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Problems Problems
From: Irish Political Review: Articles
Date: May, 2012
By: Eamon Dyas

The Stability Treaty Referendum: the case for a "No" vote.

There is only be one reason for a socialist to vote “Yes” in the referendum on the Stability Treaty and that is if you believe that by so doing it somehow contributes towards the underpinning of the German model of capitalism throughout Europe. There is little doubt that the social market element in the German model serves the working class far better than the Anglo-American model that has its basis in classical liberal economics. Things like worker participation in the running of companies, extensive trade union rights, superior welfare provision, job security, pensions etc. are taken for granted by the German working class while the working class which is compelled to live under the typical Anglo-American model (exemplified of course, by Britain and the United States) can only point to minimal trade union rights, non-existent or diminishing social welfare provision and falling pensions as the norm. If Ireland is viewed as the battleground of both these models then there is no question that any socialist would be compelled to vote “Yes”.

But socialists must be very clear that the scenario thus presented represents the actual situation and that we don’t end up buying a pig in a poke.

Economic philosophy behind the German Model.

Let us look a little more closely at the German model. The first thing we notice is that it is not an alternative to classical liberal economic theory. Although it has certain features that are more attractive from a working class viewpoint it remains a variant of classic liberal economic thinking. In other words it is based on the absolute belief in the supremacy of the market as the most efficient means of supplying society’s needs. Therefore, besides those bright spots to which we have already made reference there are the dark aspects that cannot be supported by socialists.

The economic theory that has guided successive West German (and then, German) governments since the end of the Second World War is based on a school of economics called Ordoliberalism. While Ordoliberalism believes in less State interference in the market than Keynesians it nonetheless advocates greater State interference than the classic Anglo-American school. Its basic premise is that the equilibrium of the market must be preserved against not only excessive State interference but against the kind of distortions caused by the developments of monopolies, cartels, etc. and it allocates a role for the State and legislation in ensuring that equilibrium. By such means it seeks to preserve the market in as pure a state as possible where the productive energy and enterprise of competition is not constrained by the growth of conglomeration and an overt concentration of power and influence.

But Ordoliberal economic theory was only one component of what went into the make-up of the German social model. That model is a mixture of the economic theories of the Ordoliberals, aspects of corporate theory that emerged under Fascism, and Christian Democratic social thinking. The way in which these ingredients came together was not a natural evolution from the ruins of German society in the aftermath of the Second World War. They were brought together and given life with the financial support and conscious intent of the United States to provide a social model that could neutralise that offered by the Soviet Union at that time. This model proved highly successful in creating a new West Germany not only in terms of its economy but in marginalising mainstream socialist thinking that had experienced a resurgence in the aftermath of the war. In the wake of the introduction of, what was called, codetermination in West Germany whereby companies were compelled to allow worker representation on their boards, the Social Democratic Party abandoned the goal of the nationalisation of the means of production from its official programme in 1957.

Privatisation, finance capital and the German Model.

In doing so it succumbed to Ordoliberal economic thinking. Because of its belief in the primacy of the market Ordoliberal economics is not sympathetic to nationalised industries and one of the areas where the influence of this thinking expressed itself on the Government of West Germany was in the early privatisation programmes it undertook. One of the first significant privatisations was that of the Volkswagen works in 1961 and, later in the 1960s, Preussag and Veba, two highly significant holding companies mostly operating in the utility and mining industries were also privatised. Then of course we have to acknowledge the biggest privatisation undertaking in history when the Government of Western Germany rapidly sold off the entire East German economy in the early 1990s. So successful was this sale that Germany came to be known as the privatising experts throughout the world leading to other ex-Soviet bloc countries beating a trail to their door for advice on their own privatisation programmes.

Of course where there is privatisation there is finance capital and finance capital is the world in which Ordoliberal economics is least suited to flourish. West Germany took over and dismantled the economy of East Germany between 18 May 1990, (when the Treaty on the Monetary, Economic and Social Union was signed), and 31 December 1994, when the Treuhand (the body which acted as a kind of NAMA equivalent for East German property and assets) officially ceased to exist. But this two-year sale and dissemination programme could only happen because the West German Government broke its own rules and significantly loosened its control of the country’s money supply. The extent of this can be gauged by the fact that by the time the Treuhand ceased trading it had lost 200 billion dollars in its five years of existence – effectively a subsidy which West German taxpayers injected into the East German economy.

But the figure of 200 billion dollars is by no means the full extent to which outside capital was used to pay for the social and political experiment that went into the buying of East Germany as the Treuhand losses do not include the non-losses, in other words the money that flooded in from outside Germany in the large number of cases where the Treuhand managed to negotiate the sale of East German businesses and property to foreign investors without any cost to the West German taxpayer.

The fall of the Soviet model had a two-pronged effect upon the Ordoliberal model. On the political level, its raison d’être ceased to be relevant and, on the economic level, by applying its economic theory in the way in which it operated the privatisation programme on East Germany it unleashed the beast of finance capitalism into the very heart of the Germany economy. In the world of global finance capitalism the reliance of Ordoliberalism on the State to provide the checks and balances to sustain the pure market is its Achilles heel as the influence of international global finance capitalism by its nature cannot be corralled by any State. But what goes around comes around and Germany’s finance sector, spurred by the privatisation of East Germany and inspired by the example of Anglo-American global capitalism, began to experiment in global financial products outside its own State on a scale not known before. By 1995 German officials were acting as consultants on major privatisation projects for about thirty countries around the world. [see: The “Colonization” of East Germany?: A Comparative Analysis of German Privatization, by Heather M. Stack. Published in Duke Law Journal, Vol. 46, No. 5, March 1997, p.1212].

German financial capitalism and the Ausländer.

In its modern context, this was the start of the grand world tour of German finance capitalism. Thus, when the crisis began in 2008 German financial institutions found themselves deeply implicated in the debts of those countries that found themselves in most trouble. Consequently, there were, and remain, very strong German vested interests in ensuring the repayment of these debts.

If we are to look at the German financial model against the Anglo-American financial model in terms of their relative superiority, from the perspective of us as outsiders there really is not much to choose between them. They are both global operators that serve the same primary object – the maximisation of profit at some other individual’s, institution’s or country’s expense. When we look at something like the German Landesbank system, as with other aspects of the German model, we see something that is quite attractive in comparison to that which exists in Britain and Ireland but that aspect of the model is not the same animal as the one which prowls the planet in search of pickings. The way in which the German Landesbank operate as community banks is precisely because they are community banks and conditioned by the environment in which they operate. Taken out of that environment and freed from the constraints of culture, custom and politics, German finance capitalism is just as predatory as Anglo-American finance capitalism within the wider world.

This is the case with the rest of the German model. It is a peculiarly German phenomenon that grew out of the peculiar circumstances of West Germany after the Second World War. The way it operates and evolves is determined by domestic considerations and these are not transferable across State borders. Also, German capitalism is not a peculiarly benign form of capitalism. It is a capitalism that also evolved out of the social circumstances of Germany and is constrained by the customs, culture and political make up of Germany. As these things change so too does the nature of the German model of capitalism.

The things we might find attractive in the German model have to be built within the customs, culture and political make up of each country acting on its own and within its own resources. It is a great mistake to believe that such a model is capable of being imported into other countries via compliance with the demands of German finance capitalism.

Ireland has itself inherited some aspects of a social model that have certain things in common with what is good in the German model. Not least of these is the system of Joint Labour Committees which have been around since just after the Second World War and were designed to establish statutory minimum pay for workers in each industry sector in which they functioned. The Joint Labour Committees for these industry sectors is composed of equal numbers of trade union and employer representatives together with independent members appointed by the Labour Court. This system was built upon in 1987 through the introduction of the Social Partnership facility which involved the trade union movement in the decision making process on national wage bargaining and other conditions. It is rather ironic that both these areas where the Irish trade unions possess some influence over national economic policy are currently under pressure as a result of the need to comply with the austerity terms imposed by Ordoliberal economic thinking.

Austerity for what?

In recommending a “Yes” vote we are also asking people not just to accept austerity but an austerity that has been pre-fashioned along Ordoliberal lines. The austerity has been circumscribed to operate in terms that demand reductions in social spending, the privatisation of nationalised assets, and the relaxing of labour protective legislation. What we have come to understand as the German social model is not apparent in any of this. However, what is apparent is Ordoliberal economic thinking freed from the constraints of the domestic environment from which it emerged and flourished. While we may honestly state that there is an undeniable need for some form of austerity and we may agree with some areas where such austerity is bound to bite we have to be very clear on the purpose of such austerity. If, as it is claimed, the only way to solve the debt crisis is by this route then this has to be squared with the experience of Greece and the absence of any logic between the demands and the stated goal behind such demands.

The austerity is demanded as a means of enabling “errant” countries to pay off their debts and to balance their budgets in the future. However, the timescale and nature of the sacrifices that these countries are being asked to make cannot result in such an outcome without much unnecessary suffering among the people or indeed if at all. Austerity in this context and on such a scale only adds to the problems as it in turn diminishes the domestic economy to an extent that it becomes impossible for national governments to raise the required sum from taxation and this then compels further cuts in government spending to make up the shortfall which in turn diminishes the taxation pool and so on ad infinitum. As a possible solution to the current crisis it defies any logic. But it is the only solution that is acceptable to Ordoliberal economic thinking.

The central platform of this thinking is that the only way to solve a sovereign debt-based crisis is through the imposition of a programme of national austerity until the books are eventually balanced. The other alternative, and the only one that can actually contribute to a solution with the minimum of suffering, is by reducing the debt through inflation. This is the only solution that national economies can use when dealing with something as immune from direct State control as global finance. But this is precisely the solution that is not open to those States that are part of the Eurozone. As a consequence the debt-burdened States are compelled to rely upon Germany to come up with the answer. Based on its own national experience of having had to rely on significant outside financial underpinning and subsidies during the early years of its existence and its own decision to loosen its money supply between 1990 and 1992 in order to achieve reunification, this should not be something that is anathema to German understanding. And yet, even in the face of the disastrous outcome of its Ordoliberal orthodoxy in the case of Greece, it continues to dogmatically oppose any action that might result in a relaxation of the money supply.

Where is the answer?

It will be said that Germany has already committed hundreds of billions of Euros to assist those countries in trouble. That is undoubtedly true but it is the wrong kind of assistance and the wrong kind of assistance can be more harmful than no assistance at all. The recent release of a trillion Euros by the ECB provides a classic example of what is wrong. The ECB offers loans to the Central Banks of constituent States on favourable terms but the Central Banks are compelled to pass on this money to their banking sectors on condition that they in turn reinvest it in Government bonds and these same Government bonds are accepted as part of their loan to asset ratios balances as they seek to comply with the new European banking requirements. Not surprisingly very little of this trillion Euro loan has made its way into the real economies of the suffering countries as it was never intended that it should. To do so would constitute an offence of Keynesian proportions as far as Ordoliberal economics is concerned.

These loans are made by the ECB for three years and everyone knows that it is only a stopgap based on a huge gamble. The gamble is based on the hope that the domestic economies of the borrowing countries will have improved within the three years to a healthy enough state for them to repay this and all the other debts associated with the bailouts. We are constantly hearing the refrain that you cannot borrow your way out of a debt crisis but that is precisely the only “solution” currently on offer.

The crisis has being catastrophically handled from the start because at the heart of it all is the dogmatic attachment of the most powerful economy to an economic philosophy that can make no useful contribution to the solution. It is the inevitable outcome of a mode of national thinking that is being inappropriately applied in a multi-state, multi-economy environment in which it is incapable of operating coherently.

There is no silver-bullet solution to the current debt-based crisis but any solution can only begin to operate if and when Germany realises that something like an inflation-based policy has a part to play. The current fixation with growth á la Hollande etc., will be another false start as it will have to be accommodated within the Ordoliberal German mind-set which means that any stimulus to growth will have to be paid from existing savings. Consequently, we hear that Merkel is prepared to consider using existing unused EU funds for the purpose of infrastructure investments. But that will only constitute another sticking-plaster and is not capable of getting to the heart of the problem. Unless there is a policy that includes the printing of more money and getting it into the real economies of the ailing Eurozone countries there really is no prospect of anything positive occurring. The problem is, and has always been, a political one and whether the German electorate can be convinced that it is in everyone’s long term interests to tolerate such a policy in the short-term. But unless they do the prospects for the unified currency are bleak indeed.

A “Yes” vote in the present circumstances is a “Yes” to an as yet unknown level of austerity much of it created by the dogmatic attachment to an inappropriate economic doctrine and with no guaranteed outcome. Germany must be convinced that there is a critical need for a change of tack and this will only happen if those affected use the only voice given to them and vote “No.”