The Global Crisis and the Crisis of European Neomercantilism

The global financial crisis that erupted in, and spread out from, the United States in 2007-8 has highlighted long-standing structural faults within European capitalism, especially its neomercantilist dimension. By neomercantilism we mean the pursuit of economic policies and institutional arrangements which see net external surpluses as a crucial source of profits. The solution to the problem of effective demand is seen as lying above all in a positive trade balance. Moreover, the current account surplus is seen as increasing the private sector’s ability to operate on international capital markets. This outlook on the part of capitalist institutions and firms – and in Germany, Holland and Scandinavia, also on the part of unions – relegates the domestic level of employment and of wages to a subordinate role compared with external expansion. Profits accruing from net exports reduce firms’ dependence on a relatively small or slow-growing domestic market, and Europe’s surplus countries are well aware that were it not for their export strategy domestic investment, profits and employment would be lower. Persistent export surpluses, especially from large economies, are tantamount to exporting unemployment. In a context where intra-European trade accounts for the greatest part of each country’s trade, the absence of an intra-European mechanism for redistributing surpluses requires the deficit countries to undertake the adjustment by going into recession. The surplus countries will therefore suffer negative repercussions on their exports and on the related level of employment. They may still maintain their net position with a trade surplus, but at a reduced overall level of activity, with, thus, higher levels of unemployment, as Germany has today. In the last three decades the severity of the intra-European adjustment has been mitigated by net European exports to the United States. Yet the role of the US market has been declining because of the shift in US trade towards Asia. Because of the long-term tendency to stagnation in the EU produced by the internal contradiction described above, European financial surpluses were being invested in toxic securities issued in the United States. By deliberately nurturing stagnation through wage deflation the European institutional and economic system gave financial firms an incentive to place the proceeds of the export surpluses in ‘structured vehicles’ and derivatives connected to the US subprime market. Even European banking institutions that were legally mandated to lend to the network of medium and small industrial enterprises took the toxic securitized path, without knowing what they were buying, simply because real investment demand was not forthcoming. This was the case with the German Landesbanken: born as facilitators of productive activities, they could borrow from the capital markets at subsidized rates – a facility annulled by Brussels’ reregulation policies. Hence instead of easing the financing of investment to small and medium sized firms, the Landesbanken invested in securitized papers, thereby becoming an important conduit of the contagion which spread from the USA to Europe with the eruption of the US financial crisis in 2007. After a few months the crisis spread beyond the financial sector and soon engulfed the whole economy, especially as the collapse of US demand towards the so-called BRIC countries (Brazil, Russia, India and China) impacted on Germany through a decline in its exports of capital goods, and then spread to the whole of Europe. The impossibility of de-linking from the US as the ‘provider of last resort’ of effective demand became transparent, while at the same time exposing the extent to which the practice of neomercantilism within the EU constitutes the most important factor in generating the EU’s internal crisis