EU needs to restore credit channels towards the real economy

2013-03-15

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Economists who did not heed the obscurantist apologetics of the neoclassical synthesis, were fully aware of the growing chasm between the financial system and the real economy. The process of the financialization of the global economy (not to be confounded with “globalization”), of the aggrandizement of financial markets and the concomitant stagnation or unsustainable growth of real economies, especially in social and employment terms, has been an underlying malignancy of the existing capitalist system, at least ever since the early 1970s. Though many economists obstinately refuse to reconsider the figments guiding their “science”, it is now evident that the Great Recession enlightened some policy-makers by bestowing upon them a profound distrust for those economists who would otherwise propound unrealistic macroeconomic models such as the theory of rational expectations, the efficient market hypothesis etc.; theories that are all couched in terms of the Walrasian chimera of general equilibrium and of this magnificent phantom of the omniscient, ever-vigilant homo economicus.

In the Euro area the denial over the core antithesis of existing capitalism, was never so much about economic doctrine, but rather of political expedience. Instead of admitting that the original euro architecture was ill conceived, it was easier for the powers that be to obfuscate the systemic features of the eurocrisis, by pretending that bank recapitalizations bound up together with tax hikes in the midst of a depressed economy (alias “austerity”) would be sufficient to contain and even reverse financial contagion and to repair credit channels towards the real economy. Ordoliberal litanies to the contrary notwithstanding, it has always been clear that “austerity” could never provide a credible backstop to the self-invigorating dynamic between the financializing global economy and the institutionally incomplete and asymmetric Economic and Monetary Union.

It is not pertinent to delve into an extended exegesis of the deleterious effects of the policies that have been adopted in the Euro area over the last years. That they exacerbated existing problems is evident to anyone who can insulate thinking from ideology. What is of interest in present time, is to identify the timid recognition by key policy-makers that the remedy that was initially enacted, contributed to the prolongation of the patient’s suffering.

For instance, Mr. Mario Draghi, the chief of the European Central Bank, has been admitting, over a series of speeches and press conferences, that the interventions of the ECB in the money and capital markets have remained contained to the financial system, without yet having any benign effect on the real economy. Credit conduits for small and medium sized enterprises remain hermetically shut, against the backdrop of a persistently stagnant or depressed economy and in spite of the expansionary monetary policy of the ECB, manifested in record-low key interest rates, the accommodative approach towards collateral requirements, the Long Term Refinancing Operations and the Outright Market Transactions (the latter, though it has not yet been called into force, has struck confidence in hearts of investors, by removing convertibility risks, thus providing the impetus for a virtuous re-integration of the financial sector).

In addition the so-called “two-pack” which was adopted this week in the European Parliament (see here and here), while far from a satisfactory bargain, does provide the basis for timidly and gradually reconciling budgetary responsibility with fiscal flexibility and with greater democratic legitimacy (where the eurozone’s existing decision-making structures leave much to be desired), while also making inroads towards the introduction of common debt instruments, in particular Eurobills (see Eurobills: On the joint issuance of European debt instruments).

The volksgeist seems to be moving away from the conventional wisdom of self-restricting austerity and now appears to be open to genuinely reformative ideas. It is at this very moment in time, at this crossroads of European politics, where the fundament to a new European narrative needs to be provided. It is when the tectonic plates of politics are on the move, when the reformulative rhetoric may permeate decision-making.