What’s wrong with post-Keynesian accounts of the Eurozone crisis?

There is general agreement that the Eurozone crisis has had a devastating impact on countries in Europe’s periphery, especially in the south. This is expressed in record levels of unemployment, social inequality and widespread social deprivation. However, there is little agreement amongst academic accounts on the causes of the crisis, nor on how this can be resolved. Recently published online early in the Journal of Common Market Studies and available HERE, a co-authored paper by myself, Andreas Bieler and Adam David Morton, titled ‘EU aggregate demand as a way out of crisis?’, critically engages post-Keynesian accounts on both the economic causes of the crisis and the political possibilities for realising a European-wide recovery.

On the causes of the crisis

Unlike literature that tends to focus on diverse national institutional configurations as distinctive, separate entities, post-Keynesian scholars emphasise unevenness across the European political economy, tending to identify the institutional set-up of EMU as the main cause of the crisis. With exchange rates fixed between countries as a result of the common currency and national fiscal policy severely restricted within the Stability and Growth Pact, the only way to increase competitiveness has been downward pressure on wages and work-related conditions. Thus, EMU was by default designed from the beginning as a model which would struggle to generate enough demand and almost inevitably relied on financialisation and the creation of national and personal debt for economic growth. This resulted in the formation of debt-driven and export-driven economic growth models. Both of these allow for growth but are also intrinsically unstable because they require increasing debt to income ratios, domestic debt in the former, foreign debt from trading partners in the latter. Hence, the main problems of EMU are understood by some post-Keynesians to be the result of insufficient demand and, in particular, the asymmetries in the formation of aggregate demand across the European political economy shaped by the institutions of EMU.

Ultimately, post-Keynesians contend that the creation of credit links back to increasing income inequality over past decades. Seeing their relative income decline, poorer households increasingly had to rely on credit to maintain living standards. The introduction of the euro and the related low interest rates in peripheral countries facilitated this financialisation of Europe’s political economy, as it made cheap credit more available. Peripheral states, unable to compete with the productivity levels and strong export performance of the likes of Germany, ended up with large current account deficits. In the long run, such development strategies based on capital inflows were unsustainable.

The primary limitation of such analysis is that it implies capitalism can overcome crises successfully, if the right state policies are adopted. In response to crisis, we argue that capital is in constant search for new markets in a drive towards outward expansion along uneven and combined developmental lines. Therefore, whilst post-Keynesians correctly identify how the development trajectories of national political economies are further drawn together in relations linked to institutional architecture of the single currency, they overlook that this has simply reinforced and exacerbated forms of unevenness that have characterised the European political economy for much longer. Free trade policies, as initially embedded within the EU Customs Union since 1968 and then especially the Internal Market from the mid-1980s onwards, when free trade was extended from trade in goods to trade in services and finance, have generally tended to reproduce long-standing asymmetries of uneven development and polarising conditions between countries.

We demonstrate this dynamic in the paper through a focus on the development of Greece and Portugal, analysing how less developed countries remain locked into low-value added industrial sectors or even experience deindustrialisation as industries in countries with lower productivity levels cannot compete with the higher productivity levels in partner countries, which benefit disproportionately from trade. In short, rather than simply focusing on the institutional set-up of EMU our argument is that uneven development pertains to the very expansionary essence of capital and the existence of competition between ‘many capitals’ searching for surplus profit and increases in the rate of surplus-value. Drawing on Neil Smith, Nicos Poulantzas and Ernest Mandel, we therefore share the view that uneven and combined development is a historically specific geographical expression of capitalism and a necessity within capital accumulation, which is generative in shaping variations across the European political economy.

On resolving the crisis

When it comes to potential solutions to the crisis, wage growth is regarded as essential for the stimulation of aggregate demand. Emphasis is placed on wages growing in line with productivity. However, in export-oriented countries – particularly in Germany – it is argued that wage growth needs to be above productivity growth plus inflation in order to restore macroeconomic balance. A prominent proposal in this respect is the ‘European wage standard’, based on national collective bargaining that is co-ordinated at the European level and intended to cause a convergence at the regional level of national wage shares, and, thereby, halt falling wage-shares. The vision for the EU’s future is clearly a federalist solution with a common economic and wage co-ordination policy.

The focus on the ‘right’ state policies indicates the second key problem of post-Keynesian analyses in our regard. They are in no doubt that the main cause of a decline in the share of wages in national income is the decline in the bargaining power of trade unions. Therefore, to ensure wage growth, trade unions need to be empowered and play a clear role together with strong employers’ associations, plus government involvement if needed, in national wage bargaining. In other words, post-Keynesians invoke national institutions linked to the post-World War II class compromise that had seemed to guarantee steady wage increases and strong domestic demand levels in industrial countries such as Germany and Sweden during the 1950s, 1960s and 1970s.

Such a technocratic vision, however, completely misunderstands the dynamics underlying working class gains in the post-1945 European political economy. Asbjørn Wahl makes clear that strong bargaining institutions were not the result of benevolence by employers or state policies but rather a result of class struggle. The outcome was an unstable equilibrium of compromises, in which capital retained the right to own the means of production in exchange for rising wages and an expansive welfare state. The Keynesian economic consensus at the time also underpinned European integration with its objective of obtaining social cohesion across the EU. However, against the background of global restructuring and the increasing transnationalisation of production and finance, especially from the early 1980s onwards, the Keynesian consensus was replaced by processes of variegated neoliberalism. Capital, now organising across transnational networks of production, renounced national class compromises based on its superior structural power vis-à-vis trade unions. At the European level, the emergence of a new compromise of ‘embedded neoliberalism’ occurred. When the EU was enlarged to Central and Eastern Europe in 2004, key redistributive policies were not fully extended to the new members.

In short, the post-Keynesian proposal of reflating demand levels through wage increases goes completely against the dominant trend of recent neoliberal restructuring. As Stockhammer and Köhler admit themselves, the post-Keynesian ‘suggestions have strong normative elements with little regard for the political preconditions of its implementation’. For example, despite the poor socio-economic record of crisis management in Greece and Portugal, in strengthening capital over labour, austerity is successfully facilitating new points of value-capture assisting capital in the search for further surplus accumulation. The pervasive privatisation programmes included in the various Memorandums of Understanding that Greek and Portuguese governments have signed with the Troika are clear examples of this. Thus, it is no surprise that magnified neoliberal restructuring has continued to be the main response to the Eurozone crisis in Europe. Putting class struggle in its rightful analytical place, alongside broader normative concerns for a progressive exit from crisis, addresses a significant limitation of post-Keynesian accounts of crisis management and policy prescriptions.

And yet, we remain keen to emphasise that our account of crisis, austerity and restructuring does not imply that there is no resistance or that alternatives are impossible. Counter-movements, however, cannot simply stem from theoretical reflections by post-Keynesian economists. They emerge out of concrete struggles often in spaces where exploitation is at its severest. Be it Vio.me, a large metallurgy factory in the north of Greece occupied and run by its workers, be it the social health care clinics across Greece, be it ongoing resistance against water privatisation in cities and towns across Greece and Portugal, or be it the fight back for housing in Spain, it is through such counter-spaces of class struggle that, ultimately, the way towards a different future may emerge.