When debt grows faster than capitalism, the governance of capitalist political economies becomes a Ponzi-like confidence game.
Wolfgang Streeck is the Emeritus Director of Director the Max Planck Institute for the Study of Societies in Cologne, Germany
Cross-posted from El Salto
Translation by BRAVE NEW EUROPE
It’s summer, Brussels pretends to be on holiday, but no one believes it: the clouds are gathering, no magic solution is in sight, everyone’s nerves are on edge. Forests are burning, it’s raining, rivers are flooding: the “climate crisis” is hitting home in an increasingly undeniable way. Not a single euro of the 750 billion euro Coronavirus “Recovery” Fund has been spent yet, just as the “fourth wave” is beginning to gather momentum. Time for an aggressive additional fiscal stimulus package, but how to pay for it?
The French war in Africa continues; the failed states of Libya, Syria, Iraq and Lebanon continue to fail; German demands for a European right of asylum, likely to shield Germany from the obligation to match its behaviour to its rhetoric, prove as divisive as ever; regime change in Russia must wait, because Putin will not step down; and to all this we now add Afghanistan. Good Uncle Joe has become evil Uncle Joe, leaving toute l’Europe in shock: that’s unilateralism for you!
In Germany and the UK, governments are desperately trying not to have to explain why, beyond following US orders, they have been fighting a senseless war in a remote, ungovernable country for two decades. And amid this profusion of disasters everywhere, Angela Merkel, the unelected but otherwise de facto super-president of the European Union, who is said to have held the EU together, is stepping down this autumn for good as German chancellor.
Will “Europe”, the “European project” as embodied in the European Union, survive Merkel? In Brussels realpolitik, this means whether Germany will continue to fulfil its obligations as the EU’s hidden hegemonic power, that is, essentially whether it will continue to pay, which it can do in a variety of ways, many of them designed to be obscure to a superlative degree: for example, by letting its net contributions to the EU budget rise; by allowing the European Central Bank to engage sub rosa in state financing, in contravention of the Treaties; by agreeing to underwrite the Corona ‘recovery fund’, also outside the Treaties; by allowing that debt to be serviced by more debt in the future, letting the €750 billion, sold as a one-of-a-kind emergency measure, turn into a ‘historic breakthrough’ toward a ‘supranational fiscal capacity’ à la française – while, in order to keep interest rates low, intimating to the markets that if the worst came to the worst, Germany would be on-hand to offer ‘European solidarity’.
Can “Europe” continue to count on Germany in the face of imminent elections, the outcome of which is more uncertain than ever in the history of the Federal Republic? At the end of August, it appeared that the next German government, the first after Merkel, would consist of a three-member coalition formed from these four parties, the CDU/CSU (Christian Democrats), the SPD (Social Democrats), the Greens and the FDP (Liberals), while Alternative für Deutschland is excluded from the constitutional arch, die Linke is struggling to pass the 5 per cent threshold and both parties are in any case deeply divided internally.
Which of the three Kanzlerkandidaten will end up as Kanzler is anyone’s guess, with the lightweight Laschet and the solid Scholz having a better chance than the Green’s unexpected candidate Baerbock. Whoever it is, they will have only a quarter of the votes at her disposal after their appointment in the new tripartite government that will include at least two parties in the political orthodoxy of the Federal Republic. Can centrism be more deeply rooted in a political system?
Nations, organised into states, develop ideas about their national interests, which reflect, among other things, geographical location and collective capacity. Embedded in the political common sense of a country and made self-evident by its political classes, national interests change only slowly. This is also true for today’s Germany, even if the idea of national interest is considered foreign there, which requires that it be reified as a general European interest or even a human interest. At its heart is the preservation of the European Union and in particular of the European Monetary Union, which has become, by a fortunate accident, the source of German national prosperity.
Even an interest as solidly established ideally and materially as German “pro-Europeanism” can, however, come under pressure when circumstances change and continuous efforts to keep the pro-European Union consensus alive become advisable. For example, of the four parties that may form the combination that makes up the next German government, two, the CDU/CSU and the FDP, will have to watch out for their new competitor on the right, AfD, which offers a different ‘nationalist’ concept of what is good for the German people. While this would not make these parties ‘anti-European’, it might force them to be less acquiescent to future calls from Brussels for Germany to practice more pecuniary Europeanism.
For example, the European Commission has for some time refrained from publishing information on member states’ net contributions to the EU budget in order not to wake the sleepy German dogs. This has not prevented the Frankfurter Allgemeine Zeitung from making its own calculations using publicly available data. According to information published by this newspaper on 6 August 2021, in 2020 Germany paid 15.5 billion more to Brussels than it got in return for a net contribution of 26 billion euros, equivalent to 1.74 per cent of federal public spending.
Germany was followed by Great Britain (with a net contribution of 10.2 billion euros), France (8.4 billion euros) and, among the other countries, Italy (4.8 billion euros). No official information is yet available for 2021, but in June 2020 the Commission estimated that in this year the German contribution would increase by more than 40 per cent, which would represent a massive increase of 13 billion euros over the previous gross payment made by Germany. In part this seems to reflect the promise made at the time of Brexit by Germany’s finance minister, the solid Scholz, to make up most, if not all, of the shortfalls in the EU budget caused by Britain’s exit.
On the face of it, what Germany pays to the EU is only a tiny fraction of its total federal spending. Like other countries, however, German general budgets leave very little room for discretionary spending, perhaps as little as 5 per cent of total spending, so any increase in contributions to the EU is by definition painful. This could turn the issue into a political problem, because two of the main beneficiaries of EU finances are the EU’s two black sheep, namely Poland and Hungary, which in 2020 received total net revenues of 13.2 and 4.8 billion euros respectively. (In second place, above Hungary, was tiny Greece, recipient of 5.7 billion euros, obviously a bonus for having signed the 2015 Memorandum of Understanding and having properly replaced the left-wing Syriza government with the current “pro-European”, read pro-capitalist, government).
Given that German citizens like to see the EU as an educational, rather than an economic or geostrategic, initiative set up to teach Eastern Europeans the new German values of democracy, marked by a strong imprint on diversity, conservative-authoritarian Eastern European member states may delegitimise the support granted to them, especially in times of fiscal hardship, and this may indeed cast a shadow over the project of an ‘ever closer union’ as a whole.
In this context, the infringement proceedings that the Commission has initiated against these two countries, at the behest of their liberal opposition parties and their allies in the European Parliament, may be helpful insofar as they involve a threat to reduce subsidies unless the countries in question comply properly, with these subsiday cuts, which save money for frugal Germans, constituting an attractive educational method for them. Let us not forget, too, the simultaneous infringement proceedings brought against Germany for failing to control its Constitutional Court’s insistence on the German government’s obligation to prevent European institutions such as the European Central Bank from encroaching on German sovereignty above and beyond what the Treaties stipulate. This procedure was demanded by members of the German Greens in the European Parliament and may well have been activated with the secret connivance of the German federal government.
Is this excessive caution really necessary? As Yanis Varoufakis famously said: “Whatever Germany says or does always works in the end” (not for everyone, actually). This was affirmed, however, in 2015 and although the spirit may still be predisposed, the flesh has meanwhile become weak, will being one thing and capacity another. Due to the coronavirus, the German national debt increased in 2020 from 60 to 70% of GDP, and is likely to increase at a similar rate during 2021 to reach the 80% threshold. There is no reason to believe that the next German government, regardless of its composition, will be able or indeed willing to abolish the so-called “debt brake”, which, introduced in the constitution in 2009, stipulates that fiscal policies implemented over the next few years will again have to observe strict limits for incurring new debt. (Further waves of coronaviruses caused by new mutant variants or entirely new variants of SARS-Covid 19 may occur, which would justify further emergency spending).
On the other hand, prior to the impact of the coronavirus, it is clear that Germany’s public infrastructure – roads, bridges, rail system – has been deteriorating rapidly over the past two decades, no doubt due to the austerity Germany has imposed on itself in an attempt to teach the rest of the EU Member States that thrift must precede spending. Now the coronavirus has also exposed the shortcomings of health care, old people’s homes, schools and universities, which will be expensive to update.
And that is not all. Merkel’s “energy turnaround” will require, according to current estimates, 44 billion euros in compensation for coal-producing regions and electricity producers between now and 2038, a sum that could be increased if the next government, as the Greens have demanded, decides to abandon coal sooner.
On the other hand, repairing the damage caused by the 2021 floods will require a “reconstruction fund” of 30 billion euros to be spent over the next few years. Add to all this that the floods may have put an end to the happy days when climate-related policies could consist of banal chatter about continually postponed pledges set on increasingly unrealistic dates for ending CO2 emissions. What now seems necessary, rather than low-cost symbolism, is expensive investment in dams and dykes, in forests less prone to burning, in air conditioning for hospitals and old people’s homes, in fresh air corridors for cities, and so on and so forth.
On top of all this, this new German debt will have to be repaid while the new EU debt (the “Next Generation EU Fund”) may actually be a drop in the ocean, if Brussels and the Mediterranean member states demand another wave of indebtedness similar to the latter, which should be guaranteed by German promises to exercise its role as debtor of last resort, if necessary. And let us not forget that all responsible political parties have promised that the German government will increase its “defence budget to 2% of GDP, an increase of no less than a third of GDP, an increase desired both by the United States, so that Germany can frighten Russia on behalf of the American power, and by France, so that it can contribute to its wars in the Sahel.
As part of all this, or as icing on the cake, France had to be promised a Franco-German fighter-aircraft system, the FCAS, which according to realistic estimates will cost approximately 300 billion euros over the next ten years. The project has met with opposition from the German military, which sees it as simply an update, with German money, of the existing but difficult-to-export French system known as the Rafale. With that much competition for the little discretionary money in the federal budget, will the German taxpayers take all this on board?
This question, however, is perhaps ill-posed, since the problem is no longer how to pay for what is necessary, but what to do if what is necessary has become too expensive to be paid for at one time or another. As a starting hypothesis, let us consider the possibility that the collective costs of running capitalism may once and for all have exceeded what societies can extract from it to cover them: paying for social peace, for the training of patient workers and satisfied consumers, paying for the preparation of surplus-value-generating production and for cleaning up its consequences, paying for the extension and defence of the market and of property rights in distant countries, and so on and so forth.
The result would be – and indeed already seems to be – a gigantic “fiscal crisis of the state”, as evidenced by the continuous increase of public debt and its stubborn persistence and irreversibility over the last decades. This increase has been facilitated by financially stressed states, which allow the financial industry to create infinite amounts of fiat money by launching attractive financial “products”. By borrowing from the financial system, states can, as long as credit is available, buy a future for capitalism by generously creating securities that give access to income streams, accruing over longer and longer terms, for the benefit of those who have enough money to lend it to them; these securities, moreover, are transferable to their children and grandchildren and are generously secured by the obligations assumed by the coming generations of those without money, who must work harder and longer to repay what has been termed their collective debt to capital.
When debt grows faster than capitalism, the governance of capitalist political economies becomes a Ponzi-like confidence game. Its immortal slogan is the words uttered by Mario Draghi: “Believe me, it will be enough”, originally said before an audience in which everyone was keen not to perceive and certainly not to say aloud that the Emperor’s clothes had long ago been pawned on the mount of mercy. In the European Union in particular, securing the future of capitalism through “fictitious capital” (Cédric Durand) takes the form of a signalling game operating on two levels: governments at the centre of the European economy send signals to governments on the periphery that they have reserves, real or reputational, that they can share; signals that governments on the periphery then pass on to their electorates to keep alive hopes for the prolongation of “European solidarity”, which, however, will soon need another injection of empty promises. Not everyone is equally adept at this game, and one of the reasons Angela Merkel has become such an important figure in the European Union-Europe may well lie in her unsurpassed ability to credibly promise the impossible, in her cool disregard for the substantive consistency of public policy, in her uncanny ability to make incompatible commitments and to make people believe that, at some later date, she will, one way or another, achieve their compatibility.
Of course, Merkel has been aided by the “pro-European” political class, which has seen no alternative but to place its trust in the German wizard’s ability to manage the postponement of the day of reckoning, if not until the end of time then at least until the end of her time in office. Somewhere in the recesses of their minds, however, these “pro-European” leaders may have harboured the suspicion or perhaps the hope that the necessary resources to be provided by Germany really do exist somewhere, in the cellars of the Bundesbank perhaps, and that through skilful negotiation and more political-moral pressure they can finally be obtained. But beyond that, this “pro-European” political class seems really happy in its support for Merkel’s mode of operation as a virtuoso artist of all kinds of Ponzi schemes of political desire, as a disseminator of studied optimism, as an expert in issuing fiduciary trust, as a mistress of debt deferral and at the same time an absolute champion of budgetary discipline, something essential in times of fiscal tension and political imposture, which these same “pro-European” political classes must learn to master day after day, faced as they are, under the conditions imposed by global capitalism, with the respective crises of underfunding of their public policies and their state models.
Will Laschet, Scholz or Baerbock, whoever is the new chancellor, be able to keep the magic alive to continue Merkel’s action, when Germany’s European periphery needs a new deferral of payments or another extension of cheap credit, when, for example, interest rates on its national debt rise despite the best efforts of the European Central Bank? In the summer of discontent in 2021, this seems doubtful indeed.
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