A Crisis of Capitalism: Guest post by Riccardo Bellofiore

23/09/2011 by

Last Wednesday, The Guardian published a piece by friend and colleague Riccardo Bellofiore entitled A Crisis of Capitalism. Here I paste an extended version of that piece, which also mentions our Modest Proposal. Enjoy!

History repeats itself, Marx wrote, first as tragedy, then as farce. If you wonder how it might repeat itself the third time, look at Italy:  a country where the most effective opposition to government are – literally – comedians. Lately, however, reality has been much more inventive than comedians.  This has distorted most analyses of the country’s economical and political situation: as if Italy’s problem is just its prime minister, distracted by sex and trials.

Italy went in the eye of the storm this summer. To understand the true nature of the Italian crisis we need to look at it in the context of the wider European crisis. Both, we are told, are part of a wider sovereign debt crisis. The limits of the eurozone are well known: it has a ‘single currency’ that isn’t backed by political sovereignty, a Central Bank that doesn’t act as lender of last resort or finance government borrowing, and no significant European public budget. The ECB policy errors, its obsessive anti-inflationary stance and its propensity to raise the interest rate whatever the cause of price rises, are also plain to see, though its pragmatism must be recognised. And Germany’s neo-mercantilist dream of profiting from Southern Europe negative current accounts but imposing them balanced state budgets pertains more to psychiatry than economics.

That said, the European crisis is not an endogenous one, the sovereign debt crisis is not truly a public debt crisis, and Italy’s crisis is not Italian-born. German neo-mercantilism induced stagnation in Europe, which survived thanks to US-driven exports. When “privatized Keynesianism” – mixing institutional funds, capital asset inflation, and consumer debt (a model exported from US and UK also to Spain and Ireland) – eventually exploded, European growth imploded.

The sovereign debt crisis is thus the private debt crisis in disguise. Deficits are not of the ‘good’ kind (planned to produce use values for the collectivity, and self-dissolving through qualitative development), but of the ‘bad’ kind (induced by real stagnation or saving finance). Anyhow, for a sovereign area, default should not be on the agenda. The problem has been the unwillingness to refinance first Greece, then Ireland, then Portugal. Their share in the euro area public debt to GDP ratio is ridiculously low:  cancelling the debt would have been less painful.

Spain was next in line (because of the rapid increase in the flow dimension of  public debt), and a bigger problem. Italy is a different story altogether. The crisis came because ‘markets’ and rating agencies had fear and smell stupidity. They saw the stupidity of European leaders, who were ineffective to provide rapidly a financial rescue for indebted countries, and who introduced self-defeating austerity programmes. Fear became panic, producing a ballooning of the interest rate spread. The sharp decrease in the already very low Italian GDP growth rate (2010: 1,3%; 2011: 0,1% first quarter) and the dramatic rise in the interest rate paved the way to Italy’s current nightmare, because of the near 120% stock of debt. It is a simple issue of doing the math to see that at some point this can start a liquidity crisis, turning soon into solvency crisis.

Does this mean that Italy has not deep, serious, failings in its economy? Quite the contrary. But they are structural, long-standing ones. Their date from the mid-1960s, and they resulted in the continuous decrease in labour productivity and the growth rate. Capitalists answered workers’ struggles with a kind of investment strike, hence through higher labour intensity rather than innovation. Industrial sectors (and most big firms) disappeared, high-technology was imported, privatisations turned public enterprises into rent-seeking activities. Industrial districts prospered mostly thanks to devaluations, but are now in a deep crisis. Lately the thriving Italian pocket multinationals (mid-seized enterprises) account for the good export record in manufacturing, but they are residual and dependent on outside-generated growth. Public debt was a means to assist a de-industrialising economy.

The fatal blow came with the policies of flexibility (that is, casualisation) of labour, leading to a collapse of labour productivity. For a while, until the faltering growth was higher than the self-dissolving productivity, this led to full-underemployment in the Centre-North. The crisis is revealing the hidden truth, and the drama of Italian unemployment and further casualisation is just at the beginning. The recent policy measures to redress the government budget balance according to the ECB diktat are the sum of increasing regressive taxes and a savage reduction of government’s money transfers to local authorities, which means cuts in essential social services.

Italy’s trouble is the same of Europe’s: lack of effective demand, but also perverse composition of output. Default plus exit from the euro are not options anymore within a crisis including Italy. In 1992 Italy left the European Monetary System and managed a huge devaluation of the lira: the structural problems deepened, and workers and popular conditions deteriorated dramatically. This time, moreover, Italy leaving the euro would mean the end of the monetary union, and a dramatic broadening of the European and world crisis. The crisis can be overcome only by stopping the domino effect and opening hope for the future: that is, dealing at once with the European financial and real crisis. One suggestion has come from Yanis Varoufakis and Stuart Holland: eurobonds not only as financial rescue but also as finance to a wave of investments on a European scale.

However the crisis is a capitalist crisis: it is part of an attack against labour, private and public, in production and social reproduction. From this point of view – if the problem is not neoliberalism, but capitalism per se  – a renewed New Deal should be part of a wider programme of the European left and trade unions, pushing forward for a socialization of investment, banks in public utilities, the intervention of the State as direct provider of employment, and capital controls. It is not (yet) Marx. It is Minsky 1975. Unfortunately what’s really missing in Europe is not the money to finance the public debt. It is internationalism. European struggles are the necessary condition to resist austerity and get back some decent reformism.

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