Currency union: some arguments

Bella Caledonia published a shortish piece of mine on the political economy of a currency union with Scotland, post-independence. I argued that disputes here reflected both the overwhelming strength of finance inside the UK economy, and the hidden weakness of its current account position. This provoked some debate; my reply is as below.

Tony Cliff and capitalist crisis

A bit more on this. Tony Cliff, in chapter seven of his classic State Capitalism in Russia, offers a brief, analytical description of capitalist crisis, based on Marx, that differs (I think) fairly substantially from what has become the orthodoxy. Cliff describes the central contradiction owners of capital face between the need to both generate profits, via the creation of surplus value, and the need to realise those profits in monetary form, by selling the output produced. It is this contradiction that drives the whole process of the business cycle, but, critically, Cliff does not here attempt to make the claim (central to Chris Harman’s version of the theory) that the falling rate of profit ultimately determines the entire system:

Unlike all pre-capitalist forms of production, capitalism is forced to accumulate more and more capital. But this process is hampered by two complementary, and yet contradictory, factors, both arising out of the system itself. One is the decline in the rate of profit, which means the shrinking of the sources of further accumulation. The other is the increase in production beyond the absorptive capacity of the market. If it were not for the first contradiction, the “underconsumptionist” solution of the crisis – to raise the wages of the workers – would be a simple and excellent answer. If it were not for the second contradiction, fascism could, by continuously cutting wages, have staves off the crisis for a long period at least…

…the rate of profit determines the rate of accumulation, the rate of accumulation determines the extent of employment, the extent of employment determines the level of wages, the level of wages determines the rate of profit, and so on in a vicious circle. A high rate of profit means a quick accumulation, hence an increase in employment and a rise in wages. This process continues to a point where the rise in wage rates so adversely affects the rate of profit that accumulation either declines catastrophically or ceases altogether…

This theory explains why, in spite of the antagonistic mode of distribution and the tendency of the rate of profit to decline, there is not a permanent crisis of overproduction, but a cyclical movement of the economy.

This is, to my mind, a much more satisfactory description of the actual history of capitalist development than the prediction of ever-worsening crises over time, ameliorated only by “countervailing factors”.

Greek austerity: the end of the line

This was originally published on the NEF blog at: http://www.neweconomics.org/blog/entry/greek-austerity-the-end-of-the-line

This is not a Greek crisis. It is a European crisis, in two parts. First, the financial crash of 2008 provoked a global recession of exceptional severity. Combined with bailouts for the banks, this led to sharply increased debts and deficits for most large economies – including those in the Eurozone.

Unexploded mines

Goldman Sachs have been helping the Greek government massage its debt figures – at no little reward to themselves, of course.

From 2002 onwards, Greece’s public finance officials arranged a neat little deal with the US megabank to hide additional debt through financial derivatives known as cross currency swaps. These involve swapping debt issued in one currency for another, for a certain, limited period of time.

There’s nothing greatly unusual in this – the market for these kinds of swaps is now huge. Goldman Sachs and the Greek government, however, did something a little more creative, as it were. Der Spiegel takes up the story (via Alexis):

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

This lax accounting means it’s not, as result, quite clear how many other derivatives UXBs are now littering the Mediterranean. Only Goldman Sachs will benefit when they explode:

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

…and guess, by-the-by, which major investment bank is now apparently lead advisor the Greek government on handling the debt crisis? You couldn’t make it up, as they say.

European contagion

It took them a surprisingly long time to move, but as of this morning the speculators have seriously latched onto the Euro:

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

As the FT suggests, they’re betting on both the Greek government’s inability to avoid default – or at least devaluation and exit from the Euro – and the subsequent inability of other Euro currencies to withstand ‘contagion’: financial instability spreading from one economy to the next, with country after country pulled into the maelstrom.

Other Euro economies are exposed to Greek upsets through the substantial investments various European financial institutions now hold there. French investors are the biggest, holding $58bn worth of Greek debt at the end of 2008 (on the IMF’s most recent figures), with German investors next on $32.3bn.

UK holdings are more modest, but still very substantial, covering $14.4bn worth of loans. Around a third of Greek government debt, meanwhile, is held by Greek investors. All will take a hit from substantial fiscal turmoil in Greece. And all the big exposures are in Europe.

Major financial institutions can try to get rid of some of this risk by adjusting their portfolio of assets. The real danger is that, in doing so, they will look to dispose of debt securities held in other, smaller Euro economies with weak fiscal positions – Portugal, Ireland and Spain, in particular.

It’s these three that are now causing additional grief for the Euro. A quick glance at the combination of high public debt, and wobbly governments, tells you why the short-sellers are licking their chops. The betting is on one of the PIGS, so-called – Portugal, Ireland, Greece, Spain – going belly-up some time soon.

But it’s Greece that remains the biggest single risk. Revisions to the public debt figures have rattled markets, while the deep spending cuts offered in sacrifice by the newly-elected PASOK government have failed to calm jangled nerves.

If the big banks and the institutional investors pull out of Greece, they can spread financial instability elsewhere – with speculators adding to the chaos, moving colossal volumes of hot money at fantastic speed across national borders. The whole Eurozone – potentially even the Euro project itself – could suddenly appear unstable.

The decade has been generous to the Euro. A benign economic environment, floating atop a giant property-and-finance bubble, kept the show on the road. Those days are long gone.

The deciding factor here, however, is political. Either the Greek government can keep the markets reaonably sweet, holding firm to bigger and bigger promises attacks public services and wages; or the markets will be unconvinced, dragging Greece out of the Euro.

That’s where the EU steps in. The risks of contagion, and the damage to the Euro’s credibility, will no doubt concentrate European finance ministers minds on arranging a bailout. It’s the prospect of a rescue package, rather than some sudden belief in the Greek government’s firm grasp of the axe-handle, that has led to some improvement in the Euro’s position.

The planned cuts are already meeting resistance. Farmers are blockading roads, and thousands of public sector workers are expected to strike tomorrow against the wage freeze.

Serious opposition in Greece to the EU’s austerity package could open the path for resistance across Europe. But successfully fighting off the cuts will also mean building a credible, political opposition to the rule of finance.

(hat-tip to Eugenia for the figures)

They think it’s all over

Well, it isn’t.

First, the numbers don’t support it. Behind a certain amount of excitable flapping and squawking over a few decentish headline stock prices, much of the underlying data is grim: unemployment here continuing to rise, foreclosures in the US and late UK mortgage payments still rising, and wage settlements grinding to a halt.

All these matter hugely for both economies, since – with credit lines still jammed – they’ll directly affect consumption. And with consumption spending driving 80 per cent of US demand growth during the boom years[*], that’s a big blow to growth across the whole economy.

Coupled with the immense pressure now being exerted on government spending as a result of the bailouts, and it should be clear that future prospects for capitalism in its neoliberal heartlands remain somewhat shaky. The trillions now sloshing around the financial institutions may, eventually, trickle into the rest of the economy, stimulating a boom. But the underlying weaknesses remain.

That’s the real story here. The numbers are only part of it – and, really, only a fairly small part. The truth of the last 18 months or so is that the entire existing economic order, “neoliberalism”, the economic rules of the game we’ve lived under for twenty or more years now, suffered a massive seizure. But instead of changing that order, even in capital’s own terms, rejigging the institutions, rewriting the rules, doing everything just a little bit differently – we’ve placed the sickly patient on a drip.

That’s the meaning of the bank profits and the bonuses. Zombie neoliberalism is still with us, lumbering on as if nothing had happened. Yet it is far weaker than previously: without a purge of the banks and the financial institutions, killing off the insolvent and the incompetent, there is no reason whatsoever for any of them to reform. And without reforms, they will expose capitalism to the same illnesses it contracted last time: contagion, the spread of financial plague from economy to economy, and systemic risk.

But of course, the banks and the institutions couldn’t be allowed to collapse, whatever Mervyn King may have wished. They were peering into the abyss after Lehman Brothers collapsed. The grim prospect of an almighty domino effect loomed, with the ties between collapsing banks pulling more and more of the economy down behind them.

So the bailouts. The patient is hardly cured; more drugged to the eyeballs, and weakened.

[*] figure from Glynn (2004), Capitalism Unleashed, p.53

New Labour’s ideological hit man

There’s an interesting detail in Decca Aitkenhead’s Monday interview with Peter Mandelson, in which Aitkenhead notes his peculiarity, in their conversation, of returning again and again to the same point in his past:

…it’s striking that Mandelson’s point of reference goes all the way back to 80s, the era he returns to in conversation unprompted, time and time again. “It was like the wild west,” he says nostalgically at one point. “It was tough.” Interestingly, he also says that, excluding his present position, his favourite ever job was as Labour’s campaign director back then.

This must seem, to most readers as well as the baffled interviewer, like “nostalgia” for a piece of ancient personal history: and who, after all, does not look back on some long (and successful) battle with a warm smile? No doubt the entitlement that Mandelson – quite literally – claims grows directly from the struggles of his (relative) youth. Because if Mandelson says he had to be the hit man, and that the battle against the Left in the Labour Party – never, tellingly, referred to as such in this interview – was “tough”, he is being entirely honest. New Labour cut its teeth in those battles. It formed itself out of the comprehensive, shattering defeat of a credible left in British politics – a defeat that Mandelson played a decisive role in.

But the popular image of Mandelson as merely a sinister manipulator, or superficial spin-merchant (tediously reprised here) was never accurate. The man himself identifies his real significance:

“Who was it who wrote the policy review in the late 80s? Me. Who presided over the creation – who was one of the architects of New Labour, and of that change in policy that created a new political force in the 90s? Me. Who enjoyed driving new policy as a minister at the beginning of this government, and is now doing so again? Me. So I’m certainly not a policy blank. My big preoccupation is policy.”

And it is this role he has returned to in government: here calling for “industrial activism” in the new, post-crash economy; there staking out a defence of government intervention. He has, since re-entering the Cabinet, been the only minister even beginning to take seriously the thought that the wheels had come off New Labour’s old, debt-and-property economic model.

A Very British self-pity

Chris Mullin, MP for Sunderland South, author of A Very British Coup, writing in the London Review of Books, myopically unable to conceive any (Labour) MP had done anything much wrong in the expenses scandal:

The damage is incalculable. Not just to us, but to the entire parliamentary system. We are sinking in a great swamp of derision and loathing. No matter that the guardians of public morality at the Telegraph appear to have paid a large – and so far undisclosed – sum of money for discs that seem to have been stolen, open season has been declared on we wretched, despised servants of the people.

Self-pitying whinging aside, the sheer blinkeredness of Mullin – and close to every other MP asked to comment on the issue – reminds me of the standard Labour Party reaction to the Iraq protests.

Opposition to the war on Iraq, we were told, was just a problem of communication on this one issue; that voters were otherwise happy; that the Parliamentary system was fundamentally sound. New Labour loyalists either could not or would not grasp that the ferocity of the opposition to the invasion was the bubbling to the surface of many, other, much deeper-rooted discontents: with Labour’s steady abandonment of its core support; with the ill-concealed contempt Westminster held for opinions in the rest of the country; and with the casual, blase attitude to the truth Blair and Campbell evinced, in particular. All these separate complaints and irritations fuelled the anger. Underneath it all was a withering of political legitimacy in this country – as noted by the unjustly (if predictably) ignored Power Inquiry.

That withering has become a near-collapse, in the wake of economic crisis. Scarcely an institution exists  that has not been damaged in the last eight months: the police, the City of London, Parliament, the Treasury: either directly, or indirectly, the economic crisis has had extraordinary political effects.

(The last of the above, for many reasons, interests me especially: from secretly running the country under Brown, the Treasury  has been pushed into a  position of  what must be almost unprecedented weakness – certainly nothing like this has been seen since the war. Take Mervyn King’s continued insubordination, for example, unthinkable even a few years ago, “independent” central bank or not; whilst Darling and his mandarins have been wholly unable to prevent Mandelson creating a new super-department overseeing key economic functions.)