Commentary on Political Economy

Tuesday 18 October 2011

Comment On Latest Martin Wolf Column in the FT

It may be worthwhile to take a break from the more theoretical matters we have tackled on this site recently to illustrate with a practical application to recent current affairs and developments in the global capitalist economy how these more abstract pursuits find indeed serious and useful applications to even everyday occurrences. We will examine for the purpose this Column from Martin Wolf - with the basic thrust of which we agree - to show how the most essential aspects and realities of the capitalist wage relation can be left out of economic analysis even when they are vital to understanding what is occurring - with the insalubrious result that our entire perception of social reality is distorted. First, here is the Wolf Column:

Wolf commendably sums up his entire argument on the structural imbalances and weakness of the eurozone in a few short sentences:
Why do external deficits matter?
First, external deficits mean that residents are spending more than their income and financing the difference abroad. If creditors decide such borrowers are no longer creditworthy (be they private or public), they will cut them off, thereby causing a recession and a plunge into – or deepening of – fiscal deficits. Second, prolonged external deficits also shape the structure and competitiveness of an economy.
Third, sustained deficits lead to huge net external liabilities, often intermediated by banks. When the external lending halts, the banks are likely to implode, undermining both the economy and the fiscal position.

Note first of all that Wolf is assuming that within a eurozone that was also "a fiscal union", there would still be "external deficits". This simply cannot be right because the entire point to a fiscal union is that the aggregate deficit of the fiscal union is treated as one by financial markets. What is causing the current problems in the eurozone is the fact that member nations have a common currency but are still financially responsible for their individual fiscal position. The problem therefore is to see whether a fiscal union would be "politically feasible" and tolerated by the political and industrial and financial elites of the member countries. And this is the main source of problems: the divisions and inter-capitalist rivalries between national bourgeois elites in Europe (and also at the global level - between the US and China and Germany and Japan, for instance).

Secondly, note how Wolf severely compromises the entire analysis of the problem with this statement: "First, external deficits mean that residents are spending more than their income and financing the difference abroad."

Now, notice how Wolf is talking about "incomes and spending" without specifying that these are measured in monetary terms that depend almost entirely on the political antagonism within each country between capital and workers, that is, on industrial and wage policy, but also on the monetary, fiscal and industrial policies of each national bourgeoisie, as well as on their exchange rate policies. On this site we have adverted repeatedly to these matters in determining the "competitiveness" of each "national capitalist system". And, true to form, Wolf quite rightly turns to this immediately: "Second, prolonged external deficits also shape the structure and competitiveness of an economy."

So here is the crux of the problem! The entire idea of European Monetary Union (as we have discussed on this site before - please use search facility to track relevant posts) was to discipline the individual national elites (especially those of the "Mediterranean" countries - Wolf calls them "Mezzogiorno", referring to Southern Italy) into confronting their national working classes so as to lead to some kind of "competitive convergence" in terms of the level of politico-economic and industrial antagonism in the new eurozone.

But this has not happened! And it has not happened not so much because European workers are really all that different after all, but rather because the national bourgeois elites have not desisted from "mercantilist" behaviour in seeking trade advantages over one another! And if the "Mediterranean" countries are "guilty" of over-borrowing, the "Nordic" industrial and financial elites are guilty of seeking "competitive advantages" over their Mediterranean counterparts by exploiting the common currency and their industrial advantage in terms of investment and class collaboration after World War Two!

Again quite admirably, Wolf does address this point - but does so only very obliquely, without meeting head on the tremendous socio-political implications for the entire "operation" of global capitalism in the final paragraph of his article:

Inside the eurozone, adjustment of imbalances remains essential. But it is also vastly difficult, because the exchange rate has gone. In its place, comes adjustment via depression and default. A currency union with structural mercantilists in the core now threatens a permanent slump in the periphery. Solving that is the true cure. Can it be done? I wonder.

And what does "structural mercantilism" mean? Here is the head of the Sovereign Wealth Fund of the most powerful dictatorship that the world has ever known - the Chinese dictatorship. Read this passage carefully and you will see how we either DEFEAT THESE MONSTERS NOW or else we end up as meat in their sausage:

Jin [the Fund leader]  was unusually candid about what ails Europe and urged leaders to have the "guts" to make significant reforms - as Asian leaders did when faced with their crisis in the late 1990s.

"The root cause of the trouble is the overburdened welfare ... the sloth-inducing, indolence-inducing labor laws," he said. "People need to work harder. They need to work longer."

People need to work harder. They need to work longer. - Coming from a Chinese beast, this is a threat from the capitalist class we had better take seriously. But Martin Wolf ignores it entirely.

[On Chinese financial deterioration due to suppression of domestic demand see also here:]


  1. Could not fin Jin's quote at your link.

  2. ilary Barnes:
    Deepest apologies, Hilary. Here is the correct link: (Blunt talk from China sovereign fund re Euro welfarism)

  3. Fiscal union doesn't always yield favorable results. There are factors to consider as well.

  4. To sum it up, structural mercantilism is a new and more accurate descriptor of the current world economic order. In the core now threatens a permanent slump in the periphery. The only solution is solving this is the true cure.

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