openEconomy

From eurocrisis to a global new deal

The author of a new book on the ongoing crisis in the eurozone discusses the survival of the euro, the default alternative, who might gain from a failed austerity, and the prospects for global Keynesianism. An interview.

Heikki Patomäki C. J. Polychroniou
8 July 2013

C.J.Polychroniou: There is a general consensus that the global financial crisis of 2008 had its origins in the process of financialization that began in the 1970s. However, while the US economy has recovered, albeit with less than enviable rates of growth, virtually all of Europe and the eurozone in particular remains in a recession, while the heavily indebted countries are experiencing economic and social collapse. How do you explain the ongoing crisis in the eurozone?

Heikki Patomäki: The Eurocrisis, in essence, is a second phase of the epic recession that began in 2008-9. Behind every financial crisis is the growth of debt and speculative capital. Billionaire investor and activist George Soros has written of the superbubble which he argues had been in the making for decades. Over time the quality of mounting debt becomes poorer and in its final phase many take loans just to service their interest payments. This development makes the system more fragile and chaotic. Even relatively small payment problems can escalate into systemic crises.

This is what happened from late 2007 onwards. Suddenly it became clear that the US mortgage market was saturated with junk bonds. Many households were granted subprime mortgages, despite having no means of repaying them. Panic ensued, and one thing led to another. In the late 2008 and early 2009, the world was on the brink of a Great Depression.  

In 2010 it seemed that the world economy was recovering, thanks to automatic Keynesian mechanisms and deliberate public interventions. This is when the eurocrisis started. The global financial crisis forced the public sector to resort to rescue and stimulus packages, at a time when state expenditure was already rising and tax revenues declining.

The money had to come from somewhere. It is here that the EMU design flaws started to play a role. We don’t have a European fiscal policy or any mechanism to balance current account surpluses or deficits. For all participating countries, the euro is a foreign currency. Neither the supply of money nor the interest rate is under their control. Eurocountries must turn to world financial markets and to investors who are indifferent to the fate of people and nations.

When the debt to GDP ratios rise rapidly, a vicious circle may easily begin, as it has done time and again during the last three years. The demand for default swaps rises, credit ratings decline, interest rates rise, high interests worsen the debt problem into an acute crisis and so on.

All of a sudden in late 2009 and 2010, many eurocountries – and especially deficit countries – were facing a public debt crisis, though the underlying problem lies in private debt and in the long-term process of financialisation.

C.J.P: The bailout conditions for nations like Greece, Ireland, Portugal, Spain and Cyprus have been nothing short of humiliating for their national sovereignty and economically catastrophic. Wouldn’t they have been better off if they were allowed to default?

H.P: Yes, these countries would have been better off if their debts had been restructured, the earlier the better. The Greek disaster would have been avoidable. One way to force the lenders and other key actors to the negotiation table is to default, but this is difficult without leaving the euro.

There is a much better solution, though, namely a debt arbitration mechanism. It would be a legally binding mechanism establishing the rule of law and equality of all parties, for restructuring unsustainable debts.

Although such a mechanism, had it existed, would not have removed the inadequacies and internal contradictions of the European Monetary Union, it would have been likely to change the course of the beginning of this decade by deferring the worst effects of the EMU’s shortcomings, and perhaps also by preventing debt levels from mounting so much and so rapidly.

But because the third world debt campaign was unsuccessful in creating new global institutions, Europe too has now become a target of the International Monetary Fund’s structural adjustment doctrines. In other words, the absence of a good global institution has indirectly caused the underdevelopment of parts of Europe.

C.J.P: The northern countries in the eurozone, including Finland, are keen proponents of austerity for the southern euro zone member states even though the experiment with “keep-cutting-till-it-grows” has failed miserably, as the IMF has openly admitted.  From your perspective, what specific interests are being served in Europe by harsh austerity measures for collapsing economies?

H.P: It’s a complicated mixture of ideas, limitations of vision and interests.

The most general explanation of the austerity policies has to do with financialization. It means that financial markets and institutions and the elites involved in financing gain increasing hold over both private economic processes and public economic policymaking. It is in the interest of those who operate in inflationary financial markets to keep inflation in goods and services as low as possible. Also the money-lenders benefit from low inflation; and in all circumstances they want to see their loans being paid back in full, no matter what the consequences may be.

It’s no coincidence that states have in the past 20-30 years adopted as their primary economic goals the maintenance of low inflation rates and competitiveness, rather than aiming - for instance - at full employment. Also the EMU incorporates these aims, which at the level of economic theory are based on monetarism, neoclassical macroeconomics and rational expectations theory. These theories basically say that economic policy is inefficient. The only thing the state can do right is to keep inflation low and increase the supply of money with economic growth.

But this is only part of the story. Perhaps the most ironic aspect of the current crisis is the position of Germany. The actions of Germany and other surplus countries during the crisis recall the treatment meted out to Germany by the victors of the Great War from 1919 to 1932. In 1953, by contrast, German debt negotiations aimed successfully at sustainability, which greatly facilitated the West German “economic miracle” and democratization.

In the decades that followed, West Germany achieved a surplus economy through exports, and payment of the debts on schedule brought no difficulties. Thus the normalization of Germany and overcoming the German trauma was taken to require a surplus economy, associated with low levels of debt. In addition the hyperinflation of the 1920s that contributed to the rise of Nazism was taken to indicate the necessity of firm anti-inflationary policies. The German economic expansion and surplus benefited various parties up until the early 1980s, but since then the German attitude has gradually become an increasing burden for the rest of Europe, and to some extent for the whole world economy. Obviously these historically-determined German moral values resonate well with the requirements of financialization. Thus they tend to reinforce each other in Europe.

As far as Finland is concerned, the prevalent attitude is that, “we have played by the rules, why should we be paying the debts of those who haven’t?” Finnish vision is limited not only by this kind of sense of self-regarding national pride and moral puritanism, but also by the taken-for-granted neoliberalism that has crept into the country since the deep depression of the early 1990s. Are the imposition of austerity measures on the crisis countries in some way in the Finnish interest? I don’t think so. Finland is totally interwoven with the developments in the European and global political economy.

The programme of the current coalition government is premised on an economic growth that cannot be achieved because of the European-wide recession. As a result, austerity measures are getting tougher on Finland as well and may even spell a political crisis in the country next winter.

C.J.P: Talk of a banking union in the eurozone have stalled, and the prospects of developing a fiscal union any time soon have a very slim chance of materializing. Would the euro survive if Italy were to go under?

H.P: The EU has driven itself to a crossroads: down one path lies the disintegration of the eurozone, down the other the development of a federal system. Some sort of fragmentation of the Eurozone or the EU itself or both is likely, but my main contention nevertheless is that the euro will survive. Deepened and more social democratic integration could also come about as a consequence of some degree of fragmentation.

But your question is important: what would happen if Italy were to go under? The public debt in Italy is in the region of two trillion (two thousand billion) euros, some five times more than that of Greece, with a potential to escalate to yet higher figures. What matters is not only the economic shock itself but the political response of other eurozone countries, especially Germany. There are already many calls in Germany to get rid of the euro. An acute Italian crisis could well be the turning point. This possibility is a real weather warning for Europe. A new direction has to be taken!

C.J.P: In your book you make a strong argument for the revival of a global form of Keynesianism.  Is this a realistic option given the absence of hegemonic leadership in the global economy?

H.P: The neoliberal world order is unsustainable. It is realism in all possible senses of the term to advocate global Keynesianism. Global Keynesianism offers a reasonable and realistic alternative to following the neoliberal path to the bitter end, but it should not be mistaken as a panacea for everything or as the end of history.

Yes, I fully understand that by realism you mean to ask also whether it is realizable within the next few years or perhaps in the next decade or two. If we look at the history of our common global institutions such as the UN, the Bretton Woods institutions, the International Criminal Court, or financial transactions tax, which is now being established, we realize that a lot of time tends to pass between ideas and their realization. Often it takes a major crisis, or a change such as the end of the Cold War, before the window of opportunity opens, and even then this opportunity has to be seized decisively by actors.

I don’t conceive global change in terms of hegemonic leadership, especially if by a hegemon we mean a leading state. Rather institutional change stems from collective learning, which occurs also through political struggles. Political economy contradictions bring about crises, which in turn induce learning and lead to the rise of transformative movements that respond to the problems and contradictions of the global political economy by building new global institutions.

What is more, I believe that theory and practice must be consistent, not only in theory but also in practice. That is the reason why I am an activist-scholar engaged in developing ideas about new forms of political agency, such as world political parties. Transformative political agency presupposes a shared programme, based on common elements of a wider and deeper world-view, and a willingness to engage in processes of collective will-formation through democratic procedures. We may be seeing not only new global institutions but also new forms of ethical and political agency.

 

This interview marks the recent publication in Greek of Heikki Patomäki’s book The Great Eurozone Disaster. From Crisis to a Global New Deal (Zed, 2013) by Metaixmio. It will be published in Greek in The Sunday Eleftherotypia (www.enet.gr).

 

 

ourEconomy: putting people, planet and power at the centre of the debate Get the weekly ourEconomy newsletter Join the conversation: get our weekly email

Comments

We encourage anyone to comment, please consult the oD commenting guidelines if you have any questions.
Audio available Bookmark Check Language Close Comments Download Facebook Link Email Newsletter Newsletter Play Print Share Twitter Youtube Search Instagram