The economic consequences of this piece of misapplied fiscal puritanism are frightening enough. If the other E.U. nations agree to it, they will be consigning their citizens to years, maybe decades, of declining living standards. If a country is in recession — and some European nations already are — it will not be able to make job-creating investments. What’s more, a balanced budget is no guarantor of economic health. Spain, for instance, was running budget surpluses right up until its privately funded housing bubble collapsed. When unemployment soared to 20 percent, its budget inevitably plunged into the red. But the changes proposed by Merkel and Sarkozy do nothing to curtail the cycles of speculative boom and bust. By prohibiting governments from enacting Keynesian stimulus legislation, they merely make it all but impossible for a country like Spain to recover.
So why would the European leaders scheduled to vote this week on the Sarkozy-Merkel straitjacket agree to put it on? Why would they surrender their hitherto sovereign power to the bean counters of Brussels? The answer is that markets leave them little choice. The interest rates they pay to float the bonds they need to stay in business have risen to ruinous heights for the less-productive nations of Southern Europe, and now Standard & Poor’s is threatening to lower the credit ratings — effectively raising borrowing rates — of the very productive nations of Northern Europe. Germany is being threatened with a rate hike not because of its conduct but because it is in the middle of a shaky neighborhood.
Like S&P’s August downgrade of the U.S. credit rating after congressional floundering over the debt ceiling, its threat to downgrade Europe on the eve of the vote to terminate national fiscal sovereignty illustrates a huge power shift in human affairs. As investment banker Roger Altman, a deputy Treasury secretary in the Clinton administration, recently noted in the Financial Times, financial markets have become “a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes. . . . [L]eaving aside unusable nuclear weapons, they have become the most powerful force on earth.”
Altman rightly attributes this epochal shift to the huge increase in financial assets and the concomitant rise in global financial flows. Financial deregulation and the emergence of mega-banks “expanded the scale of finance” so greatly that it came to dwarf and then dominate the real economy. From 1990 to 2007, the ratio of global financial assets to global GDP rose from 2.5 to 1 to nearly 3.6 to 1. The ratio of financial power to governmental, democratic and popular power can’t be quantified so neatly, but it has increased hugely as well.
The turmoil in Europe is commonly depicted as a fight between Germany, which wants its neighbors to adopt fiscal constraints, and the feckless southern countries. In a larger sense, though, Germany is merely fronting, however unwittingly, for global finance. This is no small irony, considering that Germany has kept its financial sector small and frowns on speculation. Indeed, the one major concession Merkel made in her agreement with Sarkozy was to abandon her position that banks and other investors would have to settle for less than full repayment of their loans when Europe restructures its nations’ economies. The new European compact will require governments and citizens to get by with a lot less, but banks — even when they’ve been the cause of economic collapse, as they were in Ireland and Spain — will emerge unscathed. Public profligacy is punished; private profligacy goes unchecked.
A global supra-government — unelected, unaccountable and unconcerned with the general welfare — has emerged. It has nothing to do with the United Nations; it doesn’t fly around in black helicopters. Gulfstream jets are more like it. And whatever 2011 may be, it’s not a good year for democracy.
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