communication over issues that concern “us as Europeans” rather than British, French, Germans or Dutch.2

In other words, we cannot speak about a prefabricated public sphere projected onto the European space. The public sphere is built through public debate on the meanings of events, facts and situations. While economic success was the foundation, everything changed with the crisis. The construction of the Union was not complete, the economic success vanished. Moreover, being “European” was not a very clear social, psychological or mental reality. In certain respects, the Union’s citizens were European; in others they were British, German or Dutch. Not only was the Union half-built but the reality of being “European” was also. The crisis and its accompanying effects raised the question of being

1

Massimo Taparelli D’Azeglio, I miei ricordi (Florence: Barbera, 1891), 5. Thomas Risse, An Emerging European Public Sphere? Theoretical Clarifications and Empirical Indicators, paper presented to the Annual Meeting of the EUSA, March 27–30, 2003, http://userpage.fu-berlin.de/~atasp/texte/030322_europe_public.pdf.

2

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“European”. Had the construction of this reality been a priority? During fairer times of an economic boom, not much was talked about the shared values or the Europeans’ options and positions on European integration. The Union was not constantly preoccupied with this problem, nor did it have a strategy for it. The crisis has forced a search for answers to the questions: what do European citizens really think about the crisis, the Union and its leadership? What can compensate for the absence of success? In the new circumstances, the way out of the crisis could be a sort of substitute for the previous success. It is true that we are facing a severe crisis but there is a vision for the future – the return to economic growth. This position may not be as convincing as success but it can maintain reasonable levels of trust in citizens. Yet the direction is as problematic as the crisis. Like any businessman, Arendt Kirkhhoff hates uncertainty and talks about mounting psychological pressure. “And economy is half psychology”. His discontent is not necessarily linked to the crisis but to a delayed response to the crisis, which erodes confidence: “The response of political leaders to the crisis was dangerously slow and fumbling.”1 The problem is not that there is a crisis but that no answer is given; not that problems are mounting but that there is no direction that might lower the pressure and feed hopes. The reality is that the Union is stagnating at the moment. There are no important measures taken, no clear directions, no vision. Poor fragmented answers contradict each other. The average citizen cannot be expected to trust the EU. The Union’s slow reaction to the crisis has a cost, which is visible in the delay of the relaunch. The Union was slow to take strategic decisions, such as the fundamental dilemma of federation versus common market. The average citizens oscillate as well between federalist and national perspectives (in strategic matters, they are expected to follow the leaders’ behaviour). The result is stagnation or endless delays, which Dominique Reynié was quick to notice. Nul pays membre et, au sein de chacun de ces pays, peu d’Européens ont véritablement refusé la marche vers une union de plus en plus étroite; mais, d’un autre cote, nul pays et peu d’Européens ont véritablement souhaité le passage au fédéralisme. L’Europe est dépourvue de dynamique politique, que cette dynamique soit souverainiste ou fédéraliste.2

1

Arendt Kirkhhoff, “A Turn for the Worse”, Financial Times, October 12, 2011. “La renaissance douloureuse de l’idée européenne”, in L’opinion européenne en 2012, ed. by Dominique Reynié (Paris: Editions Lignes de Repères, 2012), 29.

2

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There are pressures on citizens as well. In the last instance, the interpretations they share are influenced by economic status and the region’s and the country’s problems. The citizens in affluent countries are more optimistic and generally have a higher trust in the Union, while the citizens from countries in difficulty have a more critical and pessimistic attitude. At this moment, two distinct public spheres are evident: the public sphere of the northern states, unaffected by the crisis, and the sphere of the periphery states. As far as we know, this distinction was first visible in the Eurobarometer in Autumn 2011, with about 80% of citizens from Sweden, Luxembourg and Germany believing their national economy’s situation was good. In other states, such as Greece, Ireland and Spain, very few shared this opinion (less than 5%). Most of the countries facing difficulties gave pessimistic answers. The periphery perceives its problems correctly. Moreover, it believes that the most difficult period is yet to come. Two out of three citizens from the periphery share this pessimistic evaluation of the crisis impact on unemployment, for instance. This may be a premise for the birth of a public sphere of the periphery, which will process facts and events differently from the dominant perspectives in central Europe. We are witnessing Europe’s psychological division, which carries an equal weight to economic division. Yet, while economic divisions can be recovered, psychological and attitude divisions last longer.

5. Euro-optimism is declining throughout Europe These differences in attitudes towards national economic situations meet in the consensus on the less-than-promising economic evolution of the Union. Such a pessimistic evaluation shows that “euro-optimism is declining throughout Europe” as Leendert de Voogd remarked.1 Trust in the Union and its capacity to solve the crisis is clearly diminishing. This “depressive spiral” of distrust in the Union has become worse, as shown in the standard Eurobarometer in May 2013, where answers differentiated along contributors versus net beneficiaries, centre versus periphery. However, in most of the fields investigated, the levels of trust in the Union are very low. We may assert that while trust in the Union and its institutions (Translation: Neither the EU member states, nor the European citizens truly refused the choice for a narrower Union; at the same time, none of the countries or of the Europeans wanted federalism. Europe lacks political dynamic, be it national or federalist). 1 Leendert de Voogd, “L’europhilie en crise?”, in L’opinion européenne en 2012, ed. By Dominique Reynié (Paris: Editions Lignes de Repères, 2012), 64.

43 42

33 29

12

5

8

7

5

7

2

5

3

3

1

Belgium

Bulgaria

CZ

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus 20

25

26

39

53

45

48

50

7

% EU 27

Yes, to some extent EB 79.3 37

Yes, definitely EB 79.3 6

28

39

34

32

42

27

28

32

30

33

25

33

EB 79.3 32

No, not really

Table 4-1 To what extent do you agree with the following? EU improves quality of life in Europe

48

18

19

29

29

17

8

13

9

15

8

9

No, definitely not EB 79.3 17

Periphery: The Illness that can Kill The Union

3

11

11

9

1

10

6

3

5

5

12

1

Don’t know EB 79.3 8

21

32

36

30

28

46

58

52

56

47

55

57

Yes, definitely EB 79.3 43

76

57

53

61

71

44

36

45

39

48

33

42

No, definitely not EB 79.3 49

187

54 31

6

6

15

8

7

8

Luxemburg

Hungary

Malta

Netherlands

Austria

Poland

48 32

5

5

6

5

5

12

Slovenia

Slovakia

Finland

Sweden

UK

Croatia 24

30

31

30

33

38

27

44

21

38

30

13

31

32

21

25

Chapter IV

7

19

13

15

20

28

11

17

7

18

13

4

18

9

5

10

5

14

3

2

4

3

13

6

10

3

6

14

6

3

9

7

64

37

53

53

43

31

49

33

62

41

51

69

45

56

65

58

31

49

44

45

53

66

38

61

28

56

43

17

49

41

26

35

Based on data from Standard Eurobarometer 79, Spring 2013, Public Opinion in the European Union: Tables of Results, May 2013.

52

47

38

26

39

2

10

Portugal

Romania

34

43

54

39

50

56

9

51

7

Latvia

Lithuania

188

34 30

25 33

6

4

7

6

4

10

4

11

2

3

4

Belgium

Bulgaria

CZ

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus 14

26

24

39

42

30

38

43

6

% EU 27

Yes, to some extent EB 79.3 32

Yes, definitely EB 79.3 5

29

31

39

23

40

22

31

36

38

38

18

38

EB 79.3 32

No, not really

Table 4-2 To what extent do you agree with the following? EU will be more equitable after the crisis

39

13

15

17

24

9

8

12

6

10

6

8

No, definitely not EB 79.3 12

Periphery: The Illness that can Kill The Union

14

20

19

23

8

20

15

16

11

18

36

5

Don’t know EB 79.3 19

18

36

27

37

28

49

46

36

45

34

40

49

Yes, definitely EB 79.3 37

68

44

54

40

64

31

39

48

44

48

24

46

No, definitely not EB 79.3 44

189

41 33

4

7

14

6

6

6

Luxemburg

Hungary

Malta

Netherlands

Austria

Poland

36 35

4

5

6

6

3

8

Slovenia

Slovakia

Finland

Sweden

UK

Croatia 31

32

35

36

33

40

24

32

27

38

35

12

27

39

24

35

Chapter IV

7

12

14

11

10

22

7

10

4

12

12

2

12

9

7

10

15

18

9

7

17

10

28

21

22

16

14

33

17

8

21

17

47

38

42

46

40

28

41

37

47

34

39

53

44

44

48

38

38

44

49

47

43

62

31

42

31

50

47

14

39

48

31

45

Based on data from Standard Eurobarometer 79, Spring 2013, Public Opinion in the European Union: Tables of Results, May 2013.

39

40

35

24

32

4

9

Portugal

Romania

28

33

39

37

40

41

7

33

5

Latvia

Lithuania

190

Periphery: The Illness that can Kill The Union

191

is decreasing generally, opinions are clearly differentiated depending on the respondents’ economic area. All countries, except for Bulgaria and Malta, rather disagree about the Union’s actions and contributions towards improving quality of life – the greatest differences being visible in Great Britain, Estonia, Greece, Slovenia and Slovakia. PIIGS countries are generally more critical, being of the opinion that the EU will be more divided after the crisis, that the Union does not guarantee a good quality of life, that their voice is not audible in the EU. We can see the number of people with a negative opinion is higher. These tendencies point to the fact that in this period, public opinion is evolving negatively on the Union, its capacity to recover from the crisis and its democratic functioning. This worrying phenomenon shows that people’s support for the Union has started to decrease, which does not herald a smooth ride for the European project. It also allows for various tendencies, which may or not be in agreement with fundamental European values.

6. Europe is conquered by Euroscepticism The Europe of today no longer resembles the Europe before the crisis. It was conquered from the inside by the virus of Euroscepticism. Trust collapsed quicker than economic growth. The psychological factor amplified the disaster. Since the beginning of the euro crisis, trust in the European Union has fallen from +10 to -22 percent in France, from +20 to -29 percent in Germany, from +30 to -22 percent in Italy, from +42 to -52 percent in Spain, from +50 to +6 percent in Poland, and from -13 to -49 percent in the United Kingdom. What is so striking is that everyone in the EU has been losing faith in the project: both creditors and debtors, and eurozone countries, would-be members, and “opt-outs.”1

The authors make a detailed analysis of Euroscepticism and distrust, mentioning the significant fact that in 2007, in Great Britain, the leader and symbol of Euroscepticism, trust in the EU was -13%. Now, the top four euro countries have lower levels of trust than the UK in 2007. Euroscepticism’s real source has changed. Before the crisis, the main 1

Jose Ignacio Torreblanca and Mark Leonard, The Continent-Wide Rise of Euroscepticism, European Council of Foreign Relations, http://ecfr.eu/page//ECFR79_EUROSCEPTICISM_BRIEF_AW.pdf.

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explanation was for this attitude was the democracy deficit – decisions in the Union being taken by technocrats rather than elected representatives. Now the situation has reversed. Europe’s main contradiction is between north and south, centre and periphery. Both parties are discontent, each believing the other to be using Brussels’ institutions to promote its interests. Discontent and disappointment have added to the divisions. The spread of distrust throughout the Union is of interest. We must admit that the way the Union is perceived in Europe’s largest countries is of particular relevance. Distrust levels are very high here as well. The euro crisis, the sovereign debt crisis, the drastic cuts in public expenses and the bailouts to states facing difficulties have all fed the worrying expansion of Euroscepticism, to the point where it can generate and support populist attitudes. At this point in European evolution, which requires the availability of both creditors and debtors to overcome the crisis, populism is the most dangerous political enemy of the Union because it can misdirect people’s wishes for a normal life. The crowning of this attitude towards the EU is the incredible spread of euroscepticism, now more powerful than euro-optimism. Two tendencies of equal importance are visible in the evolution of European public opinion. The first is the spectacular increase in the number of Eurosceptic citizens, above the number of euro-optimists. More important than the increase is that the two attitudes carry similar weight among the Europeans. Europe now follows the divide in American politics, where blockage can be put down to the equal number of Democrat and Republican congressmen. This blockage is extremely expensive in economic and democratic terms, but also in image terms. In Europe, it is significant that the number of undecided or uninterested people is relatively small, which shows the importance of the confrontation, the citizens’ interest in the European crisis. In sociology, the tendency is more important than the number of respondents because the tendency indicates the direction. The Eurobarometer mainly illustrates that Euroscepticism is an evolution. Europe may well repeat the experience of American blockage. In any case, public opinion rapidly and radically processed the crisis phenomena and configured an attitude that may work as a warning: a solution to the crisis needs to be found quickly or the process of building the EU will cease to exist in European minds first of all. Euroscepticism has spread throughout the Union, irrespective of the countries’ economic status, with the significant differences we have talked about. The extent of this pessimism needs to be highlighted. José Manuel Barroso, former president of the European Commission, declared that the

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European dream was endangered by “the resurgence of populism and nationalism” in Europe. At a time when so many Europeans are faced with unemployment, uncertainty and growing inequality, a sort of “European fatigue” has set in, coupled with a lack of understanding. Who does what, who decides what, who controls whom and what? And where are we heading to?”1

This is indeed the question, and the president of the European Commission was the one to give the answer, along with explanations for the delays in challenging the crisis and taking strategic decisions to overcome the blockage. We might even say that it is not the crisis that is the Union’s fundamental problem but the stagnation, which was visible before the crisis and is now more so. The problem of the Union is the Union itself. No clarifications have been made here. The development of German power has become a fact (compare the power of the president of the Union to the power of German Chancellor Angela Merkel). The crisis is only secondary to the true problem of the Union.

7. A divided European public sphere Building group identity is an extremely difficult enterprise, requiring time and a continuous joint action. On a national level, an essential element of this identity building is the national narrative – the founding myths, a shared language, an educational system projected to serve common values and options, and so on. At the European level, these elements were not thought of when the Union was successful economically and there was time for a grand projection on European identity. Other things have since become more important, and the elements constitutive of identity have been put aside, “until the crisis goes away”. But the crisis is here to stay, and it amplifies differences, heightens tensions and feeds discontent. As we have shown above, trust in the Union is low and citizens have nowhere to turn for hope. Resorting to populist discourse is not only harmful but devastating because it stimulates false expectations at a time when the Union is going through a difficult period and has important decisions to make. In summary, the European public sphere cannot rely on its (now vanished) success, its (now vague) direction, or determination – European 1

Quoted in Ian Traynor, “Crisis for Europe As Trust Hits Record Low”, The Guardian, April 24, 2013.

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leaders’ attitudes in this period have been characterised by long discussions and procrastination. It is true that the problems that need to be solved are complex and require time for clarifying debates. Countries and leaders have different interests and perspectives on these problems, which specialists may find partially justified. But the average citizen has noticed the crisis and is bearing the consequences: unemployment, recession or economic stagnation, delayed decisions, the absence of perspectives, all lead to dissatisfaction. For average citizens, the impact of the crisis will be so strong that it might lead to resetting the collective attitude. In this new context of continuous disappointment, citizens take refuge in national identities. The return to the national public sphere and its values appears tempting and secure. This reaction appeared because the efforts to solve the crisis were focused nationally, because national states and their public spheres exist. The European public sphere’s evolution follows economic life. When the Union was promising and tempting, the dominant direction for national public spheres was their Europeanization. With those tendencies now reversed, we are witnessing a renationalization of the public sphere, with national preoccupations and values taking centre stage. Some may say that this is a reversible process. In history, however, there was no turning back. We use the term “national” public sphere for lack of a better word, but its content is different in this European age. It includes states of mind and changes over the last decades. It is not a return, nor is it a homogeneous process throughout the Union. This “return” can take two forms: the return of countries that failed and feel frustrated, disappointed and resentful will be different from the countries that did not suffer that much, and are confident and proud of their status. They generate two distinct types of public spheres, fed by different feelings. The uniting element is general discontent: the latter believe that crediting the southerners has reached its limits; the former feel they are wronged by the conditions of the loan and the rigours of austerity, which are difficult to bear. With the crisis, Europe has turned to the organisation it has exported throughout history: the centre-periphery. Europe thus risks reproducing and illustrating the division it has brought into the world, which is highly ironic. If the European public sphere had been the result of an independent strategy for cultivating European values and highlighting the advantages of the evolution towards integration, which would have benefitted all citizens, there would now be European options, convictions and attitudes that would not necessarily be dependent on economic success. These behavioural acquisitions would have constituted a pillar for overcoming

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difficulties and resisting the renationalization of the European public sphere. Because there was no strategy for building European attitudes, we are now witnessing a paradox: instead of encouraging resistance against renationalization, the debates in the European public sphere are accelerating the process. The value of the Union is represented by the state of its periphery as well. A body’s vitality does not reside exclusively in its core but also in its extremities, where the development pulsars are weaker by the force of things. It is important to know how things are going in the periphery and how the centre is perceived there. Without a vision on the evolution of the periphery, in the absence of the perspective that the centre needs to give to the periphery’s development and emancipation, the Union will not hold together for long. In this light, we can say that the periphery highlights vulnerabilities, and represents the real test for the Union’s core. At this moment, the core is fatigued, undecided, or has an agenda it leaves to the periphery to decipher. In any case, the centre is waiting for the periphery to go the way of the core, forgetting that in the meantime the Union is boiling over and the inhabitants of the periphery are losing trust, which is the Union’s essential element. “Once lost, that confidence has proved almost impossible to regain.”1

1 Peter Spiegel and Alex Barker, “A Weekend to Save the Euro”, Financial Times, October 20, 2011.

CHAPTER V EUROPE NEEDS A NEW DEAL, NOT A MARSHALL PLAN!

A tangle of blockages and overlapping crises, some more powerful than others. This is how we could characterize the Union, in short. Any road you take, you run into obstacles. The natural reaction is to turn back to the starting point and choose between two temptations: you either take the unexplored path or, in the face of so much trouble, you postpone the answer and wait for a chance. Which, given the Union’s complexity, will not come. After the events in Syria this summer, George Friedman, intrigued by the continent’s refusal to back a military intervention in this country, travelled to Europe and subsequently wrote a paper about his geopolitical journey.1 From his many acute observations, there is one which, although familiar to us, is bound to be underestimated: the Union was built on the basis of the French-German tandem. Can we still talk about the continent’s unity when there is dissent at the very heart of the founding tandem? The two countries have drifted apart because they have different preoccupations. Germany is facing the historical decision of taking on the role of hegemon or stepping down; France is suffering because of the debt and low economic competitiveness. It is then natural for their agendas to be different. Several comments and remarks on the 50th anniversary of the Élysée Treaty were very instructive. For instance, François Heisbourg (the expert involved in the French-German dialogue for 30 years) reveals something that goes beyond economic problems. “Wide divergences” of opinion on Europe existed at the time but there was a mindset, a genuine belief in the viability of the project forging a common destiny. After so many years, says François Heisbourg, “I am deeply struck by this loss of intimacy”, by the fact that “the willingness of Berlin and Paris to

1

George Friedman, “Geopolitical Journey: The U.S. – European Relationship, Then and Now”, Geopolitical Weekly, September 24, 2013.

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overcome their differences – the imperative underpinning the treaty – has dissipated.”1 It is difficult to perceive that the true victim of the crisis is the idea of a common European destiny. The Union has become again – if it ever ceased to be – a collection of nations, united by economic links and interests but not so many common beliefs. We are all Europeans when there are no problems setting us apart; when there are, we are Germans, French, Italian, or, depending on the case, northern or southern, creditors or debtors, representatives of the periphery or of the European core. This is the Union, a fractured organisation that cannot produce history, offer a model or represent a laboratory where new evolutions are created. Friedman is right to say that, from a geopolitical perspective, Europe is gradually turning into Scandinavia: “It was quite prosperous, a pleasure to visit but not the place in which history was being made.”2 The Union has always been a “fluid concept”, a free exchange zone excluding certain European countries, a eurozone not comprising all member states, an economic power but not a military power, and so on. Now, the Union needs to confront two gaps, one more important than the other, both difficult to close. The eurozone usurps the Union as it represents it, with its single currency, an almost-here banking supervision system and rules applying to its countries. We cannot say that countries outside the eurozone are of secondary importance. The euro crisis proved that the idea of an à la carte Europe is superficial. Whoever went with this trend is not in the game any longer. Even the UK has felt the bitterness of this experience. In fact, the states outside the eurozone are not full members of the Union, even if this truth is not openly talked about. The Union was born like a union of solidarity, a type of organisation meant to stimulate development, favour the closing of economic gaps and differences among member states. The enlargement of the Union was made in stages somehow imposed by geopolitical criteria, where the economic homogeneity criterion was pushed into the background. The crisis highlighted the Union’s new economic reality, which can eventually tear down the construction. With the birth of the periphery, the model of a solidary Union becomes a sort of political fiction and can only survive in textbooks. The moment of strategic decision cannot be postponed without incurring very high costs. Europe cannot have economic integrity and individual states at the same time. This decades-long balance has exhausted 1

François Heisbourg, “The Union at Europe’s Heart Is Frayed”, Financial Times, January 21, 2013. 2 George Friedman, Geopolitical Journey.

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its potential. The Union must either transform itself into a federation – and Europe’s powers will have difficulty accepting this – or remain a free exchange area, a simple common market. The uncomfortable element, encouraging a federal evolution, is the single currency. Europe cannot postpone the answer but nor can it make a decision. If Germany is the one taking steps, it will be accused of wanting to rule Europe. Paradoxically, Berlin will be harshly judged whether it acts or not. France’s sensitivity when it comes to sovereignty infringement is well known. This is Europe’s present state and it isn’t likely to change soon. There is a war at its very centre: that between creditors and debtors. An undeclared war, without generals or commanders-in-chief; the two camps are united by the fact that no one can retreat without being wounded. Do not fear defeat, because it will not take place. The creditor cannot wish its debtor to fail, but has hopes it will pay its debt sometime. If this is the contradiction, the blockage at the heart of Europe, then we can conclude that the crisis will be managed but not solved. Consequently, even if some of the fundamental data of the crisis will be overcome (there is economic growth, for instance), the crisis will last in its lesser forms: “We should prepare for neither resounding success nor catastrophic failure but instead for a further drawn-out phase of standoff, slowdown and stalemate.”1 What the Union needs now is wisdom. It needs to rise above the economic dispute as such or it will either sink without any hope of recovery or enter a war of secession. From this perspective, the true test of Europe’s survival is the development of the periphery. The periphery and the euro crisis are two faces of the same coin: crisis. One is predominantly social, the other is financial. Both directly influence the Union’s survival as a union of solidarity. The EU started from the fundamental idea that no country can become a hegemon, that strategic decisions will be the result of consensus among member states. These latest evolutions show that Germany could follow this road. This is the most important moment in the Union’s evolution. All important decisions in Europe depend on Germany. Whether we realize it or not, to talk about Europe means, first of all, to talk about Germany and its options. Let us give an example that speaks volumes. We took David Marsh’s book, Europe’s Deadlock, and counted how often the author referred to Germany in the text: approximately 200 times. What about France? 50 times. We wanted to do the same with our own book but we gave up, hoping the readers will do so. Undoubtedly, the result will be similar. If we talk about the euro, we need to talk about Germany’s position first. If we talk about the periphery, the European 1

Marsh, Europe’s Deadlock, 3.

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budget, solidarity, we cannot ignore Germany’s position as the main contributor. There is an essential German trace in any European theme. In other words, admit it or not, Germany is a hegemon without the formal responsibilities of one. Let us think twice about the Union and the Eurozone. At the moment, Germany is not interested in being a hegemon. Europe’s critical situation is not necessarily inconvenient for Germany. In any case, Germany is a referee. The euro works for those with high competitiveness (Germany, in other words). In a recent article (2013), Robert D. Kaplan talked about the relationship between anarchy and hegemony. Big systems need someone to lead, someone who is expected to lead: “When a hegemon does not lead, it is acting irresponsibly.”1 The position of Poland’s Minister of the Exterior, openly inviting Germany to lead reform in Europe, is significant.2 The Europeans’ choice is: either they make this role official (and bear the consequences) or they consent to tensions and chaotic evolutions. Someone must untangle the knot, and the country that has won this right is Germany. Germany’s transformation into a significant power has taken over a generation. Statistically, a generation lasts 25 years. This is the time lapsed since Germany’s reunification, and in the meantime there were two national enterprises: the former Eastern Germany economic modernization and the launch of a vast modernization and general competitiveness growth programme called Agenda 2010. Both required huge financial effort and availability and represented an investment in the future. What should we admire first? The rhythm of this progress? The resolution to promote an idea? Germany elite’s capacity to follow their people’s wishes and show them the way? For us, this very last thing is most impressive. It was nations with valuable elites not lured into following various fashions, attached to the idea of solid, durable, organic evolution, that succeeded. At a time when development becomes complex, the elites’ qualifications and their attachment to the cause of their people are crucial. It is remarkable that the German elite worked with a view to feeding Germany’s selfrespect. The solidity of German financial, industrial and managerial elites is impressive; what is more impressive is that these very well-qualified specialists serve the nation’s self-respect, stimulate its ambition and preserve its spirit. Germany has a right to inscribe this 25-year period in 1

Robert D. Kaplan, “Anarchy and Hegemony”, April 17, 2013, http://www.stratfor.com/weekly/anarchy-and-hegemony. 2 “Poland’s Appeal to Germany – Sikorski: German Inaction Scarier than Germans in Action”, The Economist, November 29, 2011, http://www.economist.com/blogs/easternapproaches/2011/11/polands-appeal-germany.

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golden letters in its history book, not at all deprived of spectacular accomplishments. In the meantime, in Romania, over the same 25 years, we managed to destroy a country under the false pretence of fighting against communism. This is the period that saw Romania’s deindustrialization. In several years hence, this period will be depicted in very dark colours. We did not have an elite – we had a counter-elite. The most prominent voices in our public space did not speak for Romanians’ long-term interests but represented and embodied external interests in our national space, followed fads, theorized them and created the psychosis that whoever opposes them is obsolete. Where was our elite when whole industries were being pulled down? Successive governments promoted various modernization programmes. Modernization is a key concept, just as development is. There is no modernization without development. How can you modernize if everything is crumbling around you? At the beginning of the 90s, we had no debts – we even had a trade surplus, several billion dollars in reserves or foreign debts owed to us, and a qualified work force. Now our debts will be paid by our grandchildren, probably our great-grandchildren, and we have not raised on our own a single modern production capability in a quarter of a century. We cannot begin to mention vision and perspective. In the last 25 years, Germany has passed two major exams, turning into a power in Europe and the world; we managed to turn a country of considerable agricultural and industrial potential into a model colony. This is the true symbol of these past years, the laurel crown of political class and the Romanian counter-elite.

THE SHIFT OF THE WORLD IN THE THIRD DECADE

The fundamental idea of this book is that the first decade of this century prefigures the evolution of the entire century. There are several arguments in favour of this idea. Firstly, the high development rhythms of emerging states, whose PPP reached 50% of global PPP in a matter of ten years. Probably the most important argument is that the emerging world benefits from advantages that do not change from one decade to the other. It is made up of large, continent-sized countries that have a large, generally well-qualified population, important natural resources, and have already accumulated an experience of development in the context of globalization. Each country has developed its own development strategy, which the crisis has largely confirmed. In other words, the emerging world is better prepared to face competition nowadays. All of this encourages us to speak about long-term tendencies, which will mark the century, rather than processes encouraged by favourable circumstances. History teaches us that unequal development rhythms lead to conflicts, a truth that one of the founders of modern geopolitics, Halford J. Mackinder, fixed in the following formula: “The great wars of history – we have had a world war about every hundred years for the last four centuries – are the outcome, direct or indirect, of the unequal growth of nations.”1 In our opinion, this explanatory pattern did not end with the Cold War – it just took a different form. Military confrontation is not actual. The world can only accept military conflict as an extreme measure. Conflicts will continue to exist but they will appear in a different form in another field. They will be essentially economic conflicts (with their many subdivisions: trade, financial, raw materials conflicts) and will often be soft, even “friendly” in nature. The first decade of the century was turbulent but not ground-breaking. It was a decade of resettlements, with important things happening silently and quietly. The current decade is the break history is taking before another important transformation. 1 Halford J. Mackinder, Democratic Ideals and Reality: A Study in the Politics of Reconstruction (Washington, DC: National Defense University Press, 1996), 2.

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Several events will mark the third decade. The end of the decade will see China at the top, with 27.9% of world GDP, the US at 18%, the eurozone at a dramatic 11.7%.1 The top of this hierarchy will be maintained throughout the century, though India may replace Japan in the third position in the 40s or 50s. The second decade will see two other important events. The race for the high-speed computer will end, a highly symbolic race that China has a chance of winning, in specialists’ view, despite the US being the favourite. The very presence of China in a field where the US was clearly the leader is a warning. At the same time, one of the most modern financial centres in the world will start functioning in Shanghai. This initiative is significant because it establishes China as a financial power. Until then, it is estimated that Beijing will have a currency reserve of 5 trillion dollars, compared to 3 trillion at present. This is a decisive moment in launching the yuan as an international exchange and reserve currency, alongside the dollar and the euro. South-east Asia already trades in yuan, and many Chinese and foreign companies have received the right to trade in it. It is not unlikely that the next decade will witness another battle, the battle of currencies. Finally, in the mid-20s, China’s official military expenditure will equal that of the US. This means that in a not-so-distant perspective, China’s military power will equal that of the US. Consequently, the coming decade will be tumultuous, announcing the characteristics of the whole century. It will see the establishment of the world’s new economic hierarchy, with emerging countries at the top, and India truly on the global scene. These are spectacular shifts. Will they lead to conflict? So far, the rising country has asked for a place at the great powers’ table and the accompanying rights. This time China wants rights, but its patience is infinite because everything is secondary to its real priority: its own development. Throughout history, Russia bought time to be able to win various military confrontations; nowadays, China is buying time to consolidate the force of its own economy. That is why it will choose to cooperate and be conciliatory. There are no predictions of military conflict. The only circumstance that could make China act uncharacteristically would be if the sources and routes of its raw materials were endangered, because this would impact its development. How are today’s powers different? They selected the fundamentals of their state’s force differently. Some states opted for a classical model (with military power as a beacon, like the US and Russia); some others (China, 1

“Looking to 2060: A Global Vision of Long-Term Growth”, OECD Economics Department Policy Notes, No. 15, November 2012.

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Germany) rapidly reconfigured their power resistance structure to fit globalization and the new context of development. They opted to export, because export is a synthetic indicator, gathering all the components of economic activity. Moreover, in a global market, it is natural to wish to occupy as much of this absorption potential as possible. A rigorous strategy and a different reading of contemporary reality are in place here. The world can no longer be conquered by horse but with competitive products and attractive ideas and models. Bigger gains (in terms of both profit and image) are possible with competitive exports than with the modernization of military equipment. Globalization has redefined the importance of a power’s economic pillar and pushed competitiveness to the top. Not only can markets be conquered with a competitive industry and export products but also the appreciation and loyalty of global consumers. Another reason is that world powers simply cannot project themselves as hegemonic military powers. They are building another image for themselves and want to appear different. In certain respects, they are. They have impressive cultural power, and the power to influence and convince. This change has taken place as a result of pressure from public opinion, fed by the press. Analysts frequently speak about power in its classical sense, ignoring the modern power of public opinion, which sanctions measures, policies and even powers. Democratic or less so, societies need to take into consideration public perception, the way the real or proclaimed beneficiary refers to what is happening. Because the modern world accepts with difficulty the ideas and practices of hegemons, just as it has pains in accepting military conflicts, the idea of hegemony has changed radically. All significant powers have realized this and tried to adapt to the new context, but some have failed. The US, with the most impressive cultural power, made two errors, which perturbed two fundamental rapports. They weakened the state too much, transferring some of its prerogatives to markets and corporations, which divested Washington of its strategic coordination, indispensable to any power; and they promoted financialization to the detriment of the country’s productive capacity, which not only pushed the US towards speculation but contributed to a decrease in productivity, which is the heart of economy. The US decline is connected to this key indicator to a higher degree than we think. Other powers focused on their economic force and their capacity to conquer external markets. Like the US, they understood the power of money in contemporary society, the force of financial markets, but they closely associated money with its main source. The real “printing machine” is the production capacity, validated by exports. This is how

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China and Germany came to have the most sought-after titles in the economic field: “world factory” (which Great Britain and the US held in their heydays) and “Europe’s factory”, respectively. China and Germany became the world’s main exporters. It seems we have come to a new period where, emancipated from the pressure of military force and conflicts, the idea of dominance and hegemony is fading, where wellbeing and happiness are more equally distributed throughout the world. Economic breakthroughs march under slogans like “modernization”, “economic relaunch”, “highlighting potential” and so on, all pretending to serve the interests, the well-being and prosperity of “the occupied”. Is it really so? In 2013, China and Germany each had a trade surplus of about 215 billion dollars.1 So, combined, the trade surplus was close to half a trillion dollars – a sign of their competitiveness and the force of their exports, which cannot be ignored. In the meantime, the demand for an objective analysis forces us to take on the perspective of the European and Asian community, on the one hand, and global community on the other. Implicitly, the 500-billion-dollar trade surplus means a deficit for other countries, even the conditions for another recession and slow economic recovery. Martin Wolf was right to remark that, in fact, the two countries dispossessed their commercial partners of their internal demand and monopolized them. A new economic reality has slowly come into being in Europe and the world: economic development to other countries’ detriment, which in literature carries the name “beggar-my-neighbour policy”. We are quick to admire Germany’s remarkable competitiveness but we cannot ignore that the European engine’s higher exports incorporate the eurozone weakness, expressed in numbers: in the second semester of 2013, the Eurozone GDP was 3.1% lower than at the crisis climax and 1.1% lower than 2011. High exports are made at the expense of other countries’ internal demand; moreover, they can paralyze economic capacities and the possibilities of an economic relaunch. What seems admirable can induce painful processes, and even inaugurate a new world order based on the same centre-periphery division, no less tough than the older division. Germany needs to consider the situation in Europe. Throughout Europe there are countries with an imperial past. Greece and Italy in antiquity; Portugal, Spain, the Netherlands, even Sweden at the dawn of modern times; and Great Britain and France in modernity. Poland had an imperial 1

Martin Wolf, “Germany is a Weight on the World”, Financial Times, November 5, 2013.

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age, so did Austria. These countries are more numerous than the countries without such a past. Obviously, these states have their sensibilities and pride. At the same time, we need to admit that hegemony is harder to accept on the continent. This is one of the meanings of the proverb we used as the motto of this work. Conquering territories is one thing; leading them is totally different. For ages, the world had to be won over by ideas, projects and aims. This is all the more true today, in Europe. At times, Germany excelled in such approaches. At the end of the 19th century, Germany had built such an important cultural power that it could have transformed the 20th century into a “German century”, as Raymond Aron said. We all know what followed. This time, Germany has won Europe with its financial force: a soft instrument. Soft, meaning nonviolent, but in some respects tougher and more enslaving than classical instruments of conquest. This is what Germany needs to understand: Europe cannot continue in the cul-du-sac of these last years, nor can Germany use its impressive financial power to conquer countries on this continent. Neither perspective is possible. Germany has an advantage that is vital for saving Europe. Germany has vision. And Europe needs a coherent vision on its own development, more than it needs money. A fragmented, albeit necessary analysis has been dominant: the Greek crisis, the periphery, the euro crisis, unemployment, and so on. Fires were extinguished but there was no correlation among these analyses that could have highlighted the structural causes of the European crisis, and might have resulted in a clear profile for the Union’s future – following Germany’s example, for whom industry was important. In this sense, we said that the Union badly needs a new Marshall Plan. But this is not enough. This needs to be doubled by a New Deal, a new understanding among countries on their own and the Union’s future. For instance, Europe says (truly, in a whisper) good-bye to solidarity. Europe cannot continue to evolve with today’s disparities; the euro crisis highlights all the mistakes in the projects of the single currency and the Union. That is why a new project for the Union is necessary after the painful years of the crisis. And the project does not need to wait for the crisis to end – it needs to be part of the recovery. The vectors of power are changing but power seeks to reproduce the same relations of dominance, which, in many respects, can be tougher, more severe and dominating. We are the contemporaries of the rise of a new power: public opinion, which counts subjects in. This transformation is real. If the world powers fail to understand this, the following decade will be marked by tensions and dull revolt. Because this decade will fundamentally influence the century, we may say that we will live in a

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century of instability. We fear we will wish for bipolar order and lose our way among some of the many global or regional centres of decision.

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