Why It's Still Kicking Off Everywhere Read online

  It could not determine its own economic policy. It could not convince its own people it was acting with good intent. The rule of law was being imposed with draconian force in one place only to break down somewhere else, as consumers pledged non-payment of bills for their privatized utilities, drivers flouted road tolls, restaurants voted to defy tax increases and youth disappeared into the grey economy.

  Borrowing a term from the early twentieth-century sociologist Emile Durkheim, commentators started to speak of ‘anomie’ and ‘anomic breakdown’—a situation where instead of anarchy (lack of government), you find mass refusals to cooperate with the system, amid the collapse of social norms. As veteran journalist Takis Michas put it, pleading with the political class to get a grip: ‘Greece is slowly becoming a society where “low-intensity conflict” dominates, the legal order is breaking down and appeals to universal values become meaningless.’2

  Political commentator Antonis Papayiannidis told me why it was becoming impossible for the politicians to save the situation:

  The Greek political class was always floating above the people, for decades. And the people didn’t care. It was win-win. They floated above us and got rich; and we got rich. Now they have lost all connection to the Greek people. They have no legitimacy.

  To the youth, amid this real-life movie trailer of fire, adrenaline and blood, it had begun to feel like war. ‘The social war encompasses the totality of everyday life,’ one wrote; ‘to be alive today is to be at war, to never sleep properly, to awaken at odd hours to work, to be constantly surrounded by surveillance and police …’3

  On 21 July 2011, faced with runs on the sovereign debt of Italy and Spain, the EU would soften the financial terms imposed on Greece. Further austerity was called for; the result was faster economic collapse and—as the EU leaders found out in late October—imminent bankruptcy. Faced with new evidence showing that austerity had no hope of saving Greece, and the first outbreak of open violence between communists and anarchists in Syntagma, the big powers of Europe climbed down. On 25 October they forced the banks to accept the ‘voluntary’ writedown of Greek debt—a controlled default—in return for the installation of permanent foreign control over Greek economic policy. To prevent a second Lehman event, they pumped €100 billion into the banking system and a trillion into the EFSF, the mega-bailout fund designed to end the crisis. But the crisis did not end.

  Meanwhile the legitimacy of the Greek state was fatally eroded in the eyes of its people. And it is in this that Greece—though an outlier economically, representing just 6 per cent of the eurozone—becomes a signifier in the year it all kicked off.

  Greece is the modern case study of what happens when the political elite of a developed country allows its legitimacy to go up in flames. Democracy and globalization itself are challenged. The minds of a whole generation begin to switch off from the dreams that had sustained them. And there is reason to fear that Greece might not be unique.

  6

  ‘Error de Sistema’: Economic Causes of the Present Unrest

  The youths who swarmed into squares all over Spain on 15 May 2011 were an unlikely bunch. Journalists mocked them for their naivety; the socialists, communists and seasoned anarchos, meanwhile, were politely amazed. Was this not the generation that had smooched its way through a thousand mornings of café con leche and cigarettes, seemingly unconcerned about the serious business of politics?

  What mystified both pundits and hardened activists most of all was the vehemence of the protesters’ anti-capitalism. ‘Error de Sistema’, said one placard, brandished by three girls straight off the fashion pages of some upmarket magazine—adding, for instant Twitter relevance, ‘#spanishrevolution’. ‘La Crisis Es El Capitalismo’ said the banner in Madrid’s Puerta del Sol, big as a tennis court, held up by similarly good-looking youths.

  But once you see Spain’s unemployment figures, there is no mystery to the anger: by mid-2011 youth unemployment was running at 46 per cent. As in Cairo, Athens and beyond, it’s economic disruption—joblessness, price rises, austerity—that has driven the unrest. To most people it may feel as though this period of disruption started with the collapse of Lehman Brothers. But the real disruption began much earlier, with the onset of globalization, and in particular after 2001. Once you grasp this, you can grasp the scale of the challenge facing those in power.

  How we came to the crisis

  The first decade of the twenty-first century saw an uncontrolled expansion of credit, during which the major financial actors’ understanding of the risks involved in lending became—and was encouraged by governments to become—detached from reality. The credit boom, in turn, was caused by a mismatch between the savings generated in the export-oriented countries—China, Japan and Germany—and the debt-fuelled consumption of the Anglo-Saxon world.

  The excess credit fuelled asset price inflation in technology stocks, housing, commodities and finally financial assets themselves. On top of this a new market in complex debt vehicles was created, and on the back of that a credit derivatives system whose notional value, at the time of the crash, was about the same as global GDP: $68 trillion.

  As the housing bubble began to deflate, the increasingly toxic debts were found stored inside a system of off-balance-sheet financial entities, which became known—only after it collapsed—as the ‘shadow banking system’. Very few mainstream financial journalists had noticed its existence.

  Once the first phase of the crisis was over, parts of the business elite began to breathe easy and tell themselves they’d seen it all before. ‘No one has yet dis-invented the business cycle,’ Rupert Murdoch chuckled, quoting Margaret Thatcher to an invited audience in London in 2010, including numerous beaming members of the Coalition Cabinet. ‘The “gales of creative destruction” still roar mightily from time to time.’1

  But this is no mere business cycle, and no ordinary cycle of boom and bust. As the data clearly illustrate, the seeds of the crisis were sown by structural changes.

  Exhibit One: the average US house price at the peak, in 2006, was double what the historic trend line said it should be, even when compared to every other boom–bust cycle since the war. This was no ordinary housing bubble.

  Exhibit Two: the value of mortgage-backed securities issued (that is, of complex debt products designed to mask the risks involved in riding the house-price bubble) increased fivefold between 2000 and 2003, to $3.2 trillion. Credit default swaps, where unknown actors in the market can bet on the future failure of another’s investment, had grown from zero to $68 trillion in eight years. This was no ordinary credit cycle.

  Exhibit Three: there was a massive rise in so-called global imbalances. China’s foreign currency reserves grew from $150 billion in 1999 to $2.85 trillion in 2010. The US current-account deficit (the difference between goods, services and capital flowing in and out) grew from $99 billion in 1989 to $800 billion by 2007. Before the crisis, these imbalances had been conceptualized as a kind of yin–yang pictogram of perfect harmony: China exports, America imports; China lends, America borrows; Chinese consumers save, American consumers borrow—it’s just a new form of the division of labour. But in the ten years after 1999, the imbalances unleashed chaos. This was no ordinary division of labour.

  Exhibit Four, probably the most signal disruption of them all: the trend for global capital flows. In 1980, the economists Feldstein and Horioka observed that since the dawn of industrial capitalism, there had been a high correlation between saving and investment within countries, at a ratio hovering just below 1:1.2 This was the famous Feldstein–Horioka paradox: why, given that capitalism had become so global, did we continue to invest our savings in our own ‘home’ markets?

  But after the year 2000 the paradox collapses: the ratio inverts. In a reversal unparalleled in the history of capitalism, the ratio of domestic savings to domestic investment fell to zero: capital had begun washing around the globe at speed, as savings in the west dried up and, in the east, piled high.3 This wa
s no ordinary decade.

  The scale of the property bubble, the scale of global capital flows, the scale of speculation and of the mismatch between consuming and producing countries was unprecedented—all of it. Right now, mainstream economics remains confused about the ultimate source of the disruption. Is it our greed? Are these the growing pains of the Chinese century? Was it all down to testosterone on the trading floors of major banks?

  Actually, the answer is staring us in the face, but it’s unpalatable. The root cause, simply put, is globalization, and the resulting monopolization of wealth by a global elite.

  In the two decades after 1989 the world’s labour force grew from 1.5 billion people to 3 billion and, through migration and outsourcing, the labour market itself became global. Harvard economist Richard Freeman has called this phenomenon ‘The Great Doubling’. The move from farm to factory in China and the developing world, combined with the entry of the former Soviet bloc into the global economy, effectively doubled the amount of labour available to capital, and halved the ratio of capital to labour.4

  The impact on wages was startling. In the USA, real hourly wages for men were, by 2005, the same as they had been in 1973.5 In Japan, the real wage index fell by 11.2% in the decade to 2007, and fell a further 2% in each of the following years.6 In the former West Germany, gross wages per employee have slipped by about 6 per cent from their post-unification high of 1991. For former East German employees, the same measure leapt by 25 per cent after unification—only to stagnate after 1999, and fall back by around 2.5 per cent between 2003 and today.7

  Of course, there are places where real wages are rising—notably, peripheral Europe and the emerging markets. But the figures show real wages falling in the 2000s across many of the West’s heartland countries and in a variety of different economies: in deflationary Japan; in the highly socialized economy of Germany; in the free-market USA. And the shortfall between stagnating wages and consumption growth is met by credit.

  The results of all this look benign—until, that is, they turn bad. There is a ‘heroic’ period of globalization, beginning in 1989 and ending around 1999, during which China’s entry into the world market helps suppress inflation; where falling wages are offset by a seemingly sustainable expansion of credit; where house prices rise, allowing the credit to be paid off and a whole bunch of innovations are suddenly deployed—above all mobile telephony and broadband Internet.

  Then there is a second phase in which the disruption overwhelms the innovations: China’s increased consumption of raw materials creates world-wide inflationary pressure; the house-price boom ends, because the banks run out of poverty-stricken workers to lend to; mass migration begins to exert a downward pressure on the wages of unskilled workers in Europe and the USA; the financial dynamic overtakes, dominates and ultimately chokes off the dynamics of production, trade and innovation.

  The rise of finance, wage stagnation, the capture of regulation and politics by a financial elite, consumption fuelled by credit rather than wages: it all blew up spectacularly. If this process had been accompanied by dire warnings from economists and politicians; if Madonna and Fifty Cent had wagged their diamond-encrusted fingers at us and rapped, ‘Hey kids, be careful, it won’t last’—then maybe the ideological shock would have been smaller. But the 2000s boom was accompanied only by yelps of glee. In Britain, the then chancellor in the Labour government, Gordon Brown, told us he’d achieved ‘an end to boom and bust’, adding that the era would be seen as ‘the beginning of a new golden age for the City of London’.8

  Even the diehard opponents of the system seemed cowed. Some of those who had organized the anti-capitalist revolts in Genoa and Prague moved to the West Bank to stand in front of Israeli bulldozers, others moved into concept art; the gritty eco-protesters who had mobilized against Shell and Japanese whaling fleets became sustainability experts for the newly greenwashed corporations. Aid charities that had flayed Bill Gates now gratefully received billions of dollars from Bill Gates, and toned down their criticisms accordingly.

  But then it all exploded. The system, the conceits, the ideology. In fact, you need something better than the word ‘explosion’ to do it justice.

  The alien and its toxic blood

  There is a scene from the movie Alien (1986) that offers a perfect metaphor for what’s happened since the Lehman crisis.

  In the spaceship’s medical bay, the alien is sitting on John Hurt’s face, breathing on his behalf: a perfect parasite. The surgeon tries to cut it off with a laser scalpel. But the alien’s blood turns out to be acid. The blood splashes on the floor of the operating theatre and burns through. The crew rush down to the next level of the spaceship, but it’s already dripping through the ceiling and fizzing through the floor. On the next level down it’s the same. Horror-struck, they realize that if it burns through to the hull, the spaceship will explode. Luckily, after burning through several decks, it stops.

  In this metaphor, the banks are the alien; the acid blood is the toxic debt; the scalpel incision is made by US Treasury Secretary Hank Paulson on 15 September 2008, as he attempts to amputate Lehman Brothers. And the unleashed toxic debt then burns through layer after layer of the global economic system.

  The first layer it burned through was the credit system. The next layer was the real economy, whose output, trade and stock market valuations collapsed at a rate completely in line with post-1929: there was a 20 per cent fall in trade, a 50 per cent fall in global stock market valuations and an annualized 40 per cent fall in merchandise exports.9

  But then it hit a deck that did not burn. In the spring of 2009, a slump on the scale of the 1930s was halted by the intervention of the state.

  By spending taxpayers’ money and reducing taxes; slashing interest rates and then printing money; quarantining trillions of dollars of bad loans inside the balance sheets of governments—the state became the barrier that contained the acid blood of toxic debt.

  The ideological implications of the state’s intervention are always avoided in conversations at Davos or Jackson Hole, or on the yachts of the super-rich. Because among the wealthy, the default theory of our age still rules: that the state is dysfunctional to capitalism; that (as free-market economic guru Milton Friedman taught) the regulator can never know more than the two parties in the deal and therefore should not, ideally, exist.

  The dominant economic theory states that individual self-interest is the great driver of progress. According to this dogma, any attempt to impose rationality on economic life leads not just to inefficiency but—as another free-market economist, Friedrich Hayek, put it—to ‘serfdom’.

  But even while mainstream economics struggled to understand the new effectiveness of the state, another problem arose. The state could not hold. That is to say, not all states, or state formations, were strong enough to absorb the acid bath of bad debt they were being asked to take.

  It has now become obvious that four globally strategic institutions were corroded to the point of failure by the attempt to contain the crisis. These are: the eurozone, British social democracy, bipartisanship in American politics, and the network of Western-backed dictatorships that ran the Middle East.

  That is nice work for one small alien over the space of three years, and its mission is not over yet.

  The euro crisis

  Ireland was bankrupted by its banks, which had become the conduit for hot money operations out of London during the boom. As they went bust, progressively, so did the Irish state, bailed out to the tune of €85 billion after a month of protesting there was no need to, on 29 November 2010.

  Greece was bankrupted by ten years of co-existence with Germany inside a single currency. Southern Europe became a market for German loans and German cars: already boosted by the low Deutschmark exchange rate fixed on entry into the single currency, the German economy simply reaped the rewards of its institutional dominance. Meanwhile stagnant wages in Germany, alongside galloping unit labour costs in the periphery meant, as eco
nomist Costas Lapavistas put it: ‘Monetary union is a “beggar-thy-neighbour” policy for Germany, on condition that it beggars its own workers first.’10 Allowing Greece to join the euro with a detrimental real exchange rate, a dysfunctional tax system and rising labour costs practically guaranteed its future penury.

  Portugal, meanwhile, was bankrupted by its failure to compete—not just with Germany but with China and developing Asia, as offshoring quickly sucked the life out of the country’s traditional timber and leather industries. In a factory outside Porto early in 2011, I saw first-hand a whole shed full of equipment for making softwood Venetian blinds. It was deserted, the machinery laced with fine cobwebs; two years before, thirty people had worked there. Next door, an unbuilt speculative property development—no more than a deserted sales office and some tattered corporate flags—completed the narrative of broken dreams.

  Greece, Portugal and Ireland could have been saved by early intervention. In the end they were saved too late, and therefore not saved at all. In May 2010 and again in July and September 2011, the entire euro currency was taken to the brink of breakup and collapse by the indecision of the eurozone’s leaders, above all Merkel and ECB boss Jean-Claude Trichet. The three bailed-out countries are now destined to remain on life support for several years. But by August 2011 inaction had dragged Italy and Spain into the danger zone, so that the European Central Bank was forced to break its own rules and start buying up the debt of these two massive, un-bailable economies.

  The dilemma throughout the euro crisis has been clear: whether to impose losses from south European bad debts onto north European tax-payers, or onto the bankers who had actually lent the money to these bankrupt countries in the first place. The outcome was always a function of the level of class struggle. By hitting the streets, Greek people were able to force Europe to impose losses on the bankers; where opposition remained within its traditional boundaries—the one-day strike, the passive demo—it was the workers, youth and pensioners who took the pain. Meanwhile Europe itself was plunged into institutional crisis. At summit after summit, the fiction at the heart of the Maastricht Treaty was exposed. Monetary union without fiscal union had failed; not as in a ‘failed aspiration’, but as in a concrete girder tested to failure.