Some people may blame capitalism for the financial crisis, but the blame lies elsewhere.
“Capitalism in crisis” was the vogue term being bandied about at the World Economic Forum in Davos last week. To which the best response is a question: “What crisis?” A crisis of confidence perhaps. But not one that is life-threatening.
True, at least twice in the past five years the travails of the transatlantic financial system have brought the economies of the United States and Europe to the brink of collapse. But the cause was not a failure of capitalism per se. Versions of capitalism, in Asia for example, have weathered the storms quite successfully. What the Western world faced (and still faces) was an economic disaster caused primarily by politicians, policymakers and political economists, assisted by the opportunism of financiers, fuelled by greed and ambition.
Adopting a simplistic strategy for monetary policy of “inflation targeting” and professing an almost religious faith in the self-regulatory powers of markets, the policymakers ignored the lessons of even recent history, and thumbed their noses at the well-known threat that credit bubbles pose to economic stability.
Nevertheless, there is not much evidence of capitalism itself coming under serious attack. Compare, for instance, the ideological drive behind the socialist policies that François Mitterand brought to the presidency of France in 1982 with the programme outlined last week by François Hollande, the presidential candidate of the French Socialists. It would appear that the left is bereft of a truly anti-capitalist ideology.
That does not mean there will not be protest against capitalism’s inequalities. The self-indulgence of a corporate kleptocracy, widening disparities of wealth, income and reward, rising unemployment, especially among the young, all pose a growing threat to social cohesion.
Yet what is up for debate now is not capitalism per se, but the role of the state. How far should it go in reining in a dysfunctional, Anglo-Saxon version of capitalism that is driven by the financial-services sector? What should be the role of the state in encouraging economic reform and in reviving Europe’s long-term growth? For if politicians and economic policymakers fail to secure more stable and equitable growth, Europe’s costly version of welfare-state capitalism will be in danger.
As Zsolt Darvas and Jean Pisani-Ferry of Bruegel, a Brussels-based economic think-tank, wrote last year: “Without growth, the sustainability of the (already precarious) European social model would be further brought into question.”
Last week, the World Bank intervened in the debate about Europe’s longer-term prospects. First, Robert Zoellick, the president of the World Bank, waded in with a now all-too-predictable attack on Germany. “What will happen to [Italian] Prime Minister Mario Monti’s political support if Italy does not see results?” he asked. “And what are the costs of eurozone breakdown if seemingly precipitated by German ‘austerity’ policies?”
Those remarks coincided with a World Bank report on Europe, which looked at the longer-term economic challenges for Europe in trying to defend its social and economic model. “Europe spends more on social protection than the rest of the world combined,” the report points out – more than twice that of the US. But demographic trends suggest its labour force will shrink by one million a year over the next 50 years, meaning that it will be “impossible to balance public accounts if people work fewer years over their lives” – as they have been doing, and as Hollande is calling for.
European economic policy has, inevitably, been directed mainly at short-term crisis management in the past three years. It has been dominated by, on the one hand, the need to respond to financial-market pressures to curb government spending – so-called fiscal austerity – and on the other by having to save the European banking system from collapse.
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Too much of a burden has, as a result, been put on the European Central Bank (ECB). The ECB has done what it can – more than would have been required if the economic governance structure of the eurozone had not proved so dysfunctional. Indeed, the ECB’s pre-Christmas ‘lifeboat’ for Europe’s banks through its three-year loan programme, totalling €489 billion, could well have headed-off a global catastrophe.
But now, with long-term stagnation threatening, what is needed are targeted and conditional initiatives, not more EU-wide monetary bail-outs.
Fortunately, for the eurozone as a whole, government debt ratios aggregate around 90%, while deficits are running nearer 4%. For the US, the comparable figures are 130% and 9%. This means that Europe as a whole still has fiscal room for manoeuvre. The question is: can it exploit those figures in ways that will underpin rather than undermine long-term economic reforms?
Benedicta Marzinotto, also of Bruegel, has highlighted one fiscal-easing opportunity. There is undisbursed money in the EU’s structural and cohesion funds amounting to around 9.3% of gross domestic product for Portugal, almost 7% for Greece and 15% for eastern European countries, she says. She suggests that these funds could be part of a ‘European Fund for Economic Revival’ to promote growth in crisis-hit countries,.
According to Zoellick, there is more. “The European Commission, backed by the European Investment Bank, should deploy under-utilised funds to match investments to countries [undertaking] structural [economic] reforms,” he said, adding: “European businesses could then support this through private investment.”
He also argued that Germany could propose a Eurobond to fund some share of a eurozone country’s past debts.
One should not be too sceptical. If a comprehensive, stability-focused eurozone economic-governance pact is achieved, then Germany should recognise that conditional and targeted fiscal easing, especially support for structural economic reforms and vital infrastructure, must be part of the long-term growth strategy that the eurozone now badly needs.
Much more is required, including addressing the politically fraught issue of increasing immigration into Europe and increasing labour mobility. The World Bank points out that demographically challenged Europe suffers from the lowest level of labour mobility in the developed world.
More immediately, however, with the ECB’s room for manoeuvre almost exhausted, more targeted fiscal transfers are required now to counteract the continuing squeeze on government spending and the downward pressures on demand and investment from efforts to relieve the unsustainable burden of past debts.
Stewart Fleming is a freelance journalist basedin London.