Finance and capitalism in EuropeIssue: 126
Posted: 26 April 10
John Grahl (ed), Global Finance and Social Europe (Edward Elgar, 2009), £79.95
Over the last 30 years European economies and their financial systems have undergone profound structural changes. Capital markets (bonds and equity) have become the main source of borrowing for firms. Barriers to capital mobility have been lifted, and a wave of directives from the European Commission have promoted the integration of financial markets and the privatisation of health and pension provisions.
The process was made possible by the decision taken in 1986 (with the signing of the Single Market Act) to complete the internal market, including removing barriers to the free movement of capital. It was later accelerated with the introduction of the euro which facilitated cross-border transactions. The whole process has been accompanied by a significant increase in the degree of centralisation and concentration of financial firms after significant waves of mergers and acquisitions. The enlargement to the east in 2004 resulted in the most extended development of these trends, and in some cases (Estonia, Slovakia and Lithuania) almost the entire banking system is owned by foreign, mostly Western European, banks.
This book provides a clear and accessible overview of these changes. The stronger parts are the first six or seven chapters which describe the changes that have taken place, take a critical look at the official and mainstream case for financial integration and place these developments in the broader framework of the “Lisbon strategy”, which essentially spells out a strategy for enabling European capitalism to “catch up” with its American counterpart.
The most important insight here is that the changes in European financial systems are the result of competitive pressures from the US financial markets. These markets are the most important in the world because they are the deepest and most liquid ones (meaning that a larger volume of financial instruments is traded in the US than anywhere else and that these instruments can be easily exchanged for their market value). So, for example, the less deep and less liquid European financial markets suffer disproportionately from price swings in US markets. If prices fall in Chicago or New York, then investors will be tempted to sell their assets in Europe to buy up these cheaper assets in the US. But less liquid markets in Europe mean that prices in Europe will consequently fall more than prices in the US will rise. The overall result is that US financial markets are more attractive for financial investors than European ones. This is one of the reasons which allow the US to attract huge capital flows from across the world and finance its ever larger trade deficits.
The book also depicts very well how these competitive pressures are the result of the spectacular development of the international financial system since the mid-1970s, something which many Marxist and radical economists call financialisation. The predominance of American financial institutions and of the dollar means that this process has developed around the US and American interests. It was American banks that first migrated to London in the 1960s to avoid federal regulation back home and which recycled into the world financial system vast amounts of dollars held outside the US, also known as Eurodollars. And most of the innovations in the financial domain such as derivatives first happened in the US.
The importance of this is that American financial firms have profited much more than anyone else from the vast development of the financial services industry. The Europeans have been trying since the 1980s to “catch up”. There was the “Big Bang” in Britain in 1986 and a similar one, although of smaller significance, in France at around the same time. Both aimed to restore the competitiveness of their respective financial service industries and to capture as big a share as possible of the rapidly growing volume of business in the sector.
The book tends to analyse the process of financialisation as being solely the result of the demise of the Bretton Woods system of fixed exchange rates. Certainly the subsequent system of floating rates increased volatility in foreign exchange markets and created a more unstable environment for firms with international operations. This explains the development of derivatives markets, especially of swaps and futures.
But financialisation has also been the result of a crisis of profitability in the manufacturing sector. The decline in the rate of profit from the late 1960s has reduced the scope for profitable investments in the “real economy” and has pushed capitalists to invest much more in financial instruments. This has increased financial volatility and is one of the reasons for the successive speculative bubbles of the last 25 years or so, the last of which is at the origin of the current crisis. Even manufacturing giants, such as General Electric for example, have set up special departments or separate companies under their control for speculating on the financial markets, and a much of their profits now come from these activities.
The point is important because it suggests the possible solutions to financial instability. If the source of this instability is the deregulation of financial relations and activities that came after the demise of Bretton Woods, then it follows that by reregulating them one can get rid of this instability and the problems it generates. But if its source is a decline in the rate of profit, it becomes rather more difficult to solve the problem by enhancing regulation. But more importantly, financialisation now appears as more the symptom of a deeper disease than a devastating cancer itself.
The second part of the book deals with the impact of financial integration on the so-called “European social model” and the measures that should be taken to protect it, and the benefits it affords workers and consumers. I found this to be the weaker part of the book. Some of the suggestions are not particularly radical, such as the idea that if takeovers “are shown to be unavoidable…there should be adequate compensation to dismissed workers and to the region affected by the closure”. In general, the gist of the measures put forward here is that the remnants of the European welfare systems should be protected and that enlargement should mean a harmonisation of standards not downwards but upwards, improving conditions for workers in Eastern Europe.
The intention is good and most of the proposed measures would reinforce the strength of workers and consumers (such as their participation with veto power in the control of their firm). But believing this to be possible without provoking a break with capitalism misses the point. The general drive in Europe since the late 1970s has been to increase the rate of exploitation and break up the power of the organised working class. The same competitive pressures coming from the US (and in the 1980s increasingly from Japan) were and still are pushing capitalists in Europe to demand this. The crisis of profitability also meant that rationalisation and restructuring had to take place so that unprofitable firms would be eliminated and the remaining ones strengthened. This is what drove European integration in the 1980s. Integration was necessary because national economies were too limited for the big European firms. The same applies to the financial sector today.
Attempting to preserve the achievements of the “European social model” (which is not so much a model as the legacy of the struggles of workers in earlier periods) in such an environment will not work, as the French Socialists in power discovered in 1981-83 after their Keynesian reflationary policies resulted in successive currency devaluations and huge trade deficits. Rather than global finance, it is global capitalism that threatens social Europe and which should be our target.