Sunday, November 20, 2011

The Origin of the [crisis in the] European Union – 5: Capital as the Union’s Main Driver

If you are following the crisis in Europe, you know how complicated the whole thing is. You see the stressed looks on the faces of politicians, central bankers and the heads of places like the World Bank, the IMF, the European Commission, read or listen to their often contradictory comments and wonder that if they are at a loss for an explanation/solution, what chance do ordinary mortals have of making head or tail of the situation? Look.

If that is what you think, you have been had; chalk off one “mission accomplished” for your local papers and international news media.

What is taking place is Europe is quite simple to understand.

The EU was created as the answer to the problem of falling rate of profit in the industrially advanced European countries. Reversing the falling rate of profit is the objective. The EU is the vehicle for realizing that objective, the means of getting there.

Creating a vehicle such as the EU which must stand over the heads of the European nations and governments is no easy task; the very idea points to the audacity of the force behind it. The force is capital, with the “democratic government” being its immediate manifestation. The size or intensity of the force – that would be the governments’ agenda, vision and modus operandi – is a function of the local conditions and varies from country to country and situation to situation. The direction of force, toward a homogenous social system conducive to capital, is fixed and remains unchanged throughout; it is “remorseless”, in the words of a British official.

Let us look at these points in the case of Greece. It should suffice for illustration.

When the Greeks were invited to join the EU, they were jubilant. Here at last was the confirmation that Greece had “arrived”. With the military dictatorship gone, the country could take its rightful place among the advanced, civilized countries.

As the Iranian proverb has it, they went for the smell of kebab, only to discover that donkeys were being branded. But by the time that realization came, when the draconian cuts hit every aspect of social life in the country, there was no going back, short of a violent overthrow of the government, which was not going to happen because Greece was now a democracy.

This latter point needs elaboration.

Look at this sentence from a New York Times article this summer after the Greek parliament had approved the first in a series of slash and burn measures:
Markets rallied globally, and European leaders welcomed the passage of one of the most radical overhauls of the Greek economy since democracy was restored in 1974.
The sentence is written like an advertising copy. Nay, it is an advertising copy, a style of writing designed to create an association between a product and “positive” words – and thus, feelings– in the absence of any logical association. You know the routine: Selling a car? Then say power, beauty, freedom.

The Times uses the formula to a “t”. "Positive" terms – Markets rallied, European leaders welcomed, overhaul of the Greek economy, democracy was restored – are tightly packed into a sentence to “soften up” the reader. The racket is quite sinister and demands the picture of the street riots to work, which is happily supplied.

Now, reading the jubilant account of the reaction to cuts in Greece and seeing the bloody faces of demonstrators confuses the readers. They are presented a contradiction that they cannot resolve with the limited information provided. They cannot make sense of the events. Confused, they become ignorant spectators of events, accepting whatever is thrown their way and passively waiting for leadership – of both thought and political kind – to show them the way. Murdoch provides the former. Cameron, Berlusconi, Sarkozy, Merkel, Obama and Papandreou provide the latter.

But facts are not isolated events. Their relation, arising from the compulsion of reason, remains indestructible and comes through even from behind a confused text. We only need to rearrange the words and put the emphasis where it belongs.

Here is the logical rewrite of the Times sentence that eliminates all the internal and contextual contradictions of the text:
It was precisely because democracy was restored that the most radical overhaul of the Greek economy became possible, after which finance capital everywhere celebrated as it saw its grand design for increasing its rate of return one step closer to realization.
Democracy is the name of the form of the government created by capital. One does not have to be a supporter of the Greek Junta to note that the undemocratic colonels would not dare to subject the Greek society to so violent a shock therapy. More to the point, they would not accept or allow it.

Establishing democracy in Greece was the necessary condition for, and the harbinger of, a social order mandated by the EU whose sole objective is making the member societies an agreeable stomping ground for capital. That’s what the EU’s 100,000-page rulebook is all about.

Now, Europe is a divided entity, with the political and social divisions at times following the change in landscape. Belgium, for example, only recently managed to have its first government in one and a half years because the northern Flanders and relatively poorer southern Wallonia could not agree on the division of the country’s wealth. (The compromise government, far from being a unifying power, reflects the institutionalization of the separation of North and South.) Or take the equally small Switzerland, in which the culture and social concerns in Canton Ticino are more Italian than any part of the country north of Gotthard.

Only a fanatic doctrinaire, then, will seek to explain everything that has been happening in Europe in terms of capital and finance capital. I devoted Part II of this series to “defining” Europe precisely to highlight the political, cultural and economic differences among the European countries and even within them. There is a historical rivalry between France, Germany and England, for example, and Silvio Berlusconi would have had his rivals and enemies even without the EU.

But the falling rate of profit and the need for cheaper labor is the grand narrative of the EU. All other events take shape and play out within it, in the same manner that all events in War and Peace take place within the context of Napoleon’s invasion of Russia. No detail of the EU crisis (or War and Peace) contradicts that main storyline. That is another way of saying that all the contradictions of the EU, which have manifested themselves in a laundry list of banking crises, market instability and political gridlock, could be explained and resolved by that narrative.

Let us wrap up then.

The idea of the EU rose from the need of capital in the industrially advanced West European countries for lower labor costs and new markets, the one-two punch that the industrialist in those countries correctly calculated would solve the problem of the falling rate of profit.

Germany and France were the leaders of the movement. Italy, Nordic countries, Belgium and Luxembourg with the relatively small, less export-oriented economies, assumed a secondary, supporting role.

The so-called “periphery” countries – the Greece and Cyprus and the Ireland of the Union – were the mark. So were the German and French workers. And the workers in Italy, the Nordic countries, Belgium and Luxembourg.

In an integrated EU, the German industrialist could produce machinery with the Greek wages, which is why and how, in a double whammy, and using the threat of cheap labor in the newly freed East Germany and the southern flanks of the EU, they were able to push down the German wages by about 20%. That, in turn, allowed them to set the euro rate against the USD at a relatively low level, which helped boost the exports and thus, profits. That is the story behind Germany’s “strength”, its “EU leadership” or much admired “competitiveness”. I quoted earlier:
Helmut Kohl, the chancellor of Germany in the early 1990s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.
Now you know the story behind the conviction and determination of politicians. (The 80% opposition, by the way, was coming from the workers and ordinary citizens who, despite massive selling of the the EU idea, had not bought into its promises. In North America, NAFTA was sold using the same exact play book. It was supposed to bring jobs to the U.S. and Mexico.)

The periphery countries proved problematic. Their problem, in a nutshell, was – and remains – the historical problem of training a peasant workforce for industrial labor.

Peasants, because their life tempo generally follows that of nature, have large margins in their daily lives. The cows need not leave their stable at 5:10am sharp, the way a train leaves the station. Approximate “sunrise” will suffice. For coming home, in like manner, “sunset” will do just fine. No need for precise arrival time, as there are no connecting herds.

This margin is precisely what the industrial capital could not permit. An assembly line is nothing but the precise quantity of work performed in an exact interval of time. When peasants are brought into the factory environment, they must be trained to shed the old ways and become robots.

Robot is precisely the word. The sole condition for working in an industrial setting is performing the prescribed steps repetitively in the given time to the exclusion of thinking and individual initiatives. That is why assembly lines naturally lend themselves to automation: in them, workers are automaton.

(The robotization/dehumanization is enforced through a training regimen whose structure and content demands a post of its own. In the training classes of FoxConn’s Chinese plants, for example, peasant/workers are instructed to go from one corner of the room to the opposite corner. When they naturally walk across the room – even donkeys would do that to reach a stack of hay on the opposite side, proving that the hypotenuse is shorter than the sum of the two sides – they are fined. The point is conditioning them to shed their instinct and initiative lest they seek shortcuts. They must at all times follow the walls, like blind men do.)

At the technical level, the inability of the peasant/workers to perform at high levels of precision translates itself to inability of the emerging countries to manufacture high quality and high precision products. So we see that even in today’s competitive markets, the members of Germany’s Mittelstnad are thriving because the highly specialized machinery they produce cannot currently be manufactured by the Chinese workers.

At the social level, the absence of industrial discipline manifests itself in a more relaxed life style which itself arises from the looser and less formal documentation of property rights and legal/commercial relations. It is not uncommon for a property’s boundary to be defined by non-stationary reference points, say, a river. Over time, then, as the boundaries change, the land disputes begin and go on seemingly forever, paralyzing the legal system. And, of course, no one beside the government workers pays much tax because the government has no way of tracking people’s income. In that regard, the racist and ignorant Prof. Hans-Joachim Voth whom I quoted in Part I of this post was right to complain about Greece’s land registry and tax system:
A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity. The economic evidence is unambiguous – the larger and more effective a country’s state apparatus, the higher output per capita. Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.
When a less industrial country such as Greece is forced into a union with an industrially developed country such as Germany under conditions that are defined for the benefit of capital only, its life style must change accordingly. Dinner starting at 9 and lasting till midnight – and that on a week night? Inconceivable! Retirement before 60? You must be kidding.

These habits and conventions, however much their roots might be economical, pertain to the old ways of doing things, i.e., they are cultural. So, as the mouthpieces of capital are quick to remind everyone, the cultural in these countries must change:
As a British taxpayer and therefore (via IMF), a contributor to the Greek budget, I was irritated to discover that all Greek students still have a constitutional right to a free, university education – and spend an average of more than seven years over their degrees. British students will be charged up to £9,000 ($15,000) a year in tuition from next year … Greece has been promised new money. Now it needs a cultural change. Otherwise the country really is going to the dogs.
And it is not Greece only. The Spaniards, Portuguese and even Italians had it too good for too long. But the party is over now and it is time to "grow up", time to pay the piper. The “piper” is the “democratic government”, which, as per Prof. Voth, must be strengthened so it could deliver the populace to the capital – lock, stock and barrel – until such time that its even minimal regulation gets in the way of capital’s expansion, at which time it should be dismantled through whatever means necessary, say a “big society” racket here or the installation of some mad man as president there.

That is it, then, all one needs to know about the EU. As for the roving sovereign/banking crisis which has been hitting the EU member states in the past couple of years, in one sense, the crisis is real. As the rate of profit across the EU members has fallen, the government expenditures that corresponded to the pre-fall era have become “unsustainable”, to use a word now in vogue. So expenditures must be cut, especially in the euro zone where government can no longer print money.

In the private sector, the main expenditure is the labor cost; hence the mass layoffs and refusal of the businesses to hire which has resulted in record unemployment.

In the public sector, in addition to labor costs, the retirees’ pension is a large expenditure. Naturally, then, it is the main focus of the “pension reform”, which aims to simultaneously cut off the pension payments and increase the retirement age so that the payments will start later.

But believing that no crisis should be allowed to go to waste, the architects of the EU are using the governments’ revenue shortfall as a bogeyman for further weakening the power of labor unions and pushing down the wages. The case of Italy shows us how the game works. FT’s political/financial commentator on October 12:
While [Italy’s] public sector debt is high at 119 per cent of gross domestic product, the private sector balance sheet is remarkably strong and the government budget is in primary surplus – that is, before interest payments. The surplus is forecast to increase significantly.

The short term position is thus comfortable and in ordinary times markets would be relaxed about default risk here.
So, Italy’s finances are in order. The country’s surplus is “forecast to increase significantly”.

But that is not the point and certainly no excuse. The commentator goes on:
In common with much of the rest of southern Europe it has a huge competitiveness problem, with unit labor costs reckoned to be 30-40 per cent too high relative to Germany. Even if we charitably assume that Italy’s underlying trend growth rate is 1 per cent, it is hard to see how the trajectory of public sector debt can be pulled back.
You see the sudden shift to the labor costs. Either Italy – now a “south European” country, and we know how those people are – increases the rate of profit by bringing down the labor costs or else. In the “else” scenario, the “markets” will discover that the Italians have been living beyond their means, the country’s bonds will tumble and the spreads on its credit default swaps will rise to the stratosphere. The country will no longer be able to borrow on capital markets and might be forced to default, with all the consequences that follow. To avoid all that, the draconian reforms must be implemented, including the “labor market reform” and pension reform.

Berlusconi could not play along so he was pushed out – for that reason alone and not for any of his long list of transgressions.

Now the “technocrat” Monti has been brought in with much hoopla to save Italy. The ignorant consumers of news are jubilant:
“We finally have a competent government, not one of dwarfs and ballerinas,” said Antonio di Pietro, the former anti-graft magistrate and head of the Italy of Values party.
Perhaps Berlusconi’s government was a circus. But alas, the joke is on the ex-magistrate and the technocrat Monti will do exactly, precisely what capital demands of him – and not an iota more or less. The Financial Times of November 15:
Mr Monti has plenty of ideas to promote in the long term through liberalising the labour market, weakening the powers of fiefdom of professional services and making it easier for public and private sectors to hire and fire.
At the end it makes no difference who is in charge because capital is ultimately in charge.

I will return with the concluding part.

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