MacroPolis

By now books about the financial crisis of 2008/09 and the sovereign debt crisis in the euro area since 2010 could fill entire libraries across the globe. The crisis narrative continues to carry such resonance in publishing houses, ranging from eye witness accounts, academic analysis, textbook guidance and even finding its way into novels. Meanwhile, journalists are starting to encounter fatigue from their editors when wanting to table a further story about the crisis in Greece or recent developments in Portugal.

But from time to time a publication that turns out to be a page-turner sees the light of day. The attempt to place the crisis narratives in a larger conceptual framework and analyse commonalities in the ideological origins and present-day consequences for a country’s economic development, social fabric and democratic politics is in high demand but low supply. Confronting this deficit is all the more reason to consider the publication by Wolfgang Streeck timely and appropriate.

The Cologne-based German sociologist Streeck has written a thought-provoking book in the best tradition of comparative political economy. He combines a wealth of historical trends in post World War II capitalist countries - chiefly Western Europe - with political science theories of democratic participation. Streeck’s key focus rests on analysing how since 2008/09 euro area governments sought to address a banking sector crisis, and since 2010 a sovereign debt crisis whose respective solutions quickly created massive knock-on problems.

Within this analytical framework, Streeck’s contribution to theories of crisis management in Europe opens a completely different perspective on its origins, narrative and the attempts at finding sustainable resolution mechanisms that require - but mostly lack - the essential element of democratic legitimacy. Streeck argues that national governments in the euro area, financial diplomats from the troika, the ECB in Frankfurt and the Commission in Brussels are jointly engaged in ‘buying time’, as the title of his book suggests.

This purchase is made necessary by the fact that previous crisis resolution instruments are not available anymore. The traditional toolbox containing inflation, increasing sovereign debt levels or making cheap credit available to private households and corporates has exhausted itself. At different junctures of post-World War II development these policy instruments served as short-term fixes – or capital injections – to support redistributional objectives. The original twist in Streeck’s line of argument is that such objectives and the means to achieve them chiefly served to benefit those market actors who needed them the least.

This form of ‘debt capitalism’ came crashing down on the back of the financial crisis originating in the USA in 2007/08. Ever since, according to Streeck, governments inside and outside the eurozone are scrambling to implement varieties of fiscal austerity, seeking to regain the ‘trust’ of capital markets, and making those who can least afford it pay for the rest of their lives. The new characteristic of governments today, chiefly but not exclusively in the euro area, is the establishment of a fiscal consolidation state that by-passes the parliamentary process and relegates public debate about policy alternatives to arguments about Cassandras.

Streeck repeatedly uses empirical examples from Greece, Portugal, Ireland, Spain and Italy to illuminate his line of argument. He is scathing in his criticism of the troika and the policy measures they obliged governments in these countries to implement in return for financial assistance, much of which served to pay back sovereign bondholders across the globe. The financial diplomats flying into Athens, Lisbon, Dublin, Madrid and Nicosia since 2010 for quarterly missions to evaluate the memorandums’ implementation fundamentally lack transparency of the decision-making process and democratic accountability. As Streeck argues, the working hypotheses of the international representatives in the troika are based more on political exigency than on macro-economic objectives.

Members of the troika themselves, notably the IMF in mid-2013, have underlined that their recommendations for the first economic adjustment programme for Greece from May 2010 were based on forecasts that turned out to be far too optimistic. This form of mea culpa by the Washington-based organisation does beg the question of whether the memorandum was in fact grounded on macro-economic projections for Greece that resembled more a hastily arranged work of fiction than a concise economic adjustment programme.

When focusing on Greece Streeck’s ire is not only reserved to the troika’s activities and misjudgements. He has a keen eye for the domestic origins of the fiscal crisis in Athens. Streeck emphasises that this crisis is primarily the result of a state that is forced to turn to sovereign indebtedness as a mechanism to replace taxes, which the authorities fail to collect from its better off citizens. Streeck highlights the extensive capital flight beginning in 2009 and the privileged tax status that shipowners, farmers, various liberal professions and the Orthodox Church continue to enjoy in Greece.

For Streeck, a state apparatus that has to transform itself from relying on sovereign indebtedness towards becoming an agent of fiscal consolidation will encounter numerous obstacles along the way. The most important concerns the nexus between democracy and accountability. The legitimacy of fiscal austerity policies, particularly when insisted on over multiple years by international creditors is increasingly being called into question by governments subjected to such measures. Members of the parliamentary opposition and a rising number of citizens across the euro area are seeking to make their voices heard in a cacophony of unorganized and increasingly desperate protest.

This legitimacy crisis now also extends to the troika itself. In November 2013 MPs from the European Parliament’s Economic Affairs Committee launched an inquiry into the troika’s activities and policies for the so-called Programme Countries during the past three years. After visits to the different countries with memorandum arrangements the two rapporteurs from France and Austria are expected to present their final report in March, just ahead of the elections for the new European Parliament in May. One still wonders why this is only happening now, so late in the day? The evidence was there for all to see from 2011.

What remains in the euro area crisis management toolbox today? Fighting private sector and sovereign indebtedness through inflation is rather out of the question. The eurozone currently faces the very real risk of moving from disinflation to outright deflation.

In Streeck’s opinion, the only financial tool left is virtual, namely central banks’ different versions of dropping helicopter money. This is otherwise known as Quantitative Easing I, II, III by the Federal Reserve in the USA and various liquidity facilities (e.g. abbreviated OMT and LTRO, respectively) provided by the European Central Bank (ECB) to financial institutions in the euro area since 2010.

But these different versions of helicopter money are highly discretionary and they discriminate in terms of their target audience on the ground. Its exclusive recipients are financial institutions. A trickle-down effect has yet to be registered beyond banks. None of this liquidity is reaching Greek, Portuguese or Spanish citizens in terms of higher disposable income. Nor are SMEs, who need working capital in Europe’s periphery, able to receive timely credit from their domestic banks. The segmentation of credit markets in the euro area and the disruption of the credit transmission mechanism are not being repaired through such liquidity provisions from above.

This modus operandi changes the mandate and legitimacy of central banks in the USA, the euro area, the UK and in Japan. In practice they have not only turned into lenders and buyers of last resort. In Streeck’s view the ECB is in fact morphing into a quasi-government of last resort. One only needs to recall the “whatever it takes” statement of the ECB’s president, Mario Draghi from July 2012 in London.

But the flight crew sitting in the ECB tower in Frankfurt fundamentally lacks the key ingredient of democratic legitimacy for their costly and risk-prone interventions. While these operations allows decision makers to again buy some time, Streeck does not consider this arrangement to be more than a short-term form of financial doping. And the cost for the ECB’s reputation is considerable as evidenced by various resignations of German members from its governing council during the past three years and the challenges it faces from the Federal Constitutional Court in Germany.

Therefore, it does not come as a surprise that Streeck’s book has unleashed a fierce debate, predominantly so far in Germany. His domestic critics, including the philosopher Jürgen Habermas, the former SPD Chancellor Helmut Schmidt and Joschka Fischer from the Greens, have either accused him of nostalgia for national currencies, being naïve about the merits of currency devaluations or lacking a workable alternative scenario outside the cornerstones of EU integration and euro area membership.

The polemical reactions of many of his critics only serve to confirm that Streeck appears to have hit a raw nerve among many in Germany. He emphatically rejects the national consensus demanded by the political and economic establishment in Germany and its prominent academics, who equate Europe with the EU and consider the single currency as a fait accompli of TINA politics, i.e. ‘There Is No Alternative’.

Indeed, the policy alternatives that Streeck offers are controversial. That is their purpose and they merit a thoughtful debate. He wants the euro to become an anchor currency parallel to the reintroduction of national denominations. Streeck is in favour of giving back to national governments the option to devalue their currency and thus creating leverage for discretionary policy intervention. A return to an orderly and flexible currency exchange system is equally part of his recommendations as are capital controls to stem recurring capital flight and tax dodging in the euro area.

But his underlying argument about policy alternatives is that contemporary capitalist societies in Europe urgently need an infusion of democratic oxygen, citizens’ involvement and a public willing to articulate different options. How this can be voiced is anybody’s guess, not least Streeck’s. Given that numerous democratic institutions have been reduced to mere bystanders in the course of the past crisis management years, Streeck formulates a rather pessimistic, but entirely reasonable alternative.

He pointedly asks why should only markets be allowed to panic and follow herd instincts? What happens when civil society threatens to do the same? Streeck argues that democratic mobilization and civic engagement should be the orders of the day. The protests may be desperate, loud, display a makeshift air and be highly disorganized but they are absolutely necessary. The ‘’αγανακτισμένοι’’ in Greece or the “indignados” in Spain are examples of a growing constituency across Europe who feel they are being treated with contempt and that their dignity has been hurt.

One can only hope that this provocative book will be widely read when it is published in English in May and possibly even find a Greek publishing house. Streeck’s line of argument about the fundamental redefinition of the relationship between capitalism and democracy across Europe deserves to be better known and read by a larger audience in Athens, Lisbon, Madrid, Nicosia and Dublin.

*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian