Will Global Financialization and the Eurozone Debt Crisis Defeat European Cosmopolitan Democracy?

If finance capitalism defeats cosmopolitanism, then the democratic checks and balances on multinational capital disappear and finance capital trumps democracy. National and supranational democracy are the last bastions of public power that can counter the criminalization deeply embedded in the unregulated financial practices that have been embraced by the big banks and insurance companies many politicians see as “too big to fail.” The recent LIBOR scandal is only one case in point. Some would argue that the big financial institutions which buy off state regulation, pay obscenely large executive bonuses, encourage speculative growth and engage in fraudulent practices are the true international actors, not states or international agencies like the United Nations.

European Cosmopolitanism?

How casually the idea of Europe and European cosmopolitanism has been cast to the scrap heap as the market death spiral tightens its grip on sovereign debtor nations. The largest European economies have slumped further and refinancing government debt generates unsustainable long-term interest rates of more than 10 percent in some cases, with recurrent doubts of credit worthiness when loans reach maturity. How quickly the page of history has turned. The original social democratic ideals of the European constitution, the bedrock of the Treaty, was signed in 2004 and fully ratified by 2005.

The Treaty of Lisbon replaces the Constitutional Treaty and entered into force in 2009. This was widely accepted as completing a historic process that began with the Treaty of Paris in 1951 and led to the creation of EU citizenship and the Economic and Monetary Union with the Treaty of Maastricht in 1992. With the establishment of the constitution, the EU for the first time developed a “legal personality,” the laws of which trump those of national parliaments. The constitution for Europe confirmed Europe’s cultural, religious and humanist inheritance and established the European Union as allegedly reflecting the will of the citizens and states of Europe to build a common future. It also upheld European values: respect for human dignity, liberty, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities, characterizing the EU by pluralism, nondiscrimination, tolerance, justice, solidarity, and equality between women and men. These lofty ideals and a set of accompanying objectives, including peace and security, sustainable development, solidarity, free and fair trade, eradication of poverty, protection of human rights, and the development of international law were enshrined in the set of fundamental principles and rights that presented a moral vision of the governance of the EU and its approach to globalization.

Europe as the home of Enlightenment cosmopolitan ideals was eternalized by Immanuel Kant in his 1795 “Perpetual Peace,” which is often seen as the starting point of contemporary liberal thought. Famously, Kant argues that “The Law of World Citizenship Shall Be Limited to Conditions of Universal Hospitality,” by which he simply means: “Hospitality means the right of a stranger not to be treated as an enemy when he arrives in the land of another.”[1] As the cold war conflict ended and calls for new world order began in the early 1990s, Kant’s cosmopolitan ideas began to receive renewed attention as a basis for a European global vision as an alternative to US hegemony.

Financialization

The seeds for the Eurozone crisis were already present in wider changes that had taken place in Western capitalism under the mantle of financialization. “Financialization” is a term that describes an economic system or process that attempts to reduce all value that is exchanged into a financial instrument or a derivative of a financial instrument. Expanding from social reproductive systems including pensions, health, education and housing into natural resources – the financialization of nature – financialization has penetrated all commodity markets. As Antonio Tricarico (2012) remarks, “Just as the privatization of public assets and services served as a building block for the financialization of the economy, so the further commodification of the natural commons is the basis for the further financialization of the economy and nature.”

Financialization refers to the dominance of the financial sector, the increasing significance of financial markets, and the increasing independence of the financial system with a shift away from traditional forms of banking and insurance toward speculation. The process can be seen as a postwar phenomenon that intensified after 1980. Financialization reduces any work product or service to an exchangeable financial instrument. It is an aspect of increased symbolization, mathematization and computerization of financial markets that are trends within knowledge capitalism.

Neoliberalism is an expression of the power of finance that has gathered pace with the internationalization of capital and the globalization of markets. Some scholars suggest that neoliberalism and globalization are themselves expressions of finance, closely tied to the development of derivatives markets and the evolution of an international financial system where the international rentiers have managed to significantly increase their share of national income – often on the basis of systematic fraud, corruption and widespread criminalization of financial practices. The current financial crisis is a systemic crisis of the entire capitalistic system based on interconnected global financial markets. This is a fundamental shift that represents the financialization of the reproductive sphere of life itself. Under this regime, the monopolization and privatization of knowledge and education has proceeded rapidly. In response to financialization and the economic crisis, governments have undertaken budget cuts and “austerity politics,” as well as created and managed the perception of these policies as an inevitable and natural response to financial crisis and collapse. Yet cuts made across the board for public services at both the federal and state levels, with massive cuts to education in all aspects, attacks on collective bargaining, and the sacking of thousands of teachers, are neither accidental nor inevitable. They are the result of very canny propaganda campaigns conducted by the 1% under the rubric of “disaster capitalism” designed to persuade us of their necessity.

It is the first systemic and global crisis of neoliberal financial capitalism that began with the crisis of the Fordist model of accumulation and the consequent deregulation of the banking system beginning during the 1970s. Stephanie Blankenburg (2009) writing for the Cambridge Journal of Economics, suggest that, “The current financial and economic crisis that has forced the likes of Greenspan to question the coherence of dominant conceptual frameworks is unprecedented in global reach and systemic gravity,” and they go on to plot the dimensions of the crisis in terms of McKinsey’s “Mapping Global Financial Markets,” (October 2008) which indicated global financial assets rose from US $12 trillion in 1980 to US $196 trillion in 2007. They also reference the International Monetary Fund’s (IMF) 2009 Global Financial Stability Report, which provides an estimate at US $241 trillion. They continue:

As early as 1990, money managers had increased their control of US corporate equities from 8% in 1950 to 60% … Similarly, pension funds had extended their share of total business equities from less than 1% to just short of 39%, and their fraction of corporate debt from 13% to 50% … In the period from 1986 to 2006, the US financial sector as a whole increased its share of corporate profits from 10% to 30%, while its outstanding debts grew from 20% of GDP in 1980 to 116% in 2007 … According to Gillian Tett from the Financial Times, outstanding credit defaults swaps (CDS) today amount to no less than US$60 trillion, with the risk embodied after discounting mutually off-setting contracts still as high as US$14 trillion …

Blankenburg and Palma also indicate that US financial institutions have already written off US $1 trillion and are expected to write down at least another US $3–$5 trillion. Even at this stage, predictions on the basis of this financial crisis and recovery suggest that a decline – especially in the Western world – is unavoidable that will entail high and sustained levels of unemployment and rapid growth of inequalities.[2]

Tricarico (2012) suggests that the crisis of the Eurozone resulted from “a financial bubble marked by weak production, expanding bank assets, and growing household indebtedness.” Financialization, according to Tricarico is responsible for the systematic transformation of both capitalist production and finance, with large corporations less dependent on banks and banks “shifting their activities toward mediating in open markets and transacting with individuals.” It is a response to the ongoing crisis of accumulation that began with overproduction of the US economy in the 1960s. He sees financialization as the third major wave of privatization after the massive sell-off of discounted public assets beginning in the 1980s and the creation of public-private partnerships (PPPs) in the 2000s designed to make new investments in infrastructure development for private enterprise. For Tricario, “the European debt crisis can be read as a further extraction of wealth from public finance in favor of rich private actors.” He suggests that the introduction of the euro has been “a powerful accelerator of the financialization process in Europe.”

Michael Aglietta (2012), the French regulationist theorist and professor of economics at the University of Paris X, Nanterre, begins his account of “The European Vortex” with the following:

Why has the Eurozone emerged as the new epicenter of the global financial crisis, when its origins – the famous subprime mortgages – were American? And why, within Europe, has Greece proved to be the weak link? The starting point for any adequate answer is the recognition that what we have been experiencing for the last five years, since the onset of the credit crunch in August 2007, is a single crisis of financialized capitalism. The Greek events are only a sequence within it. Despite the concerted efforts of the governments of the G20, the intervals of recovery have been no more than short-lived episodes; the political measures taken have proved powerless to overcome the strong depressive tendencies at work. The crisis has struck the heart of the financial system – the banks – but it is systemic, affecting every part of the economy: banks, firms, households, states (p. 15).

Clearly, global financialization combined with easy credit and high-risk practices, together with the housing subprime market bubble, fiscal policies and imbalances in international trade all played their part. The problem is made more complex because of a widely perceived flaw in the architecture of the Eurozone currency union with a central bank and common monetary policy, but no common fiscal policy. Whatever the causes, the European debt crisis has the potential to destabilize Western capitalism and to unthread the Eurozone, leading to an entrenchment of the Global Financial Crisis (GFC). Fears of the sovereign debt crisis intensified in 2010, when European finance ministers approved the €750 billion European Financial Stability Facility (EFSF). Greece, Portugal, Ireland, Italy and Spain all failed to generate enough growth to guarantee bond yield rates. Despite the Eurozone’s policy actions so far based on imposed constraints and austerity measures, the Eurozone crisis is spreading, with a looming “fiscal cliff” and serious risks to the European banking system, the viability of the euro, and threats to the European integration process.

Perhaps most important, this protracted financial crisis – at best contained, but not yet resolved – seems to threaten the political viability of Europe and to further imperil the so-called “democratic deficit” that the constitution was shaped to address. Some are now questioning whether the original idea of transnational European cosmopolitan democracy is possible at all. Aglietta (2012) writes:

The Eurozone has arrived at a historic crossroads. A sustainable exit from the crisis will require a decisive shift in its political philosophy. When the Maastricht Treaty was signed, political leaders refused to acknowledge that in creating the euro they were changing the very nature of the European project. They thought they could make do with a currency that was incompletely constituted—that is, external to the sovereignty of the member states, yet lacking any sovereign federal body. The crisis has shattered this illusion. The euro must be constituted as a full currency, which means it must be undergirded by a sovereign power (p. 36).

European Cosmopolitan Democracy

In the midst of this disaster, Jürgen Habermas (2012) warns that the narrow economistic focus on the banking and debt crisis obscures the larger political dimension of the EU envisioned by its founders and, in particular, threatens the prospect for achieving European cosmopolitan democracy based squarely on the concept of human dignity and the realistic utopia of human rights.

In this new extended essay, Habermas (2012) is critical both of the way in which the crisis is perceived and how it has been managed. He is concerned for the lack of a future democratic perspective on European unification and for the way European governance has lapsed into executive federalism rather than taking the opportunity to realize the EU’s democratic potential by evolving beyond the level of the cooperation of nation-states into a cosmopolitan community. The crisis, he suggests, has concentrated power in the hands of a few government leaders and a bureaucratic elite who have implemented administrative and technical adjustments to maintain stability in a “post-democratic” form of rule that sacrifices European ideals, imperils political integration and abandons the EU to the imperatives of markets. Yet, as Habermas reminds us, it is only through a cosmopolitan Europe that the dynamics of global capitalism can be controlled at a level beyond the nation-state.

Habermas (2003) begins his paper “Toward A Cosmopolitan Europe” with a statement from Richard Münch’s (1998) work on Global Dynamics and Local Life World: “The dominant question at present is whether the ecological, social and cultural dynamics of global capitalism can be remastered beyond the nation-state, at a supranational and a global level.” He goes on to remark: “No one disputes the power of markets for innovation and coordination. But markets react only to messages written in the code of price. They remain deaf to the externalities that they generate in other areas.” And he concludes with the question of whether “the small set of globally influential political actors can construct a reformed world organization from a loosely connected network of transnational regimes – and, if so, in such a manner that a change of course, toward a global domestic policy without a global state” (pp. 98-9).

Habermas’ alternative is to continue with the process of the democratic legal domestication of the EU, and he argues “the construction flaw of the monetary union cannot be rectified without a revision of the treaty” which needs unified electoral law for the European Parliament and the effective rebalancing and “symmetric relation” in the functions and competences of the three main bodies: the European Parliament, the European Commission and the Council of Ministers. Habermas recommends that the leaders need to forgo the advice of experts and “risk” a democratic struggle and transnationalization of the existing national publics. Habermas’ remarks profile the entrenched conflicts between capitalism and democracy. “Free” markets were supposed to be one of the conditions for free societies: instead, they have eroded the power of people, substantially widened economic and social inequalities, compromised social solidarity, and dominated the political system.

References

Aglietta, Michel (2012) “The European Vortex”, New Left Review, 75, May-June: 15-36.

Habermas, Jürgen (2003) “Toward a Cosmopolitan Europe”, Journal of Democracy 14.4: 86-100.

Habermas, Jürgen (2012) The Crisis of the Europe Union: A Response. Cambridge, Polity Press.

Blankenburg, Stephanie and Palma, José Gabriel (2009) “Introduction: the global financial crisis“, Cambridge Journal of Economics, 33 (4).

IMF (2009) Global Financial Stability Report.

McKinsey Global Institute (2008) “Mapping global capital markets: Fifth annual report.”

McKinsey Global Institute (2011) “Mapping global capital markets 2011.”

Münch, Richard (1998) “Globale Dynamik, locale Lebenswelt: Der schwierige Weg in die Weltgesellschaft”. Frankfurt am Main: Suhrkamp Verlag.

Tricarico, Antonio (2012) “The European crisis in the context of finance capitalism“, Corporate Europe Observatory.

1. See the full essay at https://www.mtholyoke.edu/acad/intrel/kant/kant1.htm.

2.
McKinsey’s “Mapping global capital markets 2011” suggests that growth had resumed, “fueled by expansion in developing economies but also by a $4.4 trillion increase in sovereign debt.” The total value of the world’s financial stock has increased from $175 trillion in 2008 to $212 trillion and “MGI finds that the recovery of financial markets remains uneven across geographies and asset classes and significant risks remain. Emerging markets account for a disproportionate share of growth in capital-raising as mature economies struggle. Debt markets remain fragile in many parts of the world – the growth of government debt and of lending in China accounts for the majority of the increase in credit globally.”