Halevi Article Europe

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international Journal of Political economy, vol. 39, no. 4, Winter 2010–11, pp. 5–30.© 2011 M.E. Sharpe, Inc. All rights reserved.ISSN 0891–1916/2011 $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 financial 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 difficulties inherent in a particular segment of U.S. financial markets, then spread to the rest of the world. And, presto, the financial crisis mutated into a banking crisis; in less than a year, it became a full-blown cri-

Riccardo Bellofiore 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, Pensée 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 defla-tion, which has depressed internal expansion, employment, and wages. Although net exports have pushed up profits, this group of countries has been exporting unemployment.

In this paper we first 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 1979–80 was anything but a retreat of the state; nor was it characterized by the abandonment of interventionist policies—quite 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 first phase of the neoconservative turn can be defined as “monetarist.” It was based on the pretense, quickly abandoned, of controlling the money supply—an unknown and unknowable quantum, as Nicholas Kaldor (1983) pointed out in his speeches at the House of Lords—to 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 first Marxist prime minister of Britain. The concrete manifestations of these policies were the cuts in social public

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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 didn’t 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 Reagan’s twin deficits, which kept the United States above water and initiated the flood 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, Reagan’s twin deficits centered on a revamped military expenditure would have been just countertendencies to the stagnation of the 1970s and the U.S. recession of 1981–82. 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 financialization 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 first character, the traumatized worker, is also the outcome of the primacy ac-quired by finance, this time in a different way from the dominance of finance before World War I. The new dominance of the economy by finance produced significant 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 financing of the economy and hence also on the injection of money into the economy and on the forms of financial intermediation, and finally 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” (Bellofiore 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


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 financial institutions and those of productive firms. The latter were co-opted to the strategies of the first 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 financial institutions, aided by credit rating agencies, which also are nonbank financial companies, determined the governance criteria for the entire business sector.

The rise to dominance of the new financially 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 financial 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 firms was, therefore, stratified 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 firms were also the decision makers and systematically strived to expand their oligopolistic position. At the bottom, firms 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 specified 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-à-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

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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 Inflation 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 finance 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 center–periphery dichotomy has lost its older rigid connotation, being repro-duced within each economic area and country.

To better grasp the interconnection between financial and real dynamics during the 1980s, we must refer to the tendency of pension fund and hedge fund capitalism to generate asset price inflation. As explained by Jan Toporowski (2000, 2010a), the growing rate at which money flowed from those funds to financial markets en-abled nonfinancial firms to issue shares cheaply, whereas the returns increasingly depended on speculative gains. Capital asset price inflation was also accompanied by an overcapitalization of productive enterprises: given the convenience of ex-panding financial relative to real investment, ownership titles were issued in excess of the needs of industrial and commercial financing. The moneys mopped up by the issues were thus being invested in financial short-term activities. In this way, the interests of the funds’ managers in financial rents and the revaluation of shares merged with the interests of firms’ 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 firms.

In the financial markets, these processes led to a systemic tendency toward upward cumulative asset inflation 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 inflation, 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 financial companies and households rather than from the physical investment of nonfinancial firms. 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 firms 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.


Capital asset inflation goes a long way toward explaining the “irrational exuber-ance” that gripped first 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 financial companies and their originate and distribute practices. Evidently all this helps the growth of effective demand. Yet wage deflation, capital asset inflation, and the increasingly leveraged position of households and financial companies are complementary elements of a perverse mechanism in which real growth is hampered by the most toxic aspects of finance. The traditional static views of a conflict between industrial and financial 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 financing of production.4 The liquidity injected by banks and financial intermediaries into household debt accounts is then transferred from the latter to the firms 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 financial markets, feeding back into the asset price bubble.

The growing household debt as well as the overcapitalization of nonfinancial firms rest on the explosion of debt internal to the financial sector. In this enchanted world, the imagination of the design of new financial 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 finance; 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 qualifications to the picture sketched above. The first pertains to the “new” economic policy, with-out which the working of the flow mechanism outlined hitherto would have been impossible. The second qualification relates to the institutional and geopolitical prerequisites that enabled setting up private indebtedness worldwide. Finally, the

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third qualification concerns the social significance 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 configurations of production. Let’s see how the policies were constructed.

The creation of “traumatized workers” meant that the dangers on the inflation 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 flat (Lavoie 2009), thereby rendering redundant the old diatribe between MIT Keynesians and Chicago mon-etarists. The existence of a flat 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 fiscal policy—except for tax reductions for the wealthy—was 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 financial intermediaries. Thus, at any sign of a financial crisis arising at the center of the system, the central bank acted, as Marcello De Cecco (1998) brilliantly put it, as a lender of first resort. The central bank’s objective was to set a floor in the event of a fall in asset prices; this policy signal was then incorporated into the expectations of the operators in financial 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 Greenspan’s 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 flat, 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


be described as a sort of a “privatized” and “financial” Keynesianism: aggregate demand is pulled upward by virtue of the wealth effect that asset price inflation engendered and central bank policies validated.

The Indebted Consumer as the Traumatized Consumer

We come now to our third and last qualification. 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 insufficient 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 significantly because of massive imports from China. Instead, expenditures generating rents for the financial 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 finance 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 finan-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 final buyer of the neomercantilist economies of Japan, Germany, and other significant parts of Europe and most of China’s 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 Bush’s military Keynesian spending, Greenspan’s flooding the economy with liquidity, and the change of the flows with Asia, which, while running large current accounts surpluses with the United States, generated capital flows toward U.S. capital and bond markets. Given Asia’s 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 deficits, 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 bubble–driven Keynesianism.6 The stock bubble was replaced by a real estate bubble that reproduced in a different way mechanisms and behaviors of the first. The dot-com bubble had also been fed by venture capital activities that financed real investments in electronic equipment, software, and so on. The real estate bubble, conversely, was overwhelmingly con-centrated on the steep inflation 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, nonfinancial firms become net creditors. Therefore, a period of profits 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-financed 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. Inflation 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 inflation. The fragility of the bubbles showed that the Federal Reserve was losing control of the policy. The guidelines contained in the much vaunted inflation-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 inflation 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


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 inflation. 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 deflation 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 financial 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 financial 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 financial instruments, the surpluses and savings of emerging economies would naturally flow to fill the deficits of the United States, Britain, Australia, and Spain (these countries generated the largest share of the world’s deficits).

When the crisis broke out in July 2007, the hoped-for twin miracle revealed itself as a double swindle. The new opaque financial papers had, in fact, not securitized risk but, rather, spread it and, indeed, created it out of thin air. Within the banking and the financial 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 magnified the nega-tive impact of financial 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 figment 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-financed growth was tied to European and Japanese stagnation as much as with China’s 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 Asia’s exports to

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North America. Europe’s net exports also benefited from the bubbles in Russia and the deflation-induced real revaluation of the Brazilian and Argentine currencies.

With Asia, Europe runs a growing deficit. Russia and Latin America went under in 1998–2000, 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 financial 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 firms, 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 financial sector’s 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 significant than the expansion of domestic demand.

Within export-oriented countries, there is a definite hierarchy among the big three who also happen to be in the eurozone. The first 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 deflation. 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-many’s. It was based on competitive devaluations. But with the euro, the weak currency approach has vanished, Italy’s structural strength vanished, and wage deflation 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 financial conservatism with wage deflation and neomercantilist goals, though the latter are seldom attained. Thus, as much as the European Central Bank (ECB) organizes


the monetary framework for price stability, wage deflation 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 Union’s 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. Germany’s 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 deficit, determined by trade with China. Yet, in this case, we have significant 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 deflation on other European countries; and as long as Germany pushes for fiscal policy adjustment elsewhere, they react perversely on the same position of the European net exporters.

We may distinguish between “active” and “passive” deficits. Germany, the Neth-erlands, and Scandinavia have active deficits. France, Italy, and Spain are the most significant representatives of those with passive deficits. The United Kingdom is a separate case. “Active” deficits 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 Germany’s 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 deficits with China and Japan. “Passive” deficits 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 financial, 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 firm that is global despite its small size) that—between the dot-com crisis and the subprime crisis—crossed 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

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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 deficit with China and Japan, we have not included it in the France-Italy-Spain group. This is because these issues do not belong to Britain’s political economy. British policymakers and British capitalism in general have given up on export-led growth since the end of the first Wilson government. Thus since the 1970s Britain—like Spain, Portugal, and Greece—has registered large trade and current account deficits. The task of covering them falls upon the financial sector and capital movements through the London. Britain’s external deficits 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 France’s industry and just below Italy’s. 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 financial flows to cover its growing current account deficits, 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 2007–8, before the unraveling of the world financial system) the main area of profitable effective demand. It is the area where Germany’s economy realizes most of its external surpluses. These, in turn, represent the financial 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-finalized 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 first substantial steps in that direction. Intra-European neomercantilism was the outcome of the persistent German surpluses, which were initially sterilized within


the European Payments Union (1949–59). 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 country’s trade, because not all countries can attain surpluses simultaneously, and because a clearing mechanism for the region is lacking, deficit 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 option—because currencies are in a fixed (although adjustable) mechanism like the European Monetary System (EMS), as in Europe between 1979 and 1992—or if there is a single currency, as in the European Monetary Union (EMU) today, the only nondisruptive adjustment would be a fiscal redistribution from surplus to deficit countries. Otherwise deficit countries are left to deflation, dragging down not only their economies but also the EMU and Europe as a whole.

The heavy currency fluctuations 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 Italy’s defense against excess differential inflation thanks to a peculiar strategy of competitive devaluation (1973–79), 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 financial sector prevented Paris from following this path. West Germany’s 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 inflation-prone countries (Italy and later Spain and Portugal) experienced a real revaluation of their currencies, and, of course, Italy’s 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 financial 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 reunification of Germany (1990), Deutschland accumulated unprec-edented surpluses as a share of its gross domestic product (GDP). Although Europe provided a profitable area for net exports and the revaluation of the U.S. dollar favored them even more, Germany’s economy was among the continent’s slowest growing. German surpluses were expanding rapidly, but its imports were not, which exported stagnation all around. Italy—whose decline in competitiveness did not help France during the 1980s—financed the external deficit by attracting foreign capital and placed the budget deficit in the hands of the capital markets. The rise

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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 1987–91 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 floors. Spain and Portugal were in an even worse state because their economies were significant net importers. They could not, therefore, generate the revenue to prevent a credibility crisis by short-term financial companies’ trading in govern-ment bonds and foreign exchange.

In 1988–91, Germany’s growth was sustained, and partially Keynesian in na-ture, because it was driven by government expenditures for reunification; it was, however, soon blocked by the Bundesbank in 1992. Internal demand—increasing wages relative to productivity, giving way to higher prices, and thus leading to a decrease in competitiveness—did 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 1992–93 and initiated a significant 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 deficit 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 Bundesbank’s 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 Germany’s 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, Germany’s 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 mark’s descent toward the lock-in exchange rates for the euro in 1999.

After the dramatic devaluation of 1992–93 and the support it gave to its indus-trial districts—this time without any, even partial, indexing against inflation—Italy 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


governments, abolished any incentives for productivity increases. Italy and France started to lose their surpluses, and in 2003–5 both countries hit negative territory in trade and current account balances, whereas Spain, Portugal, and Greece saw their external deficits 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, Germany’s neomercantilism strength-ened, with German income growing less than the eurozone average. Germany’s trade surplus returned higher than ever, reinforced by the fact that the countries in deficit could neither devalue nor develop expansionary fiscal policies. Germany’s deflationary 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 Dublin–Amsterdam Stability and Growth Pact, however, Germany does not bear any responsibility for the deficits 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, first, the help coming from the U.S. dot-com bubble plus the asset stripping–induced consumption bubbles in Russia, Brazil, and Argentina in the second half of the 1990s and afterward the initial fall in the euro–U.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 profitable demand.

As far as Germany, Italy, France, the Benelux countries, Austria, and Scandina-via are concerned, the transmission mechanism of the global crisis in 2007–9 was not through the debt deflation 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

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fall in German output and employment, nor did the crisis of the BNP–Pays 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 identified 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 deflation 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 Deflation crisis

These three areas absorb a significant 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 1997–98 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 Germany’s 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 financial crisis in Britain and the explosion of the housing bubble in Spain. As frequently remarked in the financial press, the real estate price inflation in Spain was connected to the financial mortgage markets in Britain and the United States.

Europe felt waves of financial 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 Europe’s 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 Merkel’s positions.


The hope that German neomercantilism can emancipate itself from intra-Euro-pean trade—a hope common to the most advanced section of Italian industry—will, 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 suffice 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 financial risks and, in the long run, new deflationary pressures.

Southern Europe in the Maelstrom

Spain, Portugal, and Greece run permanent trade deficits 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 deficit. The two countries, however, lack a capital goods sector capable of generating capital ac-cumulation internally and had to rely on net imports and financial inflows. Greece, the Iberians, and Ireland profited from EU structural funds for less developed areas. In the case of Greece, growth could be sustained thanks to “Keynesian” public deficits in a non-Keynesian world, with an increasing current account deficit benefiting 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 fiscal 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 deficits 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 deficits before the crisis were financed through money inflows, thanks to bond issuances in Greece, or capital transfers, thanks to the

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integration of Spain in the London-based real estate market. The collapse of that market caused an immediate contagion of the 2007–8 bubble and an abrupt increase in unemployment—something similar happened in Ireland. In all these cases, the unsustainable nature of the public deficits 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 deflationary effects on income and hence on the same ratios of deficits and debts relative to GDP, by the insane policies supposedly aimed at rescuing public finances.

Clearly, the “sovereign” debt crisis was nothing but the other face of the private debt crisis, which, as in the United States, began first. In Europe, the aggravating factor is that the “sovereign” debt is not sovereign at all, with the individual countries at the mercy of Brussels’s and Berlin’s 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 deficits. Barely three years after the 1999 launch of the single currency, Berlin (and Paris) saw their budget deficits exceed the 3 percent limit set by the Maastricht treaty and the Dublin–Amsterdam 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 fiscal 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 criteria—as did France, which like Berlin implemented targeted interventions on some industrial sectors and even adopted a policy of a publicly financed shortening of the work week. Italy resorted to Eduardo De Filippo’s famous passive hope ha da passà 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 inflexible 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 Spain—but also for Italy, and


even for France, because the crisis is pushing up the latter’s budget deficit, to 80 percent above Germany’s.

At the time of writing in December 2010, Germany’s strategy seems to be the winning one, because the latter’s 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 financial crisis engulfing 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 finances is the prohibition against refinancing 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 refinance.” 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 deflation 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 deficits. But, as Alain Parguez (2010) reminds us, there are “good” deficits and “bad” deficits. Deficits 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 deflationary policies like those now perversely spreading to the entire European continent, whether within the eurozone or not,

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including the same net exporting countries, through huge public budget cuts and an unprecedented attack against public sector workers. Bad deficits 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 financialization 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 finance 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 (Bellofiore 2004), in an area like Europe, characterized by huge differences in productivity and (tangible and intangible) infrastructure, nominal convergence without a redistributive fiscal 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 deficits, hence higher inflation and deficit/GDP ratios for those countries seeking to catch up. The Dublin–Amsterdam 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 Europe’s 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 criteria—for which, it is to be stressed, no theorem exists showing why a particular debt or deficit 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.


A similar error is repeated for the European crisis, tracing its origins back to the Maastricht criteria and the Dublin–Amsterdam 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 économistes atterrés (Abraham-Frois et al. 2010), which starts from an analysis of finance 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 today’s European leaders, first of all the German ones, as amateurs, altogether ignorant of economics—regrets 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 didn’t understand that we were recording surpluses on our current account. We are doing the same thing as the Chinese—the great difference is that the Chinese have their own currency and we haven’t. 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 suffices 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 “it’s difficult to say. I said the probability would be 51 percent—that 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 confine the others in a second ring of the EMU. Controlling their devaluation would not imperil their export-led growth model and dissolve their financial advantages—all Schmidt’s 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, profiting 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

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hunchback assistant. Freddy laments, “What a filthy 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 unfinished 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 Bellofiore 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 Bellofiore and Halevi (2011a, 2011b).

2. Minsky is well known for his financial instability hypothesis, and the crisis has been labeled a “Minsky moment” turning into a “Minsky meltdown.” However, financial 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 Bellofiore, Halevi, and Passarella 2010). For a criticism of Aglietta, who has been quite supportive of pension fund capitalism in a social–liberal fashion, see Bellofiore (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 financial 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, André Orlèan (1999), before the dot-com crisis.

3. This same phenomenon is christened by Bennet Harrison (1994: 8) as “concentration without centralization,” inverting Marx’s 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 Bellofiore (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 Bellofiore and Halevi (2006, 2007) and Bellofiore, Garibaldo, and Halevi (2010).

8. Germany’s wage deflation pressure also worked in the 1980s, whereas Italy’s 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 firms’ need to gain profitability, 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 deflation for every country of the eurozone.

9. Indeed, Europe avoided a total collapse between 2008 and 2009 because of three factors that contradicted the official “anti-Keynesian” rhetoric of European governments: the operation of fiscal automatic stabilizers, some explicit pro-industry targeted programs, and government extraordinary policies sustaining employment (e.g., Germany financed a temporary reduction in working hours). Italy was sheltered by the provincial nature of its


financial 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 deficit spending policy, which would have been driven, however, by tax cuts. Her temporary stance in support of deficit spending did not last long.

10. On the topic of this paper, it is worth rereading De Brunhoff (1999).

References

Abraham-Frois, G., et al. 2010. manifeste des économistes atterrés [Manifesto of the Appalled Economists]. Available at http://economistes-atterres.blogspot.com/2010/09/manifeste-des-economistes-atterres.html, accessed December 14, 2010.

Acocella, N., et al. 2010. Lettera degli economisti [Letter of the Economists]. Available at www.letteradeglieconomisti.it, accessed December 14, 2010.

Aglietta, M. 1998. “Le capitalisme de demain” [Tomorrow’s Capitalism]. notes de la fondation Saint-Simon, no. 101 (November).

Bellofiore, R. 2000a. “Forza reale e bolla speculativa” [Real Strength and Speculative Bubble]. La rivista del manifesto [Manifesto Review], no. 4 (February): 25–30.

———. 2000b. “Il capitalismo dei fondi pensione” [Pension Fund Capitalism]. La rivista del manifesto [Manifesto Review], no. 10 (October): 35–42.

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