You’ve looked closely into how the financial crisis that erupted in 2008 played out in different parts of the world. What did the financial crisis in Europe have in common with the US crisis?
One common factor in the US and Europe was unregulated, undisciplined finance capital. First, European banks, including German banks, bought huge amounts of toxic subprime securities and as a result they saw their balance sheets gravely impaired, and, in the case of many, they had to be bailed out by their governments.
Second, European banks engaged in the same uncontrolled lending to real estate ventures, thus creating a huge property bubble in places like the United Kingdom, Ireland, and Spain.
Another common factor was that European countries had also adopted so-called “light-touch” regulation, under the influence of Wall Street and neoliberal theories like the so-called “Efficient Market hypothesis,” which asserted that financial markets left to themselves would lead to the most efficient allocation of capital. Even German authorities were under the spell of such doctrines, so that they were caught by surprise by the massive exposure of their banks to toxic subprime securities and to poor credit risks like Greece.
And what was unique about or particular to the European crisis that distinguishes it from the US crisis?
The main thing that distinguished the crisis in Europe from the US crisis was the complication introduced by 19 states having a common currency without a fiscal or political union. On the one hand, the euro gave lenders the illusion that the credit risk of the weaker economies was practically the same as that of the stronger economies, encouraging them lend to the former without due diligence. On the other hand, being in the Eurozone severely limited a country’s options to recover since it eliminated devaluation as a means by which an economy could move from a trade deficit to a trade surplus. The euro became a gilded cage where the weaker economies have been condemned to long-term stagnation.
What was Germany’s role in the financial crisis? How did German policies shape what happened in, for example, Greece?
Germany had a central role to pay in the generation of the crisis. First of all, the neoliberal reforms called the Hartz Reforms, which were implemented by the Social Democratic government in the early 2000’s, made German labour relatively cheap compared to its neighbours. This turned many other European nations into deficit countries in their trade relationship with Germany. To cover their deficits as well as support social security measures for those displaced by German exports, the governments of these countries, like Greece, borrowed heavily from German banks.
Second, unrestrained by supposedly sober German government institutions like the Bundesbank, German banks did not perform due diligence on borrowers like Greece and lent massive amounts, recklessly. German exposure in Greece came to some 25 billion euros, leading Barry Eichengreen, a prominent finance expert, to comment that what was at stake “was not just the solvency of the Greek government but the stability of the German financial system.”
Third, while refusing to acknowledge the responsibility of its banks and heaping the blame wholly on Greece and other borrowing countries, Germany has stubbornly dictated the austerity policies that Greece and other countries have been forced to adopt. These policies are designed to recover the bulk of the loans made by Germany’s banks. Even the IMF acknowledges that these austerity policies simply doom Greece and other Southern European countries to long-term stagnation, but Germany insists on its pound of flesh, and this can only end up promoting the spread of anti-European Union right-wing populist movements.
So what about the standard accounts that say the Greek crisis was triggered by the revelation in 2009 that the government had been cooking the books.
Well you have to consider that, in 2007, two years before the statistics scandal, the tango of frenzied lending by German and French banks and addictive borrowing by the Greek government and private banks had already pushed Greece’s debt to 290 billion euros, which was 107 per cent of GDP. Yet, Greece was still seen as a good credit risk.
What made the situation in 2009 different was the spread of the global financial crisis from Wall Street to Europe, with banks collapsing or being bailed out by governments. The fallout from Wall Street made the creditor countries worry that private borrowers in the debtor countries would not be able to pay back their loans. So they pressed governments like Greece, whose government was already highly indebted, to also take responsibility for or nationalize the private sector’s debt. This conversion of private debt into a state liability converted the financial crisis in Europe into a sovereign debt crisis. The Greek statistical cover-up mainly functioned as an excuse for the creditor governments to crack down on the debtor states.
You quote Joseph Stiglitz as saying the euro is just a 17-year-old experiment, poorly designed and engineered not to work. Does that mean you think the euro will not survive?
As I said earlier, the problem with the Eurozone is that it is a monetary union that does not have the necessary requisites of a fiscal union and political union that would set up the rules and mechanisms to allow the central authorities to move capital from surplus to deficit regions. Right now there are only two ways to resolve the trade imbalances within the Eurozone. One is internal devaluation, that is, the adoption of harsh austerity policies that would cheapen labour and make a deficit country’s exports competitive; this carries the risk of subjecting a country to long-term stagnation owing to a sharp reduction of effective demand. The other way is to simply get up and go, leave the Eurozone, and adopt a new currency, the value of which would be low compared to the euro, thus making one’s exports “competitive.” Not surprisingly, this would also carry the risk of squeezing effective demand in the debtor economy. However, the second option would allow one much more room for manoeuvre than if one were trapped in a loveless, depressed marriage like the Eurozone.
So in my sense, the countries in the Eurozone face the choice of either moving towards full fiscal and political union, which would make financial transfers largely a matter of funds being automatically activated to flow from surplus to deficit areas in a fully unified economy, as in the United States. Or they end the monetary union. My sense is there is no middle way.
What would you say the role of social democracy was in the crisis?
Social Democracy is deeply implicated in the crisis. While Margaret Thatcher became the face of neoliberalism, social democrats had a very central role in pushing neoliberal measures throughout Europe. New Labour promoted financial liberalization and light-touch regulation in the United Kingdom, with Gordon Brown, first as chancellor, then as prime minister, becoming, as one writer puts it, “lionized” by the City as a result.
Francois Mitterand and the French socialists were the principal champions of the euro, in what former Greek Foreign Minister Iannis Varoufakis describes as a French project to harness German economic power to European integration under French political and administrative leadership.
And in Germany, it was under the Social Democratic government of Gerard Schroeder that implemented the labour market “reforms” that reduced labour wages and consolidated Germany’s position as a surplus country and its neighbours as deficit countries, forcing them to rely on German banks to cover their trade deficits. The Christian Democrat party could not have done what the social democrats did, but Angela Merkel and the conservatives ended up eating the SPD’s lunch.
Could the financial crisis in Europe have been averted? If so, how?
Yes, it could have been averted if there had been very stringent regulations governing finance put in place by governments that did not see finance capital as a partner but as a force to be disciplined. Finance has to be put in its proper place as a mechanism to get capital from those who have it to those who can apply it to productive use. More and more, it seems like only a nationalized banking system can properly fulfil this function. Having said this, I share the apprehension of the American economist Hyman Minsky that so long as capitalism reigns, finance capital will find ways to adjust to government regulations to again engage in reckless lending.
Are we out of danger now, or is there a chance this could happen again?
No, we are not out of danger because financial sector reform, which was pushed in the immediate aftermath of the financial crisis, has been ineffective or not implemented due to the successful lobbying efforts of financial corporations.
Finance capital remains undisciplined. In the meantime, owing to austerity policies, most of Europe’s real economy is in the grip of permanent stagnation. This creates the temptation for unregulated finance capital to engage again in speculative ventures, where one squeezes value from already created value through the creation of bubbles that are destined to collapse, again bringing chaos in their wake.
This interview is based on a paper by Walden Bello, ‘Europe: social democracy’s Faustian pact with global finance unravels, published by the Transnational Institute (May 2017)