For a short time after the crisis of 2008, we were all Keynesian reformers, but now our politicians have gone back to serving the conservative cause—making the poor pay the gambling debts of the rich by shrinking the welfare state.
Neo-liberal economists—that brand of economists like von Hayek who are market fundamentalists—have never liked the welfare state. The Reagan-Thatcher agenda, it will be recalled, was to roll back the state to a size compatible with performing minimal ‘night watchman’ duties of defending the realm and upholding the law. Anything which went much beyond guaranteeing the rights and privileges of the property-owning classes was deemed to infringe on individual liberty, a view which continues to inspire the libertarian right in the USA.
Here in Europe, the post-war settlement creating the welfare state was meant to have put an end to such retrograde views. In the days of the Cold War, although Europeans largely shunned Soviet-style communism, they remained suspicious of US-style unfettered capitalism, preferring the well-regulated environment of universal education, health care and decent pensions. Labour and capital were deemed to work together as ‘social partners’, both sides recognising the need for Keynesian-style intervention in the economy to regulate the business cycle—either in the form of discretionary policy intervention or by use of rules-driven automatic stabilisers. Or so it seemed.
Nor was the Reagan-Thatcher agenda confined to a handful of Anglo-Saxon countries: the US, Britain, Australia et al. From the 1980s onwards the resurection of pre-Keynesian ideology was to be found everywhere. The ‘Washington consensus’ ensured that any country falling into the clutches of the IMF—-as happened particularly in the developing world—would need to balance the budget, privatise state enterprise, promote flexible labour markets and, above all, liberalise capital and trade flows.
Such policies became popular in Europe as well; the Maastricht Treaty was drafted, mainly by bankers who believed in sound money. Jacques Delors’s 1993 White Paper, which proposed to counter-act the deflationary bias in EMU by embarking on large-scale public works, was derided as unaffordable by Europe’s finance ministers. The vision of a well-funded European Treasury implementing Keynesian-style polices, first proposed in Donald MacDougall’s report in the late 1970s, slipped into quiet oblivion.
By the 1990s, the neo-liberal agenda had taken full hold in Brussels and privatisation, flexible labour markets and interest-rate targeting were the order of the day. In the UK in 2003, when Gordon Brown refused to join the euro, it was not because he rejected the brand of economics preached by Brussels; rather, he thought Europeans too keen on regulation. The fact that some Americans, both on the right and left, still think of Europe as ‘socialistic’ simply betrays their provincialism.
The banking crisis of 2008 was as traumatic for Europe’s politicians as its bankers. For a time, it seemed that the very foundations of market-driven Europe might be threatened as growth turned negative and unemployment grew. Even the Germans, never known for their Keynesian sympathies, threw money at the banking system and engaged in diverse forms of stimulus for their ailing economy. And it worked! A combination of currency stability, buoyant demand in the large developing countries and cheap labour from the newly integrated eastern-bloc nations helped drive German-led EU recovery. Germany today is growing faster than before the 2008 crisis.
The one spoiler was that a decade of (mainly German) capital flows into Europe’s peripheral countries had driven up real wages faster than productivity. The Club-Med countries ran rising external deficits which mirrored rising Germany’s trade surplus. And the internal counterpart to an external deficit is either private or public borrowing (or both). In some cases, Governments became indebted (eg, Greece) while in others either private debt threatened the banking system (the UK, Spain) or its burden was imprudently underwritten by the public (Ireland).
The Club-Med countries have been made to foot the bill for this state of affairs through public austerity and deflation, a principle Mrs Merkel and her sound money advisors wholly endorse. The alternative in the short-term would be for Club-Med countries to default, an outcome which now looks nearly inevitable for Ireland and Greece. After all, Iceland—very much on the periphery of Europe— refused to let the public pay for the bankers’ recklessness and appears to have survived quite nicely!
Much is made of the new European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) to follow in 2013. But these arrangements are only palliatives. In the longer term, not only is a European Treasury needed which could issue European T-bonds, but Germany and the Nordic countries must reflate their own consumer demand, which has remained squeezed in order to free resources for exports. Since one country’s exports are another’s imports, to require all countries in the Eurozone to ‘copy Germany’ and be net exporters is logically impossible. Nor can the rest of the world absorb a net export surplus run by all Eurozone countries together. In short, instead of forcing the periphery to deflate, the centre must reflate.
One factor above all is fundamental to any economic attempt to reverse the shrinkage of Europe’s welfare state and relieve the burden of deflation imposed on labour: the neoliberal paradigm must be abandoned which, in effect, means breaking the stranglehold of the banks on our economies. Finance is a public good, one far too important to be left entirely in the hands of bankers. Financial services should be public services, with publicly-owned banks setting the standards for a newly regulated private sector.
While the recent Basle Three agreement requires banks to carry a slightly higher cash cushion, nothing has been done to re-establish the division between investment banking and commercial high-street banking, a division which disappeared with the repeal in the US of Glass–Steagall in 1999. Except for a temporary ban on naked short sales in Germany, the derivatives trade remains mainly unregulated. Credit default swaps (a form of insurance on risky financial products) are still sold over-the-counter rather than through an official market, President Obama having apparently reneged on his 2009 pledge to re-regulate these. The notion of a Tobin tax has been mooted repeatedly, but nobody is willing to take the first decisive step.
Throughout Europe and the Anglo-Saxon world, there has been much talk, but little action. Our political classes, whether on the right or even the centre-left, seem paralysed, unable to break the mould—unable to act in the interests of the majority. One hardly dares say it openly, but perhaps nothing less than another major financial crisis will bring forth a new generation of politicians willing to do so.