Preface

JANUARY 2012

 

This book brings together many of my published monthly newspaper columns, with no subsequent updating or revision. Some of these pieces have aged a bit, others less so. Taken together, they represent one social scientist’s effort to understand and analyze the day-to-day world, to get involved in the public debate; an attempt to reconcile the rigors and responsibilities of scholarship with those of citizenship.

The years during which these columns were written were deeply marked by the world financial crisis that began in 2007–8 and is still ongoing. On several occasions, I tried to understand the new role of central banks as they sought to avert a collapse of the world economy, or to analyze the similarities and differences between the Irish and Greek crises. Not to mention traditional domestic topics, still vital for our common future. But toward the end of the period, one question began to eclipse all the others: Will the European Union be able to live up to the hopes that so many of us have placed in it? Will Europe manage to become the continental power, and the space for democratic sovereignty, that we’ll need in order to take control of a globalized capitalism gone mad? Or will it once again be no more than a technocratic instrument of deregulation, intensified competition, and the subjection of governments to the markets?

At first glance, the financial crisis that began in the summer of 2007 with the collapse of the U.S. subprime mortgage market and the September 2008 bankruptcy of Lehman Brothers can be seen as the first crisis of twenty-first-century globalized patrimonial capitalism.

Let’s review. Starting in the 1980s, a new wave of financial deregulation and an outsized faith in self-regulating markets descended on the world. The memory of the Great Depression of the 1930s and the cataclysms that followed had faded. The “stagflation” of the 1970s (a mixture of economic stagnation and inflation) had showed the limits of the Keynesian consensus of the 1950s and ’60s, hastily constructed in the specific context of the postwar decades.^* Naturally, with postwar reconstruction and high growth rates coming to an end, the continual growth of taxes and expansion of government that characterized the 1950s and ’60s could no longer be taken for granted.^† The deregulation movement began in 1979–80 in the United States and United Kingdom, where there was rising unease as the economies of Japan, Germany, and France caught up with—and, in the British case, surpassed—their own. Riding the wave of discontent, Ronald Reagan and Margaret Thatcher explained that government was the problem, not the solution. They called for escaping a welfare state that had made entrepreneurs soft, a return to the pure capitalism of the pre–World War I era. The process accelerated and then spread to continental Europe after 1990–91. The fall of the Soviet Union left capitalism without a rival, and a new era began in which many chose to believe in an “end of history” and a “new economy” based on permanent stock market euphoria.

In the early 2000s, stock market and real estate values in Europe and the United States matched and then surpassed their previous peaks, dating to 1913. Thus, in early 2007, on the eve of the crisis, French households’ financial and real estate wealth (net of debt) reached €9.5 billion, six years’ worth of national income. French wealth fell slightly in 2008–9, but started climbing again in 2010, and now exceeds €10 trillion. If we put these figures in historical perspective, we can see that wealth hasn’t been this robust in a century. Today, private net wealth is still equal to nearly six years’ worth of national income, compared to less than four years’ in the 1980s, and less than three years’ in the 1950s. You would have to go back to the Belle Époque (1900–1910) to find French wealth holders so prosperous, with wealth-to-income ratios on the order of 6-to-7.^*

It can be seen, incidentally, that wealth owners’ current prosperity isn’t simply due to deregulation. It’s also, and chiefly, a long-term catch-up phenomenon after the violent shocks of the early twentieth century, as well as a phenomenon linked to the slow growth of recent decades, which automatically leads to extremely high wealth-to-income ratios. The enduring fact is that we live in an era when wealth in the rich countries does very well, while production and incomes grow slowly. During the postwar decades, we mistakenly believed we’d moved on to a new stage of capitalism, a sort of capitalism without capital. In reality, it was only a passing phase, reflecting an era of capitalist reconstruction. In the long run, patrimonial capitalism is the only kind that can exist.

Nevertheless, the deregulation that has taken place since the 1980s and ’90s created an additional problem: it left the financial system, and the patrimonial capitalism of the early twenty-first century, particularly fragile, volatile, and unpredictable. Whole swaths of the financial sector grew with no oversight, no prudential regulation, and no accounting worthy of the name. Even the most basic international financial statistics are marred by systematic shortcomings. For example, at the world level, net financial positions are negative overall, which is logically impossible unless we assume that, when averaged out, we’re owned by the planet Mars . . . More likely, as the economist Gabriel Zucman has shown,^* this inconsistency suggests that a nonnegligible share of financial assets is held in tax havens by nonresidents and not correctly recorded as such. Among other things, that affects the net external position of the Eurozone, which is far more positive than the official statistics suggest. And for a simple reason: well-off Europeans have an interest in hiding their assets, and at the moment, the European Union isn’t doing what it should—and can—to deter them.

More generally, Europe’s political fragmentation and its inability to unite are particularly debilitating as it faces the instability and opacity of the financial system. When it comes to imposing the necessary prudential rules and tax laws on globalized markets and financial institutions, the nineteenth-century European nation-state is, obviously, no longer the right level at which to act.

Europe suffers from an additional problem. Its currency, the euro, and its central bank, the ECB, were designed in the late 1980s and early 1990s (euro banknotes went into circulation in January 2002, but the Maastricht Treaty, creating the European Union, was ratified in France in September 1992), at a time when many imagined the only role for central banks was to watch from the sidelines—that is, to ensure that inflation stays low and the money supply grows at roughly the same rate as the economy. After the stagflation of the 1970s, policymakers and public opinion became convinced that central banks had to be, above all, independent of governments, with the sole objective of targeting low inflation. That’s how, for the first time in history, we managed to create a currency without a state and a central bank without a government.

Along the way, we forgot that during major economic and financial crises, central banks are an indispensable tool for stabilizing financial markets and avoiding cascading bankruptcies and generalized depression. The rehabilitation of the central banks’ role is the great lesson of the financial crisis of recent years. If the world’s two biggest central banks, the Federal Reserve and the ECB, hadn’t printed considerable sums of money (several tens of percentage points of gross domestic product each, in 2008 and 2009) and lent it at low rates—0–1 percent—to private banks, it’s more than likely the slump would have taken on proportions comparable to that of the 1930s, with unemployment rates above 20 percent. Luckily, both the Fed and the ECB were able to avoid the worst, rather than repeating the “liquidationist” mistakes of the 1930s, an era when banks had been allowed to fail one after the other. Of course, central banks’ infinite power to create money has to be kept within bounds. But in the face of a major crisis, forgoing this tool, and this critical lender-of-last-resort role, would be suicidal.

Unfortunately, the monetary pragmatism of 2008 and 2009 that helped us avoid the worst, and put out the fire for now, also led us to think too little about the structural reasons behind the disaster. Progress on financial supervision has been very timid since 2008, and we’ve chosen to ignore the inegalitarian origins of the crisis: all evidence points to rising inequality and the stagnation of working- and middle-class incomes—especially in the United States (where almost 60 percent of growth was absorbed by the richest 1 percent between 1977 and 2007)—as having contributed to the explosion of private debt.^*

Most important, the rescue of private banks by central banks in 2008 and 2009 failed to prevent the crisis from entering a new phase in 2010 and 2011, a crisis of Eurozone public debt. The important point to note here is that this second part of the crisis, which now preoccupies us, is happening only in the Eurozone. The United States, the United Kingdom, and Japan are more indebted than we are in the Eurozone (with public debt levels of 100 percent, 80 percent, and 200 percent respectively, versus 80 percent for Eurozone members), yet they experienced no debt crisis. The reason is simple: the Federal Reserve, the Bank of England, and the Bank of Japan all lend to their respective governments at low rates—less than 2 percent—which calms markets and stabilizes interest rates. By comparison, the ECB has lent very little to Eurozone governments—hence the current crisis.

To explain the singular attitude of the ECB, it’s customary to mention the primordial traumas of Germany, which is said to fear a return to the hyperinflation of the 1920s. To me, this line of thinking doesn’t seem very convincing. Everyone is perfectly aware that the world isn’t menaced by hyperinflation. What threatens us today, rather, is a long deflationary recession, with prices, wages, and production falling or stagnating. Indeed, the enormous money creation of 2008–9 caused no significant inflation. The Germans know this just as well as we do.

A potentially more satisfying explanation is the fact that, after several decades of denigrating the state, many find it more natural to aid private banks than to aid governments. Except that in the United States and United Kingdom, where this denigration reached its zenith, central banks proved more pragmatic and didn’t hesitate to buy massive amounts of public debt.

In reality, the specific problem we face, and the main explanation for our troubles, is simply the fact that the Eurozone and the ECB were badly designed from the start; so it’s difficult—though not impossible—to rewrite the rules in the midst of a crisis. The basic error was to imagine that we could have a currency without a state, a central bank without a government, and a common monetary policy without a common fiscal policy. A common currency without a common debt doesn’t work. At best, it can work in good times, but in bad times it leads to an explosion.

By creating a single currency, we put an end to speculation on seventeen Eurozone exchange rates: it’s no longer possible to bet on the drachma falling against the franc, or the franc against the mark. What wasn’t foreseen was that speculation on exchange rates would be replaced by speculation on seventeen different interest rates for public debt. Yet, to a great extent, this second kind of speculation is even worse than the first. When your exchange rate is attacked, you can always choose to get out ahead of it and devalue your currency, which at least makes your country more competitive. With the single currency, Eurozone countries lost this possibility. In principle, they should have gained financial stability in exchange, but clearly that’s not the case.

There’s something else that’s especially perverse about the interest-rate speculation confronting us today, which is that it makes it impossible to arrange an orderly rebalancing of our public finances. The sums at stake are considerable. With a public debt around 100 percent of GDP, paying an interest rate of 5 percent, rather than 2 percent, means an annual debt-service burden of 5 percent rather than 2 percent. That difference, 3 percent of GDP or €60 billion in France, represents our entire budget for higher education, research, justice, and employment! So if you don’t know whether interest rates in a year or two will be 2 percent or 5 percent, it’s simply impossible to start a calm public debate about what spending should be cut and which taxes should be raised.

That’s especially regrettable because European welfare states obviously need to be reformed, modernized, and rationalized—not only to attain balanced budgets and sound finances, but above all to ensure better public services, more responsive to individual situations, with stronger guarantees of rights. The Left in France must take the initiative on these issues, whether it’s the modernization of our tax system (which is both complex and unfair, and should be rebuilt based on the principles of “equal tax on equal income,” withholding at the source, and the broad base and low rates of our social security tax, the contribution sociale généralisée, or CSG^*), reconstructing our pension system (currently fragmented into multiple regimes, making it both incomprehensible for citizens and impossible to reform equitably and via consensus^†), or the autonomy of our universities (a third key issue, which, like tax and pension reform, shouldn’t be abandoned to the Right).

What to do? To put an end to speculation on the seventeen Eurozone interest rates, the only lasting solution is to mutualize our debt, to create a common debt (i.e., “eurobonds”). In addition, that’s the only structural reform that can allow the ECB to fully play its role as lender of last resort. Of course, the ECB could buy more sovereign debt on the markets right now, and that emergency solution will probably play a crucial role. But as long as the ECB faces seventeen different sovereign debts, it will face an impossible problem: which debt to buy and at what rates? If the Fed had to choose every morning between the debts of Wyoming, California, and New York, it would have a lot of trouble carrying out an orderly monetary policy.

But to have a common debt, there has to be a strong and legitimate federal political authority. We can’t create eurobonds and then let each national government decide how many it wants to issue. And that federal authority can’t be the European Council or the Eurogroup. We need to take a giant step forward toward political union and a United States of Europe; otherwise, sooner or later we’ll be headed for a huge step backwards—that is, a rejection of the euro. The simplest solution would be to finally invest the European Parliament with genuine budgetary power. But the problem with the European Parliament is that it comprises all twenty-seven countries of the EU, not just those of the Eurozone. Another solution, discussed in my November 22, 2011, column, would be to create a kind of “European Senate,” bringing together members of the finance and social affairs committees of the national parliaments of those countries wishing to mutualize their debts. This body would have the final say over decisions on issuing common European debt (which wouldn’t prevent each country from issuing national debt if it wishes, but national debt would not be collectively guaranteed). The important point is that this group would make its decisions via simple majority, like all parliaments, and its debates would be public, transparent, and democratic.

That’s what would make it different from the European Council, which tends toward inertia and the status quo because it relies on unanimity (or quasi unanimity), and usually amounts to a private confab. Most often no decision gets made, and when, by some miracle, a unanimous decision emerges, it’s nearly impossible to know why it was made. That’s the opposite of a democratic debate within a parliamentary forum. A new European treaty that stays purely within an intergovernmental logic (merely modifying the decision rule in the European Council from 100 percent to 85 percent) would be inadequate to the challenge at hand. And it obviously wouldn’t permit the creation of eurobonds, which will require far more boldness in the field of political union—a boldness that the Germans seem far more prepared for than the French government. We should take them at their word on this issue and make specific proposals. That is our challenge in the months ahead.