A famous quotation that is commonly attributed to Paul
Volcker, former Chairman of the US Federal Reserve, is ''In my next
life, I want to be all-powerful. So I want to be reborn as the bond
market.'' Over the past half century, various developing and ''emerging''
markets were forced to learn about this power of financial markets the
hard way, as volatile inflows and outflows of capital (in the debt markets
and in stock markets) created boom and bust cycles that often left a
trail of devastation in real economies.
People in these countries also grew familiar with their own government
representatives looking nervously over their shoulders for signs of
financial market approval or disapproval, and tailoring their policies
to meet the expectations of these markets. The desire of governments
to attract global capital, and then to prevent capital outflow, dominated
over the justified demands of citizens for fulfilling their social and
economic rights in terms of basic needs and dignity. Despite electoral
systems and the need for government to establish some public legitimacy,
politically, there was little doubt about which of these forces has
been stronger.
The media in most developing countries were not just chroniclers of
this trend of the growing power of finance to affect national economic
policy making. They were also active (and often enthusiastic) participants
in the process, vesting financial players with significant public voice.
The behaviour of the stock market (which rarely if ever reflected the
real economy) was treated as important news at almost every hour and
given a lot of prominence in daily news; opinions of those representing
financial markets in different ways were given a great amount of time;
even the analyses of media persons were coloured by the perspective
of finance capital. Merchant bankers and hedge fund managers would raise
their eyebrows at the size of the fiscal deficit, or at some proposed
taxes on capital, and governments would quake and rush to modify their
measures.
Worst of all, the dominance of the markets appeared to permeate the
political system to such an extent that whichever government happened
to be in power, the economic and financial policies would be broadly
the same. Governments that alienated the people by privileging the interest
of capital over the people would get defeated by the electorate; the
newly elected government would come in and do the same thing. Since
''technocratic'' leaders were more favoured by financial markets, governments
led by supposedly apolitical ''technocrats'' less affected by political
pulls and pushes, and more subject to the supposedly iron laws of the
markets, also became more common.
But all this was for developing countries, the subalterns of the global
system. In the ''mature'' democracies of rich capitalist countries,
however much the will of the people was actually thwarted by economic
processes, the formal structures of democracy were not just retained
but also given explicit recognition and importance.
That was then. Things have changed quite a bit in a relatively short
time. In economic history books of the future, November 2011 may well
be remembered as the month when European leaders explicitly placed the
appeasement of financial markets over the requirements of political
democracy.
Consider two countries at the centre of recent action. In Greece, the
elected Prime Minister George Papandreou, and his Socialist party government,
had already put in place severe budget cuts and other austerity measures
designed to reduce the public deficit so as to appease the financial
markets sufficiently to bring down the rising yields on Greek government
bonds. Greece had already availed of bailouts from the IMF and the European
Central Bank, and requires still more infusion of funds. But the measures
being insisted upon are essentially counterproductive, because they
force an economy that is already into a downward spiral into further
contraction, and thereby make the deficit to GDP and public debt to
GDP indicators look even worse.
It is evident that some debt restructuring is inevitable. And so the
European Union, in a major first, negotiated directly with bankers –
through the Institute for International Finance in Washington DC, a
global association of financial institutions. This resulted in yet another
package designed to ''save'' Greece, but actually to save the bank responsible
for overlending, with a declared 50 per cent write down of debt (though
in fact the loss faced by banks would be much less) and further severe
austerity measures to be imposed on Greece in the effort to ''rebalance''
the economy.
These measures are not just macroeconomically misguided. They are also
deeply unpopular with the Greek public, who see themselves as being
forced to pay for irresponsible banking practices, with massive unemployment,
falling real wages, reduced public services. (Incidentally, the widespread
myth in northern Europe - about lazy Greeks lying in the sun drinking
ouzo while hardworking Germans support them - is completely false. Real
wages in Greece are significantly lower than in Germany; average working
hours in Greece are significantly longer than in Germany; the rate of
productivity increase in Greece in the decade preceding their crisis
was one of the fastest in Europe.)
The simmering anti-austerity mood in Greece finds expression in strikes
and street protests, which have become commonplace. When the latest
round of such cuts was insisted upon by the EU, Papandreou announced
that he would have to take strategy to a popular referendum. Of course,
this should have been done much earlier. It is not even clear if he
intended to phrase the question in such a manner as to ensure a ''yes''
vote to give legitimacy to further cuts. But the very possibility of
such democratic referral and the associated uncertainty created outrage
and fury among European bosses.
Like an errant schoolboy, Papandreou was quickly summoned to Cannes
where G20 leaders were meeting. According to reports, he was subjected
to a humiliating dressing down by the Gang of Four of Angela Merkel
of Germany, Nicolas Sarkozy of France, Christine Lagarde of the IMF
and Jean Claude Juncker, head of the eurozone group. He was told in
no uncertain terms that any such moves to refer to public opinion amounted
to ''disloyalty'' that would not be tolerated, and that Greece would
not receive the next crucial tranche of EU-IMF money of 8 billion euros
if it persisted with this plan.
Papandreou returned to Athens, cancelled the referendum, and even resigned
in the process, as his position had now become untenable. A ''government
of national unity'' has been set up, to be run by former banker Lucas
Papademos. No career politician was found acceptable by the markets,
only an insider (he has been Governor of Greece’s Central Bank and Vice
President of the European Central Bank) whose stated priority is to
keep Greece in the eurozone at all costs, with no mention at all of
what the people of Greece might happen to want.
In Italy, where bond markets next turned their attention, the head to
fall was that of Silvio Berlusconi, whose period in power has been more
noted for salacious scandals and aggressive buffoonery. Bond yields
in Italy touched the declared danger mark of 7 per cent; other European
leaders then announced openly that Berlusconi had to go. As it happens,
he should have gone much earlier, for a variety of other crimes. But
the EU leaders now felt that his departure was necessary ''to calm the
markets''. And so go he eventually did, announcing that he would resign
once the Parliament passed further austerity measures that were also
''required'' by the markets.
The new government in Italy is even farther from any democratic norm
than that in Greece. It is headed by another economist/banker, Mario
Monti, who has the added advantage for the markets of having worked
for a trusted institution like Goldman Sachs (which was heavily involved
in helping the earlier Greek government to fudge its accounts to conceal
the extent of its debts and deficits). Mr Monti runs a government composed
entirely of ''technocrats'' rather than any representatives of political
parties: bankers, businessmen and former bureaucrats, who are completely
in tune with the expectations and requirements of finance capital.
As if these examples are not enough, elected leaders in Europe are now
more openly expressing their intellectual and policy subservience to
financial markets in different ways. Recently, Finland’s Minister for
Europe has argued that the eurozone’s six Triple A-rated countries should
have a greater say in economic affairs within the single currency and
act as its inner decision-making core, because ''a country that is not
triple A rated is not going to be the best one to give you advice on
your public finances.'' So now credit-rating agencies are going to decide
which governments in Europe get to make the decisions for all of the
eurozone!
Note that these credit rating agencies have almost universally underperformed
massively especially in the past decade, missing signs of fragility,
over-reacting after the event and generally behaving in procyclical
and herd-like ways that are typical of financial market functioning
in general. Yet elected leaders in Europe are seriously suggesting that
they hold the key to which governments can be more ''trusted'' to make
crucial decisions for the people of Europe.
It is hard to see how any of this can be taken seriously, but this is
actually the way that governments in Europe are currently responding
to the advancing crisis. It does not follow that these efforts to placate
finance at all costs will be possible, though, since this subservience
to financial markets is now more questioned by the people. Governments
may have decided to sacrifice democracy to the markets, but the people
may still not let this happen.