Crisis in the Eurozone. Costas Lapavitsas
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heavy need for refinancing, particularly as the budget swung violently into deficit in 2009. But Italian public debt is also high. It is also true that Greek governments have been persistently manipulating data, and that the country faces a large current account deficit. But these pressures could have been handled reasonably smoothly if it was not for speculation in the financial markets. Even speculation could have been confronted decisively, if the eurozone authorities had shown any inclination to bring it to heel. To analyse the interplay of these factors it is now necessary to consider the financial sector, the part of the economy that is most heavily responsible for the crisis of 2007–9.
6. THE FINANCIAL SECTOR: HOW TO CREATE A GLOBAL CRISIS AND THEN BENEFIT FROM IT
An institutional framework that favours financial but also productive capital
The European Central Bank (ECB) and the national central banks constitute the European System of Central Banks (ESCB), which has price stability as its primary objective.12 The ECB has normative power over the national central banks since decision-making on monetary (and financial) policy emanates from the ECB and then reaches national central banks. It can also make recommendations to national authorities relating to prudential supervision of credit institutions and the stability of the financial system.
The ECB is an unusual central bank. It has the exclusive right to authorise the issuing of banknotes in the EU, though notes are issued by individual central banks. It is also responsible for holding and managing official foreign reserves of member states. However, the ECB (and the national central banks) is prohibited from offering overdrafts or other credit facilities to member states, including the purchase of public debt instruments. The ECB is considered independent in the sense that no public institution or individual member state is authorised to influence its operations and decisions. But its substantial independence comes from the absence of a unitary European state with which it would have been obliged to interact.
The peculiar character of the ECB is also apparent in its own statutes. Subscription to ECB capital and the transfer of foreign reserve assets to the ECB, for instance, are proportionate to each member state’s population and GDP. Furthermore, when the number of member states exceeds fifteen, participation in the decision-making process of the ECB is supposed to take place on the basis of GDP as well as on the aggregate balance sheet of the monetary financial institutions of each member state, again reflecting a hierarchy of state power.13
The ECB has supported financialisation in Europe mostly by protecting the interests of financial capital. European financial markets have been unified as financial liberalisation has spread and become deeper. Restrictions on financial operations have been abolished among the member states. Monetary union and the establishment of the euro as world money have benefited European financial capital in competition with US and other global banks. The euro has also been marked by an appreciation bias, rising from around 0.95 to the dollar at its launch to reach a peak of 1.58 in July 2008. The euro has retreated since then, particularly following the sovereign debt crisis, and currently stands at around 1.35 to the dollar (March 2010). Without necessarily being deliberate, the appreciation bias has served the interests of financial capital since it has helped to induce global wealth holders to change the currency composition of their portfolios in favour of the euro.
It appears that the appreciation bias of the euro has not damaged the interests of the European productive sector, because it has forced productive capital to lower costs in order to be able to compete globally. This has meant steady pressure on workers’ pay and conditions. German structural adjustment in the 2000s, in particular, has been based on squeezing workers, as was shown above. Productive capital has further benefited from reductions in uncertainty surrounding exchange rates as well as from differences in financial environment. Finally, a strong and rising euro has also supported European capital in undertaking mergers and acquisitions (M&A) in other parts of the world. In short, the euro as world money has served the international interests of both financial and productive capital in Europe.
For European banks in particular, the euro has provided liquidity facilities regulated by the ECB that have been able to support banking expansion across the world. The European banking system (above all, German and Dutch banks) steadily increased its net long US-dollar positions until the middle of 2007 (roughly $400 bn), with the ECB effectively acting as one of the main funding counterparties.14 Note also that, in contrast to other central banks of mature countries, the ECB has always accepted private securities as collateral in its operations. Normal procedure for central banks is to accept only government securities. The Federal Reserve, for instance, started to accept private securities in 2008 only as an extraordinary response to the crisis.
There is no doubt that the institutional arrangements of the euro have been beneficial to European finance. However, after the outbreak of the global crisis and as global banks faced trouble, the significance of the absence of coordination between the monetary and the fiscal spheres became apparent. In contrast to the USA and the UK, monetary union has revealed an underlying weakness, namely the absence of a unitary or federal state in Europe.
Given the absence of political union, the Stability and Growth Pact has acted as anchor for the euro in the world market. Contrary to the USA, which has been able to relax fiscal policy, the euro has required fiscal tightening as the crisis has unfolded. The implication has been to push member states toward policies that further squeeze workers in peripheral countries, while defending the interests of the European financial system. Thus, monetary union has meant an asymmetric adjustment between banks and states in the financial sphere after the crisis: banks have been protected, while the onus of adjustment has fallen on weaker peripheral states.
Banking in the eurozone: The core becomes exposed to the periphery
Financialisation has developed in both core and peripheral countries of the eurozone, as is clear from the rising volume of financial institution assets relative to GDP (See table 1).
There are no apparent differences between core and peripheral countries with respect to the underlying trend of financialisation; there is, however, considerable variety among them. Furthermore, there has been no dramatic increase in foreign bank ownership, unlike the trend toward growing foreign bank entry in several developing economies during the same period. Assets of foreign banks (both subsidiaries and branches) in the eurozone stand around 20–25 percent of total assets of credit institutions, the only exception being Ireland, with around 50 percent.15
Table 1 Credit institutions, Total Assets/GDP
Source: ECB (2010): Structural indicators for the European Union banking sector, and ECB (2005): European Union banking structures
The international investment position of European banks, however, presents several noteworthy features. Figure 23 shows that the aggregate cross-border claims of banks have been rising globally since the mid-1980s, and quite rapidly in the 2000s.16 But the aggregate of cross-border claims of European banks rose much faster in the 2000s. The data is presented in US dollars, and the appreciating euro to US dollar exchange rate is shown on the right hand scale. To a certain extent, the appreciating euro has probably inflated balance sheets denominated in euro compared to those denominated in dollars. Nevertheless the growth in the international claims of European banks appears also to reflect greater integration within the European Union, drawing on the beneficial effect of the single currency and single market for finance.
Fig. 23 International positions by nationality of ownership of reporting banks (USD, bn)
Source: BIS Locational Banking Statistics
Turning to cross-border lending within the eurozone, it is useful to consider trends by splitting countries into core (Germany, France, Belgium and the Netherlands) and periphery, broadly understood (Greece, Ireland, Italy, Portugal, Spain). Lending has increased in both directions. As is shown in figure 24, gross exposure by banks grew from March 2005 until early 2008, after which it declined across the board as banks reined in their lending. It is important to stress, however, that even though