The long phase that lasted thirty years starting with the neoliberal turn of 1979–80 was anything but a retreat of the state; nor was it characterized by the abandonment of interventionist policies. Certainly the U-turn in economic policies at the end of the 1970s generated a rapid compression of effective demand. The sharp increase in nominal and, later, real interest rates, together with the spread of uncertainty, contributed to the fall in private investment. This first phase of the neoconservative turn can be defined as a “monetarist” one. However, in the very early 1980s there were political countertendencies. The most notable of these was President Ronald Reagan’s twin deficits, which kept the United States above water and initiated a flood of net imports, thereby sustaining the rest of the traditional industrialized world in Europe, Japan, and East Asia. In those years the United States and, to a lesser extent, Britain, Australia, and Spain were transformed into the market outlet of last resort of both strong neomercantilist states, such as Germany and Japan, and the weak ones, such as Italy. 

The monetarist phase of the neoliberal counterrevolution set in motion processes that led in the 1990s to the emergence in the United States of a type of capitalism based on a sort of “privatized Keynesianism.” The novel elements, although containing some of the traits of late–nineteenth-century capitalism, were renewed financialisation of the economy and the precariousness of jobs and working conditions. These two elements rested on the balance, which turned out not to be sustainable, between three characters: the “traumatized worker,” the “maniacal saver,” and the “indebted consumer.” 

The rise to dominance of the new financially led governance engendered, in Marxian terminology, a process of “centralization without concentration.” Key sectors experienced huge mergers and acquisitions, thereby concentrating capital more. However, the same process did not bring about the formation of new large scale vertically integrated industrial enterprises, which would have been the mark of enhanced capitalist concentration. The multiplication of financial enterprises following the process of deregulation in Western countries created among the global players in manufacturing and services a “destructive” competition in their investment strategies. The value chain system was rapidly reorganized, thus becoming truly transnational in nature. 

The transformations in working conditions have occurred as a consequence of a “real subsumption” of labor to finance and debt, namely, a subordinate integration that has a direct impact on the process of production, generating longer working hours and increasing the effort required of employees. The extractions of relative and absolute surplus value have become inextricably intertwined, whereas the center–periphery dichotomy has lost its older rigid connotation, being reproduced within each economic area and nation. For the above reasons, the expansion of production is no longer coterminous with the expansion of a working class concentrated in contiguous space, in similar factories, and subject to the same legal system. Work has been fragmented and rendered ever more insecure. Precariousness and instability may seem absent in one pole while appearing in devastating forms in another. 

Money manager capitalism generated a capital asset price inflation, which was accompanied by an overcapitalization of productive enterprises. The moneys mopped up by the issues were thus being invested in financial short-term activities. In this way, the interests of the funds’ managers in financial rents and the revaluation of shares merged with the interests of firms’ directors in the new forms of remuneration. Such a conjunction created a highly favourable climate for spectacular mergers and acquisitions and for the savage restructuring of firms. The bubble in asset prices, especially of houses, allowed the expansion of consumption on credit. Savings out of disposable income fell next to zero or even became negative because of the stagnation, that is, decline, in real weekly earnings. For the bulk of the population, the dynamics of consumption became, therefore, autonomous from earned income while getting stimulated by the perceived wealth effects, a perception validated and swelled by

financial companies and the originate and distribute practices. Evidently all this helps the growth of effective demand. Yet wage deflation, capital asset inflation, and the increasingly leveraged position of households and financial companies are complementary elements of a perverse mechanism in which real growth is doped by the most toxic aspects of finance. As Jan Toporowski writes, the middle class was sedated and deprived of the need to think by escalating property values. 

The central bank managed the creation of liquidity with the objective of sustaining a continuous rise of share and capital market values. It was done directly but also indirectly by acting as a guarantor of the “shadow” banking system and of financial intermediaries. Thus, at any sign of a financial crisis arising at the centre of the system, the central bank acted, as Marcello De Cecco brilliantly put it, as a lender of first resort. The hope of financial companies was that the rise in the cost of borrowing could

be offset by a further hike in asset values, thereby expanding the value of collateral used in loan applications. The fast proliferation of the subprime mortgages, with the inevitable enticement of poor households to step into the financial swamps, was an attempt to keep the real estate bubble by all kinds of means. Meanwhile, the U.S. authorities continued to believe in the likelihood of two miracles: that more complex and obscure securitization packages would distribute risk, thereby reducing its dangerous effects in the face of defaults; and that, through the same magical financial instruments, the surpluses and savings of the emerging economies would naturally flow to fill the deficits of the United States, Britain, Australia, and Spain (these countries generated the largest share of the world’s deficits). 

When the crisis broke out in July 2007, the hoped for twin miracle revealed itself as a double swindle. The new opaque financial papers had, in fact, not securitized but rather spread the risk and, indeed, created it out of thin air. Within the banking and the financial system, the securitized derivative-based packages ceased to act as quasi-private moneys instantly, blocking interbank lending because of the absence of any reliable collateral. The collapse of interbank relations magnified the negative

impact of financial imbalances all around the globe. For the same reasons, the belief in the decoupling of the United States from the rest of the world was proven to be a pure figment of the imagination. The large exporting countries could not but receive the shock of the sinking of the indebted U.S. consumer. Moreover, the United Kingdom, Spain, and Eastern Europe absorbed a significant amount of exports from the surplus and surplus seeking countries. For these countries transmission has come through the mortgage and financial crisis in Britain and the explosion of the housing bubble in Spain. 

The euro was born with an original sin. Even left-wing parties chose not to see it, though it was quite evident from the start. Thus, they agreed to introduce a single currency that, in its own DNA, was going to determine a recessionary drift, deep differences in the competitiveness of each country, a wage squeeze, an increasing social inequality, the dismantling of trade unions and a permanent industrial restructuring. Within the structurally heterogeneous European area, in which there are radical variances both in the productive power of labour and in (material and immaterial) infrastructures, a nominal convergence cannot but give way to a progressive deepening of the real divergences. The in-built and on-going tendency to self-dissolution of the monetary union could be counteracted only through a common fiscal policy, governing the resource redistribution within the euro-zone internal regional areas. European authorities should also implement industrial and structural policies explicitly targeted to overcome the real divergences among countries. By contrast, the European Union budget (compared to GDP) is ludicrously low. 

The multi-speed dynamics of Europe are well known by now. Its core is the growth of Germany with its ‘satellites’. Net exports are the driving force, with the resulting profits invested abroad. Germany, like its ‘satellites’ and the rest of Northern Europe, has a historical need for exporting in the rest of Europe, where it realizes the largest part of its profits. Trade deficits in Southern Europe facilitate German growth also for a second reason: they hold down the nominal revaluation of the euro (compared to what would happen with either the Deutsche mark or also a euro restricted to the net exporters). The ‘single currency’ gives rise also – thanks to both the increase in the productive power of labour and the wage repression, the one and the other leading to competitive deflation – to a real devaluation that benefits the stronger area. After the 1990s, even in the last decade, the net neo-mercantilist position of Europe kept on ‘closing’ thanks to the American engine. Europe’s net exports towards the United States, however, became more and more unable to offset the growing structural deficit with China, and to mend the effects of instability in Russia and Latin America. In that phase, trade imbalances were not a great problem. For a while, financial and trade imbalances, mounting exponentially, seemed to magically make the economies more and more ‘resilient’. The concern about government finance did not look so pressing. As Paul Krugman reminded us, if one makes a list of countries in which government finance was in serious trouble before the crisis, then after the crisis only one more needed adding: Greece. 

The idea that European authorities will be forced, ‘out of necessity’, to create an institution giving financial support to countries in crisis, or will eventually implement some kind of fiscal redistribution on a continental scale, is not wrong in itself. The point is that they are too little, too late. The paradox is that, if they condoned Greece’s debt, the costs for Europe would have been negligible. The same is valid if you add Ireland, and then Portugal. Even in this case, a cancellation of the debt would have been much less destructive than the dynamics set in motion to avoid default, without rescheduling and reducing the debt to be repaid. But when the crisis hit Spain, and then Italy, the crisis changed its nature. The leap from quantitative became qualitative. In this situation, one either learns to swim or drowns. 

The crisis in Europe is not due to Greece. Nor is it the result of the government indebtedness of a given country (either in absolute terms or compared to GDP). As Jan Toporowski argued, what matters is the willingness (or not) of the central bank, here the ECB, to re-finance government deficits. Even with a hypothetical euro limited to Germany and its satellites, the ‘sovereign debt’ crisis could burst anyway. For instance, it could in Belgium, whose debt to GDP ratio is close to 100%. Excluding default, a way out could be inflation, a second growth, or a mix of the two. Both inflation and growth increase the denominator in the deficit (or debt) to nominal GDP ratio. 

One could ask whether an exit option from the eurozone would be desirable. It is not possible to exclude that the evolution of the situation could lead to the dissolution of the single currency. Nonetheless, at present, this is a counsel of despair. An advice like this came from the left last year with regards to Greece, then to Ireland. The positive example usually put forward is Argentina in 1992. However, as again Toporowski observed, the main problem with Argentina was the banking crisis, and, second, the fact that its debt was denominated in a foreign currency. By contrast, in the Greek case, the banking crisis follows the crisis of the government debt, and it is denominated in an internal currency – or better, a currency that should be internal: the fact that it is not, in practice, is a despicable political choice. Getting out of the euro would dramatically increase the external debt burden, as it would go along with a huge devaluation. In addition, the feasibility of such a choice requires a condition that is absent in Greece, i.e. significant continuous series of government primary surpluses. Otherwise, the concurrent impossibility to satisfy the internal debt may likely lead to the insolvency of the domestic banking system. The worsening of the structural foundations of competitiveness, which has been going on for decades, makes an improvement of the trade balance something which may be very slow, or not existent at all. A spectacular reduction in the real wage should be added to the picture. It is very difficult to consider all this a ‘leftist’ solution to the crisis. 

The real convergence of the European economies would have required policies which are the opposite of those defined in the Maastricht Treaty: creation of money in support of private innovation; and a temporary but substantial increase in government deficits financed by new money – deficits which may be labelled ‘productive’. At the beginning, this policy entails higher inflation and an increase in the debt to GDP ratio. But the price increase and the fiscal ‘imbalance’ will be reabsorbed as long as the policy is effective. 

The introduction of the euro was not the only possible form of the monetary unification. An alternative has been suggested by Suzanne de Brunhoff, in the wake of Keynes’ plan at the Bretton Woods Conference. It is about the introduction of a ‘common currency’, instead of a ‘single currency’ circulating among the public. The former is just a reserve currency that would be used in the clearing mechanism among central banks of the member states, within a system of fixed (but adjustable) exchange rates. These latter would be changed in case of significant trade deficits of some countries, with the symmetrical commitment of net exporters to reduce their surpluses. This is what the EMS and also the Bretton Woods agreement failed to consider, inscribing in their DNA a deflationary drift. 

The clearing of the European real ‘imbalances’ requires, yesterday as today, an intervention that concerns not only reflation on the demand side, and/or a re-coupling of the wage to productivity. A strong intervention on the supply side and in the productive structure, along with financial stabilization, is indeed needed. Without a fiscal union, whose institution is utopian in the short-run, there remains only the eurobond solution, as a common guarantee for all the public debts of the Eurozone countries. However, apart from the formal (legal and political, besides technical) difficulty linked to its quick introduction (something which could be speeded up by a worsening of the crisis), the question is: eurobonds to do what? As Yanis Varoufakis observed, it is necessary to consider eurobonds as something more than a credible instrument to reach a low-cost public debt financing for the countries in trouble. They have to be regarded also as the foundation for a coordinated expansion of expenditure and investments on a European scale. It amounts, in fact, to a proposal for a renewed, and innovative, New Deal that could directly lift the structural obstacles to growth, by improving the quality of the output and by increasing the productive power of labour. 

The Great Recession, as the final crisis of Neoliberalism as we knew it, and the European collapse, as the deadlock of Neomercantilism, are putting again on the agenda the issues of how, and what, and how much to produce. 

Riccardo Bellofiore is Professor of Monetary Economics and History of Economic Thought at the University of Bergamo. The interested reader may find more details and references in Riccardo Bellofiore, Francesco Garibaldo, Joseph Halevi, “The Global Crisis and the Crisis of European Neomercantilism”, Socialist Register 2011,  and in the author's intervention at the International Conference on “Public debt and austerity policies in Europe: The response of the European Left” organized in Athens, 10-12 March 2011 (cf. also this article). You can follow Riccardo's work and activities on Facebook.