[Marxism] G20 and Inter-capitalist Conflicts

Louis Proyect lnp3 at panix.com
Wed Apr 8 07:02:44 MDT 2009


http://www.monthlyreview.org/mrzine/halevi070409.html
G20 and Inter-capitalist Conflicts
by Joseph Halevi

In the Financial Times of March 31st, Martin Wolf set down a 
straightforward criterion to evaluate the outcomes of the G20 meeting in 
London.  Will they decide, he asked, to put forward a plan to shift 
world demand from the countries with a balance of payments deficit to 
those with a surplus?  The underlying reasoning is just that of Keynes 
at Bretton Woods in 1943-44, for whom the surplus countries contributed 
to a dearth in demand.  Hence they should be made to spend their savings 
(surpluses), thereby importing from the deficit areas.  Wolf's hunch was 
that they would not even attempt to approach the issue.  His guess 
turned out to be correct.  As noted by the New York Times, the G20 has 
agreed to endow the IMF with 1.1 trillion dollars in the event of 
developing countries falling into balance of payments crises and needing 
loans.  Yet, the paper points out, the G20 has made no provision to 
stimulate world demand.

The 1.1 trillion dollars are funds made available to private banks by 
the public refunding of the IMF.  Countries that cannot meet the 
payments to banks are to ask for a loan taken from those funds to pay 
them.  In one stroke the G20 succeeded in revitalizing the role of the 
IMF as a creditor and future debt collector.  The bad reputation of the 
IMF in the years of the Washington Consensus stemmed precisely from the 
fact that it acted as a banker and not as an agency enabling 
development.  Contrary to official declarations about fighting the 
crisis, the crisis itself has become the midwife of the old IMF in new 
clothing.  The IMF could have been given even 3 trillion dollars; a 
larger sum would have made no difference to the issue of fighting the 
collapse in world demand.  Those 3 trillions would have still 
represented only endowments for lending to governments in crisis (i.e. 
unable to meet payments), not funds for financing the recovery of 
effective demand and of employment.  In other words, the G20 didn't even 
address, let alone untie, the knot highlighted by Martin Wolf in the 
Financial Times.  To really untie the knot, however, it is absolutely 
necessary to put an end to wage deflation in the Eurozone and to 
radically reorient the productive structures of the Japanese and Chinese 
economies.  That seems to escape the Financial Times' concern.

France and Germany do not even want to hear the term economic stimulus. 
  Last October, Angela Merkel stated that she wouldn't spend one euro 
for the rest of the Eurozone, as such a move would weaken Germany's 
financial position.  In the interview given to the Financial Times on 
the 27th of March, Merkel went further, stressing openly that Germany 
does not intend to change its reliance on (net) exports, that is, on 
persistent external surpluses.  For the German government and 
corporations, their own domestic economy should not be "stimulated." 
Their (wrong) rationale is that the size of the German economy will make 
a German stimulus bigger than that of the other Eurozone countries and 
that thus Germany will start taking in imports, jeopardizing its net 
external position.  The same argument is made in a more devious way in 
France.  If we reflate, says President Sarkozy, imports will gain most. 
  Thus, argues the President of the French Republic, to come out of the 
crisis, people should work more and increase productivity.  Clearly the 
objective is to export the ensuing surplus output since wages, under the 
wage deflation ruling in the Eurozone, will hardly rise on a par with 
productivity.  This implies that domestic demand cannot possibly rise 
with the expansion of production.  Hence Sarkozy's words simply mean to 
work more in order to export more.

For both Germany and France, as much as for most of the European 
countries, to increase exports means mostly to expand them within Europe 
itself.  This is what characterizes intra-European neomercantilism 
(except for the UK).  It is a built-in feature since the years of the 
Common Market, but it became unavoidable with the unwillingness to move 
towards a Federal Europe and with the systemic trade deficits of Europe 
with China, Japan, and East Asia.  Since the formation of the euro in 
1999, competitive wage deflation is the pillar of intra-European 
neomercantilism.  In the Eurozone, the race towards wage deflation has 
replaced the competitive exchange rate devaluations (or currency 
realignments, as they were called) occurring periodically in Europe 
since 1971, when the United States put an end to the Bretton Woods 
system of fixed parities.  The guarantee of a persistent wage deflation 
throughout the Eurozone resides in an austere currency based on an 
equally persistent anti-inflationary stance by the Central Bank managing 
it, the ECB.  This is an additional and important factor ruling out 
stimulus-oriented policies in Europe, and it is consistent with the 
neomercantilist direction of Germany, France, Italy, Benelux, Austria 
(Spain, Portugal, Greece, and Ireland have been running long-term large 
trade deficits).  The austere currency is the euro, which has a 
remarkably close institutional resemblance to the infamous gold-based 
French Franc of the 1930s known as le Franc Poincaré.

In this austere gold standard-like framework, both Paris and Berlin are 
interested in bringing their banks into a protected monopolistic cocoon 
with guaranteed financial rents.  The clearest example comes from 
France, where despite the losses on the stock exchanges and the crash of 
several hedge funds owned by the giant BNP-Pays Bas, banks, including 
the aforementioned one, still posted hefty profits as recently as 
February.  On the German and the French side, the crisis is portrayed in 
a populist manner, as the product of the corrupt U.S. financial system 
which has exposed the innocent European banks to the contagion coming 
from the subprime market.  This attitude, stemming as it does from the 
Poincaré 1930s nature of the euro-currency governing intra-European 
neomercantilist conflicts, goes a long way toward explaining why France 
and Germany are dead set against economic stimuli but strongly in favor 
of new financial regulations which would sharply curtail the more 
risk-prone lending posture of U.S. banks and financial institutions.

Meanwhile in Washington, the hope placed in reflating the mountain of 
toxic assets, thanks to the rigged auction plan devised by Geithner and 
Summers, proves that there are no serious intentions to reform the 
banking system.  Hence, President Obama's willingness to apply 
significant fiscal stimuli is being tied to the defense of the position 
of the megabanks and to the artificial revaluation of toxic assets.  The 
United States no longer wishes, however, to act as the main world net 
importer because global imbalances are now acknowledged to augment 
volatility and financial instability.  Whether or not it's possible to 
achieve it, the U.S. objective cannot but worry the Eurozone and Japan. 
  (China too is worried, but its case is more complex.)  An eventual 
reduction of the role of the United States as the only large non-EU net 
importer of Eurozone products and as the crucial importer to close the 
effective demand loop for Asia would imply a strong devaluation of the 
U.S. dollar relatively to the euro and the yen.  Given that neither 
Paris nor Berlin would allow spending on the EU economies, the European 
crisis is bound to worsen.

Like the U.S., Japan also plans to stimulate the economy.  Yet past 
experience shows that it is very difficult for Japan to be Keynesian. 
The country is full of excess capacity far beyond what the domestic 
market could absorb.  Its domestic industrial structures are developed 
in sync with the global oligopolistic role of its multinationals.  The 
Japanese economy is therefore as structurally dependent upon world 
demand as are its multinational companies.  In practice, this means that 
Japan's stimulus must come from China and the United States, given that 
Europe has decided to freeze itself out in a latter-day euro-gold 
currency system.

China is experiencing the worst effects of the crisis.  Millions have 
lost their jobs and several more millions will follow in their wake.  In 
the exporting areas, whole industrial parks are being emptied.  There 
are no substantial social safety nets, health care is expensive, and 
therefore it is extremely difficult to for a jobless worker to live in a 
city.  Since a year ago, twenty million unemployed workers have returned 
to the much poorer countryside.  Such "repatriations" are also 
encouraged by the government.  China does intend to spend to mitigate 
the crisis.  However, the measures undertaken so far favor the heavy 
industrial sectors, thereby increasing the gap between investment and 
consumption.

Nevertheless, the issue now is precisely how to expand the domestic 
consumption goods market so that the capacity in many exporting sectors 
can be reactivated.   It is evident that China is seeking to recalibrate 
the export-led growth strategy rather than abandon it.  Hence it is 
reluctant to operate a major shift towards domestic consumption.  In 
this way, China exposes itself to the impact of any further devaluation 
of the U.S. dollar.  While the gap in money wages between China and the 
United States will remain so large that, in the case of a strong U.S. 
recovery, China can expect its exports to pick up again even in the face 
of a devaluation of the U.S. dollar, the currency management 
implications will be, and already are, serious.  China finds itself 
today in a situation where its dollar-denominated assets are not 
profitable because of the low interest rates in the United States and a 
depreciating dollar.  Since China's exports are not rising, indeed they 
are shrinking, the sacrifice of holding dollars is not offset by gains 
in external trade, especially with the United States.  Beijing does not 
want to rock the boat, but it does aim at formulating a world policy for 
the governance of the dollar.  China is using its current holding of 
U.S. debt as a lever to gain more weight within the IMF where its 
presence is still minimal.  The United States will never agree to have 
its currency policy managed by other countries, however.  Thus the 
question of U.S. dollar assets abroad is bound to boil over economically 
as well as politically.

Not one participant among the G20 has provided a compelling analysis of 
the crisis and a framework worth discussing.  Likewise, no one among the 
so-called economists (of any persuasion) has a lucid vision of the 
future comparable to that of Keynes at Versailles in 1919, who foresaw 
the tragedy that was to devastate Europe.
Joseph Halevi teaches political economy at the University of Sydney.  He 
is a member of the international editorial board of Economie Appliquée 
(Paris) and of the editorial board of Cahiers d'Economie Politique 
(Paris).  He is also associated with France’s National Research 
Council's Institut de Recherches Economiques sur la Production et le 
Développement at the University of Grenoble.  Since 1990 he has been a 
regular contributor to Il Manifesto.  This is an expanded version of "Il 
summit e i conflitti intercapitalistici" published by Il Manifesto on 4 
April 2009.




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