The future of the European Union

The European crisis

The European Union, who would deny it, is presently not in a good shape. The economic condition of large parts of Southern and Western Europe is disastrous, with frightening levels of unemployment, in particular, youth unemployment, shrinking incomes, dropping outputs, and ever more rising sovereign and private debts. Contrary to the bold growth promises of the Lisbon Conference of 2007, the Euro zone as a whole is now moving between recession and stagnation, with only few countries such as Austria, Finland and Germany showing a very moderate growth. Political intervention as a factor to counteract the crisis has failed almost completely at the national as well as at the EU level. Faced with ever new sovereign debt and banking crises (Greece, Ireland, Portugal, Spain, Cyprus), the members of the EU Council have had to rush from one ‘summit’ to the next in order to achieve immediate stabilization. So far, a collapse has been prevented because the EU managed to create a joint rescue fund (first called the EFSF or European Fiscal Stability Facility, then the European Stability Mechanism or ESM) to provide financial assistance to Euro zone states in difficulty. The fund, which is supported also by the International Monetary Fund (IMF) as a third party, had been activated in favour of the above-mentioned five countries. The second, even more important stabilizing factor was the European Central Bank (ECB) with its extremely relaxed monetary policy and its practice of purchasing sovereign bonds of troubled states in the secondary market.

In so far as the European crisis management hitherto has succeeded in avoiding the worst – a catastrophic breakdown which quite well could have been the result of the repercussions of the global financial crisis – it can be called a ‘success’. However, this is already the end of the good news. At best, the present rescue policies offer the prospect of continuing stagnation, if not further decline. The ESM and the ECB are lending large capital sums to the Irish, Greek, Cypriot, Spanish, Portuguese Governments, not in order to stimulate their ailing economies, but with the sole purpose of keeping them solvent vis-à-vis their national and international creditors. Credits are issued to redeem former credits and to maintain the façade of grotesquely inflated bank balances, not a few of their national aggregates surpassing the GNP several times. The European rescue machinery is circulating largely around itself, to be more precise: around the financial industry as its real centre. Its effect on the depressed real economies is not only nil, but even negative. In order to raise the necessary amount of funds on the capital market and to secure the cooperation of the IMF, the ESM has to meet the expectations of potential investors and to invalidate their suspicion that their money is going to be poured into bottomless pits. The ESM has to conform to the established myths of financial market rationality, according to which ‘good’ debtors are those who cut ‘costs’, and strive to increase their ‘performance’ and ‘flexibility’. Seen from this viewpoint, the austerity programmes imposed on the debtor countries by the ‘Troika’ cannot simply be attributed to hegemonic ambitions of the German government, as several authors are arguing; rather, they are rooted in the dominant rationality conceptions of financial markets. However, these conceptions have proven to be ‘myths’ in a pejorative sense, since their actual impact on the economy is not positive and stimulating, but, to a large degree, depressing. National states do not function like individual corporations; what can be efficient in the case of the individual corporation may trigger a vicious spiral of decreasing expenditures and revenues in the case of the state (Blyth, 2013). Indeed, this seems to have happened in Greece, Portugal and other debtor countries, where the austerity measures imposed by the ‘Troika’ have reinforced the economic downturn, with sovereign debts not decreasing, but increasing. Thus, the economic prospects of the European integration process appear bleak. And if the economic outlook is so negative, it is safe to predict that political integration and cooperation within Europe will suffer even more.

Critical observers of the European integration process such as Fritz Scharpf and Wolfgang Streeck have argued that all this did not come about by chance. As they argued as early as the 1990s (Streeck, 1995, 1999; Scharpf, 1999), the European integration process was characterized from its outset by a built-in imbalance between economic and political integration. Without doubt, hopes for peace and cooperation in Europe after the devastating experiences of two world wars did play a key role in initiating European unification in the 1950s. In practice, however, the European institutions turned out to work as a machine to liberalize markets according to the often cited ‘four freedoms’ (markets, services, persons, capital). Progress was made mainly in the removal of barriers to trade and capital mobility and the creation of a single European market, with the decision to introduce a common currency in the Treaty of Maastricht in 1992 as a final step. The complementary political and social integration, however, which often had been demanded, notoriously lagged behind. Attempts to complement economic liberalization with common social standards and institutions almost regularly failed to find the necessary consent among the European governments. Since the legitimacy of the modern democratic state rests to a large degree on its capacity to guarantee not only individual and political, but also the social rights of citizens, the neglect of the social dimension by the European machinery contributed to weaken its doubtful democratic legitimacy even more, and at a critical point. The ‘post-democratic’ turn (Crouch, 2004) of the national states themselves was due to a large degree to the loss of national economic sovereignty resulting from the implementation of the single European market and the European Monetary Union (EMU). With the European Parliament playing only a fig leaf role, the European integration process is revealing itself as what it had been from the outset: a project of the economic and political elites. It is this elitist nature of the EU which, as the critics are arguing, manifests itself most pronouncedly in the present-day ‘consolidation’ regime.

In his recent book, Wolfgang Streeck (2013) has deepened this diagnosis by referring to an article written by the mentor of contemporary neoliberalism, Friedrich von Hayek, in 1939 (Hayek, [1939] 1948). In this article Hayek suggests the idea of a transnational market system characterized by a free flow of ‘men, goods and capital’ (Hayek, [1939] 1948: 255), and he examines the changes in political governance structures required to make such a system efficient. He proposes a system of ‘interstate federalism’ with a common foreign and economic policy, and a uniform monetary system. To curb national particularisms with their potentially disrupting effects, the union would have not only to curtail drastically the sovereignty of the national states, but also to restrict its own economic interventions to a minimum. As Hayek argues, the federation necessarily will be a liberal one, even more: ‘[It] will have to possess the negative power of preventing individual states from interfering with economic activity in certain ways, although it may not have the positive power of acting in their stead’ (p. 267). Streeck interprets Hayek’s model of interstate federalism as an intellectual anticipation of the European integration process. With its clear statement of the trade-off between economic liberalization and democratic political interventionism, Hayek’s analysis reads, as he argues, ‘like a blueprint for the European Union of today’ (Streeck, 2013: 146, trans. C.D.). In Streeck’s eyes, the loss of national monetary sovereignty due to the EMU, and the suspension of democratic rules by the present-day ‘consolidation regime’ are terminal steps in the process of establishing a ‘Hayekian’ regime across Europe.

Is this a plausible description of the prospects of European integration? Although surely there is a good point in Streeck’s reference to Hayek’s important article, I have doubts about his diagnosis. The first, obvious objection is that the timing of the argument appears bad. The ‘Hayekian’ transformation of the advanced capitalist economies did not come into full play only after the introduction of the EMU, but earlier, in the 1970s and 1980s, with the liberalization of global capital markets after the collapse of the Bretton Woods system, and it was not confined to Europe. The reforms of Margaret Thatcher, her ‘big bang’ in 1986, and the policy of ‘Reaganomics’ in the USA were inspired to a large degree by Hayek’s ideas. The liberalization and deregulation moves of the Single European Act and the Maastricht Treaty only extended the application of neoliberal recipes to the rest of Europe, in particular, by removing the remaining capital controls. So, if there exists something like a ‘Hayekian’ regime, Europe has already been experiencing it for two decades. Second, though Streeck’s political conclusions are diametrically opposed to those of Hayek, he accepts Hayek‘s conception as a valid analysis of the problems of European economic integration, and he does not enter into a substantial critique of it. The crucial question, however, is whether the Hayekian vision of a liberal transnational market order can work in practice. Can it show the way to creating a growing and innovative capitalist economy? Should this be the case, one would not have to worry too much about the democratic imperfections of Hayekian neoliberalism. A booming economy with an ample supply of jobs, and good income and consumption opportunities would almost certainly provide a broad democratic legitimacy for a neoliberal government, even if formal participation chances should be lacking. Much has been said and written already about the theoretical problems and flaws in Hayek’s conception, and I will deal with these points below. However, if it is true that the Hayekian regime is not only yet to come, but something Europe has experienced already since the 1980s, there should have been enough opportunity to test its viability empirically and practically. As we know today, the result of the test is unambiguous and dramatically negative. The Hayekian liberalization of international markets did not free the animal spirits of capitalist growth but led finally into a global financial collapse.

Thus, my point will be that, contrary to Streeck’s diagnosis, we are not faced with a ‘Hayekian’ regime yet to be fully implemented, but with the challenge of removing the debris which the breakdown of former Hayekian globalization has left – in Europe as well as in the USA and other OECD countries. How to remove the debris, taking mainly the form of zombie banks and large uncovered capital claims, is a problem of historically unprecedented dimensions, and the ways to manage it politically are anything but clear. What is clear is only that, given the unprecedented level of transnational economic interdependence in and beyond Europe, recourse to the traditional model of national democratic capitalism will hardly be helpful in meeting this challenge, but innovative political solutions at a transnational level are wanted.

The Hayekian credo and the financialization of advanced capitalist economies

Can the Hayekian vision of a market order spontaneously created by free individuals work in practice? Hayek’s mature analyses are strong, even brilliant, just where he shows why it cannot work, or, to be more precise: why any rational evaluation whether it can work or not is impossible. The Walrasian mathematical deduction of a collective ‘optimum’ from individually rational decisions is ‘irrelevant’, as Hayek states laconically, since the information which is required to implement such a model is not available anywhere and for anybody. What is really relevant for the market process is not scientific but practical knowledge which, however, is confined to individual actors, their particular contexts and subjective interests. Market coordination ‘is a problem of the utilization of knowledge not given to anyone in its totality’ (Hayek, 1945: 520). If the assumption of ‘perfect knowledge’ were true in a strict sense, there would be no need for the market participants to act at all. Equally irrelevant is the neoclassical idea of perfect competition, since it assumes away everything which renders ‘competition’ an empirically and historically meaningful concept. In the real world, there are no ‘homogenous commodities’, and no two single commodities are exactly alike. The actors are confronted with uncertainty; what customers ‘really’ want, what the ‘best’ methods of production or the ‘right’ prices are, can be discovered only in a process of permanent trial and error: ‘The solution of the economic problem of society is in this respect always a voyage of exploration into the unknown’ (Hayek, [1939] 1948: 101).

Hayek’s critique of the neoclassic equilibrium concept is brief and concise. The intellectual provocation lies in the conclusions he draws from this critique. The conclusion one would have expected is a concept of markets as a ‘black box’, a field of vast contingencies, where almost anything can happen. Price signals may induce a positive, welfare-enhancing feedback effect on individual actions, but likewise they may induce vicious circles of self-reinforcing disequilibria. Thus, any verifiable statement about the functioning of markets would be contingent upon further empirical information about the concrete forms of their social and institutional ‘embeddedness’ (to cite the well-known term of Karl Polanyi). Instead of such a black box vision, Hayek ends up with a euphemistic portrait of markets as spontaneous processes reflecting a higher level of human evolution. Since markets are able to process a level of complexity that surpasses anything individual human reason can grasp, there is no chance to assess the ‘rationality’ of price signals and their movements. Nevertheless we have to accept them, as Hayek argues, not only as a matter of fact, but with ‘humility’, because they represent a ‘higher’ order of human affairs transcending the power of individual reasoning. ‘True’ individualism, in contrast to ‘false’ rationalist individualism, qualifies itself by its ‘consciousness of the limitations of the individual mind which induces an attitude of humility toward the impersonal and anonymous processes by which individuals help to create things greater than they know’ (Hayek, [1939] 1948: 8). Hayek’s apology for markets not only brushes away management and organization as fundamental issues of economic practice and theory, but is also self-contradictory: Hayek criticizes individual reason in the name of an allegedly superior collective reason embedded in the evolutionary process. However, how should the latter be accessible without recourse to the former? What Hayek is offering is not a scientific theory but a quasi-religious belief in the superior power of markets (for a discussion and critique of Hayek, see, e.g. Kley 1992, Brodbeck 2001, Backhaus 2005, Fleischmann 2010).

Understandably, the Hayekian credo did not find much public resonance during the 1930s, and even after the war, when the memory of the devastating financial crisis of the early 1930s was still fresh. Keynes, not Hayek, became the champion of economic theory and policy. The international monetary order created at Bretton Woods with Keynes as its leading architect, was not a ‘liberal’ order in Hayek’s understanding, but an ‘embedded liberal’ one, which, just in order to secure a free international trade of goods and services, granted countries the explicit right to introduce capital controls. A free transnational mobility of capital was considered a source of speculative unrest which would undermine stable exchange rates and endanger the political autonomy of the newly emerging Keynesian welfare state (Helleiner, 1995: 318). During the 1960s, however, the Keynesian consensus prevailing in the USA dwindled away due to increasingly disappointing experiences with Keynesian state interventionism, rising inflation, growing trade deficits, and increasing difficulty in covering the high US military expenses. The regulations of the capital market were progressively undermined by the booming Eurodollar market in London. In 1972, the Nixon administration had to suspend the gold convertibility of the dollar. Subsequent moves to maintain capital controls and fixed exchange rates failed; finally the governments agreed in 1973 to let exchange rates float (for a historical recapitulation, see Strange 1986, Helleiner 1995).

The collapse of the Bretton Woods system created an environment where Hayek and his ideas found new public attention, not only in the USA, but also in Britain, where the Institute of Economic Affairs, a conservative think-tank founded under the guidance of Hayek in the 1950s, became influential. Hayek, who denounced capital controls as a violation of individual freedom and an impediment to an efficient allocation of capital, became one of the gurus (besides Milton Friedman) of the neoliberal turn in public opinion and international policy. ¹ A growing community of influential believers gathered around his utopia of free markets. The rising free market mood poured water on the mills of politicians seeking to downsize state intervention and to liberalize markets. The US and British governments took the initiative in deregulating their national markets and encouraging offshore financial centres as early as the 1970s, thereby strengthening the international lead of their financial industries, and forcing other countries to follow in order to get access to international capital (Fichtner, 2014). When the Mitterand government in France tried to fight the recession in 1981–83, it ‘found itself constrained by speculative activity against the franc in international financial markets’ (Helleiner, 1995: 326). Like the Labour Government in Britain six years before, it had to learn that the traditional instruments of fiscal expansion and capital controls were no longer effective (or only at a unacceptable cost) in counteracting the recession and the downward move of the national currency. Finance Minister Jacques Delors persuaded President Mitterrand that France had no choice but to liberalize markets and submit to the monetary and fiscal discipline imposed by the forces of the globalized capital market. The same Jacques Delors, in his later capacity as European Commission President, became the protagonist of the single European market and the abolition of capital controls in the EU. A broad coalition of national governments, financial service industries and business associations was formed to promote financial market integration and capital market liberalization in Europe, with the directives of capital liberalization (1986–1988), the Second Banking Directive (1993), the Investment Services Directive and the Capital Adequacy Directive (1996) as signposts (Bieling, 2013: 287).

Thus, the realization of Hayek’s vision of a transnational free market order had progressed already to a considerable degree during the 1980s, and it was pushed further by the fall of the Iron Curtain after 1990, when neoliberal recipes were applied to the reorganization of the former socialist countries. The introduction of the EMU, which was agreed upon in the Treaty of Maastricht in 1992, meant a further step in the transnational integration of product and capital markets. Nevertheless it had not been part of the original neoliberal agenda. Rather, mainstream economists had mostly advocated a system of competing national currencies which would exert a healthy disciplining pressure on national monetary and fiscal policies. Hayek himself, who dealt with the EMU project in his late years, went even further. He not only criticized the European currency as a ‘utopian’ project which would consolidate state monopoly over money even more – in his view, the core evil of economic misgovernment. Instead, he pleaded for a complete denationalization and privatization of the supply of money (Hayek, 1990: 23). The EMU project, which met heavy resistance from the Anglo-American banks and hedge funds too, was – as is well known – motivated largely by the political concerns of the French and other EU governments to counter a possibly even stronger hegemony of Germany over Europe after reunification. The institutional framework of the euro would – they hoped – help to counteract the dominance of the Bundesbank over European monetary policy, whereas the German government insisted that the envisaged European Central Bank should work just like the Bundesbank – a conflict that could be kept virulent for some time, but surfaced again in the present crisis.

How can the outcome of the regime of liberalized transnational capital markets which has continued now for around forty years, be summarized? There had been no lack of warnings that the abolition of capital market controls would transform capital markets into a global ‘casino’ afflicted by uncontrollable turbulence (Strange, 1986), and that the strengthening of the position of capital owners would lead to excessive social inequalities and a dismantling of the welfare state (Eichengreen, 1996). Viewed from today, most of these warnings have proved to be correct. There is now much consensus among researchers that the liberalization and deregulation of global capital markets indeed did unfetter forces of growth – growth, however, not of the real economy, as the neoliberals had promised, but of the financial sector. The abolition of capital market controls triggered a long-term process of ‘financialization’ of mature capitalist economies which finally led to the collapse in 2008 (Krippner, 2005; Epstein, 2005; Froud et al., 2006; Palley, 2007; Orhangazi, 2008; Reinhard and Rogoff, 2009; Lounsbury and Hirsch, 2010). Over more than three decades, private financial assets, and, as their counterpart, public and private debts, grew at a pace three times higher than nominal GDPs, and not only in the USA. According to the figures of the McKinsey Global Institute, global financial assets (stocks, bonds, securities, loans) grew from US$12 trillion in 1980 to US$212 trillion in 2010. At the same time, the ‘financial depth’ (the ratio of financial assets to global GDP) rose from 1.2 in 1980 to 3.6 in 2010 (Bieling, 2013: 287). The growth of assets and debts ran parallel with a structural shift of the mature economies in favour of the FIRE (financial services, insurance, real estate) sectors, which surpassed the conventional manufacturing and service sectors as a source of value creation and profit. The hypertrophy of the US financial industry had been the focus of warnings and concerns even before the financial crisis (e.g. Phillips, 2006); however, in the EU-27 too, the FIRE sector contributed to no less than 28.8% of GDP in 2010, topping industry (18.5%) and every other sub-branch in the service sector. Even in Germany with its strong industrial sector, the FIRE share of GDP amounted to 30.4%, again topping industry (23.4%) significantly (Eurostat, 2011). Financialization was a process that not only promoted far-reaching changes of macro-economic structures, but also had profound effects on other levels and spheres of society, such as corporate governance, labour markets, fiscal and tax policies, consumer behaviour and household finances (Deutschmann, 2011). There is no need here to recapitulate these changes again in detail. I will confine myself to two effects resulting from the liberalization and deregulation of capital markets and that contributed to exorbitant financial growth: first, income redistribution, and, second, speculative bubbles due to financial ‘innovations’.

First, the removal of national capital controls meant that capital now could move freely across borders, and investors were faced with an el dorado of global investment opportunities. As a consequence of the new mobility of capital, national states increasingly found themselves in the position having to compete for the favour of financial investors, thereby increasingly copying the behaviour of private corporations (Davis, 2009). To attract investors, many governments cut corporate taxes and tax rates on high incomes. In the 20 key OECD countries, the average corporate tax rate fell from 44% in 1985 to 29% in 2009; in the East European transformation economies, the reductions after 1990 were even more marked (Genschel and Schwarz, 2011: 356). Moreover, the globalization of capital markets opened vast opportunities to evade taxation altogether. To discover and exploit these opportunities, an entire industry of accounting firms and consultancies emerged, offering their services to corporations and wealthy individuals. While tax revenues went down, central banks rushed to fight inflation by pushing interest rates up; from the early 1980s to the early 2000s, real interest rates in the G7-countries were kept constantly at a level above growth rates (Deutscher Bundestag, 2002). The erosion of tax revenues forced governments to cut social expenditures and public investments and to downsize public sector personnel. Moreover, public property and public corporations in sectors like energy, transport, health, education were privatized on a large scale, thus obeying the pressure of investors to open new outlets for their idle capital. Nevertheless the trend towards rising sovereign debts could not be stopped; again the investors profited in the form of increased flows of interest payments.

Due to the depressing impact of public austerity policies and high interest rates, unemployment rose in many countries from the 1980s. Exceptions were the USA and the UK, where financial expansion temporarily fed a credit-financed consumption boom, bringing down unemployment to relatively low levels. However, this policy of ‘privatized Keynesianism’ (Crouch, 2009) could not be sustained, as became evident in the financial crisis. The general outcome of public austerity and tight monetary policies was the deterioration of the distributional position of labour vis-à-vis capital which revealed itself in the declining trend of wages-to-GDP ratios in all G7 countries between the 1980s and 2011 (SVR, 2012: 322). Due to the declining market power of employees and unions, the real wages of the majority of employees stagnated or declined, apart from the salaries of only small groups of technical and professional specialists. Income inequality increased, precarious and low wage employment rose in the USA as well as in Europe. ‘Financialization’ of corporate governance structures led to a marked redistribution of incomes and corporate profits in favour of asset owners (Duménil and Lévy, 2005; Epstein and Jadayev, 2005). It was not real economic growth that fed the expansion of financial wealth; to the contrary, real growth rates of mature industrial economies showed a clear declining trend from the mid-1980s to 2011 (Streeck, 2013: 231). Thus, there can be no doubt that the growth of financial assets did not reflect a booming industrial economy but developed as a kind of compensation for lacking real growth. To a large degree it was due to a zero-sum redistribution game at cost of the non-financial sectors of the economy and, in particular, labour.

Second, however, such tremendous growth in financial assets, as shown by the above-cited McKinsey figures, cannot be explained solely by income redistribution. Here a second factor comes into play: Speculative inflation of assets due to dubious financial ‘innovations’ which could grow in the regulation-free space emerging after 1973. As mentioned above, the national governments, with the USA and the UK taking a leading role and the EU governments joining, actively promoted the erosion of the regulatory framework of financial markets. Bank laws were liberalized, legal constraints against shadow banking were removed, ‘firewalls’ between credit and investment banking were demolished, transparency prescriptions were watered down, offshore centres were instituted, hedge funds were allowed to develop. For the financial industry, this meant the chance to overcome the constraints of its traditional credit and saving business, and to engage on a large scale in new and promising fields, such as global investment banking and the marketing of financial ‘innovations’. New vehicles of financial speculation such as derivates, options, futures, credit default swaps (CDS), collateralized debt obligations (CDOs), asset-backed securities (ABS) mushroomed, in parallel with a continuous expansion of financial leverage. Moreover, not only mortgage credits, but also state bonds were securitized and sold on the open market, following the ‘greater fool theory’ (Lanchester, 2012), thus giving room to issue new credits, etc. This happened not only in the USA but also in Europe, as in the cases of Greek bonds or Spanish and Irish mortgage credits. The result was a tremendous increase of turnover on the financial markets. Being freed from tiresome controls, the financial industry became self-referential, its transactions becoming more and more independent from its functions for the real economy (Mayntz, 2012). The old truism that financial assets are always debts which ultimately have to be repaid by work in the real world dropped out of view. The tremendous bank profits did not flow into real investments but again into bank and financial products; the above-mentioned coexistence of sluggish real and booming financial growth explains itself largely from here. In short, Hayekian liberalization of transnational financial markets resulted in pumping up a veritable ‘super-bubble’ which ultimately burst. Contrary to Hayek’s euphemistic prophecies, the liberalization of markets did not help to bring about a higher level of human evolution but led it into disaster. It is not Hayek’s theory but the black box theory of markets that has been confirmed by the global financial crisis.

How to remove the debris of the Hayekian regime?

Actually, however, the superbubble did not really burst then. For a brief moment, it looked so when the US Government hesitated to intervene after the breakdown of Lehmann Brothers. Faced with the prospect of a catastrophic downturn, however, the government quickly changed its mind and rushed to support insolvent banks and insurance firms by gigantic rescue parcels, thus pushing up sovereign debt to unprecedented heights. The same happened in Europe:

After the rescue of individual banks proved to be insufficient, governments set up more comprehensive funds to recapitalize – in some cases, even nationalize – troubled banks via the acquisition of shares, asset relief purchases and the provision of loans. Besides these immediate support measures, governments provided public guarantees in order to smooth the markets. (Bieling, 2013: 289)

Between October 2008 and October 2012, the European Commission approved aid from the member states to the financial sector for an overall amount of 5.058 billion Euros (40.3% of EU GDP), 3.646 billion of which were guarantees, 777 billion recapitalization measures, 446 billion asset relief interventions, and 216 billion liquidity measures (EU, 2012: 31). In other words, the crisis actually is not yet over but has been settled only temporarily by transforming private into sovereign debts. As a result of the explosion of sovereign debts, the financial markets became suspicious about the solvency of the very agency that saved them from collapse, the national states. The financial industry and its clients have managed to take the states hostage to escape their own problems, thus forcing the EU governments to create new joint funds (the EFSF, the ESM) to rescue the troubled states themselves. Ultimately the ECB had to intervene by purchasing state bonds and providing liquidity to banks at almost zero costs, as happened before in the USA and the UK. Despite all these efforts, the problems of the European financial industry are far from being settled. Since bank portfolios contain large quantities of now dubious state bonds, state and bank troubles tend to reinforce each other. The next act of the drama is yet to come in the course of the implementation of the European banking union which will require a thorough investigation of the balances of 130 big banks. It is an open secret that many of these balances still contain large volumes of ailing credits, overvalued and uncovered assets; according to estimates of analysts of the Royal Bank of Scotland, the total of claims to be written off may amount up to 3.2 trillion Euro (Der Spiegel, 36/2013).

The collapse of the Hayekian regime has left behind a huge amount of pending, uncovered private and public debt that lies at the heart of the Euro crisis (not much different from the situation in the UK, the USA and Japan). Without removing these remains and writing off a considerable amount of the debt, there will be no chance of bringing the European economies back onto a sound footing. The excessive level of sovereign debts in the Euro zone after 2008, which had triggered the Euro crisis, is due in most cases – which the exceptions only of Greece and partly Italy – to costly state interventions to rescue troubled banks and to counteract the recession following the global financial crisis. Moreover, it is the result of a decade-long tax race to the bottom between the OECD countries, and of the liberal attitude that most governments have practised for long time towards tax evasion by transnational corporations and wealthy individuals. All this evidence notwithstanding, not a few contributors to the debate about the Euro crisis – in particular in Germany – appear to have decided to seek the main causes of the crisis elsewhere and to enact ever the same rituals of mainstream economic crisis modelling. Some unswervingly repeat the mainstream economic story about the necessary ‘failure’ of democracies to keep public finances in order, thereby mixing up causes and effects of the crisis. Others, among them Streeck (Streeck, 2013), point to the inconsistencies in the institutional construction of the EMU, reviving the old arguments brought before against the introduction of the Euro by many economists as long ago as in the 1990s. According to these voices, the introduction of the EMU has deprived the economically weaker countries in the Euro zone of the option of devaluing their currencies, thus removing a vital ‘safety valve’ to restore their competitiveness.

While the problem of differing levels of national, and, of course, also regional and local, competitiveness in a single market with a common currency cannot be denied, it is doubtful whether these problems play an important role in explaining the present crisis, whose main cause obviously was not increasing intra-European trade balance disequilibria. It is even more doubtful whether the possible restoration of national currencies today would help the troubled countries to overcome their difficulties. In a highly integrated economy like the European single market, where not only trade relations but also logistic chains at firm level run largely across national borders, exported products often contain large proportions of imported value creation; for example, 20% of the value of German exports in 2008 came from imported products or components (Aichele et al., 2013). Trade deficits and surpluses, hence also possible gains and losses resulting from exchange rate changes, are therefore difficult to calculate. While devaluing economies may enjoy some advantages from lower export prices, they would also have to pay more for imports, which can mean a source of strong inflationary pressures, especially for small countries unable to replace vital import goods such as energy or technology. Moreover, devaluing countries would have to raise interest rates (or even to introduce capital controls) in order to prevent the outflow of capital to be expected. The contractive impact of these measures would counteract the possible gains on export markets even more. Last, but not least, it would be illusionary to expect that national governments and central banks would be free to decide on exchange rate changes ‘autonomously’ according to their political choices. Rather, a re-nationalization of currencies would mean an invitation to hedge funds to play ping-pong with the European currencies again. Changes of exchange rates would not reflect primarily shifts in real competitiveness but speculative movements in highly volatile capital markets.

In short, the economic costs of the dissolution of the EMU would be incalculable, even disregarding the disastrous political signal connected with it. A re-nationalization of currencies in Europe (or, what would amount to largely the same thing, splitting up the EMU bloc into two or more blocs) would make nothing better, but probably much worse. Above all, it would not provide any solution to the above-discussed key problem: how to write off the huge pile of ailing debts/assets? A cooperative solution to this problem, however, appears much more likely if it takes place within the framework of the Euro and the European institutions instead outside of it. Basically, there are three possible options to solve the problem.

The least cooperative option would be a market solution which would mean a new crash. Nobody – except neoclassical market purists in the comfortable position of not bearing responsibility for the practical consequences of their policy recommendations – wants such a solution, but it could quite well be the unintended outcome of the disruption of the Euro group, which not a few Euro critics are toying with in thinking without advocating it openly. The second, somewhat more cooperative, option is the one which the ECB is already pursuing with its policy of financial ‘repression’. By keeping real interest rates below zero, purchasing state bonds in the secondary market, and filling the banking system with liquidity, the ECB may bring about a gradual watering-down of the real value of assets to more realistic levels, thus bringing relief to over-burdened private and public debtors. Such a policy may recommend itself because it is easy to implement and leaves the asset owners little chance to resist it. However, it needs much, perhaps too much, time to become effective, and it amounts to an invitation to the financial industry to reconsolidate its political influence and to continue its casino games as usual; indeed this is what seems to be happening (Bieling, 2013). While there is little chance of overcoming the economic stagnation by such a policy, likely repercussions are a build-up of new financial bubbles, inflationary risks and an even more uneven distribution of wealth at the cost of the middle classes and in favour of the super-rich and professional investors. The third option, requiring the highest level of cooperative effort, would be a politically negotiated reduction of assets and debts, which again could take different forms. First, a financial market transaction tax, higher taxes on corporations and high incomes, or a once-off tax on capital assets (as is being considered even in the IMF, see Frankfurter Allgemeine Zeitung, 5 Nov. 2013) which could help to fill the deficits in public finances due to the bank rescue measures. A second possibility is the institutionalization of a regular procedure to secure the participation of shareholders and depositors in covering bank losses, as is envisaged in the current negotiations on the European bank union.

Clearly, solutions of this type would be the most fair and efficient ones, and they would have few negative side effects. However, they are most difficult to implement, as they require a high intensity of transnational cooperation between the governments and are likely to meet heavy resistance from the side of the banks and the financial lobby – and not only from them but also from their clients, i.e. larger numbers of upper- and middle-class asset owners. A democratic political settlement of the debt crisis would force governments into a confrontation with extremely powerful pressure groups which they want to avoid if at all possible. Nevertheless, some steps in such a direction have already been made, such as the inclusion of shareholders and depositors in the settlement of the Cyprus crisis, in the decision of 11 European countries to introduce a financial market transaction tax, in the preparations for the banking union, or in the progress recently made in international coordination efforts to fight tax evasion. However, to proceed here, not only intact European institutions are required, but also much more democratic pressure from below. Such pressure is active already in the countries hit badly by the crisis, but needs to be coordinated transnationally to become more effective. There is a broad popular consensus across Europe that the costs of the financial crisis should be borne by those who gave rise to it and who profited from the expansion of the financial sector. It should be a key responsibility of the European Parliament to articulate this consensus.

Conclusion

The collapse of the Hayekian regime ruling the advanced capitalist economies for a period of more than thirty years confirms the classic Polanyian view that markets need to be socially and institutionally ‘embedded’ in order to fulfil their positive economic and social functions. The removal of the existing controls and regulations of the global capital markets which the governments promoted after 1973, under the joint influence of the financial lobby and the Hayekian utopia, finally turned out to lead into disaster. Following Polanyi’s well known ‘double-movement’ theory (Polanyi, 1978: 182f.), one would conclude that the time now should be ripe for counter-movements to emerge, aiming to protect society against the self-destructive dynamics of free competition and to re-embed markets in a collective institutional framework. However, such counter-movements are hardly in sight yet, neither in Europe nor elsewhere, and international efforts to re-regulate the financial markets have proved to be weak and inefficient so far (Mayntz, 2012). The reasons are fairly clear. For Polanyi, as well as for most economic sociologists of today, it is evident that the key agency to embed markets could only be – besides local communities and associations – the national state. It is, however, just the democratic national state whose position today has become more precarious than ever vis-à-vis a transnationally integrated capitalist economy. Transnationally mobile economic actors have little difficulty avoiding and hollowing out legal norms and tax regulations whose reach is confined to the territorial rule of national states. Due to their dependence on credit, national governments are under heavy pressure to serve the interests of their financial industry. It is the gap between the transnational level of economic integration and the nationally bounded character of political democracy which lies at the heart of the present crisis. To overcome this gap, basically there are only two options: either one could try to make the economy again congruent with the political system by re-nationalizing it – an option which today is being put forward seriously only by forces of the extreme right. If this option is ruled out, the only way to overcome the present-day dominance of unfettered markets over politics and society is to make democratic politics congruent with the economy and to reorganize it at a transnational level. This would not require the construction of a transnational ‘super-state’, but rather the development of new, intelligent combinations of micro-, meso- and macro-regulation (Habermas, 2011). New political movements like Attac and Occupy have long been pursuing such a strategy, fighting not against the EU but for a ‘better’ Europe. At present, this may appear utopian, and indeed it comes down to a journey into largely unknown lands. However, despite all the flaws and deficits of the European Union, where else should the preconditions to start such a journey be better found than here?