The euro lurches towards the abyss – but does the Left have a Plan B?

With the eurozone engulfed in a semi-permanent state of crisis, Ann Pettifor outlines five steps the global Left can take towards a Plan B.

The eurogame is up. The banking crisis that started with the unpayable debts of the US sub-prime sector, and has now moved on to include the unpayable debts of sovereigns. It is increasingly clear there is declining political and institutional support for further private bank bailouts.

The dramatic resignation on Friday of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe.

That is the conclusion of investors in both Wall St. and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds. 

The Growth and Stability Pact was, and is, repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder.  The ECB, led by Jean-Claude Trichet, is also obliged to flout its terms, causing the resignation of not just Mr Stark, but also Germany’s Axel Weber

This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.

The eurozone and its economic framework were designed as a financial ‘straitjacket’, to undermine the sovereignty of Europe’s elected governments, to transfer power over financial and therefore economic policy to unaccountable central bankers – powers then enforced by ‘the invisible hand’, international speculators on foreign exchange and financial markets.

It was also, its protagonists argued, designed to ensure peace across Europe. But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence, of European economies; sovereign insolvency; bank failures; rising unemployment; the degradation of public services; and with it the intensification of tensions and conflict across Europe.

Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes, who was then responsible for outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.

So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?

The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes.

The Institute of Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.

But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor.

Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.

So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run. However, fiscal expansion is needed immediately to deal with the collapse of employment and private sector activity.

The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion.

This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity.

Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to  replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced.

The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their internal markets.

The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’.

Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011). 

Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration.  In other words, the rule should be ‘tight but cheap’ money.

Fifth, governments and central banks should be mandated to promote full employment and sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite.

For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.

“Look after employment” as Keynes argued, “and the budget will look after itself.”

Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.

24 Responses to “The euro lurches towards the abyss – but does the Left have a Plan B?”

  1. checkpointcharlie

    The euro lurches towards the abyss – but does the Left have a Plan B? //t.co/NrZ98wG by @AnnPettifor

  2. Political Planet

    The euro lurches towards the abyss – but does the Left have a Plan B?: With the eurozone engulfed in a semi-perm… //t.co/0doAO7x

  3. William Shaw

    The euro lurches towards the abyss – but does the Left have a Plan B? //t.co/NrZ98wG by @AnnPettifor

  4. fauxpaschick

    The euro lurches towards the abyss – but does the Left have a Plan B? //t.co/NrZ98wG by @AnnPettifor

  5. Susan Jones

    The euro lurches towards the abyss – but does the Left have a Plan B?: This will involve the financing of a prog… //t.co/L0OraV7

  6. Selohesra

    It is truly shameful the way the people of Europe were deceived by politicians of all the main parties by the Euro project. Everyone knew that the Euro was doomed to failure without full econominc and political union but as that would have been unacceptable to the electorate of most countries the politicians swore blind that it was not necessary – those few from the left and right who stood up and said this cannot work were rididiculed and abused by the establisment and a compliant media.

    Now the predictable crisis is upon us those same politicians will try and bounce the eurozone countries into the unpopular political union they previously denied was necessary.

  7. Prime Economics

    Liberal finance in its death throes. Here is a Plan B. //t.co/XkEK42I

  8. Ann Pettifor

    Liberal finance in its death throes. Here is a Plan B. //t.co/4mi9onc

  9. M.B.K.M.

    Liberal finance in its death throes. Here is a Plan B. //t.co/4mi9onc

  10. JamieSW

    Liberal finance in its death throes. Here is a Plan B. //t.co/4mi9onc

  11. Tony Greenham

    Liberal finance in its death throes. Here is a Plan B. //t.co/4mi9onc

  12. sammgoldsmith

    Liberal finance in its death throes. Here is a Plan B. //t.co/4mi9onc

  13. larryb

    Excellent. RT @AnnPettifor: Liberal finance in its death throes. Here is a Plan B. //t.co/xRApVnE

  14. James Stanhope

    Excellent. RT @AnnPettifor: Liberal finance in its death throes. Here is a Plan B. //t.co/xRApVnE

  15. Nick Srnicek

    A leftist proposal for post-crisis economies – //t.co/RK2mwZ2 Good, but overlooks reasons for shift to financialization in the 1970s.

  16. robert the crip

    yes follow it into the Abyss….

  17. Leon Wolfson

    Selohesra – What rot. There are plenty of ways to solve this. Of course, your kind’s constantly talking down the currency has made things much worse…

  18. Selohesra

    What’s your plan then Leon? – as to the impact of my comments I suspect the basket case economiies in Greece, Ireland, Portugal, Spain , Italy etc probably have a bigger effect on this crises than what I say but there again perhaps I am more powerfull than I thought. Glad to see you dropped the ‘e’ in your surname – didnt really add much

  19. Knut Cayce

    RT @leftfootfwd: The euro lurches towards the abyss – but does the Left have a Plan B? //t.co/KqxgxHnc

  20. Ann Pettifor

    RT @sammgoldsmith: Liberal finance in its death throes. Here is a Plan B. //t.co/WNX04MJM #eurocrisis

  21. Chris Roberts

    “Look after employment, and the budget will look after itself.” Keynes, JM. //t.co/ul2ziWQP by @AnnPettifor

  22. Fergal

    RT @sammgoldsmith: Liberal finance in its death throes. Here is a Plan B. //t.co/WNX04MJM #eurocrisis

  23. Ben Little

    RT @sammgoldsmith: Liberal finance in its death throes. Here is a Plan B. //t.co/WNX04MJM #eurocrisis

  24. ed conduit

    We favour the argument above. We consider that these three areas of fiscal stimulus would have a Keynesian multiplier effect between 2015 and 2020:

    1. housing, particularly the conversion of empty
    commercial property to council flats

    2. electricity generation that gives sale prices below 10p
    per kWh; biogas from food waste, gasification of scrap cars, and in-stream
    hydro-electric are good candidates

    3. tourism, especially large public spectacles in London, and
    perhaps new bike trails
    Ed Conduit, S. Staffs constituency
    Tony Winters, Henley constituency

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