The 2008 near-death experience of the dominant finance-led system and the years of austerity that followed did not produce a shift towards deleveraging and a return to a production and wage-led economic model. Instead we are faced with the introduction of the Capital Markets Union (CMU), a schizophrenic strategy by the European Commission (EC), which is dangerous, opaque and part of a new ‘post-democratic’ mode of governance.
This expert opinion was written in response to our research article on the European Capital Markets Union: Europe and the financial sector: a continuing love affair.
The politics of austerity have been institutionalized and effectively depoliticized in the ‘six-pack’, a package of five new regulations and one directive of the EU. The message is that Keynesianism, or the politics of providing fiscal stimuli when a decline in aggregate demands calls for it, is dead and buried. Orthodox monetarist principles remain as the sole guiding light in the uncharted territory of quantitative easing and operate well insulated from political contestation. Notions such as ‘growth’ and ‘stability’ are being used to describe the new praxis, which is so Orwellian that it brings to mind the politics we find in authoritarian Russia and Turkey today. Under this new policy, the fiscal deficits of member states will eventually be turned into surpluses, transforming the budgets of member states into extractive undertakings, sucking aggregate demand from the economy to pay off the class of rentiers. This is clearly a recipe for disaster and wilfully ignores lessons learnt from the past crises.
More debt, just a different kind
The strategy of the EC calls for more debt – private debt – to generate economic growth and create employment. The proposal to lower capital costs for securitized assets and the broad EU framework for ‘simple, transparent and standardized’ (STS) securitization will stimulate the growth of mortgage debt. This project to enlarge the stock of mortgage debt is not a side-show of the CMU, but lies at its core. The role of member states is reduced to creating fiscal surpluses, basically to generate a profit from managing the economy, whatever the economic, social and political costs (look at Greece). The role of households is to run deficits and capitalize on growing housing wealth. This is ‘privatized Keynesianism’ in its purest form.
If we look at how private debt has developed across EU countries, we see that a number of countries experienced a severe housing bubble and ballooning private debt. Private debt as a share-of-GDP increased in Spain, Ireland and the Netherlands from 70%, 44% and 61%, respectively, in 1980 to 211%, 228% and 205%, respectively, in 2010. Unsurprisingly this group of countries was also vital in providing collateral for the EU stock of pre-crisis securitized assets. A recent paper by myself and Manuel Aalbers identifies four different models of housing finance. Beside the highly-indebted countries mentioned above, the majority of countries in the EU have yet to experience the financialization of their housing stock and accumulate a large stock of mortgage debt.
This group includes the largest economies of the Eurozone, namely, Germany, France and Italy, with private-debt-to-GDP in 2010 of 107%, 111% and 115%, respectively. In these ‘lower debt’ countries, the CMU, which aims at creating a supranational marketplace for tradable securitized debt, will most likely result in the expansion of the balance sheet of households (debt and equity), while we are still recovering from a balance sheet recession. This is the best way to ensure we have another wider, deeper and more contested, financial crisis. In short, the CMU will spread the proven dismal pre-crisis debt-led economic model of Spain, Ireland, the Netherlands and the UK to the rest of Europe.
It’s post-democracy silly
While the economic justifications for the CMU in its current form and in the current context are highly questionable, there is something more sinister at work, which also requires attention. The underlying decision-making apparatus that generates and sells the CMU is showing ‘post-democratic’ signs. While the popular debate is focused on day-to-day acts of parliaments, and elections maintain the illusion of competing ideas, the primacy of politics has long moved to an opaque technocratic arena, insulated from public scrutiny. Ewald Engelen and Anna Glasmacher use the metaphor of ‘front stage’ and ‘backstage’ to describe the CMUs post-democratic policymaking. They highlight the discrepancy between the front stage narrative, focused on small and medium-sized enterprises (SMEs), economic growth and a new type of securitization, and the actual backstage law making, focused on lowering the capital costs for old-school securitization.
Ignoring the systemic risks of shadow banking
While the parliament and media are distracted by the SME narrative, the core issue, namely, the debt-led economic model it promotes and the systemic risks associated with enlarging the shadow banking system, is kept out of the debate. No matter how much the ‘front stage’ PR machinery in Brussels tries to convince the public that these are simple, transparent and standardized financial assets, the CMU only regulates the process and the underlying collateral. This is a critical omission as the last crisis, triggered by subprime mortgage loans has shown. Also, the process is far from simple. Finance Watch has shown the inherent problems with tranching and discussed alternative ways to securitize assets.
Broadening the debt-led accumulation system means that we are on an unsustainable path. In this model, claims on future income and production are used to solve today’s problems. And, last but not least, the systemic risks of the shadow banking system are wilfully ignored by giving securitization a central role in capital intermediation in the EU. These fundamental aspects of the CMU should be central to the debate if we are to break the post-democratic grip on the economic narratives of the EC.