The European crisis in the context of finance capitalism

We live in a time of finance capitalism, when trading money, risk and associated products is more profitable and outpaces trading goods and services for capital accumulation. That is in short what people often refer to as “financialisation” of the economy. This has huge implications for where capital is invested and the everyday exposure of people to capital markets, as more and more aspects of everyday life – from home ownership to pensions and schooling – are mediated through financial markets rather than just markets.

Financialisation is now penetrating all commodity markets; expanding from areas like social reproductive systems (pensions, health, education, housing) into natural resources management (what can be regarded as the financialisation of nature). Just as the privatisation of public assets and services served as a building block for the financialisation of the economy, so the further commodification of the natural commons is the basis for the further financialisation of the economy and nature.

However financialisation should be regarded as more than just a further stage of commodification or privatisation.

Financialisation as a systemic transformation of capitalism

The crisis of 2007-9 resulted from a financial bubble marked by weak production, expanding bank assets, and growing household indebtedness. For these reasons the crisis casts light on the financialisation of capitalist economies.

The literature on financialisation generally links weak production with booming finance; according to some, causation runs from weak production to booming finance, while for others it runs in the opposite direction. However this dihcotomy is becoming more and more misleading, given that there may be no direct causation between booming finance and weak production. Rather, financialisation represents a systemic transformation of both capitalist production and finance, which ultimately accounts for the crisis of 2007-9.

This systemic transformation has three main features:

• less reliance of large corporations on banks (i.e about half of profits of all US corporations in 2007 were generated on financial markets and similarly corporations get financed more and more through financial markets than the traditional banking system);
• banks shifting their activities toward mediating in open markets and transacting with individuals (through the establishment of a shadow banking system for this purpose);
• increasing implication of individuals and households in the operations of finance (as shown by the growing credit card and consumer debt and related securitization practices or the recent diffusion of retail derivative products).

A crisis of accumulation

The need for a systemic transformation of both capitalist production and finance represents an answer to the ongoing crisis of accumulation that started during the 1960s and which has not been structurally solved since.

In the 1960s the overproduction of the US economy in relation to existing markets coupled with lowering returns on new investments triggered the “globalisation” process as an answer to overcome these limitations to capital accumulation: Thus the creation of much larger global markets through extensive international liberalisations and privatisations as well as deflationary policies against labour to reduce costs of production (in short neoliberalism). This answer soon generated new problems at the end of the 1980s (see the 1987 financial crisis) when aggregated demand was still low, due to the reduction of labour income. Meanwhile it created a new class of financial elites  empowered by the existence of the first global and thorough market to be built after the break-up of the Bretton Woods monetary system and related removal of controls on movements of capital in the 1970s. Today the global capital market is still much deeper and larger than any other global market of goods and services.

In order to overcome again the same crisis of accumulation - and given that the still dominant neoliberal ideology banned any direct state intervention in the economy in order to support global demand - a new answer was developed: an unprecedented “private Keynesian” response aimed at boosting aggregated demand through increasinng the indebtedness of corporations, banks and households. This triggered financialisation in the form we know it today, which affects any major actor in the spheres of production and finance.

The new frontier of financialisation

Since the beginning of the decade, after the dot.com bubble, financialisation has been looking for new assets in which to invest huge and growing private wealth accumulated. New key areas in which financialisation started unfolding thus have emerged: natural resources (soft commodities and new commodities, such as “carbon”) and public finance itself, meant as a mechanism to produce new financial assets to extract more value and profits. Within this also development finance is being financialised as well as infrastructure finance.

Concerning infrastructure, the financialisation approach is leading to a third wave of privatisation, with the first being the privatisation of public assets at a discounted value and the second the creation of Public Private Partnerships (PPP) vehicles to help privatised companies finance their business and make new investments in infrastructure development. Given the blatant failure of the PPP approach in many sectors, a third wave of privatisation is being conceived in the form of capital markets to build private infrastructure which just serve private sector interests.

European countries are leading this new frontier of financialisation. In particular, the European debt crisis can be read as a further extraction of wealth from public finance in favour of rich private actors. Similarly European proposals to boost the role of private financial actors in development finance (in particular the use of financial intermediaries and the leverage of public aid on capital markets) and to promote a new generation of EU project bonds to finance infrastructure development should be seen as an attempt to systemically put public finance in the hands of capital markets.

The European Union is also a major drive for the further financialisation of natural commons, by supporting proposals for a further expansions of failing carbon markets and the establishment of ecosystem services trading and payments systems at the Rio+20 Conference next June. And the EU is similarly promoting water trading schemes in Europe and abroad, with water being one of the few existing commodities that has been less financialised up to today.

All these proposals aim at generating new asset classes for investing accumulated wealth thus once more trying to overcome the same crisis of accumulation we have lived under since late 1960s.

Legislation is needed to create new commodities and their new markets (see the case of ecosystem services trading), for creating new capital market infrastructure to finance infrastructures and “development” operations within and outside the EU, for transforming public debt and finance management. Contrary to the popular perception, neoliberalism and then financialisation did not aim to destroy the state, but actually required a strong state to create markets and today's financial markets and new asset classes. Something that the prvate sector alone can't do.

The role of the Euro in financialisation

The establishment of the European Monetary Union in the 1990s and then the introduction of the Euro a decade ago have been a powerful accelerator of the financialisation process in Europe. In particular, the construction of the single currency as a “strong global currency”, and not just a common currency. This was planned in order to attract global capital as well as to have a new reserve currency, in other words a means a means of payment and hoarding in the world market.

The Euro has had deflationary effects on labour, which have become deeper through austerity measures, and served the interests of the major states that command it as well as of the large financial and industrial enterprises that deploy it internationally. But, by the same token, the Euro has crystallised the tensions and imbalances of European capitalism, acting as the epicentre of crisis.

In particular the European monetary union has produced a profound transformation of the banking system in European continental countries. That's why the Lehman Brothers collapse hit the European banking system so badly and also today why the debt crisis dimension remains strictly linked with the European banking crisis (more than is happening in the US). And today it is through the tensions over the Euro that this banking crisis is being transposed into a new frontier of financialisation, the transformation of public finance.

At the same time the financialisation drive has also boosted the EU obsession of fostering global trade and in particular within this further investment liberalisation in developing countries. Investments and intellectual property rights are at the centre of the EU export-led economy policies today (primarily moved by Germany). Such a push is often seen in the sphere of the productive economy with the idea of generating new asset classes through foreign investments which can then be financialised at the convenience of capital market. And thus again the sphere of the economy and that of finance work together towards ever deeper financialisation.

Tackling the specificity of the European crisis

Beyond the rhetoric of recovering growth, the imposition of dogmatic austerity measures and further labour deflation, both leading to further recession, confirms that economic and financial elites ruling in Europe no longer consider  supporting aggregated demand in Europes as crucial. Just as in the 1980s the answer was to financialise corporations, banks and households, today the answer is to promote a further financialisation of global markets and create new asset classes by expanding financialisation into nature, public finance and infrastructures (both in Europe and abroad).

In this context, two major specific structural problems remain at the root of the Euro crisis: the weakness of the European banking system and regional economic imbalances due to the German export led model. These are not being questioned yet, but just refined and adapted to the new needs of the financialisation process, in particular hoping that the transformation of public finance, the boosting of infrastructures and the “green economy” (all the new frontier of financialisation) will help Europe get its way out of the economic crisis.

In particular, the model of export-led growth, which creates such deep unbalances in many European countries, is being coupled more and more with new investment provisions aimed at building a global financial market infrastructures supporting private sector international investments. This is the case, for instance, of the new EU energy security policy or the EU Raw material strategy, which will not simply produce further extractivism and negative impacts in the global South, but will help build a new capital market infrastructure locking in extractive porjects and large scale infrastructure for the decades to come. In this regard it is important to note that there is  growing pressure on legislators in emerging economies to relax constraints on investments by national pension funds in order to mobilise larger private liquidity to finance private infrastructure and foreign corporations' investments.

At the same time the European banking system is trying to recover from heavy losses occurred in the recent crisis by driving investments in the new areas of financialisation and advocating for new legislation at European level and in developing countries. That's why many European financial actors have been strongly supporting the “Natural Capital Declaration” promoted for the Rio+20 Conference, as well stayed involved in refinancing European countries' public debt. In this regard significant European countries of the “periphery”, such as Spain and Italy, are still seen as too big to fail because that their high interest treasury bonds remain profitable assets for European banks and other financial investors (thus extracting more wealth from citizenship who has to repay this costly debt in the future).

Conclusion

Financialisation is a systemic transformation of both production and finance in capitalist economies. This is a slow, pervasive process, which far from being halted by the 2007-2009 crisis, found new energy and drive to expand into new areas, such as nature, public finance and infrastructure.

The European Union and its policies are fully part of the financialisation answer to the ongoing crisis of accumulation that we have lived since the late 1960s. And today proposed answers to the crisis are still in line with the objective to meet the new “needs” of the financialisation process, to “boost” growth and create new assets and sustain the accumulation process.

Regulating European financial markets won't be enough the address the scale of the problem we face. Similarly promoting new European monetary policies and institutions, regaining public control of the European Central Bank, as well as a new approach to European economic and fiscal integration can help but will not solve the underlining structural causes of the crisis.

In order to identify a different response to the crisis of accumulation affecting the global economy and the European one, it is crucial to fight in the new battlegrounds opened by the financialisation process, in which the European Union is a key driver (both within and outside the EU): financialisation of nature, financialisation of public finance and financialisation of infrastructures. In this regard, it is central to reflect on how to implement a strategy for excluding financial markets  from many spheres of society, to redefine public finance, and reintroduce controls of movements of capital at national and regional level.

At the same time, it is important to address the two major areas which have been transformed by the establishment of the European monetary union: the export-led growth model (coupled with investment liberalisation and financial infrastructure building) and the integration of the European banking system. Both areas require radical responses in order to not just halt the new frontier of financialisation, but d-efinancialise European economy and finance and open up a space to pursue alternative public interest policies in favour of labour and the environment.

Prepared by Antonio Tricarico, CRBM, Italy. It was discussed during the financialization of nature meeting, and was the basis for the discussion in the workshop on green economy and alternatives.