The Pandemic Depression
The Global Economy Will Never Be the Same
When the euro was created some 15 years ago, there was speculation that the new currency might come to challenge the dominance of the U.S. dollar as the international reserve currency of choice. But the euro’s guardian, the European Central Bank (ECB), had little appetite for such a role. Likewise, foreign exchange markets showed little support for supplanting the dollar’s hegemony with the euro, despite a move into euro-denominated bonds and a strengthening of the value of the euro over the 2000s. This has meant that the EU has, in large part, played a “helper” role in U.S. financial hegemony throughout the postwar era to today.
But now, Europe’s “helper” status may well be in question. The populist forces that have emerged throughout the continent challenge the legitimacy of the euro and threaten both the institutional and ideational foundations upon which it rests. With this uncertainty arises the possibility of the EU turning into a “risk generator” within the global financial order or perhaps even worse—a “spoiler” of the very system itself.
AN INCOMPLETE POLITICAL DEVELOPMENT
The sovereign authority of the ECB is critical to the broader stability of the global financial system. But one of its key weaknesses involves the particularities of the euro’s design: unlike every other successful single currency, the ECB stands by itself at the European level, without the broader societal and political institutions needed to give currencies a solid and durable foundation. There are four roles in which this broad structure of political authority is needed: to serve as a trusted generator of market confidence and liquidity, to provide robust regulation of financial risk, to build mechanisms for fiscal redistribution and economic adjustment, and to create the political solidarity necessary to undergird hard times. It is this lack of broader governance that places the euro in jeopardy and creates its “spoiler” potential for the international financial system, not its shortcomings as an optimum currency, as some economists such as Paul Krugman have argued.
Regarding the first element—serving as a visible and ironclad backstop to reassure financial markets—the eurozone is doing relatively well. Although originally founded as a hyper-independent central bank and given a narrow mandate to fight inflation and protect the value of the euro, the ECB has proven more innovative in providing confidence and liquidity over time than imagined by its creators when they met in Maastricht in the early 1990s. Most notably, the ECB, under the leadership of Mario Draghi, has issued hundreds of billions of euros in emergency loans to European banks over the years following the implosion of the Greek economy in the wake of the 2008 global recession. The policy to some extent mirrored the U.S. Treasury and Federal Reserve’s decision in 2008 to bail out American banks through the Troubled Assets Relief Program. The ECB’s Long Term Refinancing Operations, which lends money at very low interest rates to troubled member states, was also a significant departure from the ECB’s image as an institution that would not act to backstop entities in financial distress. LTROS have proven relatively successful in calming markets and giving indebted member states some breathing room to reform—even as policy demands for austerity have been severely damaging.
These new policies and programs have been matched by a much more forceful and overtly political set of statements from the ECB leadership. In the summer of 2012, Draghi’s muscular remarks pledging his institution to do “whatever it takes” to save the euro got plenty of attention across Europe and the United States, but it was only one of many such statements that came from the ECB over the course of the eurozone crisis. In terms of both its institutional capacity and its role in the political debate, the ECB has been playing a critical and unexpected role as an unofficial lender of last resort and thus reducing the EU’s role as a potential “risk generator.”
The second factor, however, which requires a European banking and financial union, is where the EU has shown more weakness. The deep financial integration across European states demands an overarching framework to protect against a contagion of banking crises. Although there has been some movement toward such a banking union framework, it remains unfinished. The European Commission, with support from the ECB, has been successful in getting an agreement on a single supervisory mechanism for the eurozone’s banks. This initiative is spearheaded by the ECB and provides a single rulebook for all banks. The European Banking Authority, created in 2011, is an important new actor regulating eurozone and non-euro states as part of the European System of Financial Supervision. These regulatory and institutional developments, however, have yet to include crucial elements such as common deposit insurance, which would protect against a cataclysmic run on the banks across the EU, and bank resolution rules have yet to be implemented to deal with future banking crises.
The third element—fiscal and economic union—remains the most far out of reach for the EU. Although some have argued that the EU only needs the politically more feasible banking union, fiscal union remains critical to managing the inevitable slings and arrows of a shared currency by providing mechanisms for fiscal redistribution and economic adjustment. A fiscal union involves the ability to extract revenue through taxes, to redistribute money through public spending, and to raise additional funds through public debt instruments. The EU currently has none of these explicit functions, although it does (less visibly) redistribute funds through its European Regional Development Fund and the European Social Fund. Proposals for “eurobonds” and other ways to mutualize debt in the eurozone have proved politically inflammatory because they smack of much deeper political integration than many in Europe are willing to accept while giving some in Germany the fear that they will be on the hook for profligate spending by their neighbors. In lieu of a fiscal union, the EU’s leadership and the heads of state and government have aggressively sought to impose austerity programs, involving deficit and debt reduction, on societies that are still reeling from the fallout of the financial crisis. Such efforts look much more like the IMF’s conditional lending programs and structural adjustment loans than an embedded governance system that could hold together a monetary union. These austerity programs jeopardize the EU’s future and, thus, stability in the broader global financial order.
Finally, the EU is also missing a broader political union, which is the legitimating foundation for all other currencies. Although the EU has become remarkably institutionalized over the past 50 years, with a constitutional-like legal framework and a series of politics and practices that deeply affect the everyday lives of all Europeans, it does not have all the state-like governance structures that support all other national currencies. To the detriment of European and global stability, the EU simply has not created the social solidarity and the legitimate political institutions to adequately embed the euro in a larger political framework.
Because the political mechanisms for stabilizing the European economy remain elusive, the crises of refugee flows and migrant resettlement, Brexit, and the rise of populist anti-EU groups has cast serious doubt on the larger European project and with it has transformed Europe’s role as a “helper” into that of a “risk generator” in the global financial order.
THE DECLINE OF NEOLIBERALISM
But institutional configurations are not the only important factor in considering the security of the EU’s role in the global financial order. Ideas are critical and unavoidable legitimating devices, too. In fact, the hyper-independent, politically-insulated ECB is itself partly the result of the broader culture of neoliberalism, a set of ideas that encompasses a range of policies, such as the strict delegation of control over the money supply to experts who are delinked from representative democracy. The theoretical rationale behind this idea is straightforward: politicians chasing votes are likely to try to manipulate the economy in ways that make the populace happy in the short term, disregarding the potential for their monetary policies to produce economic trouble in the long run. The insulation of central banks from the direct influence of elected officials was one of the most notable governance changes globally in the 1990s. The ECB, established in 1999, took central bank independence to the extreme, with only weak channels of political representation and oversight.
Central bank independence achieved a formidable status in contemporary political life, with little questioning of its logic or effectiveness. But the evidence in support of central bank independence has always been mixed at best. This contradiction can be explained by what I call the spread of a “rational fiction.” Governments such as those in the eurozone choose to delegate financial power to acquire important legitimizing and symbolic properties, which are particularly attractive in times of uncertainty or economic distress.
This dynamic is rational and instrumental, but only when placed within a very specific cultural and historical context that legitimizes that delegation—the culture of neoliberalism. But moving to an independent central bank only appears to shelter monetary policy from politics. In fact, as Jacqueline Best has argued in Foreign Affairs, it solidifies a specific set of ideologies and partisan positions that favor certain societal groups, most notably investors, over others, such as workers. The ECB benefited from the strong consensus about the desirability of central bank independence that was part and parcel of the neoliberal turn of the 1990s onward.
The question is this: after several decades of low inflation and slow growth, will this independent central bank legitimating dynamic hold? This is far from clear, as the disastrous effects of the austerity policies imposed on debtor countries such as Greece, Ireland, Italy, Portugal, and Spain have created deep political cleavages and fanned the flames of populist backlash against the insulated EU technocracy. As euroskeptic parties emerge across the EU to challenge the orthodox liberal consensus that ruled the EU, it is unclear whether the legitimating foundations of the ECB and the euro still hold today. If the justification for the ECB’s independence is challenged but the institutional configuration of the EU is not updated to lend the euro the political authority it needs, the chances are high that the EU will struggle mightily.
Just as observers now fear that the United States is in a structurally weakened position because of President Donald Trump’s seeming rejection of the United States’ “indispensable nation” role, the incomplete political development of the EU and the backlash against the ECB’s legitimating ideology bring into question Europe’s ability to navigate future crises. These factors make the EU a “risk generator” at the very least and a potential “spoiler” in the global financial order at worst. The global financial system can ill afford such an outcome.