winter 201011 5

5
international Journal of Political economy, vol. 39, no. 4, Winter 201011, pp. 530.
2011 M.E. Sharpe, Inc. All rights reserved.
ISSN 08911916/2011 $9.50 + 0.00.
DOI 10.2753/IJP0891-1916390401
RICCARDO BELLOFIORE AND JOSEPH HALEVI
Could Be Raining
The European Crisis After the Great Recession
Abstract: this paper presents a general overview of the structural transformations
marking the new capitalism and analyzes the contradictions of european
neomercantilism within the Great recession. in the past two decades, neoliberalism
turned into a paradoxical sort of privatized fnancial Keynesianism based on the
triad of traumatized workers, manic-depressive savers, and indebted consumers.
it argues that the present european economic and political situation is deeply
rooted in linking capitalist accumulation to the attainment of export surpluses, a
situation in which, as is the case in Germany, most of the net external balances,
are realized within europe itself. it shows that such a process has led to the rise
of strong neomercantilism (in Germany) and to weak neomercantism (in italy).
the recent crises, including those in Greece, ireland, Portugal, and Spain, are
discussed in this framework. it concludes by observing that in light of the ongoing
contradictions, the challenge for the Left is the question of the socialization of the
banking system, of investment, and of employment.
Key words: europe, Great recession, neomercantilism, privatized Keynesianism
Capitalism today is in a systemic crisis that started in the summer of 2007. Finan-
cial instability arose from the diffculties inherent in a particular segment of U.S.
fnancial markets, then spread to the rest of the world. And, presto, the fnancial
crisis mutated into a banking crisis; in less than a year, it became a full-blown cri-
Riccardo Bellofore is a professor of economics at the University of Bergamo, Italy, and
a research associate in the History and Methodology of Economics Group, University of
Amsterdam, Netherlands. He thanks the laboratoire UMR 5206 Triangle Action, Discours,
Pense Politique et Economique, Lyon, and the University of Lyon 2 for hosting him while
he worked on this paper. Joseph Halevi is a senior lecturer in political economy at the Uni-
versity of Sydney, Australia, and International University College, Turin, Italy.
6 internationaL JournaL of PoLiticaL economy
sis in the real economy. Since then, the recovery, if it can be called that, has been
rather weak and without any reduction in unemployment. The Great Recession not
only is likely to be prolonged but also may become another Great Depression. An
extended period of stagnation with mass unemployment is before us.
The crisis has revealed permanent structural faults within European capitalism,
originating in its neomercantilist dimension centered on the German economy and
its satellites, with Belgium (which is partially linked to France), the Netherlands,
Austria, and Scandinavia revolving mostly around Germany. For these areas, as
for Switzerland, external surpluses in the trade balance have been the instrument
of choice to resolve the realization problem. They were also linked to a positive
balance in the current account, thereby allowing a deepening of interventions on
the international capital markets. This has created long-standing pressure for defa-
tion, which has depressed internal expansion, employment, and wages. Although
net exports have pushed up profts, this group of countries has been exporting
unemployment.
In this paper we frst look at the global crisis on the basis of the novelties in
the capitalist form of growth and in economic policy. Then we focus on Europe
as a whole. In particular, we inquire how the contradictions of European neomer-
cantilism developed historically, leading to the current stalemate and intractable
entanglement within the European Union.
The First Phase of Neoliberalism: The 1980s
It may be useful to start by looking at the present crisis from a historical perspective.
Are we experiencing the crisis as an outcome of unrestrained free market liberal-
ism?
1
Not quite. The long phase that lasted thirty years starting with the neoliberal
turn of 197980 was anything but a retreat of the state; nor was it characterized
by the abandonment of interventionist policiesquite the contrary. Certainly the
U-turn in economic policies at the end of the 1970s generated a rapid compression
of effective demand. The sharp increase in nominal and, later, real interest rates,
together with the spread of uncertainty, contributed to the fall in private investment.
This frst phase of the neoconservative turn can be defned as monetarist. It was
based on the pretense, quickly abandoned, of controlling the money supplyan
unknown and unknowable quantum, as Nicholas Kaldor (1983) pointed out in his
speeches at the House of Lordsto hold in check the prices of goods and services
as well as wages. Theoretically, the monetarist phase rested on the assumption that
the Phillips curve would remain vertical in the case of a high unemployment rate,
thereby transforming the unemployed into people who voluntarily withdraw their
supply of labor in favor of more leisure. However, the relevant politicians of the
period never thought in those terms. Margaret Thatcher, for instance, deliberately
sought to create a reserve army of labor to destroy the trade union movement,
and for this reason Kaldor pointedly called her the frst Marxist prime minister of
Britain. The concrete manifestations of these policies were the cuts in social public
winter 201011 7
expenditure and the fall in wages either in real terms (in the United States) or as
a proportion of national income, initially generating a tendency toward the fall in
consumption demand.
So, why didnt the Great Effective Demand Crisis occur? It should have happened
during the 1980s. Our short answer is that, indeed, in the early 1980s there was a
demand-determined crisis that was repulsed by political countertendencies. The
most notable of these was President Ronald Reagans twin defcits, which kept the
United States above water and initiated the food of net imports, thereby sustaining
the rest of the traditional industrialized world in Europe, Japan, and East Asia. Dur-
ing those years the United States and, to a lesser extent, Britain, Australia, and Spain
were transformed into the market outlet of last resort of both strong neomercantilist
states, such as Germany and Japan, and weak ones, such as Italy.
The Second Phase of Neoliberalism: The 1990s
By themselves, Reagans twin defcits centered on a revamped military expenditure
would have been just countertendencies to the stagnation of the 1970s and the U.S.
recession of 198182. What must be understood, however, is that the monetarist
phase of the neoliberal counterrevolution set in motion processes that in the 1990s
led to the emergence in the United States of a type of capitalism based on a sort
of privatized Keynesianism. The novel elements, although containing some of
the traits of late nineteenth-century capitalism, were the renewed fnancialization
of the economy and the precariousness of jobs and working conditions. These two
elements rested on the balance, which turned out not to be sustainable, between
three characters: the traumatized worker, the maniacal saver, and the indebted
consumer.
The Traumatized Worker and Centralization Without Concentration
The frst character, the traumatized worker, is also the outcome of the primacy ac-
quired by fnance, this time in a different way from the dominance of fnance before
World War I. The new dominance of the economy by fnance produced signifcant
real impacts. For a while, this had virtuous effects on capitalist dynamics, on the
process of immediate valorization and the management of production, as well as
on the fnancing of the economy and hence also on the injection of money into the
economy and on the forms of fnancial intermediation, and fnally on the level and
composition of effective demand. The phase that has been improperly christened
the golden age of capitalism and even more the phase that followed its crisis in the
early 1970s witnessed the rise of what Minsky (1993) termed money manager
capitalism and Aglietta (1998) called le capitalisme patrimonial, which can also
be dubbed pension funds capitalism (Bellofore 2000b).
2
A system of compulsory
savings became formalized with wage earners pension contributions deposited in
private funds. With the crisis of the golden age and the ensuing curtailment of the
8 internationaL JournaL of PoLiticaL economy
social role of the public sector, a growing proportion of the legislated employee/
employer contributions to social security was compulsorily directed toward these
funds, which therefore came to absorb a great deal of household savings.
It is well known that the management of pension funds is based on getting the
maximum returns within a short time, especially in light of both a weakening stream
of contributions due to sagging wages and to a higher number of claims in the
near future caused by an aging population. The placement (investment) of these
sums in securities, shares, and other kinds of investments created a commonality
of interests between the managers of fnancial institutions and those of productive
frms. The latter were co-opted to the strategies of the frst group directly through
salaries linked to stock options and economically by increasingly partaking in the
objectives of maximizing dividends and share values. The overarching presence
of pension funds thus created a situation in which fnancial institutions, aided by
credit rating agencies, which also are nonbank fnancial companies, determined
the governance criteria for the entire business sector.
The rise to dominance of the new fnancially led governance engendered, in
Marxian terminology, a process of centralization without concentration.
3
Key
sectors experienced huge mergers and acquisitions, thereby concentrating capital
even more. However, the same process did not bring about the formation of new
large-scale vertically integrated industrial enterprises, which would have been the
mark of enhanced capitalist concentration. At the same time, the transformation
of the economic and political spaces of world capitalism (including the integration
of East Asia as a crucial part of the electronic chain of production with the emer-
gence of China, and Indonesia as well, as major areas of outsourcing) were made
easier by new technologies. The multiplication of fnancial enterprises after the
process of deregulation in Western countries created destructive competition in
their investment strategies among the global players in manufacturing and services
(Crotty 2000). The value chain system was rapidly reorganized, thus becoming truly
transnational in nature. The network of frms was, therefore, stratifed according
to their relative power within the branch in which they operate. At the top were
companies producing the technological and design blueprints and supplying the
key capital goods; these frms were also the decision makers and systematically
strived to expand their oligopolistic position. At the bottom, frms multiply and
thereby struggle to survive while ferociously competing against each other to obtain
contracts from those at the top of the chain. It follows that the conditions of wage
labor also depend on the position of their respective enterprises within the value
chain system of the specifed industrial branch.
For the above reasons, the expansion of production is no longer coterminous
with the expansion of a working class concentrated in contiguous space, in similar
factories, and subject to the same legal system, thereby making it practically ho-
mogenous vis--vis capital labor (Vertova 2006). Work has been fragmented and
rendered ever more insecure. Precariousness and instability may seem absent at
one pole while appearing in devastating forms at another. Yet the instability of job
winter 201011 9
and working conditions at the lower end operates as a threat and signal to those
employed in factories located at the upper end. The weakening of the bargaining
power of labor is the product of the collapse of the Soviet Union and the entrance
into the circuit of world capitalism of China and, to a much lesser extent, India that
led to the doubling of the industrial reserve army (Freeman 2004).
Capital Asset Infation and the Real Subsumption of Labor to
Finance and Debt
The transformations in working conditions have occurred as a consequence of what
we label a real subsumption of labor to fnance and debt, namely, a subordinate
integration that has a direct impact on the process of production, generating longer
working hours and increasing the effort required of employees. The extractions of
relative and absolute surplus value have become inextricably intertwined, whereas
the centerperiphery dichotomy has lost its older rigid connotation, being repro-
duced within each economic area and country.
To better grasp the interconnection between fnancial and real dynamics during
the 1980s, we must refer to the tendency of pension fund and hedge fund capitalism
to generate asset price infation. As explained by Jan Toporowski (2000, 2010a),
the growing rate at which money fowed from those funds to fnancial markets en-
abled nonfnancial frms to issue shares cheaply, whereas the returns increasingly
depended on speculative gains. Capital asset price infation was also accompanied
by an overcapitalization of productive enterprises: given the convenience of ex-
panding fnancial relative to real investment, ownership titles were issued in excess
of the needs of industrial and commercial fnancing. The moneys mopped up by
the issues were thus being invested in fnancial short-term activities. In this way,
the interests of the funds managers in fnancial rents and the revaluation of shares
merged with the interests of frms directors in the new forms of remuneration.
Such a conjunction created a highly favorable climate for spectacular mergers and
acquisitions and for the savage restructuring of frms.
In the fnancial markets, these processes led to a systemic tendency toward
upward cumulative asset infation disequilibrium without any short-term cor-
rection mechanism. Markets were becoming more liquid, and the supposed
quality of collateral assets was thought to improve regularly, itself a mirage of
asset price infation, leading to a perceived ex post increase in the cushions of
safety (Kregel 2008). It is for these reasons that the growing indebtedness ensued
mostly from fnancial companies and households rather than from the physical
investment of nonfnancial frms. The latter felt a lesser need to use the banking
system, which, in turn, had to change its frame of reference. Rather than being
the institutions selecting and monitoring industrial frms as their main debtors,
banks could not but look for returns in the area of consumers credit and in the
fees stemming from securitization packages. This is nothing but the originate
and distribute model of banking.
10 internationaL JournaL of PoLiticaL economy
Capital asset infation goes a long way toward explaining the irrational exuber-
ance that gripped frst the stock market and later the real estate market. It is at this
juncture that we may bring in the other two characters of the new capitalism:
the maniacal saver and the increasingly indebted consumer. They both represent
the other side of the coin. The bubble in asset prices, especially of houses, allows
the expansion of consumption on credit. Savings out of disposable income fall to
nearly zero or even become negative because of the stagnation, that is, decline, in
real weekly earnings. For the bulk of the population, the dynamics of consumption
become, therefore, autonomous from earned income while being stimulated by the
perceived wealth effects, a perception validated and swelled by fnancial companies
and their originate and distribute practices. Evidently all this helps the growth of
effective demand. Yet wage defation, capital asset infation, and the increasingly
leveraged position of households and fnancial companies are complementary
elements of a perverse mechanism in which real growth is hampered by the most
toxic aspects of fnance. The traditional static views of a confict between industrial
and fnancial capital and the traditional way of framing these concepts cease to be
useful for the analysis of current capitalism.
Under these circumstances, the monetary circuit also undergoes a radical de-
parture from the previous forms. The injection of credit money into the system
has its main point of entry in household indebtedness rather than the fnancing
of production.
4
The liquidity injected by banks and fnancial intermediaries into
household debt accounts is then transferred from the latter to the frms and to the
markets for goods and services, enabling, therefore, the realization of value and of
surplus value. Liquidity can also be retained within the fnancial markets, feeding
back into the asset price bubble.
The growing household debt as well as the overcapitalization of nonfnancial
frms rest on the explosion of debt internal to the fnancial sector. In this enchanted
world, the imagination of the design of new fnancial instruments could run wild.
The mirage appeared as reality. The business sector seemed able to create its own
money in a fully Hayekian way, independent from the monetary creation of the
traditional banking system and the central banks (Bryan and Rafferty 2007). Yet
a mirage it was; and even Marxists, who should have known better, fell for it. As
the late John Kenneth Galbraith often stressed, there are no innovations in fnance;
any innovation is a new way to create debt obligations.
The Maniacal Saver, the Indebted Consumer,
and the New Monetary Policy
To avoid any misunderstanding, we should add three important qualifcations to
the picture sketched above. The frst pertains to the new economic policy, with-
out which the working of the fow mechanism outlined hitherto would have been
impossible. The second qualifcation relates to the institutional and geopolitical
prerequisites that enabled setting up private indebtedness worldwide. Finally, the
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third qualifcation concerns the social signifcance of the indebted consumer, who
emerges as an expression of a society whose population is getting poorer, not
richer.
As for economic policies, it should be clear by now that the capitalism of the
1990s was everything but stagnationist, thanks to a new direction of economic
policies centered on an eminently political management of effective demand that
also affected the composition and geographical confgurations of production. Lets
see how the policies were constructed.
The creation of traumatized workers meant that the dangers on the infation
front no longer came from wage earners. The public authorities realized that it was
possible to have a reduction of unemployment without upward pressure on wages.
In other words, the Phillips curve became essentially fat (Lavoie 2009), thereby
rendering redundant the old diatribe between MIT Keynesians and Chicago mon-
etarists. The existence of a fat Phillips curve made it possible to set full employ-
ment as an attainable goal. But it was not full employment in the Keynesian sense
of sustainable wages and stable jobs. Rather, it entailed full underemployment,
with unemployment penetrating the employed labor force through the spreading
of part-time and casual/informal occupations. Full underemployment can easily
tip over to mass unemployment, as we are now witnessing.
Monetary policy rather than fscal policyexcept for tax reductions for the
wealthywas the tool used to bring the economy as near as possible to full un-
deremployment. Yet the aim was not that of enforcing the traditionally supposed
causality between low borrowing costs and higher demand for investment (capital
goods). The chain process has been altogether different. The central bank managed
the creation of liquidity with the objective of sustaining the continuous rise of share
and capital market values. It was done directly but also indirectly by acting as a
guarantor of the shadow banking system and of fnancial intermediaries. Thus,
at any sign of a fnancial crisis arising at the center of the system, the central bank
acted, as Marcello De Cecco (1998) brilliantly put it, as a lender of frst resort.
The central banks objective was to set a foor in the event of a fall in asset prices;
this policy signal was then incorporated into the expectations of the operators in
fnancial markets. This is what the Greenspan Put was about. The put saw the light
of day with the Wall Street crash of October 1987 and expanded enormously under
Greenspans entire mandate. Through Greenspan, quantitative monetarism exited
the stage and was explicitly replaced by an interest rate policy in which money is
made available in unlimited amounts at any rate of interest established by the central
bank (in the United States, the Federal Reserve). Hence the supply curve of money
became fat, just like the Phillips curve. The rationale for the policy is given by the
Taylor rule regarding the calibration of the rate of interest, rather than by accepting
that money is intrinsically an endogenous creation of the credit system.
The interaction between monetary policy and the stock market contributed
to the rise in consumption demand via the rise in the virtual value of household
wealth. The Greenspan period thus is the second phase of neoliberalism and can
12 internationaL JournaL of PoLiticaL economy
be described as a sort of a privatized and fnancial Keynesianism: aggregate
demand is pulled upward by virtue of the wealth effect that asset price infation
engendered and central bank policies validated.
The Indebted Consumer as the Traumatized Consumer
We come now to our third and last qualifcation. Household indebtedness and
the expansion of private consumer expenditures in no way correspond to a state
of economic and social welfare, although they may contain elements of apparent
opulence with a consumption bias toward nonessential goods. In reality, some im-
portant works had already shown that the American as a consumer was overspending
and as a wage and salary earner was being overworked (Schor 1991, 1998). More
recently in her path-breaking research and Senate testimony, Elizabeth Warren has
shown beyond any shadow of a doubt that the source of indebtedness, and hence
of overspending, lay in the insuffcient level of income for acquiring ever more
expensive educational and medical services (U.S. Congress 2007). Relative to the
1970s, the share of income going to purchase consumption goods has actually de-
clined signifcantly because of massive imports from China. Instead, expenditures
generating rents for the fnancial sector, such as insurance and education, became
the crucial determinants of debt in a context in which no household could live on
one salary. Thus two incomes are not the guarantee against indebtedness assumed
to be the main avenue to prevent the worsening of living standards. The real sub-
sumption of labor to fnance and debt entails an increased dependency of the labor
force on capital by virtue of new forms of enclosures, leading to a new primitive
accumulation by dispossession (Harvey 2003; Sacchetto and Tomba 2009).
From the Dot-Com Crisis to That of the Subprime Markets:
The Real Estate Bubble and the Depressive Saver Phase
To sum up, the new capitalism was based on the trinity formed by the fnan-
cialization of capital, the fragmentation of labor via value chains and outsourcing
systems, and the increasing focalization of economic policies on monetary ones.
As the three pillars of the trinity were mutually reinforcing, we witnessed over a
number of years a rather dynamic capitalist development, highly unequal in terms
of income and wealth distribution and centered on consumption purchased on credit.
If the indebted consumer has been the locomotive of U.S. growth, the United States
was, in turn, the fnal buyer of the neomercantilist economies of Japan, Germany,
and other signifcant parts of Europe and most of Chinas outputs. The pair formed
by the maniacal saver and the indebted consumer has shown itself to be not just
a highly unstable combination but also, in the end, an unsustainable one. The bi-
polarism of manic savers becoming depressive savers emerged when the dot-com
economy, which prospered on the interaction between monetary policies and the
rise of stock market values, collapsed in early 2000.
5
With the dot-com crisis, the
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real possibility arose that the saver would go into a phase in which households
must reduce expenditures out of disposable income to reduce their debt exposure.
The authorities did everything to avoid that eventuality.
The efforts were successful thanks to Bushs military Keynesian spending,
Greenspans fooding the economy with liquidity, and the change of the fows
with Asia, which, while running large current accounts surpluses with the United
States, generated capital fows toward U.S. capital and bond markets. Given Asias
dependence on U.S. effective demand, there was no real alternative. But such an
objective state of things is for ideological purposes turned upside down when it
is claimed that global imbalances are due to a savings glut (Bernanke 2005). It is
instead the dynamics of effective demand that led the United States to accumulate
external defcits, against which there must be external surpluses abroad.
During the very early years of the millennium, the policy mix mutated from
war Keynesianism to a revised form of the asset bubbledriven Keynesianism.
6
The
stock bubble was replaced by a real estate bubble that reproduced in a different
way mechanisms and behaviors of the frst. The dot-com bubble had also been fed
by venture capital activities that fnanced real investments in electronic equipment,
software, and so on. The real estate bubble, conversely, was overwhelmingly con-
centrated on the steep infation in house prices. Under these circumstances, people
who bought houses carried larger mortgages, and their exposure to debt rose sharply.
By the second half of 2003 recovery from the dot-com recession was under way,
and indebted households could now remortgage their houses by transforming them
into cash dispensers for consumption expenditures and, especially, for the payment
of medical insurance and education fees. As real social debt, the service of which
depends on earned incomes, is shifted largely onto households and wage/salary
earners, nonfnancial frms become net creditors. Therefore, a period of profts
without investment begins. The latter picked up some momentum only toward the
end of the post-2003 recovery, as it was pulled forward by the accelerator effect
of debt-fnanced consumption.
Also, this second bubble phase risked ending rather quickly. In 2004 the Federal
Reserve began to raise interest rates, once more to forestall any possible increase
in product prices. Infation was considered bad if it pertained to product prices and
wages, not if it applied to capital asset prices, which instead had to be fostered.
In 2005 house prices started to dip because an oversupply eventually materialized
in the sector. We can see here the contradictions facing the new monetary policy
aimed at enhancing asset price infation. The fragility of the bubbles showed that
the Federal Reserve was losing control of the policy. The guidelines contained in the
much vaunted infation-targeting approach became worthless. The main structural
fault in the new monetary policy was that it could not square the circle in relation
to increases in raw material prices. The growth based on capital asset infation at
the expense of investment was stimulating imports from emerging economies,
especially from China, which built on it its overall accumulation strategy.
A similar process has been taking place in India, although its high growth rate
14 internationaL JournaL of PoLiticaL economy
is not based on net exports. Both countries are large buyers of raw materials and,
with the expectation that their growth will not abate, raw material prices are sub-
ject to both demand and speculative infation. There was nothing that the Federal
Reserve could have done to prevent the rise of raw material prices. But it could
generate another round of wage defation domestically, via an increase in interest
rates, to offset the domestic impact of the rise of raw material prices. Yet such a
move would contribute to hurt the very object of the policy, namely the rise in
capital asset values.
The hope of fnancial companies was that the rise in the cost of borrowing
could be offset by a further hike in asset values, thereby expanding the value of
collateral used in loan applications. The fast proliferation of subprime mortgages,
with the inevitable enticement of poor households to step into fnancial swamps,
was an attempt to maintain the real estate bubble by all means. Meanwhile, U.S.
authorities continued to believe in the likelihood of two miracles: that more com-
plex and obscure securitization packages would distribute risk, thereby reducing
its dangerous effects in the face of defaults; and that, through the same magical
fnancial instruments, the surpluses and savings of emerging economies would
naturally fow to fll the defcits of the United States, Britain, Australia, and Spain
(these countries generated the largest share of the worlds defcits).
When the crisis broke out in July 2007, the hoped-for twin miracle revealed itself
as a double swindle. The new opaque fnancial papers had, in fact, not securitized
risk but, rather, spread it and, indeed, created it out of thin air. Within the banking
and the fnancial system, the securitized derivative-based packages suddenly ceased
to act as quasiprivate moneys, blocking interbank lending because of the absence
of any reliable collateral. The collapse of interbank relations magnifed the nega-
tive impact of fnancial imbalances all around the world. For the same reasons, the
belief in the decoupling of the United States from the rest of the world was proved
to be a fgment of the imagination. The large exporting countries could not but feel
the shock of the sinking of the indebted U.S. consumer. For China the reduction
in the growth rate from the last quarter of 2008 through most of 2009 was like a
hard landing: More than 20 million workers lost their jobs and homes and had to
return to the countryside.
The Other Side of the Coin of the Global Crisis:
European Neomercantilism
The United States also functioned as the market where the net neomercantilist posi-
tion of Europe was consolidated.
7
As we have already hinted, U.S. debt-fnanced
growth was tied to European and Japanese stagnation as much as with Chinas
export-led growth. The three-decade-old European stagnation, characterized by
low growth and persistently high unemployment, was just mitigated by overall
net exports to the United States. This force against European stagnation had been,
however, weakening in the past two decades because of the rise in Asias exports to
winter 201011 15
North America. Europes net exports also benefted from the bubbles in Russia and
the defation-induced real revaluation of the Brazilian and Argentine currencies.
With Asia, Europe runs a growing defcit. Russia and Latin America went under
in 19982000, and both returned to their role as net exporters of raw materials and
of energy products, thereby developing a surplus with Europe. Hence the United
States was the largest, richest in per capita terms and most durable and stable area
of net realization for the European Union and the eurozone in particular. Coupled
with ongoing stagnation, this meant that European fnancial surpluses obtained by
means of net exports were being reinvested in speculative securitized toxic papers.
European institutions, legally mandated to lend to the network of medium-size and
small industrial frms, took the securitized toxic path without knowing what they
were buying simply because real investment demand was not forthcoming (the
Landesbanken in Germany). Thus the U.S. crisis severely hit Europe both through
the worthless pieces of paper banks held as assets and, more ominously, through
the fall in exports and the related domestic productive activities.
The political economy of the European Union had evolved on the same prem-
ises and principles of the Common Market (1957) and of the European Economic
Community, which are no longer valid. These are nothing but the objectives of
achieving net export balances. Not that every country is in a position to attain that
goal. Some countries, such as Spain, the United Kingdom, Portugal, Greece, and
most East European members of the European Union do not even have it as an
objective. Indeed, the British, Spanish, and Greek external current accounts have
been negative for decades, whereas Poland, Hungary, and the Baltic states have
combined negative current accounts with large fnancial sectors external borrow-
ing. But the core six countries of the former Common Market with Austria and the
three EU Scandinavian countries do see export growth as more signifcant than the
expansion of domestic demand.
Within export-oriented countries, there is a defnite hierarchy among the big
three who also happen to be in the eurozone. The frst in the hierarchy is Germany,
whose export dynamics did not and does not depend on nominal exchange rates
with the other main currencies. Rather, German exports are tied to technological
innovations and to the widespread array of capital goods sectors. The price com-
petitiveness element comes from what, for all practical purposes, is wage defation.
Indeed Germany extended that policy to the entire eurozone upon the formation
of the euro.
8
Second is Italy because its export orientation is exactly the opposite of Ger-
manys. It was based on competitive devaluations. But with the euro, the weak
currency approach has vanished, Italys structural strength vanished, and wage
defation is needed even more than in Germany.
Third is France. Paradoxically France has a net export objective but only oc-
casionally achieves it. Yet the policy posture of France is to combine fnancial
conservatism with wage defation and neomercantilist goals, though the latter are
seldom attained. Thus, as much as the European Central Bank (ECB) organizes
16 internationaL JournaL of PoLiticaL economy
the monetary framework for price stability, wage defation is, in a way, connected
to the national validation of price stability policies set by the ECB, the unifying
element in the respective neomercantilist goals.
However, the European Union is applying neomercatilism in a self-defeating
manner by essentially exporting back to itself. Let us see how. The European Unions
extra trade absorbs a substantial part of total EU exports. But the bulk of the sur-
pluses of net exporters are realized within the EU itself. The other component comes
mostly from net exports to the United States. But exports to the United States are
around 8 percent of the EU total, inclusive of intra-EU trade. Germanys share of
exports to Eastern Europe is the same size as exports to the United States. In relation
to China, Japan, and Korea, the EU countries have a growing defcit, determined by
trade with China. Yet, in this case, we have signifcant differences. The fact that, for
Germany and its satellites, the surpluses are obtained mostly via intra-European
trade is an important factor in the internal crisis (for Europe) and dissolution (for
the single currency). They force competitive defation on other European countries;
and as long as Germany pushes for fscal policy adjustment elsewhere, they react
perversely on the same position of the European net exporters.
We may distinguish between active and passive defcits. Germany, the Neth-
erlands, and Scandinavia have active defcits. France, Italy, and Spain are the most
signifcant representatives of those with passive defcits. The United Kingdom is a
separate case. Active defcits are those that are consistent with the export-oriented
form of capital accumulation. In this context, we see that the sectors netting the
bulk of Germanys trade surpluses exhibit net balances in their trade with China
(not with Japan, though). The same observation holds for Sweden and Finland. In
the Dutch case, the overall external surplus overwhelms the defcits with China and
Japan. Passive defcits are those that hamper export-oriented accumulation. Italy
and France are the leaders of this group because Spain is still far behind in terms
of homegrown industrial, not fnancial, inventiveness. The sectors that are good
export performers for France and Italy are poor export performers when it comes
to their trade with China and East Asia. Furthermore, Chinese products in third
markets and in Europe increasingly compete against these sectors. Therefore, the
contribution to export-oriented accumulation by the sectors on which the external
projection of those countries depends does not have a solid basis. It periodically
undermines their global neomercantilist objectives and induces a deepening of the
hierarchy of capitalist models and job inequalityon the European scale.
In the Italian case, we witness an economy ridden with contradictions. Capital-
ist growth is vital and accelerated for some areas of industry. This is especially
true for the so-called fourth capitalism of pocket multinationals (i.e., a frm that is
global despite its small size) thatbetween the dot-com crisis and the subprime
crisiscrossed over into high value-added production and now is undergoing
a selection process that favors the richer sections of small and medium-size
enterprises. The mechanical and high-tech industries, located mostly in the areas
from Milan eastward and in the Emilia Romagna region, have been incorporated
winter 201011 17
into the German bloc as areas of subcontracting activities. This also explains why
the trade account net of energy imports was remarkably positive in the past few
years before the crisis, and Italy is the second manufacturing exporter in Europe
after Germany. For the standardized consumption goods sectors, conversely, Italy
is subject to a shift toward China of the imports of the German bloc. Hence, the
made in Italy model cannot escape a constitutive fragility and can survive only
at the price of a continuous restructuring.
Although the United Kingdom has the largest EU defcit with China and Japan,
we have not included it in the France-Italy-Spain group. This is because these
issues do not belong to Britains political economy. British policymakers and
British capitalism in general have given up on export-led growth since the end of
the frst Wilson government. Thus since the 1970s Britainlike Spain, Portugal,
and Greecehas registered large trade and current account defcits. The task of
covering them falls upon the fnancial sector and capital movements through the
London. Britains external defcits feed the overall net exports of Germany, the
Netherlands, and Scandinavia and alleviate the often-negative current account
position of France and Italy. Notice that this has little to do with the actual size
of the industrial sector in Britain. The value of its output is actually marginally
higher than that of Frances industry and just below Italys. Indeed by the end of
the nineteenth century, Britain, which had an industrial sector second in size only
to that of the United States, focused on capital-based fnancial fows to cover its
growing current account defcits, which by 1913 became unsustainable in the
context of the gold standard.
For whom should Europe (the EU) work? For Germany, the European Union is
(rather, was until 20078, before the unraveling of the world fnancial system) the
main area of proftable effective demand. It is the area where Germanys economy
realizes most of its external surpluses. These, in turn, represent the fnancial means
with which German corporations internationalize their activities in the rest of the
world. Whether the internationalization happens through foreign direct investment,
acquisitions, or mega joint projects (such as building the Beijing-Lhasa railway
line with Chinese partners, or the possible participation with China in the yet-
to-be-fnalized construction of the Santos-Antofagasta line) will depend on the
circumstances. Yet they must all be consistent with persistent, possibly growing
external surpluses of the macroeconomy of the Bundesrepublik. These net balances
are mostly obtained in European markets.
European Neomercantilism: A Historical Sketch
In the postwar period, neomercantilism was nurtured under U.S. hegemony, with
the creation of a common economic space for European oligopolies. The Economic
Coal and Steel Community (1952) and then the Common Market (1957) were the
frst substantial steps in that direction. Intra-European neomercantilism was the
outcome of the persistent German surpluses, which were initially sterilized within
18 internationaL JournaL of PoLiticaL economy
the European Payments Union (194959). The return to convertibility and the end
of the European Payments Union meant that balance-of-trade constraints were
becoming the main constraint governing European policies. The aim to bolster net
exports rather than internal demand characterized the 1960s when, from 1962 to
1966, France, Italy, and Germany enacted in quick succession stop-and-go policies
to secure positive trade balances.
Because intra-European trade absorbs most of each countrys trade, because not
all countries can attain surpluses simultaneously, and because a clearing mechanism
for the region is lacking, defcit countries must adjust by going into recession.
This, in turn, will have a feedback effect on exports and employment of the same
surplus countries, which can maintain a positive trade balance only by curtailing
their levels of activity. If devaluation is not an optionbecause currencies are
in a fxed (although adjustable) mechanism like the European Monetary System
(EMS), as in Europe between 1979 and 1992or if there is a single currency, as
in the European Monetary Union (EMU) today, the only nondisruptive adjustment
would be a fscal redistribution from surplus to defcit countries. Otherwise defcit
countries are left to defation, dragging down not only their economies but also the
EMU and Europe as a whole.
The heavy currency fuctuations within Europe after the collapse of Bretton
Woods, the end of Fordism, and the oil shocks were all factors threatening
German net exports. Early on, the main danger came from Italys defense against
excess differential infation thanks to a peculiar strategy of competitive devaluation
(197379), that is, pegging the lira to the U.S. dollar, which at the time was falling
relative to the deutsche mark and the yen. The crucial relevance for France of the
fnancial sector prevented Paris from following this path. West Germanys answer
was building the EMS in 1979, with its exchange rate mechanism establishing an
upper and lower limit for currency movements. During the convergence phase the
most infation-prone countries (Italy and later Spain and Portugal) experienced a
real revaluation of their currencies, and, of course, Italys net exports began to fall.
The EMS was a German preoccupation strongly favored by the Netherlands and
Belgium, which always searched for a niche within German neomercantilism. It
could not, however, be established without France, whose government and fnancial
sector preferred to gain net exports through reducing imports via a drastic depression
of domestic demand and employment, as enforced by the government of Raymond
Barre in the years preceding the formation of the EMS in 1979.
Until the reunifcation of Germany (1990), Deutschland accumulated unprec-
edented surpluses as a share of its gross domestic product (GDP). Although Europe
provided a proftable area for net exports and the revaluation of the U.S. dollar
favored them even more, Germanys economy was among the continents slowest
growing. German surpluses were expanding rapidly, but its imports were not, which
exported stagnation all around. Italywhose decline in competitiveness did not
help France during the 1980sfnanced the external defcit by attracting foreign
capital and placed the budget defcit in the hands of the capital markets. The rise
winter 201011 19
in the rate of interest was a crucial factor in the increase in the ratio of public debt
to GDP. As demonstrated by the fact that in 198791 the lira had reached its upper
limit, this was in part a policy choice by the Bank of Italy to force the restructuring
of the public sector and deepen the wage squeeze and the reorganization of shop
foors. Spain and Portugal were in an even worse state because their economies
were signifcant net importers. They could not, therefore, generate the revenue to
prevent a credibility crisis by short-term fnancial companies trading in govern-
ment bonds and foreign exchange.
In 198891, Germanys growth was sustained, and partially Keynesian in na-
ture, because it was driven by government expenditures for reunifcation; it was,
however, soon blocked by the Bundesbank in 1992. Internal demandincreasing
wages relative to productivity, giving way to higher prices, and thus leading to a
decrease in competitivenessdid not have to be a threat for positive net exports.
The hike in German interest rates, to force restructuring and attract capital, sank
the EMS in 199293 and initiated a signifcant revaluation of the deutsche mark in
relation to the lira, whereas the parity between the French franc and the deutsche
mark was defended by Paris and Bonn. The high value of the deutsche mark pro-
duced a persistent German external defcit until 2000, despite the surplus in the
merchandise account, because of the large interest payments to foreign capital. In the
same decade, the low value of the lira, relative to the deutsche mark and the French
franc, brought Italian net exports to the highest absolute level in the Organization
for Economic Cooperation and Development. Therefore, the Bundesbanks high
interest rate strategy to defend the export-led model failed miserably. The export-
led orientation of German capitalism was reinstated only by the introduction of
the euro, unwittingly achieved at much lower interest rates and lock-in exchange
rate parities for the deutsche mark.
Since 1988 and the Delors Commission, if not before, the stronger push for a
single currency came from France, which after 1992 took advantage of the tempo-
rary but deep crisis of Germanys neomercantilism and wanted to share control of
European monetary policy. The alternative was (as it is now) to be included in a two-
layered Europe, on the border of a stronger euro, that is, a de facto deutsche mark
area. France, which was then accumulating trade and current accounts surpluses,
was under the delusion it was becoming the political (and military) stronger partner
in the hegemonic partnership with Germany. After 1996, Germanys interest rates
were lowered, also because of French pressures: The lira immediately appreciated,
and so did the Spanish peseta and the Portuguese escudo, thereby initiating the
deutsche marks descent toward the lock-in exchange rates for the euro in 1999.
After the dramatic devaluation of 199293 and the support it gave to its indus-
trial districtsthis time without any, even partial, indexing against infationItaly
was able to comply with all the Maastricht criteria (except for public debt). Its
competitiveness, however, was hampered by the stabilization of the exchange rate,
giving way to a real revaluation. The generalized casualization of labor through
part-time and temporary contracts, promoted by both the center-left and center-right
20 internationaL JournaL of PoLiticaL economy
governments, abolished any incentives for productivity increases. Italy and France
started to lose their surpluses, and in 20035 both countries hit negative territory
in trade and current account balances, whereas Spain, Portugal, and Greece saw
their external defcits double and triple within a few years.
The Making of the Current Crisis and the Worsening of the
European Divide
With the introduction of the single currency, Germanys neomercantilism strength-
ened, with German income growing less than the eurozone average. Germanys
trade surplus returned higher than ever, reinforced by the fact that the countries in
defcit could neither devalue nor develop expansionary fscal policies. Germanys
defationary policy was built on labor productivity outpacing the eurozone com-
petitors by more than 35 percent and its wages growing at half their average. The
structural strength of Germany is well known: the dominance of the capital goods
and technology sectors in the dynamics of expanded reproduction. Oligopolistic
corporations are integrated in a productive apparatus able to outsource and relocate
production in Eastern Europe without losing (as is the case with France and Italy)
its structural-intersectoral consistency and still generating new machines and new
technological complexities. With the Maastricht treaty and the DublinAmsterdam
Stability and Growth Pact, however, Germany does not bear any responsibility
for the defcits that emerge elsewhere in Europe, thereby exacerbating the intra-
European economic divide.
The apparent success of this model should not be generalized nor must it be
taken for granted. The crucial factor has been, frst, the help coming from the U.S.
dot-com bubble plus the asset strippinginduced consumption bubbles in Russia,
Brazil, and Argentina in the second half of the 1990s and afterward the initial fall
in the euroU.S. dollar exchange rate. However, Germany regained its overall net
surplus position in 2001 and was then driven by the subprime-led U.S. housing
bubble. In both episodes the positive net exports within Europe were an essential
ingredient for the German performance in the context of stagnation for Europe as a
whole. The intra-EU export surplus model of capitalist accumulation is so embed-
ded in the very institutional functioning of intra-EU relations, especially between
Germany and France, that EU policymakers and businesses have no policy answer
to the question. The only response from both Germany and France is to reject co-
ordinated demand-oriented policies lest spending by one country boost the exports
of another within Europe itself. Yet for Germany the present crisis is tearing apart
the export surplus mechanism within its own area of proftable demand.
As far as Germany, Italy, France, the Benelux countries, Austria, and Scandina-
via are concerned, the transmission mechanism of the global crisis in 20079 was
not through the debt defation affecting households, because the level of personal
indebtedness has been much lower than in the United States and in the United
Kingdom. Hence it was not the Landesbanken crisis in Germany that created the
winter 201011 21
fall in German output and employment, nor did the crisis of the BNPPays Bas
three hedge funds sink the French economy. They were symptoms more than trig-
gering factors. The reasons for the sharp repercussions of the crisis that began in
the United States can be identifed in the following factors:
the State of expectations affecting investment in the Pure Keynesian
Sense
The EU situation was already very brittle. The economies of the eurozone were
mired in a competitive wage defation and a stingy budgetary environment.
Thus effective demand creation was, on the aggregate, weak and what mattered
was the attainment of export surpluses. It did not take long to realize that, without
any intra-EU dynamic, as acknowledged by most, the real U.S. crisis would have
become, sooner rather than later, a real European crisis.
from the Beginning of the crisis, the united Kingdom, Spain, and
eastern europe were in Debt Defation crisis
These three areas absorb a signifcant amount of the total German exports, the same
share as exports to the United States. The crisis of Eastern Europe is rendered more
acute by the absence of a growth area on which to pin their hopes. The Asian crisis
of 199798 was eventually overcome by export drives toward the United States
and, for Korea and Taiwan, toward China.
the uK and the iberian Peninsula Have Been absorbing more than 13
Percent of Germanys exports
These are all areas generating positive net balances. Furthermore, the United King-
dom and the Iberian peninsula are important outlets for France and Italy, the latter
also being a net exporter to France. Transmission has come through the mortgage
and fnancial crisis in Britain and the explosion of the housing bubble in Spain. As
frequently remarked in the fnancial press, the real estate price infation in Spain was
connected to the fnancial mortgage markets in Britain and the United States.
Europe felt waves of fnancial shock from the United States while stuck in its
own neomercantilist cage without any way out.
9
The phenomenon is rooted in the
structure of Europes patterns of accumulation, which fell into stagnation well
before the unraveling of money manager capitalism. But neomercantilism made
Germany vulnerable to the onset of the world crisis, as shown by the fact that it
registered the highest percentage fall in production among the EU-15 countries.
German exports have revived since the end of 2009, to the point that Germany
is heralded by Brussels as the new locomotive for Europe. This is widely due to
higher exports to China and emerging countries, and it is the rationale behind the
hardening of Angela Merkels positions.
22 internationaL JournaL of PoLiticaL economy
The hope that German neomercantilism can emancipate itself from intra-Euro-
pean tradea hope common to the most advanced section of Italian industrywill,
however, end necessarily in another delusion. The dream is based on the forecast
that high-tech investments in Germany, as well as product innovations by pocket
multinationals in Italy, will grant an advantage relative to new competitors such as
India and China, making the medium-high sector of these mass markets available
for their exports in a never-ending catch-up attempt from India and China. These
markets have such a dimension that if only the richest parts of them become acces-
sible they will suffce to guarantee an adequate return on investment.
The idea is nevertheless a naive one. China is increasingly able to supply its
domestic markets with productive processes whose upstream and downstream
activities are self-contained; they are becoming net exporters not only at the low-
est level of goods and services supply. China licenses foreign direct investment
requiring technology transfers. It has also undertaken massive educational and
research programs in industrial know-how. The overall effect has been and still
is to add more capacity in many industries at the global level, with new fnancial
risks and, in the long run, new defationary pressures.
Southern Europe in the Maelstrom
Spain, Portugal, and Greece run permanent trade defcits and provide a net export
area for Germany, France, and Italy by absorbing 7, 10, and 9 percent, respectively,
of their total exports. From the mid-1990s until 2008, Spain and Greece grew more
than the EU average, with the growth rate calculated net of the external defcit. The
two countries, however, lack a capital goods sector capable of generating capital ac-
cumulation internally and had to rely on net imports and fnancial infows. Greece,
the Iberians, and Ireland profted from EU structural funds for less developed areas. In
the case of Greece, growth could be sustained thanks to Keynesian public defcits in
a non-Keynesian world, with an increasing current account defcit benefting mostly
Germany, but also Italy. The case of Spain, like Ireland, was quite different. There,
the growth went hand in hand with a housing bubble. In Spain, however, the banking
sector was relatively regulated and could not engage in savage risky behavior, as in
Ireland. Nor did Spain have a fscal regime favoring incoming foreign investment on
a massive scale like Ireland. That is why in Spain and Ireland, in contrast to Greece
and Portugal, the public budget has not been characterized by huge defcits and debt:
the latter were the outcome of the onset of the crisis and, in the case of Ireland, of
the fact that government incurred the cost of bailing out the private banking sector.
As with Argentina in early 2000s, the best scholars of traditional economic wisdom
ended miserably. And now Ireland, without the possibility of devaluing its currency
and without having opted for the nationalization of banking, is faring worse than
Iceland.
The current account defcits before the crisis were fnanced through money
infows, thanks to bond issuances in Greece, or capital transfers, thanks to the
winter 201011 23
integration of Spain in the London-based real estate market. The collapse of that
market caused an immediate contagion of the 20078 bubble and an abrupt increase
in unemploymentsomething similar happened in Ireland. In all these cases, the
unsustainable nature of the public defcits was translated by capital markets and
rating agencies in a widening spread of the reference interest rate on German bonds.
The markets, quite wisely, also discounted the defationary effects on income
and hence on the same ratios of defcits and debts relative to GDP, by the insane
policies supposedly aimed at rescuing public fnances.
Clearly, the sovereign debt crisis was nothing but the other face of the
private debt crisis, which, as in the United States, began frst. In Europe, the
aggravating factor is that the sovereign debt is not sovereign at all, with the
individual countries at the mercy of Brusselss and Berlins Frankenstein-like
experiments with a nonsovereign currency. The ECB and European institutions
are functioning in a piecemeal fashion, just trying to adjust to one catastrophe
after another, ex post, case by case, and in a disorderly fashion. Thus, the ECB
accepted Greek bonds as collateral but was immediately stopped by German
pressure, to which France succumbed. Yet they were compelled to admit that
Greece had to be temporarily bailed out because debtors beget creditors and
it turned out that the creditors were mainly German, Swiss, and French banks
holding Greek bonds.
The crisis of Southern Europe shows how the fragmentations within Europe
are spreading throughout the EU. Germany does not hold a similar dogmatism
relative to its own defcits. Barely three years after the 1999 launch of the single
currency, Berlin (and Paris) saw their budget defcits exceed the 3 percent limit set
by the Maastricht treaty and the DublinAmsterdam Stability and Growth Pact.
German companies were helped by the government to restructure and prepare the
next export offensive.
When net exports actually came back with a vengeance, thanks to the new
capitalism of the debt-induced, subprime housing bubble, Berlin returned to the
usual rhetoric of fscal conservatism. The Bundestag even passed a law to balance
the domestic budget in a few years. Suffering a fall of 5 percent of GDP in the
current crisis, Germany could not but again violate the Maastricht criteriaas did
France, which like Berlin implemented targeted interventions on some industrial
sectors and even adopted a policy of a publicly fnanced shortening of the work
week. Italy resorted to Eduardo De Filippos famous passive hope ha da pass a
nuttata (the night must pass, somehow) and hoped that its pocket multinationals
could then start to grow again thanks to external demand. Merkel was, however,
adamant that no euro should be transferred to the weaker areas of the eurozone.
Convinced that German industry will successfully come out of the crisis through
export-oriented restructuring at home and outsourcing to Eastern Europe, Berlin
appears infexible in stating that its own public moneys should go to facilitate those
tasks instead of being squandered on Greece, Ireland, or Portugal. First Greece,
then Ireland, must serve as punitive examples for Spainbut also for Italy, and
24 internationaL JournaL of PoLiticaL economy
even for France, because the crisis is pushing up the latters budget defcit, to 80
percent above Germanys.
At the time of writing in December 2010, Germanys strategy seems to be the
winning one, because the latters net exports are once again experiencing a boom.
Nobody seems to notice that this is due to extra-European growth that, much more
than U.S. based, is instead predicated on a weakening euro, which is all but uncer-
tain, and most of all to a Keynesian-like expansionary budgetary policy in China
in 2009, which may fade away because of internal contradictions. The two things
coalesce because the relative revaluation of the yen is increasing German machine
exports to China. To be maintained, the growth of the emerging economies will
require the introduction of severe capital controls, which are either happening or
foreshadowed. Once again, the light at the end of the tunnel appears to be that of
a Schnellfahrstrecke (high-speed train) quickly approaching Europe as a whole.
And the few chances for an escape from disaster lie entirely in policies that will
contradict the mainstream ones.
Conclusions
As Jan Toporowski (2010b) has noted, the European crisis is mostly due to policy
errors and a faulty institutional design (together, we may add, with the harsh reali-
ties of class and power relations in the Old World). In Not a Very Greek Tragedy,
he observed that if the fnancial crisis engulfng the eurozone had not emerged in
Greece, and if Europe were to be reduced to just Germany, Finland, Austria, Bel-
gium, the Netherlands, Luxemburg, and France, the crisis would have burst out in
Belgium, which has a public debt of 100 percent of GDP. The reason for the crisis
sensitivity of the eurozone public fnances is the prohibition against refnancing
government borrowing with new money. The critical variable, Toporowski writes,
is not the absolute level of government indebtedness, or even the level of that
indebtedness relative to national income, as put forward in the Maastricht Treaty,
but the level of indebtedness that central banks refuse to refnance. Thus, central
banks are allowed to buy corporate and other bonds, even toxic collateralized
debt obligations, but not bonds issued by governments. The faith in the superior
wisdom of private banks and rating agencies should have been wiped out after the
subprime collapse. Instead the opposite has happened. Not surprisingly, however,
when debt defation looms, governments are looking for quality assets, supplied,
alas, by governments, against the good old neoclassical strictures.
Indeed, the governments, willing or not, have been obliged to go into huge
defcits. But, as Alain Parguez (2010) reminds us, there are good defcits and
bad defcits. Defcits are bad when they do not spring from a long-term policy
targeting the creation of a useful and productive stock of capital, either tangible or
intangible. They result from shock therapy like that applied to Greece or Ireland.
But they also may be the outcome of defationary policies like those now perversely
spreading to the entire European continent, whether within the eurozone or not,
winter 201011 25
including the same net exporting countries, through huge public budget cuts and an
unprecedented attack against public sector workers. Bad defcits do not yield any
long-term positive impact, either on social capital or private expectations.
The challenge is that of devising target interventions by integrating the stimuli
to demand with structural reforms going toward a socialization of investment, as
a permanent not a temporary solution, and in a way that the same socialization of
investment turns into a socialization of employment, with no separation between
the two policies. Both presuppose a socialization of banking, which turns banks
into public utilities even considering an extensive program of nationalization.
Considering also that, with the fnancialization of capitalism and its new forms,
the infrastructure network has been allowed to decay in favor of capital asset
values (the state of U.S. infrastructure is there for all to see, but the same can be
said about the United Kingdom, Italy, and Australia), the socialization of fnance
is also a crucial instrument for undertaking public spending programs for public
infrastructure. A structural economic policy is needed that does not separate inter-
vention on demand from that on supply. Not to be idealistic, all this presupposes
a renewed strengthening of labor.
The contradictions of the single currency project were known from the begin-
ning. As one of us noted (Bellofore 2004), in an area like Europe, characterized
by huge differences in productivity and (tangible and intangible) infrastructure,
nominal convergence without a redistributive fscal policy could only widen real
divergences. As Jean Luc Gaffard (1992) observed, the paradox of productivity
should advise us to implement policies opposite to those implied by the Maastricht
treaty: credit creation in favor of private innovation and productive state budget
defcits, hence higher infation and defcit/GDP ratios for those countries seeking
to catch up. The DublinAmsterdam Stability and Growth Pact was from the start
an agreement with no mechanism for forcing Germany or even France to comply. It
was designed as a policy instrument to be applied to small countries and in fact ex-
ploited by the core countries to tie their hands and enforce on the small countries
population neoliberal (or, for that matter, social-liberal) policies. In this context,
the main factor of adjustment cannot but be the use-value and exchange-value of
labor power. An alternative to the single currency existed, as Suzanne de Brunhoff
(1997) wrote in the late 1990s, that is, a common reserve money for the central
banks in an institutional setting adapting to Europes 1944 Keynes plan.
10
Of course,
this option was never really on the table, nor did the so-called Left ever support it.
The same social liberals, more than the neoliberals, enthusiastically adhered to the
Maastricht criteriafor which, it is to be stressed, no theorem exists showing why
a particular debt or defcit level should be determined as a limit.
Progressive economists usually interpret the global crisis in an overly simplis-
tic stagnationist way. They begin with income redistribution away from wages,
develop it into underconsumptionist pressure on effective demand, and end
up dreaming about a wage-led recovery. This is something unlikely not only for
Marx but also for Keynes, for whom the driving force was autonomous demand.
26 internationaL JournaL of PoLiticaL economy
A similar error is repeated for the European crisis, tracing its origins back to the
Maastricht criteria and the DublinAmsterdam Stability and Growth Pact. Indeed,
a good example of this view is the Italian Lettera degli economisti (Acocella
et al. 2010), in which the crisis is read as the crisis of a world of low wages.
Slightly better is the French manifeste des conomistes atterrs (Abraham-Frois
et al. 2010), which starts from an analysis of fnance and its curses but underrates
the class divide and the geopolitical contradictions, nor is it really radical in the
analysis or the policy proposal.
In a recent conversation with David Marsh, Helmut Schmidt (2010)after
having treated todays European leaders, frst of all the German ones, as amateurs,
altogether ignorant of economicsregrets that the euro was not born as the cur-
rency of a small group of countries. He adds,
For a long period the German political elite didnt understand that we were
recording surpluses on our current account. We are doing the same thing as the
Chinesethe great difference is that the Chinese have their own currency and
we havent. If we had our own currency it would have been revalued by now. To
have kept the deutsche mark, as Tietmeyer would have liked, would have led to
speculation against the deutschmark at least once if not twice in the past 20 years
in an order of magnitude worse than we have seen with Greece or Ireland. . . .
Over the next 20 years, I think it is rather likely, at least 51 percent likely, that a
hard core of the Union will emerge. (Schmidt 2010)
The hard core, this is what Schmidt says openly, is selected as a political issue,
not an economic one. It is clear that words betray thinking, and it is also true the
other way around. It suffces to look at the composition of the core devised by
Schmidt. First, it would comprise Germany, Benelux, Austria, and probably Sweden
and Denmark, not the United Kingdom, of course. What about the others? Well,
for France its diffcult to say. I said the probability would be 51 percentthat
makes 49 percent left. I am not a prophet. I do not know. It depends very much
on the behaviour of the Germans. Italy, of course, is out. Though it is not stated,
the key fact is to confne the others in a second ring of the EMU. Controlling their
devaluation would not imperil their export-led growth model and dissolve their
fnancial advantagesall Schmidts criticisms of this model notwithstanding. It
seems to be the only perspective giving some (at present, unconscious) rationality
to the current moves by Germany. But its premises are dubious. It discounts that
Germany and the satellites may stay out of the storm, profting from the BRIC
(Brazil, Russia, India, China) revival. However, the path from here to there may
pass through hell. The stagnation of Europe as a whole may turn into open reces-
sion. Countries at the periphery of the core may see the increasing return and the
decreasing costs of opting out.
Perhaps the good news is that Europe may turn out to be irrelevant to the evolution
of the rest of the world economy today. The bad news is that, after all, it may not yet
be. In the movie young frankenstein, Freddy (i.e., Dr. Frederick Frankenstein)
is exhuming the corpse of the Monster at the cemetery, together with Igor, his
winter 201011 27
hunchback assistant. Freddy laments, What a flthy job! Igor retorts, Could be
worse. The grandson of the mad scientist asks, How? and Igor answers, Could
be raining! A second after, there is thunder and lightning, and it starts raining.
The European nightmare in the middle of the unfnished global crisis calls for the
same answer to the question. Yes, it could be raining.
Notes
1. The analysis undertaken here is an update of our reading of the new capitalism that
goes back at least to four articles in the Italian monthly La rivista del manifesto, published
between 1999 and 2004 and available online (see especially Bellofore 2000a). It was de-
veloped in two conferences organized by the newspaper il manifesto in 2005 and 2007 and
in our subsequent articles on the crisis. The synthesis of our interpretation in English can
be found in Bellofore and Halevi (2011a, 2011b).
2. Minsky is well known for his fnancial instability hypothesis, and the crisis has been
labeled a Minsky moment turning into a Minsky meltdown. However, fnancial instability
in money manager capitalism does not conform to the original formulation (Minsky 1975,
1982, 1986) so that it needs to be reformulated (as we do in our recent work; see Bellofore,
Halevi, and Passarella 2010). For a criticism of Aglietta, who has been quite supportive of
pension fund capitalism in a socialliberal fashion, see Bellofore (2000b). In the past few
years, Aglietta seems to be more conscious of the radical instability affecting the new
capitalism. But in 1990, he was a supporter of fnancial globalization, and in 1996 he saw
securitization as stabilizing. And his judgment on Greenspan was largely positive when
Greenspan ended his appointment at the Fed. An (implicit) criticism of Aglietta can be found
in an important work of his coauthor, Andr Orlan (1999), before the dot-com crisis.
3. This same phenomenon is christened by Bennet Harrison (1994: 8) as concentration
without centralization, inverting Marxs terminology.
4. This point has been clearly, although very telegraphically, made by Augusto Gra-
ziani (2004: 21). Mario Seccareccia (forthcoming) has developed a detailed analysis of the
monetary circuit in the new capitalism.
5. A prescient analysis of what was about to happen can be found in Wynne Godley
(1999). See also Bellofore (2000a). In the following years, Godley and his coauthors writ-
ings for the Levy Institute extended the analysis to the subprime crisis and beyond.
6. Recently Robert Brenner has also spoken of a stock market Keynesianism (Brenner
2009).
7. We update here our analysis of Europe as found in Bellofore and Halevi (2006, 2007)
and Bellofore, Garibaldo, and Halevi (2010).
8. Germanys wage defation pressure also worked in the 1980s, whereas Italys competi-
tive devaluation could not work in that decade as it did in the 1970s because of the different
dynamics of the U.S. dollar and the deutsche mark. Thus, between 1980 and 1986, we had
Italian competitive devaluations, but they were always running behind frms need to gain
proftability, as in the second half of the 1970s when the lira devaluated against the mark
following the dollar. Between 1987 and 1992, Italy had a strong lira with a deteriorating
current account balance. The euro blocked all this without any possibility of escape, thereby
institutionalizing the wage defation for every country of the eurozone.
9. Indeed, Europe avoided a total collapse between 2008 and 2009 because of three
factors that contradicted the offcial anti-Keynesian rhetoric of European governments:
the operation of fscal automatic stabilizers, some explicit pro-industry targeted programs,
and government extraordinary policies sustaining employment (e.g., Germany fnanced a
temporary reduction in working hours). Italy was sheltered by the provincial nature of its
28 internationaL JournaL of PoLiticaL economy
fnancial and banking system and did almost nothing waiting for an export-led recovery. In
Germany, Angela Merkel, pushed perhaps by her new liberal partners, for a while seemed
to consider a shift to a defcit spending policy, which would have been driven, however, by
tax cuts. Her temporary stance in support of defcit spending did not last long.
10. On the topic of this paper, it is worth rereading De Brunhoff (1999).
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