External account imbalances, investments and profits: which come first?

From its very beginnings the crisis has generated many interpretations and consequently recipes to solve it. Among progressives, the most popular arguments involve trade imbalances and deflationary policies in the core European countries, principally Germany. According to this thinking, Germany has depressed internal demand and pursued an aggressive mercantilist orientation with deadly consequences for the periphery. The prescription calls for wage raises in Germany to help restore trade balances, as better paid German workers will then hopefully populate beach resorts in the periphery. Furthermore, the EU would need to launch a major investment programme to restart (sustainable) growth. Although not always specified, it is obvious that this programme would be financed by German trade surpluses. The corollary is progress towards debt mutualisation, fiscal federalism, and, of course, a greater role for the European Parliament.

But there are several problems with these proposals, which at the very least make them questionable. On the one hand, there is an alternative view of external balances, which can be expressed by the following question: Could it be that the financial accounts imbalances, although necessarily mirroring current account imbalances, are not a direct result of the latter? Accounting identities are true in themselves but have no explanatory power. Investing in the real-estate boom in southern Europe during the first years of the 2000s may have been a rational choice for core European capitals in view of the expected profits, and of course financing investment in the periphery facilitated exports from the core, but this was a by-product reinforcing the tendency, not the result of deliberate planning. In fact, the share of southern European EU members in Germany’s trade surplus declined between 1999 and 2008 from 39.1 per cent to 30.8 per cent.¹

This lending boom financed peripheral consumption and housing investment, pushing up inflation while temporarily fulfilling the promise of profits for all – for realtors, contractors, and bankers. But assuming that profits in the intra-EU trade were recycled into loans to the importing periphery does not even tally with the accounting results. As pointed out by Hale and Obstfeld, ever since the euro was launched European core banks increasingly have borrowed from financial centres like the US or UK and expanded their balance sheets.² This brings us to another accounting identity: the Kaleckian interpretation of causality running from investment to profits instead of the reverse, which is Marx’s view. The fictitious character of these investments does not prevent them from reaping profits from the productive processes they finance. The expectations were sufficiently high as to encourage borrowing to fill the gap between trade surpluses and total lending. The periphery trade deficits can be explained as the result of these inward flows of capital both boosting imports and fuelling the inflation differential and thus causing the real exchange rates to deteriorate.

Symbiosis within the EU and the euro

Why do capitalists throughout the EU share the same enthusiasm for the deflationary policies popularly seen as imposed by Germany? In particular, why do the Greek, Spanish, and Portuguese bourgeoisies follow these stringent prescriptions? Perhaps we should look at the EMU as a logical step in the original process of the single market whose central leitmotiv is the encouragement of competition. This is the explanation provided by Milios and Sotiropoulos. When a capitalist country has reached a certain stage of development, exposure to increased international competition is the most appropriate strategy for bourgeois power both to constantly reorganise labour and to get rid of inefficient competitors.³ This brings about, they explain, a sort of symbiosis between the different geographical sections of European capital. In this sense, we can read the EU as the institutional embedment of a joint set of rules and commitments to advance the agenda of this transnational alliance. This agenda does not exclusively treat the EU’s territory as a kind of hinterland for European capital but is concerned with the global circuit of accumulation. That is why considerable effort is devoted to monitoring permanent restructuring in the pursuit of the Lisbon Strategy goal: becoming the most competitive and dynamic knowledge-based economy in the world, with emphasis on ‘most competitive’ and ‘world’. Therefore, it should not come as a surprise that provisions for preventing intra-EU unbalances are so scarce in the EU institutional framework.

While there is a lively debate over whether the euro affected intra-EU trade as promised in the 1990s, the undisputed effect it produced is a major restructuring of the productive sectors of all the Eurozone Member States.⁴Lacking any possibility of competitive devaluation, this restructuring entailed a shift of business focus from production to upstream and downstream activities, such as product design, advertising, marketing, and distribution, and a corresponding reduction in the share of blue collar workers in total economic activity,⁵ as a result of mergers and acquisitions, and outsourcing or plant relocations, the latter reflected in a nominal growth in trade arising, for example, from the movement of assembly parts between parent and subsidiary companies within and across the borders of the EU.⁶

The second very relevant effect of the euro has been the intensification of integration in the financial sector, in fact before commercial integration. We have already mentioned the brokerage of loans to the periphery funded from international financial centres with the large core banks as intermediaries. These funds would never have arrived in the periphery without this intermediary layer armoured with the institutional design of the euro. The levelling of the difference in interest rates implied the need to further assure that risks would be kept low, and so by signing the Stability Pact the Eurozone’s members committed to politically imposed fiscal rules that were supposed to rule out ‘moral hazard’.⁷This is a voluntary over-determination to still further reinforce the equalising terrain of competition created by the free movements of capital.

Convergence: theories and practice

Greece joined the EC in 1981; Portugal and Spain followed in 1986. Ever since, there has been much debate on whether a convergence of these relatively backward countries with the European core actually occurred. The most that can be said is that such convergence was, as Karl Aiginger puts it, a ‘bumpy road’ ... until the crisis came and the road turned into a yawning gap.⁸The ECB admits that little real convergence has taken place among the original Eurozone countries,⁹but it relies on orthodox economic conceptions of market failures or distortions to explain why the path to convergence did not lead where its own theories and recipes had predicted. These explanations included the unsuitability of ‘human capital’, the lack of investment in R&D, coordination failures, which prevent the realisation of scale and/or network economies, faulty institutional design, and even crony-capitalism and corruption. These explanatory models in fact claim to incorporate many heterodox critiques (institutionalist, post-Keynesian, neo-Schumpeterian) wrapped in the appropriate mathematical niceties expressed in exotic production functions. Even radical economists have used them as analytical frameworks to characterise globalisation and propose alternatives for public intervention.¹⁰

Based on this diagnosis, some kind of state interventionism is justified and called for. Two main avenues for intervention are proposed: ‘factor policies’, that is, the upgrading of infrastructures, ‘human capital’, and the level of technology, on the one side, and institutional reform on the other. The former have been the core of the EU’s regional policies since the European Structural Funds reform in 1988. The latter have pushed Europe towards deregulation and market-friendly reforms combined with the dismantlement of welfare – exactly the opposite of the hope that the southern periphery’s popular classes had of achieving the European social model. By 2004, some years before the crisis, it was obvious that the social goals of the Lisbon Agenda were unattainable although well-intentioned progressives are still obsessed with them.¹¹ Confronted with this reality, they argue that the European institutions have in fact not had the political will to wholeheartedly pursue these social policies, mirroring the arguments of ultra-liberal economists who contend that the marvels of free markets have not yet been realised because their recipes have not been fully applied. But all this is delusion as public intervention from the side of the EU is guided and limited by the interests of the dominant classes in both the core and the periphery. The Ockham’s razor explanation for EU regional policies is, once again, the above-mentioned symbiosis: large infrastructural projects provide markets for core transportation equipment manufacturers and peripheral construction companies; agricultural funds help preserve the coherence of the dominant class coalition while local agriculture goes global. The mantra words are ‘horizontality’ or ‘factor policies’, but what is essentially occurring is the blending of local vested interests with the general trend, with horizontal interventions, in practice, necessarily favouring some activities over others.¹²As with most orthodox economic doctrines, the growth theories invoked by the EU – all their pseudo-scientific paraphernalia notwithstanding – are only convenient alibis for class policies.¹³

How are the peripheral elites faring in this framework? Examples from Spain

Rooted in historical underdevelopment, the peripheral features of Greek, Portuguese, and Spanish economies seem not to have changed. Even the apparent convergence in terms of GDP per inhabitant during the period before the adoption of the euro should be scrutinised. The three countries acceded to the Common Market amidst the unfolding of a new international division of labour following the crisis of the late 1970s. In this context, restructuring of the pre-existing indigenous productive fabric consisted in either dismantlement or foreign acquisitions later hollowed out by the acquirers. Nevertheless, at least in the case of Spain, the capitalist class thrived on this restructuring, first by brokering and channelling the financial flows of structural funds and privatisations, and later carry-trading on the gap between uniform nominal interest rates set by the ECB and different national rates of inflation. Meanwhile, the economic structures of Spain underwent great transformations. These transformations follow the path of competition and common currency as means of restructuring but are rooted in the historical trajectory of Spanish capitalism. In that sense, the composition of the dominant fraction of capital in Spain has changed little since Franco’s time.¹⁴

An important meeting occurred in spring 2011 between Prime Minister Zapatero and a selected grouping of around forty Spanish entrepreneurs representing their highest echelons to discuss how to implement the Euro Plus Pact.¹⁵The Spanish economic elites were very supportive and have proven very effective in adapting and successfully inserting themselves into the new globalised economy. This transformation consisted of shedding their industrial investments, through a series of adjustments, privatisations, and mergers taking place during the first stages of accession and concentrating on what they were better at: banking, construction, and all sorts of public activities. During that period the rate of implementation of de-regulatory reforms was selectively synchronised to this restructuring while Structural Funds paved the way. Thus when the single currency was introduced leading Spanish firms were ready for it and began to borrow at interest rates that previously were practically unimaginable, triggering the internationalisation process. The evolution of Spanish transnational companies is quite different from those based in the core countries. Initially, not only was their expansion not based on technological skills, but their activity was focused on just one or two regions, particularly Latin America. Drawing on decades of know­how built dealing at arm’s length with the Spanish administration, they gained the markets they were good at and now can position themselves as leading European companies.¹⁶Only three – two smaller banks and the partially state-owned network of wholesale electrical power supply – of the 35 companies on which the index of the Spanish Stock Exchange (IBEX 35) is based have less than 50 per cent of their revenues in international markets.¹⁷This shows how successful the insertion of Spanish capital into the global circuit of capitalist reproduction has been.¹⁸

Finally, we can say that aggregate measures of economic performance do not tell the whole truth about the transformations suffered by peripheral economies due to the fractal nature of inequalities and imbalances in globalised capitalism. This trajectory of survival and adaptation by the dominant classes should serve as a warning against adopting an exclusively geographical or nationalistic view of the imbalances. On the other hand, it makes clear the limits to adopting ‘developmental’ policies in the periphery countries without a major shift in the balance of social power.

Is there space for productive reconstruction in the southern European periphery?

If we want to better understand the problems of the European periphery we need to turn back – albeit critically – to previous theories of development and underdevelopment. As marginalism arose as an apparent remedy for the ‘dangerous’ path taken by classical economics, so did endogenous growth theories as substitutes for theories of polarisation, and unequal-development, core-periphery, and dependency relations. These currently neglected theories allowed for meaningful public intervention that was coherent with practical developmental policies because it did not rely on the absurdities of neo­classical economics.¹⁹Whether this intervention favoured popular interests or local elites is another question, but it did give rise to some resounding success stories, as in Eastern Asia last century. However, reproducing this dynamic raises several questions.

The lively ‘new productive model’ debate in Spain today is over which sectoral orientation productive reconstruction should have after the crisis. Union spokespeople, ecological activists, left parties, and progressive think tanks agree in pointing towards the environmentally-friendly refurbishing of the traditional sectors, alternative energies, and the provision of social needs (care, health, education), all associated with a broader R&D effort and technology upgrade. These proposals are reasonable enough and to be welcomed, but capital is also welcoming them as new demand for new use values it can commodify and market and through which it can create new growth. The question is thus not one of which sector to emphasise.

More accurately, the problem lies with what Michael H. Best calls ‘social structures of consumption’,²⁰which are decisive in the Spanish pattern of growth. A new productive model has to break with these structures that underlie the current unsustainable modes of urbanisation, transportation, and energy and natural resources consumption. The same must be said about the gender bias of the insufficient welfare networks for which home (feminine) care substitutes. Changing these structures is a matter of strategic public policies to be carried out with popular participation and transparency, that is, with more democracy, to avoid being captured by elite interests, as happened with Structural Funds.

Should the periphery try to catch up with the core – and how?

There is much emphasis placed on the decline of manufacturing sectors and of productivity in general and consequently on the question of technological dependency. But it needs to be said that the largest exporters in Spain are manufacturing firms, most of them fully integrated into global value chains (automobiles, chemicals, and food and beverages); many of these industries are owned by TNCs and operate in a way that raises the question of the spatial and temporal limits of ‘industrial upgrading’ in a contemporary global economy characterised by excess capacity in manufacturing,²¹not to mention the limits to technological improvement in such a context.²²These companies are the other side of Spain’s economy. In contrast to the already mentioned ‘indigenous’ firms, these are normally owned by foreigners. Of course, they share the same arms-length closeness to Spanish authorities but, as would be expected, depend less on them.

In terms of trade, Spain is dominated by Germany and France, and, in turn, it dominates Portugal, Morocco, and Algeria, while its relation to Italy is complementary in the global commodity chains; its relationship to Greece is minimal.²³This means that Spain needs the large countries as an import source and export destination, while only France needs Spain as an export destination. The obverse relation obtains with Portugal, Morocco, and Algeria, although only Portugal is needed by Spain as an export partner. Italy and Spain need each other as exporters. Perhaps the goal should be a rebalancing of these relations, furthering integration with both sides of the Mediterranean basin on a less unequal basis so as to progressively reduce domination by the Central European core.²⁴But that would also imply major political and structural transformations. For example, one cannot expect Spain’s current financial system to contribute to such a move; therefore a new set of tools and new power relations both at the national and the international levels are needed to support it.

Who are the actors of change?

The last Greek episode shows that the symbiosis is working. Restoring national sovereignty does not appeal to peripheral bourgeoisies. The fiscal federalism proposed by some progressives is not being taken up, even though it would have been in the interest of France and Italy, for example. Despite national dysfunctions the will to hold the EU together is prevailing because it provides the national bourgeoisies with the kind of competitive environment they need to shake free of their national welfare systems. Still, one should not rule out the possibility that a sharpening of these contradictions could divide the core countries, especially France and Italy from Germany and its allies, but much less can be expected from the peripheral countries within the current inner balance of forces. In fact, we should expect other kinds of inner contradictions developing in peripheral countries, such as what is taking place nowadays in Catalonia or a revival of the North-South Italian divide. As Lutz Brangsch puts it, European integration applies to the whole circuit of reproduction of capital, and macroeconomic national aggregates do not provide an accurate picture; per capita income can stay the same while the basis for income changes, which in turn can entail completely different capital reproduction requirements,²⁵ as we hope to have shown in the Spanish case.

Unity of action against the euro as it currently stands is, of course, what is most needed, and should be attempted while temporarily putting aside the question of Euroexit, Euro-reform, or alternative currency agreements. What we have seen in the September 2015 Greek election is that those favouring immediate Euroexit have no Plan B, or at least it is not credible in the eyes of the Greek people, and most probably the same could be said of other southern-periphery peoples. But if the global economy goes into another slump, the hard-liners of fiscal discipline will become very exposed, and the left should try to provoke a crisis in the political structures, both national and European, and be ready to intervene by denouncing debt and social cuts and demanding a democratic process, perhaps in the way Catherine Samary has.²⁶How this subsequently develops in terms of currency will depend on the balance of forces and more or less even trajectories between and within countries.

Meanwhile we should take into account another lesson learned from Greece: there can be no change in external relations if it is not accompanied by a change in internal relations. Therefore, in terms of productive transformation, the left needs to develop strategies that take stock of past failures. There are enough guidelines on the table as to what should be done in terms of specialisation, but the problem is how and by whom. Experiments in economic democracy, alternative currencies, and financial institutions, participatory and social economy, public-employment schemes, social auditing, fair trading, and all kinds of practices aimed at creating spaces partially free from the euro rules are needed. This is the only way to break the dependencies imposed by the social structures of consumption and production. Of course, democratic central planning together with socialisation of basic branches is a central part of a productive transformation strategy, along with some form of collective self-reliance among countries,²⁷ but if the agents of change are to be the people, an active response on their part is indispensable, and this can be only achieved through practice.

Notes

1. Annamaria Simonazzi, Andrea Ginzburg, and Gianluigi Nocella, ‘Economic relations between Germany and Southern Europe’, Cambridge Journal of Economics, vol. 37(3) (2013), pp 653-675.
2. Galina Hale and Maurice Obstfeld, ‘The Euro and the Geography of International Debt Flows’, CEPR Discussion Paper No. 9337, 2014.
3. John Milios and Dimitris P. Sotiropoulos, ‘Crisis of Greece or crisis of the euro?’, Journal of Balkan and New Eastern Studies, 12, 3 (2010).
4. Reuven Glick and Andrew K. Rose, (2015). Currency Unions and Trade: A Post-EMU Mea Culpa, CEPR Discussion Paper 10615, 2015.
5. Matteo Bugamelli, Fabiano Schivardi, and Roberta Zizza, ‘The Euro and Firm Restructuring’, Alberto Alessina and Francesco Giavazzi (eds), Europe and the Euro, Chicago: University of Chicago Press, 2010.
6. Lavinia Rotili, The Euro effects on intermediate and final exports, Working Papers (Dipartimento di scienze sociali ed economiche) 7/2014, Sapienza Università di Roma.
7. Dimitris P. Sotiropoulos, (2012) ‘Thoughts on the Ongoing European Debt Crisis: A New Theoretical and Political Perspective’, ElenaPapadopoulou and Gabriel Sakelladiris (eds), The Political Economy of Public Debt and Austerity in Europe, Athens: Nissos, 2012.
8. Karl Aiginger, ‘The bumpy road of convergence: the catching up experience in Portugal, Spain and Greece’, Estudios de Economía Aplicada, 22, 3 (2004), pp. 451-473.
9. European Central Bank, ‘Real convergence in the euro area: evidence, theory and policy implications’. ECB Economic Bulletin, 5/2015.
10. See, for example, Yann Moulier-Boutang (1997) <http://www.multitudes.net/La-revanche-des-externalites/> (accessed 27 October 2015).
11. European Commission (2004) ‘Facing the challenge: The Lisbon strategy for growth and employment’, Office for Official Publications of the European Communities, Luxembourg.
12. Dani Rodrik, Normalizing Industrial Policy, UN Commission on Growth and Development, Working Paper No. 3, Cambridge and Washington, 2008.
13. Rémy Herrera, ‘The Hidden Face of Endogenous Growth Theory’, Review of Radical Political Economics, 38, 2 (2006), pp. 243-257.
14. Albert Recio Andrey, ‘Rasgos del nuevo poder oligárquico en España: viejas y nuevas caras de la oligarquía española’, Federico Aguilera and José Manuel Naredo (eds), Economía, Poder y Megaproyectos, Teguise – Lanzarote (Spain): Fundación Cesar Manrique, 2009.
15. El País, 23 March 2011.
16. Mauro F. Guillén and Esteban García-Canal, The New Multinationals – Spanish Firms in a Global Context, Cambridge: Cambridge University Press, 2010.
17. William Chislett, Spain’s Multinationals: the Dynamic Part of an Ailing Economy, Working Paper 17/2011, Real Instituto Elcano: Madrid.
18. This insertion of Spanish capital, however, has negative effects on national productive structures. A case in point is the olive oil complex, a story not as well known as the cases of Banco Santander, Telefonica, or big contractors. Olive groves have expanded by 500,000 hectares, and olive oil extracting facilities have been modernised all over the olive-producing regions of Spain, financed through the European Agricultural Guarantee Fund and supported by the Common Organisation of Agricultural Markets. Today, Deoleo, a company listed in the Spanish Stock Exchange, is the top olive-oil exporter in the world, surpassing its Italian competitors. The other side of this success story is that a traditionally sustainable crop providing a means of living in many rural zones has turned into an ecological problem with very little social return. Ownership of land remains in the farmers’ hands but cooperatives have been swollen by a company controlled by a risk capital firm based in London (CVC Capital Partners) and a couple of Spanish banks (see Manuel Delgado Cabeza, ‘La globalización de la agricultura andaluza: evolución y vigencia de la cuestión agraria en Andalucía’, Manuel González de Molina (ed.), La cuestión agraria en la historia de Andalucía: nuevas perspectivas, Centro de Estudios Andaluces: Sevilla, 2014). Thus the ‘agrarian question’ remains, but it is a ‘new agrarian question’.
19. Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, London: Anthem Press, 2002.
20. Michael H. Best, ‘Productive Structures and Industrial Policy: The missing link in EU Cohesion Policy?’ Working Paper, 2013, <http://www.michaelhbest.com/recentpublications.html>.
21. Giovanni Arrighi, Beverly J. Silver, and Benjamin D. Brewer (2003) ‘Industrial Convergence, Globalization and the Persistence of the North-South Divide’, Studies in Comparative International Development 38,1 (2003), pp. 3-31.
22. Eduardo Sánchez Iglesias, ‘Internacionalización de la producción y cambio tecnológico: Las estrategias tecnológicas de Filiales de Empresas Extranjeras y su relación con la dependencia tecnológica del sector industrial en España’, unpublished PhD thesis (draft), Universidad Complutense de Madrid, 2015.
23. Valentino Piana, ‘The “pattern approach” to world trade structures and their dynamics’, presented at the conference Observing Trade: Revealing International Trade Networks (Princeton Institute for International and Regional Studies) 9 March 2006.
24. Luciano Vasapollo, Rita Martufi, and Joaquín Arriola, Il Resveglio dei Maiali: PIIGS. Le proposte de CESTES-PROTEO, Milan : Jaca Book, 2011.
25. Lutz Brangsch, ‘The “Hard Core” of European Integration’, transform!, 10 (2012).
26. Catherine Samary, (2015) ‘Contre la consolidation néo-coloniale de l’Eurogroupe – Leçons de Grèce pour une Europe des droits sociaux et démocratiques’, 9 August 2015, <http://www.europe-solidaire.org/spip.php?article35629>.
27. Justyna Pierzyńska, ‘Collective self-reliance: A portrait of a Yugoslav development strategy’, Miscellanea Geographica – Regional Studies on Development 16, 2 (2012), pp. 30­-35.