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The road to Europe: the return of the State

Too much economic activity in finance, too little investment for the real economy and society. Consumption falls, the recession is everywhere, but politics is nowhere to be seen. After the mistakes of neoliberal Europe, are we watching capitalism’s self-destruction? And can politics repair it?

The thought-provoking piece by Rossana Rossanda that started the debate on “The road to Europe” in Sbilanciamoci.info, il Manifesto and OpenDemocracy raises the issue of whether political integration should have preceded economic integration. My feeling is that it may not so much be a problem of the timing of the two types of integration but of the type of Union we created and under what type of ideological context.

The European Monetary Union has been conceived and realized under the banner of neoliberalism and of the neoclassical economic paradigm: markets are efficient; they, through their price mechanism, are the best allocator of resources. They are the best regulators of economic activities, not the State. This ideology is antithetic to social cohesion both within and between countries. We could have built a different type of European Union, within a different ideological, economic and political context: one in which the markets could have played a role but under the power of the State to regulate them for the benefit of all; one in which social cohesion within and between European States could have played a large role. In such an ideological context, economic, political and social integration would necessarily have gone hand-in-hand and the issue of timing of economic versus political integration would not have arisen. But this would have required adherence to different economic paradigms and a different political starting point.

These are, of course, counterfactual scenarios. Before I go back to full reality, let me start my analysis of the economic situation with another counterfactual assumption: a visit to Earth from a Martian. Were a Martian to visit Earth in the XXI century, she would have observed the following: (a) an enormous quantity of resources – human, technological and capital resources – allocated to the production of so-called financial products which seem to her totally useless; (b) people who work or invest in these products earn much more than the rest of the population; and (c) most Earthlings appear to be in need of basic products from food to roads and transportation to health services and education. Why, on Earth, are the resources not allocated to more useful production?

But let us forget our puzzling Martian who is unlikely to exist and, if she does, she may be used to even stranger economic and social systems. Let us deal with a reality nearer to us: Italy in the 1950s in the aftermath of the Second World War. In those years Italy and, indeed other European countries, were undertaking huge investment programmes in the real sector. The investments were connected with building up the basic infrastructure as well as developing the production of consumer goods and services. In that context it would have been unthinkable for entrepreneurs to devote their capital and energies to the production of abstruse financial products. So, why can’t we do it today? What is the difference?

Post WWII Italy and Europe presented enormous opportunities of investment in the real sector: opportunities for the private sector and at high profit rates, high enough to induce entrepreneurs to invest as much as the available resources allowed them to. In the last few decades the investment opportunities in the real sector bearing high returns have declined and capital has been looking for high profits and rents in the financial sector: the deregulation of the financial sector and the development of its new products and institutions are connected with this search for higher and higher rents. It must be clear that returns in the real sector are not null: it is just that they are likely to be lower than in the financial sector.

But why have the investment opportunities with high returns in the real sector declined? There are many reasons for this ranging: from relatively lower demand for consumption goods as income per capita increase in developed countries; to shifts in the distribution of income and wealth away from the lower and middle classes in favour of the rich which exhibit a lower propensity to consume; to problems related to the new technologies. The latter have brought in a huge development in the productive forces without generating a corresponding development in terms of consumer products. This has heightened the problem of gap between demand and productive capacity. In the post-WWII European economies we saw the development of very large markets opened up by the production of cars, motorcycles and household electrical products. The large markets have moved alongside the production capacity and alongside increase in incomes per capita which allowed people to afford those products. Thus the production, demand and distribution side of the economic system tended to keep pace with each other and be in more equilibrium with each other than they have been in the last 30 years. The digital era – while increasing the potential and often the actual productive capacity – has not given us scope for new products and markets to the same extent. Moreover, the shift in income distribution further exacerbated the imbalance between the production, demand and distribution sides of the economies: the crisis we are witnessing is, to a large extent, the outcome of such imbalance.

When I talk of low investment opportunities in the real sector I do not mean to say that there is no need for investment in both developed and developing countries. Such a need is obvious even to our Martian: from infrastructures to houses to alternative sources of energy to education, transport and health services. However, many such investment would not give an adequate return for the private sector: they are investments that give high social returns in the medium to long term and therefore they can only be made with State intervention.

If the under-consumptionist thesis sketched above as the underlying malaise for the advanced capitalist system today is even partly correct, the following implications can be derived. The first one is that the overall situation is probably more serious than it appears at first sight. It may not be enough to reform the financial sector – badly needed as this is – we must think of investment opportunities. And here we cannot but go back to the role of the State: in this perspective, it becomes essential for the very survival of capitalism.

The second implication refers to the balance of social and political forces in our economies. There is a need to gradually shift income distribution in favour of the groups with low to medium income per capita. Their higher propensity to consume would give a boost to effective demand and thus help growth and give further investment opportunities to the private sector. A radical reform of the financial sector would by itself halt the shift in income and wealth distribution towards the rich that we have seen in the last 30 years. These are considerations relative to the demand and distribution side of the system.

However, the supply side also needs serious strategic intervention. Specifically: investment in training and education of large section of the labour force, some of whom have been deskilled by years of unemployment; and investment in new technologies still underdeveloped in many regions of EU countries. Only by this type of human and capital investment can we make sure that, when demand eventually picks up, we shall not have supply side constraints. Lastly, intervention to reform the financial sector. Europe is a large enough unit and strong enough to be able to take the lead on this. Among the reforms needed are, in my view, the following. (a) regulation of cross-border financial movements; (b) tackling the tax havens problem; (c) separation of banking activities involving different types and levels of risks such as commercial v investment and v housing market banking; (d) bringing under the same regulatory umbrella as the banking sector any financial institution involved in banking activities; (e) limits to the very risky financial products.

But how can we possibly reach all this? How can capitalism be prevented from self-destruction? Many economists and non-economists are convinced that the current policies are seriously wrong. Cuts in public expenditure are the opposite of what is needed to boost demand and thus stimulate the growth which would, in the medium term, help towards the increase in government revenue. The national debt would decline if the cuts were halted and indeed an effective programme of social investment put in place while at the same time the rich were made to pay their fair share of taxation. The European policies of leaving peripheral countries at the mercy of rating agencies and speculators and then intervening almost at the last minute, is exactly what the speculators want: a period of uncertainty followed by the clear expectation that they will not be left to shoulder the burden: that, in the end, the EU will pay up partly because it is its banks who would be left dry in case of sovereign defaults.

The EMU and its institution were created under the neoliberal political agenda. The ECB independence, indeed detachment, from the ground level problems of most European member States was based on the assumption that the best regulator of the countries’ ability to borrow should be the market. What seems to have been left out of the institutional agenda was the role of speculation in the markets and its destructive and contagious power. In the space of a few decades we have gone from economic and political settlements in which ‘the State – mildly – regulates the markets’ to ‘markets are efficient and self regulating’ to markets regulate governments and their policies’.

Will we emerge from this? Certainly not with the current policies in Europe and the US. Yet there are a few positive glimmers on the horizon. Following the tentative assault on France by the financial speculators, the European leaders seem, at last, to have woken up to the possibility that the whole European project might collapse and bring further down the European and world economy. They seem to be looking into the possibility of deeper integration across the EU. But in order to carry this forward they would need - in concert, all together – to move from the rhetoric of separation and fragmentation – of them and us – to one of deliberate leadership towards social and political cohesion. Thus instead of blaming profligate Greek or incompetent Italian for the European crisis, they could – more truthfully – mention the role of banks in the debt crisis and how they could and should be involving in averting a European catastrophe spreading the world over. The leaders could stress the positive contribution to the economies of more advanced European countries made by the eastern European workforce whose immigration is usually welcome by the employers in these countries while, at the same time, it is blamed by the right-wing press and politicians for the high levels of unemployment or shortage of social services. Instead of blaming the unemployed and needy for their situation, the leaders could emphasize what a major contribution they could be making to the economies of their country and of Europe, were they to be offered proper skills and job opportunities.

The glimmers of hope mentioned above rest on the following. First, the violent protests, the riots and the more peaceful demonstrations in Europe may be giving the signals that the population at large – particularly its younger groups – have had enough of bad economics, bad politics and unrepresentative democracy. Second, it is no coincidence that not long after the riots in England we saw some of the wealthiest people in the world calling for higher taxation for their own income-per-capita group. Third - and mentioned above - the relentless pressure of speculation on the European economies may push towards the U turn in European politics. Leaders worthy of such a label could take this opportunity to move from the rhetoric of ‘we cannot soak the rich’ to one of ‘we should stop soaking the poor and ask the rich – who have benefited from the last 30 years of policies in their favour - to make a contribution in these hard times: that is what ‘we are all in it together’ should mean and could be sold to mean to the population at large including the rich.

A politics inspired by social cohesion – within and across European countries - supported by an economics for the many and not the few is our only way forward. Such politics and economics can only go hand-in-hand and be developed simultaneously.

 

About the author

Grazia Ietto Gillies Grazia Ietto-Gillies is an Italian economist living and working in London. She is Emeritus Professor of Applied Economics, London South Bank University and Visiting Professor, Birkbeck University of London. She is one of the initiators of the World Economics Association (www.worldeconomicsassociation.org). She has published extensively on the economics of Transnational Companies and on Globalization. 

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