Eighty years ago, faced with today’s economic events, nobody would have been in any doubt — we would obviously be living through a crisis in capitalism.
Instead, there is a collective unwillingness to tell it like it is. This is variously a crisis of the EU, a crisis of the euro, a debt crisis or a crisis of political will. It is all those things, but they are subplots of a much bigger story — the way capitalism has been conceived and practiced for the last 30 years has hit the buffers. Unless and until that is recognized, Western economies will be locked in stagnation which could even transmute into a major economic disaster.
Simply put, the world has trillions upon trillions of excessive private debts financed by too many different currencies whose risk is allegedly mitigated by even more trillions of financial bets that, in aggregate, do not minimize the systemic risk one iota. This entire financial edifice, underwritten by tiny amounts of capital, has been created over three decades backed by the theory that markets do not make mistakes. Capitalism is best conceived and practiced, runs the theory, by hunter-gatherer bankers and entrepreneurs owing no allegiance to the state or society.
This is nonsense.
Business and the state co-generate wealth in a system of complex mutual dependence. Markets are beset by mood swings and uncertainty which, if not offset by government action, lead to violent oscillations. Capitalism without responsibility or proportionality degrades into racketeering and exploitation. The prospect of limitless pay is an open invitation to bad, or even criminal, behavior.
Good capitalism cannot happen without referees to blow the whistle or robust frameworks in which markets can function — neither is reliably created by capitalism itself, hence the role of democratic government. Yet the world is trying to solve the legacy of the past 30 years as if none of this were true and, instead, that the practice and theories that created the mess are still valid.
US Secretary of the Treasury Timothy Geithner, joining EU finance ministers in Poland as again they pondered how best to end the ongoing crisis in the eurozone, was at least recognizing today’s interdependencies between countries when he urged his fellow ministers to stop bickering because the markets were terrified by the threat of a catastrophic event — with all the risk that poses to the US.
British Chancellor of the Exchequer George Osborne was also right to declare that a strong euro was in Britain’s interests, but worrying about how a failed euro might impact on yourself is old speak. What the markets need to hear is that Western politicians — whether in the eurozone or not — see the euro as part of the potential solution to capitalism’s current crisis, not its cause, and that they are prepared to do all in their power to support the reforms necessary to make the euro survive and take other measures vital to make the world’s financial system functional again. Geithner and Osborne must put some money where their mouths are.
The euro’s critics, endlessly emphasizing that it is a monetary straitjacket and that the best reform now would be to break it up, miss the point. It was not this so-called straitjacket that caused today’s crisis in the eurozone. It was the interaction of the euro system with a once-in-a-century crisis of capitalism that its designers and supporters, like its critics, never anticipated.