How the EU is once more expanding the casino system
by Peter Wahl
The liberalisation and deregulation of financial markets was the driving force of the wave of globalisation that began in the 1980s. Until then, financial markets had been largely conceived of as being confined to the nation states. The Bretton Woods system of monetary management covered the governance of international financial relations and included fixed exchange rates, capital controls and political coordination.
When Bretton Woods ended, liberalisation and deregulation began. The process was modelled on neoclassical (neoliberal) theory, which is built on the core belief that financial markets are efficient and self-regulating. Its early adopters included Thatcher’s Britain and the US under Reagan. As financial markets became transnational and thus increasingly difficult for nation states to regulate, a new stage was set for capitalist development. Some refer to it as financialisation. The Keynesian tradition calls it “casino capitalism”, while others talk about market-driven capitalism, or financial capitalism for short.
The EU did not yet exist in its present form, but its predecessor, the European Economic Community (EEC), had already been established. The degree of integration in the EEC was much lower than in the EU. It was essentially a free trade area with a customs union. Financial market issues did not form the subject of common policies.
Free movement of capital – The principle at the heart of the common market
This changed fundamentally with the Maastricht Treaty and the establishment of the single market in 1992. The single market functions like a national market and serves to guarantee the four so-called “fundamental freedoms”: the free movement of capital, goods, services and workers. Within this system, the principle of free competition applies.
In addition, the movement of capital enjoys a special status: its cross-border mobility doesn’t only apply between member states, but also for the movement of capital with the outside world. As Article 63 of the EU Treaties states: “Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited.”
From the outset, the neoliberal approach of Thatcher and Reagan was embraced enthusiastically by the EU and cemented in law. The above-mentioned fundamental freedoms fall under the umbrella of “primary law”, which affords them precedence over national law (hard law). Other interests – such as workers’ rights, tax justice or the environment – remain within the competence of the member states and are classified as soft law. If conflicts arise between hard and soft law, they can be brought before the European Court of Justice (ECJ). To date, the Court has passed several judgments restricting even fundamental rights (such as the right to strike) in favour of internal market freedoms.
As a result of all this, there is a fundamental imbalance built into the architecture of the EU’s legal system: financial interests (first and foremost, the interests of financial capital) are privileged both systematically and under law and, in effect, are privileged with constitutional impact, while other interests are forced to assume a lower priority. In critical discussions on Europe, this is referred to as “neoliberal constitutionalism”.
This system of priorities works automatically to block any regulation of the financial sector that is geared to the interests of the wage-dependent majority – as long as they adhere to the contracts and judgments of the ECJ, anyway. To put it in the starkest possible terms: the economic constitution of the EU is a mechanism for the obstruction of emancipatory financial, economic and social policy.
The EU – An engine for the establishment of casino capitalism
The Maastricht Treaty not only enshrined the free movement of capital, but also provided an opportunity for the member states to standardise the rules for their national financial markets. An action plan (the Financial Services Action Plan) was created for this purpose in 2000. Here, too, the overwhelming tendency was towards deregulation and the downwards adjustment of standards – in other words, towards more liberal rules.
From the 1990s up until the crisis of 2008, the EU functioned consistently as an engine for the establishment of a casino capitalist system, with all the consequences one might expect. The volumes of capital on the financial markets grew enormously in quantity, generating a huge pressure to yield profit. Corporate financing, in particular for large corporations, migrated from traditional bank loan financing to market-based financing. The real economy slipped further under the influence of the financial markets, while shareholder value (the stock value of a company) became the key indicator for the performance of corporate activity.
New players – such as highly speculative hedge funds and private equity funds – gained a great deal of influence, while “innovative” products such as credit default swaps (a type of derivative) became big sellers and were later regarded as toxic assets. High-risk business models like naked short selling, which bet on falling prices, were allowed to run rampant. As a result of all this, the systemic instability of the financial sector increased dramatically across the EU, culminating in 2008 with the entire sector collapsing like a house of cards.
Beyond the immediate changes in the financial markets, market-driven capitalism has also had other consequences. There has been a strong pressure on public services in the direction of privatisation, including on health services and pensions. Tax systems have been adjusted in line with financial interests, with the result that the financial sector is generally undertaxed and the public sector chronically underfunded. The casino capitalist system promotes redistribution from the bottom to the top, contributing to deepening inequality. In addition, the influence of financial markets exacerbates the erosion of democracy. As early as 2000, the then-head of Deutsche Bank boasted, “Investors no longer have a need to pursue the investment opportunities offered to them by their government; rather, governments must follow the wishes of investors.”
While the financial crisis is not the only cause, it is one of the key factors contributing to the current political instability throughout the EU and the rise of the New Right.
Reforms to increase the stability of the casino environment
The EU played virtually no role in managing the financial crisis. Both the bank rescue and the multi-billion economic stimulus packages designed to curb the effects on the real economy were provided with the money of member state taxpayers, since only the nation states had the necessary political, legal and financial instruments.
After 2008, the EU implemented a series of financial market regulation reforms. Among the most important of these were an increase in capital requirements for banks, restrictions on risky derivative transactions and business models, a resolution mechanism for banks and the improvement of supervision. For large banks, this is now carried out by the European Central Bank (ECB).
But while this tackled a number of key problems and made a certain contribution to systemic stability, it did not prevent the casino system from operating in itself. At best, it made the system more stable – and for the gamblers in particular. In addition, certain problems were not tackled at all, including shadow banks and the problem of “too big to fail” (the assumption that some banks will be saved at any cost to prevent them bringing the whole system down with them). Though the acute drama of 2008 and 2009 has subsided, the crisis continues to bubble under the surface.
According to the IMF, a quarter of banks in the EU and the Eurozone have shrunk by as much as 30 percent. These zombie banks are kept afloat only by the fact that the ECB, relying on a creative interpretation of its statutes, has supplied the markets with cheap money in the order of up to a trillion euros. But even this is not enough. Banks have since needed to be rescued with public money, with examples including the Italian Monte dei Paschi.
Capital markets union – The rollback begins
In the interim, the zeal for reform has come to a standstill – in fact, not only this, but the rollback has already begun. The Capital Markets Union project – a brainchild of the Juncker Commission – is aimed at getting deregulation rolling again and restoring acceptability to risk financing under the pretext of improving financing for small and medium-sized enterprises. But Brexit has brought it grinding to a halt.
The reason for this is that Brexit seems likely to promote deregulation via different means. Some actors will move from the City of London to Paris or Frankfurt, strengthening the “culture” of unbridled financial capitalism in the EU. On the other hand, the financial industry on both sides of the channel will exert pressure to achieve the most favourable conditions for their own side in the divorce settlement, with the risk that special agreements will become the gateway for undermining the existing rules.
Finally, the Wall Street-friendly policy of the new US administration will increase the pressure to roll back. Trump has already moved to topple the Volcker Rule (a rule that protects consumers from risky behaviour by preventing banks from carrying out certain investment activities) and announced further plans to liberalise. Furthermore, suggestions from the British government that Britain will form an axis between the City and Wall Street post-Brexit would, if realised, result in an Anglo-Saxon zone of liberalised and deregulated financial markets, which in turn would occupy an immensely strong position on the global financial markets. This would significantly worsen international competitive conditions faced by competitors to the EU. As such, it is to be expected that the financial lobby in the EU will exert strong pressure to relax the regulations that emerged after 2008.
On the other side, emancipatory politics must hold firm to the lessons of the 2008 crash. The power of the financial markets over the rest of the economy and society must be broken. Financial capital needs strict regulation, and its potential must be placed at the service of socially just, ecologically sustainable development. The conclusion of the UNCTAD 2009 report on the financial crisis is as valid today as it was then: “Only the closure of the casino can bring about a lasting solution.”