Europe’s Faustian Bargain with Big Finance

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This interview, courtesy of the Transnational Institute, is based on a paper by Walden Bello, “Europe: social democracy’s Faustian pact with global finance unravels,” published by the Transnational Institute (May 2017). Originally published at Triple Crisis

An Interview with Walden Bello

Europe’s social democrats played a central role in unleashing the financial sector that created the European economic crisis that continues to today.

You’ve looked closely into how the financial crisis that erupted in 2008 played out in different parts of the world. What did the financial crisis in Europe have in common with the US crisis?

One common factor in the US and Europe was unregulated, undisciplined finance capital. First, European banks, including German banks, bought huge amounts of toxic subprime securities and as a result they saw their balance sheets gravely impaired, and, in the case of many, they had to be bailed out by their governments.

Second, European banks engaged in the same uncontrolled lending to real estate ventures, thus creating a huge property bubble in places like the United Kingdom, Ireland, and Spain.

Another common factor was that European countries had also adopted so-called “light-touch” regulation, under the influence of Wall Street and neoliberal theories like the so-called “Efficient Market hypothesis,” which asserted that financial markets left to themselves would lead to the most efficient allocation of capital. Even German authorities were under the spell of such doctrines, so that they were caught by surprise by the massive exposure of their banks to toxic subprime securities and to poor credit risks like Greece.

And what was unique about or particular to the European crisis that distinguishes it from the US crisis?

The main thing that distinguished the crisis in Europe from the US crisis was the complication introduced by 19 states having a common currency without a fiscal or political union. On the one hand, the euro gave lenders the illusion that the credit risk of the weaker economies was practically the same as that of the stronger economies, encouraging them lend to the former without due diligence. On the other hand, being in the Eurozone severely limited a country’s options to recover since it eliminated devaluation as a means by which an economy could move from a trade deficit to a trade surplus. The euro became a gilded cage where the weaker economies have been condemned to long-term stagnation.

What was Germany’s role in the financial crisis? How did German policies shape what happened in, for example, Greece?

Germany had a central role to pay in the generation of the crisis. First of all, the neoliberal reforms called the Hartz Reforms, which were implemented by the Social Democratic government in the early 2000’s, made German labour relatively cheap compared to its neighbours. This turned many other European nations into deficit countries in their trade relationship with Germany. To cover their deficits as well as support social security measures for those displaced by German exports, the governments of these countries, like Greece, borrowed heavily from German banks.

Second, unrestrained by supposedly sober German government institutions like the Bundesbank, German banks did not perform due diligence on borrowers like Greece and lent massive amounts, recklessly. German exposure in Greece came to some 25 billion euros, leading Barry Eichengreen, a prominent finance expert, to comment that what was at stake “was not just the solvency of the Greek government but the stability of the German financial system.”

Third, while refusing to acknowledge the responsibility of its banks and heaping the blame wholly on Greece and other borrowing countries, Germany has stubbornly dictated the austerity policies that Greece and other countries have been forced to adopt. These policies are designed to recover the bulk of the loans made by Germany’s banks. Even the IMF acknowledges that these austerity policies simply doom Greece and other Southern European countries to long-term stagnation, but Germany insists on its pound of flesh, and this can only end up promoting the spread of anti-European Union right-wing populist movements.

So what about the standard accounts that say the Greek crisis was triggered by the revelation in 2009 that the government had been cooking the books?

Well you have to consider that, in 2007, two years before the statistics scandal, the tango of frenzied lending by German and French banks and addictive borrowing by the Greek government and private banks had already pushed Greece’s debt to 290 billion euros, which was 107 per cent of GDP. Yet, Greece was still seen as a good credit risk.

What made the situation in 2009 different was the spread of the global financial crisis from Wall Street to Europe, with banks collapsing or being bailed out by governments. The fallout from Wall Street made the creditor countries worry that private borrowers in the debtor countries would not be able to pay back their loans. So they pressed governments like Greece, whose government was already highly indebted, to also take responsibility for or nationalize the private sector’s debt. This conversion of private debt into a state liability converted the financial crisis in Europe into a sovereign debt crisis. The Greek statistical cover-up mainly functioned as an excuse for the creditor governments to crack down on the debtor states.

You quote Joseph Stiglitz as saying the euro is just a 17-year-old experiment, poorly designed and engineered not to work. Does that mean you think the euro will not survive?

As I said earlier, the problem with the Eurozone is that it is a monetary union that does not have the necessary requisites of a fiscal union and political union that would set up the rules and mechanisms to allow the central authorities to move capital from surplus to deficit regions. Right now there are only two ways to resolve the trade imbalances within the Eurozone. One is internal devaluation, that is, the adoption of harsh austerity policies that would cheapen labour and make a deficit country’s exports competitive; this carries the risk of subjecting a country to long-term stagnation owing to a sharp reduction of effective demand. The other way is to simply get up and go, leave the Eurozone, and adopt a new currency, the value of which would be low compared to the euro, thus making one’s exports “competitive.” Not surprisingly, this would also carry the risk of squeezing effective demand in the debtor economy. However, the second option would allow one much more room for manoeuvre than if one were trapped in a loveless, depressed marriage like the Eurozone.

So in my sense, the countries in the Eurozone face the choice of either moving towards full fiscal and political union, which would make financial transfers a matter largely of financial transfers being automatically activated to flow from surplus to deficit areas in a fully unified economy. Or they end the monetary union. My sense is there is no middle way.

What would you say the role of social democracy was in the crisis?

Social Democracy is deeply implicated in the crisis. While Margaret Thatcher became the face of neoliberalism, social democrats had a very central role in pushing neoliberal measures throughout Europe. New Labour promoted financial liberalization and light-touch regulation in the United Kingdom, with Gordon Brown, first as chancellor, then as prime minister, becoming, as one writer puts it, “lionized” by the City as a result.

Francois Mitterand and the French socialists were the principal champions of the euro, in what former Greek Foreign Minister Iannis Varoufakis describes as a French project to harness German economic power to European integration under French political and administrative leadership.

And in Germany, it was under the Social Democratic government of Gerard Schroeder that implemented the labour market “reforms” that reduced labour wages and consolidated Germany’s position as a surplus country and its neighbours as deficit countries, forcing them to rely on German banks to cover their trade deficits. The Christian Democrat party could not have done what the social democrats did, but Angela Merkel and the conservatives ended up eating the SPD’s lunch.

Could the financial crisis in Europe have been averted? If so, how?

Yes, it could have been averted if there had been very stringent regulations governing finance put in place by governments that did not see finance capital as a partner but as a force to be disciplined. Finance has to be put in its proper place as a mechanism to get capital from those who have it to those who can apply it to productive use. More and more, it seems like only a nationalized banking system can properly fulfil this function. Having said this, I share the apprehension of the American economist Hyman Minsky that so long as capitalism reigns, finance capital will find ways to adjust to government regulations to again engage in reckless lending.

Are we out of danger now, or is there a chance this could happen again?

No, we are not out of danger because financial sector reform, which was pushed in the immediate aftermath of the financial crisis, has been ineffective or not implemented due to the successful lobbying efforts of financial corporations.

Finance capital remains undisciplined. In the meantime, owing to austerity policies, most of Europe’s real economy is in the grip of permanent stagnation. This creates the temptation for unregulated finance capital to engage again in speculative ventures, where one squeezes value from already created value through the creation of bubbles that are destined to collapse, again bringing chaos in their wake.


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  1. LT

    In other words, how can a nation be in the Eurozone and not be Germany’s b – – – -?
    Is it any wonder why Trump kept asking Merkel if he could do a trade agreement with Germany without thought to EU agreements? I thought it was funny too, but not for the same reasons as the papers.

  2. Susan the other

    At this point, fiscal policy might not work. Nothing is creating new capital. Macron would like to see a stimulus that promoted neoliberal tactics, what Diane Johnstone calls “vertical egalite” or equal opportunity to do start-ups. But Schaeuble must know that it won’t work because a conservative fiscal policy can’t be crammed together with a neoliberal industrial policy across the EU. It is again so apparent that (above) “…finance capital (still) engages in speculative ventures where one squeezes value from already created value through the creation of bubbles that are destined to collapse…” as to be a demonstration that unregulated capitalism quickly reaches its limits. Maybe it is because “financial time moves faster than real time.” If those clever Europeans could figure out how to fix the clock it might help. What made NIRP fail? Is this a paradox?

    1. Disturbed Voter

      Positive interest rates are a virtuous circle, if run properly. It is possible for savings to legitimately finance legitimate investments (main street economy).

      Negative interest rates are a vicious circle, no matter how you run it. This is simply a “sucking sound” taking all the liquidity out of the main street economy and putting into financial and governmental hands.

      Western civilization has lost its way, in the interests of leveraging the status quo centers of power and wealth. The main street economy is the seed corn, we are eating the seed corn.

  3. a different chris

    Mr. Bello made a lot of sense, except for one tiny off-key phrase. Now I don’t know if this was a transcribed verbal interview or not. If it was I can understand this: “The euro became a gilded cage “…. methinks the Greeks would like even a little gilding on their cage but not gonna happen obviously.

    If not, then maybe it was just a second language sloppiness.

    1. TheCatSaid

      I understand the “gilded cage” analogy. Something looks attractive and necessary but it’s a prison. Many Europeans (Greece, recent French election, etc.) desperately cling to retaining the Euro as if it were a life jacket, despite the fatal flaws portrayed clearly in the article.

  4. Jim Haygood

    This chart is from 2010, but its basic outlines have not changed much. It shows that banks in Belgium, France, Germany, Italy, Netherlands, Spain and the UK are many multiples the size of their TBTF US counterparts, when their assets are compared to their home country’s GDP.

    Until the mid-1980s, continental European equity markets were quite underdeveloped. Corporate finance depended much more on bank lending than in the US. Today European banks remain giants in comparison to their economies and national governments.

    Loading up these Leviathans with zero-yield sovereign bonds that are treated as risk-free — while the ECB’s TARGET2 clearing system serves as a vendor financing mechanism for Germany, whose credit balance has reached an astounding €843 billion as of 30th April — is deranged.

    One fears there is not enough popcorn on the planet to sustain spectators as this mutual suicide pact slams into a mountainside and explodes in an incandescent fireball.

  5. readerOfTeaLeaves

    Wonderful post.
    Worthy of comment:

    “…owing to austerity policies, most of Europe’s real economy is in the grip of permanent stagnation. This creates the temptation for unregulated finance capital to engage again in speculative ventures, where one squeezes value from already created value through the creation of bubbles that are destined to collapse, again bringing chaos in their wake.”

    Today, UBER’s market cap is either $28 billion, or $62 billion, depending on your source.

    Anyone see a speculative bubble in a market cap that diverges by a range of over $30,000,000,000?!
    For ‘bubble’, let’s substitute the word ‘bullshit’.

    It’s bullshit, in the Frankenfurter sense of the word, i.e.: ‘the liar doesn’t care about truth or falsehood; only about whether the listener believes what they say.’

    The world is awash in bullshit.
    This post, on the other hand, was a gem of insight and honesty.
    Thanks to NC for making it more widely available.

    1. Disturbed Voter

      Proper markets … for labor, goods and services, are based on honesty. An honest days work, honest and reasonably priced services and goods. Lying and fraud are the foundation on which corruption is built.

      When grifting isn’t enough, we slump into the slough of despond … theft and violence follow.

    2. Synoia

      Uber’s valuation of itself is either $28 billion or $62 billion….depending on Uber as the source.

      Mr. Investor might just have a different opinion.

      In truth if Uber is worth the figures bandied about, where’s the IPO? Not there? Then the valuation is nothing more than a Trumpian statement of value.

      And we all greatly value Trump’s statements.

    3. TheCatSaid

      Great post and like you I’m grateful to NC for finding it and featuring it. I’d never heard of Walden Bello. I hope we hear more from him.

  6. Eustache de Saint Pierre

    Such truthtelling hardly anyone wants to hear, never mind believe. The as yet untouched believe they are above it all, as they look down their noses through perfumed handerkerchiefs at the victims.

    Macron will wave a fist at the German immovable object……I foresee a winter of discontent.

    1. Hayek's Heelbiter

      Agreed. So many related articles in NC over the past year or so but nice to see all the information consolidated into a single post. Not that it will be persuasive enough to convince MSM consumers that the Eurozone’s problems were NOT caused by lazy Greek workers and corrupt Spanish politicians. Still.

      1. TheCatSaid

        @HH: “nice to see all the information consolidated into a single post” Indeed! Bello’s article is wonderfully clear and concise.

  7. John k

    He did mention banks getting back to allocating credit from savers to borrowers… no mention of banks not needing savers, just credit worthy borrowers…

    1. TheCatSaid

      The lack of credit worthy borrowers (or anyone wanting to borrow) was highlighted by economist Richard C. Koo in a talk I found especially good here.

      He points out that the lack of borrowers is a major part of what is currently going on, but the most common macro-economic models do not consider this possibility, nor is this discussed much in academic or banking circles when considering central banks’ possible actions.

  8. Synoia

    The other way is to simply get up and go, leave the Eurozone, and adopt a new currency, the value of which would be low compared to the euro, thus making one’s exports “competitive.”

    Which based on expert opinion at this very web site is not possible. If it were someone would be doing it.

    Leaving the only option, as all can attest, to be:

    Internal devaluation, that is, the adoption of harsh austerity policies that would cheapen labour and make a deficit country’s exports competitive; this carries the risk of subjecting a country to long-term stagnation owing to a sharp reduction of effective demand.


    Put down the Peasants.

    1. djrichard

      If I remember right, I think the argument was that Greece in particular didn’t have its ducks in a row for migrating off the euro and onto a drachma.

      Fair enough, but that shouldn’t mean their window closed for doing that. There’s no reason they still can’t get their ducks in a row. If I were Greece, I would be doing just that, behind the scenes, to spring that on Germany as part of negotiations when the time is right.

      I get the sense though that Greek leadership isn’t actually interested in playing chicken with Germany. They were more interested in playing chicken with their own people (while making it look like they were playing chicken with Germany). And their people blinked. And with that it seems they reached a stable equilibrium that will be resistant to change. Mission accomplished. So I have no hope for them to actually get their ducks in a row to migrate off the euro.

      Status quo there until some other country puts Germany to the test.

    2. TheCatSaid

      When the Euro implodes in one or more or all EZ countries, then ready or not people will have to do something to respond as best they can, even if supposedly “TINA”.

      It seems inevitable. The timing and speed of the great unraveling is uncertain. (One country? several? all? Connected to financial or political crises outside the EZ?)

      What follows will be a combination of messy, creative, painful, disastrous, successful, community-destroying, and community-building results, depending on each local community’s unique resourcefulness and network-building initiatives.

  9. witters

    I used to think it was NC’s view that it was impossible (TINA!) But on re-reading, I think the real NC view is that it is possible in the following sense:

    “I tell you the truth, it is hard for a rich man to enter the kingdom of heaven. Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God. When the disciples heard this, they were greatly astonished and asked, “Who then can be saved?” Jesus looked at them and said, “With man this is impossible, but with God all things are possible.” Matthew 19:23-26

  10. Altandmain

    Ultimately, I think the problem is that finance has become a parasite on the economy, as Michael Hudson has repeatedly said.

    We need a financial system that works for the people, not one that enriches itself.

  11. agkaiser

    Austerity measures are imposed to reduce debt. Spiraling debt grows and wealth becomes more concentrated because of the interest, which is the profit of those who invest in debt. We go into debt, as does our govt. because we have insufficient income. Debt dividends are the income of the banksters and billionaires who own everything.

    Do you really think the banksters and billionaires are going to let us or our government, their two biggest cash cows, get out of debt through austerity or any other means we poor mortals can devise? The debt spiral that feeds the parasitic monsters who own everything is the death spiral for the economy and the human race.

    1. TheCatSaid

      The author of this post never mentioned debt forgiveness. While I’d agree Germany would resist this, on the other hand it should always be mentioned. Even the IMF mentions it.

  12. Ignacio

    There is something incorrect with the narrative. By no means the Hatz Reforms made German labor cheap compared to other countries. Say Greece or Spain. The effect of these reforms was to reduce consumtion and increase german saving rate. This led to capital exports matched with commercial surplus.

    It is also time to change false narratives.

    Salaries in Spain have been, during all this time, much lower than german.

    1. St Jacques

      I think he’s talking in labour costs relative to what is produced per hour worked which varies with the structure of the economies. However it would be interesting to see a comparison of all Euro countries over the period he speaks of.

  13. sunny129

    The global Banking has gone FUBAR!

    Nothing changes until RESET sets in, following IMPLOSION

  14. Gman

    Really refreshing to see something written in plain English on here and not replete with the usual, impenetrable off-putting jargon.

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