Europe is likely to be the main and permanent loser in the current world crisis. It is once again the focus of world attention; and its current plight has implications for all humanity. The European Union holds parliamentary elections later this month. These are generally considered to be much less important than national elections in each member country. The world – and Europe in particular – is in crisis, yet no-one expects the European parliament to do anything about it. Rather, a self-appointed ‘troika’ consisting of the European Central Bank, the European Commission and the International Monetary Fund issue orders to failing Southern European governments that everyone knows are underwritten by Germany’s strategy for saving the euro.
Is this just a parochial matter that can be safely ignored by the rest of the world? Western Europe has been an island of complacency in the seismic upheavals on its Eastern and Southern periphery in the last 25 years (collapse of the Soviet bloc, Balkan wars, Arab Spring, Iraq, Libya, now Ukraine and Syria). The Europeans themselves treat the immigrants from neighbouring territories on whom they depend for their pensions largely as a threat to their own cohesion and sovereignty. Yet the prolonged crisis of their single currency threatens to exacerbate internal conflicts. While there are other danger zones, some of which may be even more lethal, Europe and the countries on its eastern and southern borders should be taken seriously as a threat to world peace. For we live in a world that the Europeans made and lost. It would not be beyond them to unleash another world war or at least a collapse of global equity markets. If civil war returns to Europe, the world will feel the consequences.
Identifying Europe as a “continent” separate from its Asian and African neighbours was largely an invention of the early nineteenth century, when the industrial revolution fuelled imperialist ambitions to control the rest of the world. This meant developing an indigenous history for western civilization, linking its source to ancient Greece and Rome at the expense of Mesopotamia or Egypt, for example. The idea of world society as an evolving racial hierarchy, with “whites” at the top, yellows, browns and reds in the middle and blacks at the bottom, required geographical divisions to be invented, so “Europe” became the whites’ distinctive homeland. Its inhabitants still struggle to find a political union there to match the historically arbitrary idea of their exceptional status.
Some 500 years ago, Iberian explorers looking for a Western route to India, stumbled across the Atlantic and found the New World. They were not the first – Phoenicians, Vikings, Irish monks and Basque fishermen probably preceded them. But this time several centuries of predation and settlement were unleashed, reinforced by circumnavigation of the planet and intensified trade contact with the rest of the world. There was nothing new about this kind of maritime expansion. The Pacific Ocean was criss-crossed by islanders long ago, as was the Indian Ocean by Indonesians, Indians, Chinese and Arabs. There is some dispute over whether the accumulation generated by European commerce, colonisation, plunder and the slave trade between 1500 and 1800 was the root cause of their subsequent global dominance. Karl Marx saw this expansion as the source of the capital fund that powered industrialization, whereas Max Weber felt that there were many similar historical examples that did not lead to industrial capitalism. In general the Europeans made only limited inroads into non-Western regions before the nineteenth century.
The period from 1775 to 1815 saw the American and French revolutions, a world war stretching from the Caribbean to India and the birth of industrial capitalism in Britain. The ensuing peace between the main European powers lasted for a century. As a result of industrial development, European death rates began to fall, while birth rates were slower to fall, leading to rapid demographic growth between 1830 and 1930, after which Europe’s population went into decline. By 1900 people of European descent controlled 90% of the planet’s inhabited land. Taking over the world with such apparent ease led them to ask how this had happened. They concluded that it was because they were smarter than the rest – they had a scientific culture whereas the others had only superstition. Moreover they found a biological cause for this cultural superiority, racial difference; and so the world’s peoples were stratified by colour and, by implication, cultural competence.
Europeans made modern world society in the nineteenth century by forcing the rest of humanity to join their empires, with the unequal results that are now well-known. Their temporary global dominance was principally thanks to a machine revolution that gave them overwhelming superiority in transport, communications and armaments, as well as manufactures more generally. At the same time, a population explosion fuelled their migration to all corners of the planet. The most powerful political entity to emerge from all this was the Anglo-Indian superstate; 85% of all British civil servants lived in India in 1870. The other European powers were forced to react to its dominance – the French in Egypt, the Russians in Afghanistan, the Germans in Persia – and in this way the seeds were sewn for the First World War.
So what happened in the twentieth century? Three decades of war and depression seemed to show that the world’s future lay with competing states of various kinds – communist, fascist, liberal, developmental – culminating in the nuclear nightmare of the Cold War. But the century’s main event was the anti-colonial revolution, the process whereby peoples coerced into world society by Europeans in the previous century now sought to establish their own independent relationship to it. Nowhere was the scale and speed of this revolution more dramatic than in China, the world’s most poverty-stricken and violently disorganized region in the 1930s and now a contender for global leadership. The impact of India’s development on world society since the end of the Cold War is almost as dramatic. But the freeing up of global flows of money and information in the last three decades has brought back extreme inequality and instability to the world economy in a pattern reminiscent of the age of financial imperialism before World War I.
National economic management has been unravelling since the US dollar left the gold standard in 1971. The money circuit has been progressively detached from politics and production and it has grown exponentially in size; but the economic consequences of the lack of fit between national controls and global finance were long disguised by the credit boom that ended in 2007-8. Since then, the North Atlantic societies have been in the doldrums, while “emerging” countries like India, Brazil and China face the challenge of offering a measure of social protection to the millions of citizens that have been drawn into urban markets of late. The divergent unipolar world the Europeans made has been replaced by a convergent multipolar version which resembles nothing so much as the world in the 12th century.
The growing inability of national governments to cope with such a world has led to the rise of regional trading federations such as ASEAN, NAFTA and Mercosul. The EU was originally one of these, following the path taken by Germany from customs union to federal state a century before. The end of the Cold War led to the reunification of West and East Europe at a time when neoliberal globalization was roaring ahead. Monetary union was seen as a shortcut to a United States of Europe whose single currency might rival the dollar. This is the primal scene of Europe’s present woes and it is the subject of James’s massive tome, to be discussed below.
At this stage we should note that the rise of both neoliberalism and the internet fuelled dreams of money and markets uncontaminated by politics. It was also recognized that individual nation-states lacked the means of protecting their citizens from the harsh winds of world markets. But the method of combination chosen by Europe was a fixed exchange-rate union that harked back to Bretton Woods and before that to the gold standard. This retro strategy was ill-suited to the regime of multiple currencies, virtual markets, transnational corporate networks and shifting alliances between states that characterizes the world economy today.
Despite half a century of movement towards greater union, Europeans still approach their common affairs from a national rather than regional point of view. They cling to their fragmented sovereignties and provide support to populist parties of the right who resist the erosion of imagined national community. After half a millennium of receiving unearned income from the rest of the world, that source is now almost dry. At some level the Europeans know that the game is up; but they can’t admit it to themselves. Heritage and education are their main industries today. Life for older citizens is civilised and more secure than elsewhere; but the question remains whether Europeans are prepared for the turbulence of a world in transition.
Europe’s ageing population has collapsed, with births in many places now only half the number of deaths. The immigrants from Africa, Asia and Eastern Europe who work for West Europeans’ pensions are routinely disparaged and socially excluded. France and Britain are the most depressed countries in Europe. They also occasionally support the US in its military adventures; but Europe as a whole has long given up on being able to defend itself. After the 2007-8 financial crisis, divisions have opened up between North and South Europe (symbolized today by the mutual antagonism of Germany and Greece) that were unthinkable a decade ago. While the United States and Russia square up over Ukraine, the Europeans have nothing to say, preferring to paper over the cracks in their obsolete monetary and banking systems.
In 1900 Europe had a population of 400 million, a quarter of the world total (or 36% including lands of European settlement) and three times Africa’s. By 2100 Asia is projected to have 43% of the world’s population (down from 60% today), Africa 39% and the New World, Europe, Russia and Oceania altogether only 18%. Europe’s share will have shrunk from 25% to 6% in 200 years. This is because, while most regional populations are ageing, Europe’s is ageing fastest and only Africans are posting rates of increase comparable to Europeans in the nineteenth century. The Asian manufacturers, especially China, have recognized Africa’s centrality to the growth of world demand in the coming century, but the Europeans and Americans still cling to a model of world society in which their own global dominance could be taken for granted.
What matter in this world are people, machines and money in that order. Population is still a powerful indicator of an economy’s size. In Europe’s case this once went along with control of the other two factors. It is no longer so. As a US air force colonel once told me: “You Europeans have stolen our moral high ground. The Chinese have stolen our manufactures. All we have left is the weapons. I guess that makes it double or quits”. Can anyone feel safe under these circumstances? No wonder that the Europeans are turning inwards away from the world they made and then lost.
A leading American economist once predicted that monetary union would bring Europe to civil war as states fought about secession from a costly economic bond. This was dismissed by Europeans at the time as American sour grapes; but the euro was conceived with massive design flaws that have only become apparent since the financial crisis of 2007-8. The euphoria of the free market’s “victory” in the Cold War led Europeans to aim for “pure money”, a currency entirely free from political intervention that would ensure price stability. Why stable prices? Keynes long ago identified the class interests involved in inflation and deflation: debtors gain when money’s value is eroded; creditors (notably the banks) and savers (owners of capital) lose. The reverse is true if money holds its value or even appreciates. The neoliberal drive to take states and politics out of the management of money was always utopian and ultimately unattainable. The euro from its inception was thus a neoliberal project, promoted by an unholy alliance between hyperactive financiers and the passive governments they had bought.
A comprehensive book by Harold James (Making the European Monetary Union, Harvard UP, 2012, 570 pages) identifies the flaws that were built into the euro from the beginning. These were mainly two: a lack of effective regulation of Europe’s banks and the German trading surplus. The credit boom disguised these flaws; but now they are only too obvious. Europe’s elites treated the financial crisis at first as largely an “Anglo-Saxon” problem. The Italian finance minister even joked that his country’s banks were sound since their managers didn’t speak English! European banks are still hiding bad debt on a scale that their American counterparts have been forced to confront. The European Central Bank’s unlimited promise in September 2012 to buy back bonds issued by member countries with sovereign debt problems has temporarily held the line; but the structural imbalance between Germany and the rest is unresolved.
Europeans now find themselves at centre stage of the world economy, as they have not been since the 1930s, with financial markets hanging on each negotiation and election. The central problem, however, is a deep-seated shift in the world economy, with national and international political institutions now unable to influence a money circuit that has gone global. Money has acquired its apparent pre-eminence because the economy has been extended rapidly from a national to a global level without any of the social regulation that existed before. The current crisis is thus not merely financial, a moment in the historical cycle of credit and debt. The removal of political controls over money in recent decades has led to a situation where politics is still mainly national, but the money circuit is global and lawless. The crisis should rather be seen as the collapse of the money system that the world lived by in the twentieth century. This has been unravelling since the early 1970s, when the US dollar went off the gold standard, a new regime of floating currencies emerged and money derivatives were invented. As the need for international cooperation intensifies, the disconnection between the economy and political institutions makes practical solutions unthinkable.
Some brief examples may indicate the momentous changes that have overtaken money in the last few decades. In Switzerland today, euros are commonly accepted in shops alongside the national currency. If you pay with a card, you can often choose the unit of account (Swiss franc, euro, pound sterling, US dollar). But only francs are acceptable for the payment of local taxes. Are national currencies a store of wealth? Hardly. They have all been radically depreciated and may even disappear, hence the flight to gold—which could turn out to be the biggest asset bubble of them all. As for real estate, the collapse of subprime mortgages got us into the present mess. And I have not even touched on what credit default swaps and collateral debt obligations are used for, or who issues them. The shadow banking system—hedge funds, money market funds, and structured investment vehicles that lie beyond state regulation—is literally out of control. Money stashed away in tax havens far exceeds that disposed by governments. London housing is the new anti-inflation currency for the super-rich.
There is still a tendency to see the potential disaster we are living through in economic rather than political terms. By attacking the free market rather than the use of the state to siphon wealth to the top, neoliberalism’s detractors often reproduce the ideology they claim to oppose. The euro is by no means the only symptom of this crisis, but it may well become the decisive nail in the coffin of the world economy. What then is our moment in history? We should ask not what is beginning, but what is ending. “National capitalism” is ending, the synthesis of nation-states and industrial capitalism whose main symbol was national monopoly currency (legal tender policed by a central bank). It was the institutional attempt to manage money, markets, and accumulation through central bureaucracy within a cultural community of national citizens. It was never the only active principle in world political economy, however: cities, regional federations and empires are as old or much older.
The apparent triumph of the free market at the end of the Cold War induced two huge political blunders, both of them based on the premise that society should be shaped by the market economy rather than the other way round. First, the radical privatization of Soviet bloc public economies ignored the common history of politics, law, and social custom that shored up market economies in the West, thereby delivering economic control into the hands of gangsters and oligarchs. And second, the European single currency, which was supposed to provide the social glue for political union, was adopted without first developing effective fiscal institutions or economic convergence between northern and southern Europe.
The big mistake was to replace national currencies with the euro. An alternative proposal, the “hard European Currency Unit” (ECU), would have floated nationally managed currencies alongside a low-inflation European central bank currency. Countries that didn’t join the euro, like Britain and Switzerland, have in practice enjoyed the privilege of this plural option, but Eurozone countries cannot devalue and so must reduce their debts through deflation—or default. The euro was invented when money was already breaking up into multiple forms and functions. The Americans fought their Civil War before centralizing their currency; whereas the Europeans centralized their currency as a means of achieving political union.
So where are the levers of democratic power to be located, now that globalization has exposed the limitations of national economic management? The cultural logic of national capitalism has led the political classes who got us into this mess to repeat the same mistakes. Politics has become a dialogue of the deaf, between those who absolutely deny the need for any political regulation of the market and others who remain trapped in the outmoded model of state money. It is obvious enough that member states of the Eurozone have been denied the option of devaluation as a means of reducing national debt. The fact is that very few people benefited from the credit boom and those few will sacrifice the rest of us to retain their power. Austerity is good for disciplining the masses and keeping them cowed, certainly better for the rich than expanding popular demand and regulating capital flows. It is up to us to show them they are wrong to think so.
The euro crisis is pushing Europe’s rulers inexorably along a path of social polarization, between corporate bureaucracy and a population rapidly being stripped of the political, legal and economic powers won after 1945. The whole story is a Greek tragedy in both the ancient and contemporary senses, where even the best intentions can no longer remedy the consequences of past mistakes. The tragedy is that, by granting undemocratic powers to the European Central Bank, the EU has ensured that the euro’s stability will be achieved only at the cost of general economic hardship. Mass political resistance will be the inevitable result, thereby further undermining the stability of the currency.
Anthony Giddens (Turbulent and Mighty Continent: What Future for Europe? Polity, 2014, 240 pages) argues that the EU has not delivered either on economic efficiency or democracy. Democratic legitimacy was not a problem at first when Jean Monnet set rather modest economic goals for the union; but it has become a pressing issue now that the heads of unelected bureaucracies (the “troika” of the European Central Bank, the European Commission and the IMF, fronting for the real power, Germany) can dictate stringent austerity policies to national governments such as Greece and Portugal. If Europe is to be further integrated, two persistent problems must be addressed — the lack of both democratic legitimacy and effective leadership. A federal state that devolves real powers to nations, regions and localities is the only way for the democratic deficit to be made good.
Given his commitment to regional federation as a political model, Giddens is certainly more broad-minded than his nationalist contemporaries. But his scope is still much too narrow. He remains trapped in a circle of high-flying European insiders (several of whom endorse this scrappy book) who seem to think that dreaming up internally self-sufficient plans will solve their immediate and long-term problems. It is not much different in other large countries like the United States, Brazil or India. European expansion into the world had tragic consequences for its victims and even for many of its protagonists. Now the tragedy is both inside and outside Europe. The continent is “turbulent” alright, but no longer as “mighty” as it thinks it is. Adjusting to a diminished future will take more than the rediscovery of “European values”, institutional tinkering and a wish list of economic, social and cultural policies to be implemented locally. The rest of the world has good historical reasons for worrying about what could happen if all this fails.