The postman always rings twice. The euro crisis inside the global crisis. By Riccardo Bellofiore

7 Oct

Europe is in the middle of an economic and social storm. In the meantime, the world economy goes towards a recession that is none other than the prosecution of the deep structural crisis of capitalism. The institutional design of the euro is marked by many contradictions. It is however the global crisis that started the European crisis. The European crisis does anything but retroact on the world dynamics.

In this context, the eurozone risks to implode[1]. The Greek crisis has been transmitted to Ireland and Portugal – i.e., the periphery of the Continent – and then, as expected,  it has eventually hit the Spain. At that point, suddenly, the crisis centered on Italy, with spillovers in France and even Germany: an acceleration that has been quite unexpected. Germany is sharply awakening from the illusion of a decoupling from European demand. This illusion is, indeed, the only reason that can justify its suicidal policy since 2010, from which however it had progressively to recede.

The green shoots of a recovery have withered away very quickly, and the bounce after the crisis was overestimated. China– the only country that, since the beginning of 2009 has implemented a true Keynesian government spending policy – may derail. Its growth relies too much on infrastructural investment; and many stress that a huge real-estate bubble is developing. Older industrialised countries pretend to teach China that it could not permanently rely on under-consumption. Here another illusion emerges: that an increase in wages would automatically transform in imports.

If we turn to Latin America, we see that also its growth is ridden by internal contradictions, which may end up in a slowing down of GDP growth: because of policies against rising inflation; because of a too big increase in the exchange rate; and because that area is too much reliant on the price dynamics of raw materials. The idea that theUnited Statescould move to the side of net-exporters, with only Latin Americaproviding the buyer of last-resort, is clearly a wild dream. The awaited ‘light at the end of the tunnel’ is none other than a high-speed train that is coming towards us.

The euro was born with an original sin. Even left-wing parties chose not to see it, though it was quite evident from the start. Thus, they agreed to introduce a single currency that, in its own DNA, was going to determine a recessionary drift, deep differences in the competitiveness of each country, a wage squeeze, an increasing social inequality, the dismantling of trade unions and a permanent industrial restructuring. This has in fact been anticipated in 1992-93, with arguments which hold to this day, both by Jean-Luc Gaffard[2] and by Paul Krugman[3].

Within the structurally heterogeneous European area, in which there are radical variances both in the productive power of labour and in (material and immaterial) infrastructures, a nominal convergence cannot but give way to a progressive deepening of the real divergences. The in-built and on-going tendency to self-dissolution of the monetary union could be counteracted only through a common fiscal policy, governing the resource redistribution within the euro-zone internal regional areas. European authorities should also implement industrial and structural policies explicitly targeted to overcome the real divergences among countries. By contrast, the European Union budget (compared to GDP) is ludicrously low: as Vittorio Valli observed a few years ago, it is equal to a tenth of what is necessary[4].

How was such a fragile construction able to take off at the end of the 1990s? The answer is in the (temporary) success of the made in USA ‘new’ capitalism. This capitalism has been able to integrate China and the rest of Asia, and to provide demand to neo-mercantilist Europe, while Latin America and Russia were facing ups and downs. Germany overcome the re-unification shock, and pushed forward a radical restructuring of the labour market and the labour process again. With its ‘satellites’, Germany benefited from the brisker capitalist development in the ‘periphery’. The real-estate bubble spread also in some European countries. Because of that, Ireland and Spain (not to speak of England) had remarkable GDP growth: this is why their public budgets were so ‘virtuous’. In a world of lower and lower interest rates, the government deficits of Greece and Portugal, as well as the management of the Italian government debt, provided financial placements for German and French banks.

The multi-speed dynamics of Europe is well known by now. Its core is the growth of Germanywith its ‘satellites’. Net exports are the driving force, with the resulting profits invested abroad. It’s a Luxemburg-Kalecki model. However, within the ‘new capitalism’ investments are increasingly driven by ‘toxic’ finance. Indeed, in Europe the treasury-bonds of the ‘periphery’ played a similar role than subprime loans in the United States.

Germany, like its ‘satellites’ and the rest of Northern Europe, has a historical need for exporting in the rest of Europe, where it realizes the largest part of its profits. Trade deficits in Southern Europe facilitate Germanyalso for a second reason: they hold down the nominal revaluation of euro (compared to what would happen with either the Deutsche mark or also an euro restricted to the net exporters). The ‘single currency’ gives rise also – thanks to both the increase in the productive power of labour and the wage repression, the one and the other leading to competitive deflation – to a real devaluation that benefits the stronger area. After the 1990s, even in the last decade, the net neo-mercantilist position of Europe kept on ‘closing’ thanks to the American engine. Europe’s net exports towards the United States, however, became more and more unable to offset the growing structural deficit with China, and to mend the effects of instability in Russia and Latin America.

In that phase, trade imbalances were not a great problem. For a while, financial and trade imbalances, mounting exponentially, seemed to magically make the economies more and more ‘resilient’. The concern about government finance did not look so pressing. Rather, in the same instances where growth was not driven by real-estate bubbles, the very government deficits offset the recessional tendency initiated by Germany. Actually, the ‘tragedy’ (or ‘farce’) of the sovereign debt should not be played even today. Deficit and debt ratios of the euro area are definitely lower than those of United States and Japan – not mentioning the United Kingdom. As Krugman[5] reminded us, if one make a list of countries in which government finance has been a serious trouble before the crisis, then the list add to only one:  Greece.

Demand and the (low) growth for Europe, as well as the current sovereign debt crisis, came wholly from outside. It is not a replay of the 1992 collapse of the European Monetary System, as some Italian left economists feared in 2008. As I countered at the time, if only the economic analysis of the Left would have escaped obsolete readings, such as the tendential fall in the rate of profit, or would have resisted the under-consumption temptation (according to which the global crisis was the crisis of a world of low wages), it could have seen in advance that it was the collapse of the ‘privatized Keynesianism’[6]  which would have actually brought Europe into deep trouble.

The problem is neither that ECB follows to the letter its ‘monetarist’ prescriptions, nor that European institutions are inactive, another legend on the Left. The point is rather that when they intervene in support of the economy, or they come to back up the public debt against speculation, or they eventually accept to change some of the institutional architecture of the single currency, they do this reactively, in the wake of the crisis.

The idea that European authorities will be forced, ‘out of necessity’, to create an institution giving financial support to countries in crisis, or will eventually implement some kind of fiscal redistribution on a continental scale, is not wrong in itself. The point is that they are too little, too late. The paradox is that, if they condoned Greece’s debt, the costs for Europe would have been negligible. The same is valid if you add Ireland, and then Portugal. Even in this case, a cancellation of the debt would have been much less destructive than the dynamics set in motion to avoid default, without rescheduling and reducing the debt to be repaid. But when the crisis hit Spain, and then Italy, the crisis changed its nature. The leap from quantitative became qualitative. In this situation, one either learns to swim or drowns.

It is useless to blame ‘markets’ or ‘rating agencies’. They are absolutely right, at present. They just register the dramatic absence of a political direction which could assure some way out. It is this political ineffectiveness that pushes up interest rate spreads, and that exposes one country after another to the risk of default (according to a mechanism well described by Paul de Grauwe[7]). The economic policies of European countries, because of their deflationary nature, pull down the rate of growth, while the rest of the world either comes to a stop or slows down. It is not a surprise that the sustainability of public debt worsens. It is a sort of ‘paradox of thrift’ applied to public finance. The peculiar form of ‘independence’ of the European Central Bank is a further complication. There is no political sovereignty over money in the single currency area. The ECB is neither a true lender of last resort nor it has the will to finance government deficits.

The crisis in Europe is not due to Greece. Nor is it the result of the government indebtedness of a given country (both in absolute terms and compared to GDP). As Jan Toporowski[8] argued, what matters is the willingness (or not) of the central bank, here the ECB, to re-finance government deficits. Even with a hypothetical euro limited to Germany and its satellites, the ‘sovereign debt’ crisis could burst anyway. For instance, it could in Belgium, whose debt to GDP ratio is close to 100%. Excluding default, a way out could be inflation, a second growth, a third a mix of the two. Both inflation and growth increase the denominator in the deficit (or debt) to nominal GDP ratio.

Inflation is currently considered as a curse. But the number of the critics of inflation will be lower and lower as the crisis proceeds. It is some years that authoritative voices, such as Kenneth Rogoff[9], have supported it, even giving a percentage, between 6%-8%. At present inflation is not an option on the table. It is the Great Recession itself that stops it. Most firms and households do not ask for credit, and loans are refuted to those who ask – because banks and financial institutions are reluctant to lend to the ‘real’ economy. We are living in a two-speed economy. Monetary stimuli make financial bubbles start again, but these bubbles do not make the real economy grow anymore. On the contrary: the burst of the bubbles brings back to the recession, and is capable of making it worse. Furthermore, one can picture what inflation means for the working classes in the absence of income indexation.

One could ask whether an exit option from the eurozone would be desirable. It is not possible to exclude that the evolution of the situation could lead to the dissolution of the single currency. Nonetheless, at present, this is a counsel of despair. An advice like this came from the left last year with regards to Greece, then to Ireland. The positive example usually put forward is Argentinain 1992. However, as again Toporowski observed, the main problem with Argentina was the banking crisis, and, second, the fact that its debt was denominated in a foreign currency. By contrast, in the Greek case, the banking crisis follows the crisis of the government debt, and it is denominated in an internal currency – or better, a currency that should be internal: the fact that it is not, in practice, it is a despicable political choice. The getting out of euro would dramatically increase the external debt burden, as it would go along with a huge devaluation.

In addition, the feasibility of such a choice requires a condition that is absent in Greece, i.e. significant continuous series of government primary surpluses. Otherwise, the concurrent impossibility to satisfy the internal debt may likely lead to the insolvency of the domestic banking system. The worsening of the structural foundations of competitiveness, which has been going on for decades, makes an improvement of the trade balance something which may be very slow, or not existent at all. A spectacular reduction in the real wage should be added to the picture. It is very difficult to consider all this as a ‘leftist’ solution of the crisis.

Was there an alternative to the construction of the single currency in the form of the euro? And on which basis? About twenty years ago, in Les dangers d’une monnaie unique, Jean-Luc Gaffard, an economist who was for sure not Marxist, asserted that one should consider the so-called ‘paradox of productivity’. It deals with the need for a prior financing to allow the displacement of resources that will give way to a new output. The outcome of  real investments, private or public, cannot but be subsequent: and it would not be possible without that financial condition which, in turn, entails a higher bank credit and also a higher inflation (including the change in relative prices).

From this (Wicksellian and Schumpeterian) point of view, the real convergence of the European economies would have required policies which are the opposite of those defined in the Maastricht Treaty: creation of money in support of private innovation; and a temporary but substantial increase in government deficits financed by new money – deficits which may be labelled ‘productive’. At the beginning, this policy entails higher inflation and an increase in the debt to GDP ratio. But the price increase and the fiscal ‘imbalance’ will be reabsorbed as long as the policy is effective.

Notice that the introduction of the euro was not the only possible form of the monetary unification. An alternative has been suggested by Suzanne de Brunhoff[10], in the wake of Keynes’ plan at the Bretton Woods Conference. It is about the introduction of a ‘common currency’, instead of a ‘single currency’ circulating among the public. The former is just a reserve currency that would be used in the clearing mechanism among central banks of the member states, within a system of fixed (but adjustable) exchange rates. These latter would be changed in case of significant trade deficits of some countries, with the symmetrical commitment of net exporters to reduce their surpluses. This is what the EMS and also the Bretton Woods agreement failed to consider, inscribing in their DNA a deflationary drift.

The clearing of the European real ‘imbalances’ requires, yesterday as today, an intervention that concerns not only reflation on the demand side, and/or a re-coupling of the wage to productivity. A strong intervention on the supply side and in the productive structure, along with financial stabilization, is indeed needed.

It is useless to make a review of the acrobatic solutions to the crisis proposed by European authorities in the last few months; and the same is valid for the alternative proposals. The former, as Wolfgang Münchau[11] rightly observed, are dead, because of this summer turmoil. The latter are too weak, far away of the heart of the matter. Even those who assert that some of the debt is illegitimate and it should not be paid, or those who press for cancellation of the debt, are not wrong. But at present it is very unlikely that their position can gain sufficient strength in this radical shape.

The so-called European Financial Stability Facility (EFSF) has been introduced late, and it has been poorly supported. What was lacking is the will to cut interest rates and to reschedule the debt: in order to extend the period of repayment and to make the creditors bear some losses. We are now besides this stage: the EFSF, in its current configuration, cannot cope with Spain and Italy. If it ever tried to do that, it would seriously worsen the very fiscal balance of the States which contribute to its financing, including the France and Germany. Finally, it is true that the ECB has decided to implement plans for the purchase of government securities, but only on the secondary market. It is still not a structural and permanent intervention, within a coherent setting for the management of European public debt.

Without a fiscal union, whose institution is utopian in the short-run, it remains only the eurobond solution, as a common guarantee for all the public debts of the Eurozone countries. However, apart from the formal (legal and political, besides technical) difficulty linked to its quick introduction (something which could be speeded up by a worsening of the crisis), the question is: eurobonds to do what? As Yanis Varoufakis[12] observed, it is necessary to consider eurobonds as something more than a credible instrument to reach a low-cost public debt financing for the countries in trouble. They have to be regarded also as the foundation for a coordinated expansion of expenditure and investments on a European scale. It amounts, in fact, to a proposal for a renewed, and innovative, New Deal that could directly lifts the structural ties to growth, by improving the quality of the output and by increasing the productive power of labour.

Some insights towards a real alternative to the current mess may come from the structural Keynesianism of those who are, at the same time, critical of capitalism and the realized Keynesianisms of the past. I shall refer her to some recent analyses by Alain Parguez[13], and to some less recent contributions by Hyman P. Minsky[14].

There is no economic development without debt. More recent decades confirmed that ex post government deficits are the condition for the net creation of income in the private sector. However, as Parguez teaches us, we have not to forget that there are ‘bad’ deficits and ‘good’ deficits. ‘Bad’ deficits – like those, first, of Monetarism, and then of ‘privatized Keynesianism’ – are the non-planned result of the tendency to stagnation, of shock therapies, of deflationary policies, of the unsustainability of toxic finance, and so on.

By contrast, ‘good’ deficits are planned ex ante deficits. Their aim is to build-up, and improve, a stock of productive resources. They are a means for the production of wealth and not of (surplus)value: a long-run investment in tangible (infrastructures, ‘green’ conversion, alternative forms of transport, etc.) and intangible (health, education, research, etc.) goods. A gender-balance and a nature-friendly approach becomes internal and crucial to this policy. The same welfare has to be transformed: from the privilege given to money transfers towards a direct intervention on the use-value side, as part of a wider planning.

Obviously, a deficit spending of this kind immediately raises the government debt to GDP ratio – but the subsequent growth in the denominator will make this increase only temporary. Such an intervention may have positive ‘capitalist’ effects, i.e. the effects which mesmerize Post-Keynesian economists. It would support the real economy from the demand side, it would stabilize the financial sector by providing ‘sound’ financial assets, and it would increase the productive power labour. This is the reason why this intervention can – and must – be part of a ‘minimum programme’ of a class Left. It is clear, however, that this entails not a stable model of a new capitalism, but rather an ‘imbalance’: an uneven terrain where the issue of an overcoming of capitalism has to be finally dealt with.

Here some of Minsky’s conclusions in his John Maynard Keynes (1975) turns out to be very enlightening. Of course, Minsky is not a ‘revolutionary’ thinker in any standard way. Nonetheless, his perspective is that of a ‘socialization of investment’, coupled with a ‘socialization of employment’ and a ‘socialization of banking’. Nothing strange, you may say. Did not Keynes himself advance the thesis that capitalism needed a thorough ‘socialization of investment’?

Not quite. The General Theory, Minsky writes, is to be read as a product of the ‘red’ 1930s. Keynes himself underlines its conservative implications, versus socialism. Once full employment is achieved – thanks mainly to high private investments supported by economic policy (including an expansion in money supply to reduce the rate of interest) and the resulting positive expectations – there is no reason to argue against the market allocation of resources. This Keynes has never been enough, and it is not enough today.

The really-existing Keynesianism during the so-called Golden age is criticized by Minsky from the bottom up. It was a system in which taxation and transfers govern consumption, monetary policy rules investments, government spending is either waste or military expenditure, rent-positions and finance are nurtured. He calls this a strategy of high profits, high investment, leading to an artificial consumption, and putting at risk the biological and social environment. A ‘socialism for the rich’.

This is Minsky. We have to come back to the first square, he insists: to 1933. We have to think for the first time a Keynesian New Deal, dealing with the fundamental questions: ‘for whom is the game played?’; ‘what kind of product do we want?’. Minsky favours a society in which the real structure of consumption is determined by government investments, which are the driving force behind autonomous demand, which gives way to a different supply side. He explicitly reclaims a ‘socialization of the towering heights’, consumption as a ‘common’ dimension, capital controls, the regulation of finance, banks as public utilities, and so on. Minsky, like Parguez, asks for the State to be the provider for a ‘direct’ creation of employment.

The Great Recession, as the final crisis of Neoliberalism as we knew it, and the European collapse, as the deadlock of Neomercantilism, are putting again on the agenda the issues of how, and what, and how much to produce.

Riccardo Bellofiore is a professor of monetary economics and history of economic thought at the University of Bergamo.

*This paper is an updated version of the intervention to the  International Conference PUBLIC DEBT AND AUSTERITY POLICIES IN EUROPE THE RESPONSE OF THE EUROPEAN LEFT, organized in Athens, 10-12 March 2011, by Synaspismos, Nicos Poulantzas Institute, European Left, and Transform! It is going to be published in the Proceedings.

[1] It was not very difficult to see that in advance. Cf. Riccardo Bellofiore and Joseph Halevi: “Could Be Raining. The European Crisis After the Great Recession”, International Journal of Political Economy, vol. 39, no. 4, Winter 2010–11, pp. 5–30.

[2] “Les dangers d’une monnaie unique”, Le Monde diplomatique, settembre 1992.

[3] “Lessons of Massachusetts for EMU”, în Torres Francisco, Francesco Giavazzi (eds.), The Transition to Economic and Monetary Union, Cambridge University Press,Cambridge.

[4] Vittorio Valli, “Una politica di sviluppo per l’Europa”, in Rive Gauche. Critica della politica economica, Sergio Cesaratto and Riccardo Realfonzo (eds), manifestolibri, Roma 2005

[6] The definining features of this ‘new’ capitalism have been put forward quite clearly already before its crisis in Riccardo Bellofiore and Joseph Halevi, “Tendenze del capitalismo contemporaneo, destrutturazione  del lavoro e limiti del «keynesismo»”, in Rive Gauche. Critica della politica economica, Sergio Cesaratto and Riccardo Realfonzo (eds.), manifestolibri, Roma 2005 (there is a German version: “Was ist neu am ‘neuen Kapitalismus’. Der Wandel von Wirtschaftspolitik und Arbeitsbeziehung aus der Perspektive von Marx und Kalecki”, in Keynes als alternative(r)? Argumente für eine gerechtere wirtschaft?, Günter Krause (ed.), Karl Dietz Verlag, Berlin, 2007; an English versioni is going to be published in the near future as “Deconstructing Labor. What is ‘new’ in contemporary capitalism and economic policies: a Marxian-Kaleckian perspective”, in Employment, Growth and Development, C. Gnos, L.P. Rochon, D. Tropeano (eds.), Elgar, Cheltenham, 2011. The picture of this financial and privatised Keynesian is developed in all other papers of ours thereof. Our reading was, and is, opposed to the distributional/underconsumptionist vulgata which is plaguing every corner of heterodox economics, and which grounds the economics proposal of the alternative Left. Privatised Keynesianism is a notion which has been independently employed by Colin Crouch, in many papers. Cfr. “Privatised Keynesianism: an unacknowledged policy regime”, British Journal of Politics and International Relations, 11: 382–399.

[7] “Only the ECB can halt eurozone contagion”, Financial Times, August 3, 2011.

[8] “Not a very Greek tragedy” Re-public June 2010,

[9] “The bullets yet to be fired to stop the crisis”, Financial Times, August 8, 2011.

[10] See her contribution in François Chesnais, Suzanne de Brunhoff, et al, La mondialisation financière: genèse, coût et enjeux, Syros, Paris 1997.

[11] “Even a joint bond might not save the euro”, Financial Times, Aug 28, 2011.

[12] Cf. the second version of his “Modest Proposal”, with Stuart Holland:

[13] “The true rules of a good management of public finance”, March 2010, mimeo

[14] Cf. chapters 8 and 9 of his 1975 John Maynard Keynes, reissued in 2008 by McGraw Hill Professional. More on Minksy’s thought (and his interpretation of money manager capitalism) in my introduction to the reprint of the Italian translation: Keynes e l’instabilità del capitalismo, Bollati Boringhieri, second edition, Torino 2008


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