Severe global financial crises have been recurring every decade: the 1987 crash, the 1997 Asian financial crisis and the 2007 Credit Crisis. This recurring pattern had been generated by wholesale financial deregulation around the world. But the root causes have been dollar hegemony and the Washington Consensus.
The Case of Greece
Following misguided neo-liberal market fundamentalist advice, Greece abandoned its national currency, the drachma, in favour of the euro in 2002. This critically consequential move enabled the Greek government to benefit from the strength of the euro, albeit not derived exclusively from the strength of the Greek economy, but from the strength of the economies of the stronger Eurozone member states, to borrow at lower interest rates collateralized by Greek assets denominated in euros. With newly available credit, Greece then went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics that left the Greek nation with high sovereign debts not denominated in its national currency. Further, this borrowing by government in boom times amounted to a brazen distortion of Keynesian economics of deficit financing to deal with cyclical recessions backed by surpluses accumulated in boom cycles. Instead, Greece accumulated massive debt during its debt-driven economic bubble.
The Euro Trap
By adopting the euro, a currency managed by the monetary policy of the super-national European Central Bank (ECB), Greece voluntarily surrendered its sovereign powers over national monetary policy, and rested in the false comfort that a super-national monetary policy designed for the stronger economies of the Eurozone would also work for a debt-infested Greece. As a Eurozone member state, Greece can earn and borrow euros without exchange rate implications, but it cannot print euros even at the risk of inflation. The inability to print euros exposes Greece to the risk of sovereign debt default in the event of a protracted fiscal deficit and leaves Greece without the option of an independent national monetary solution, such as devaluation of its national currency.
Notwithstanding a lot of expansive talk of the euro emerging as an alternative reserve currency to the dollar, the euro is in reality just another derivative currency of the dollar. Despite the larger GDP of European Union (EU) as compared to that of the US, the dollar continues to dominate financial markets around the world as a bench mark currency due to dollar hegemony which requires all basic commodities to be denominated in dollars. Oil can be bought by paying euros, but at prices subject to the exchange value of the euro to the dollar. The EU simply does not command the global geopolitical power that the US has possessed since the end of WWII.
Dollar Hegemony and the Washington Consensus
Economic growth under the dollar hegemony regime requires market-participating nations to follow the rules of the Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronised ideology of Washington-based establishment economists, reverberated around the world for a quarter of a century as the true gospel of economic reform indispensable for achieving growth in a globalized market economy. It is an ideology that has landed much of the world in recurring financial crises.
Initially applied to Latin America and eventually to all developing economies, the Washington Consensus has come to be synonymous with the doctrine of globalized neo-liberalism or market fundamentalism to describe universal policy prescriptions based on free-market principles and monetary discipline within narrow ideological limits. It promotes for all economies macroeconomic control, trade openness, pro-market microeconomic measures, privatization and deregulation in support of a dogmatic ideological faith in the market’s ability to solve all socio-economic problems more efficiently, and to assert a blanket denial of an obvious contradiction between market efficiency and poverty eradication or income and wealth disparity.
Return on Capital vs Wages
Financial capital growth is to be served at the expense of human capital growth. Sound money, undiluted by inflation, is to be achieved by keeping wages low through structural unemployment. Pockets of poverty in the periphery are deemed as the necessary price for the prosperous centre. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. State intervention has come to focus mainly on reducing the market power of labour in favour of capital in a blatantly predatory market mechanism.
The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) fiscal discipline; 2) redirection of public expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows;
privatization; 9) deregulation and 10) secure private-property rights.
Abdication of Government Responsibilities
These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic. Unemployment and poverty then are viewed as temporary, transitional fallouts from wholesome natural market selection, as unavoidable effects of economic evolution that in the long run will make the economy stronger.
Neo-liberal economists argue that unemployment and poverty, deadly economic plagues in the short term, can lead to macroeconomic benefits in the long term, just as some historians perversely argue that even the Black Death (1348) had long-range beneficial economic effects on European society.
The resultant labour shortage in the short term pushed up wages in the mid-14th century, and the sudden rise in mortality led to an oversupply of goods, causing prices to drop. These two trends caused the standard of living to rise for those still living. Yet the short-term shortage of labour caused by the Black Death forced landlords to stop freeing their serfs, and to extract more forced labour from them. In reaction, peasants in many areas used their increased market power to demand fairer treatment or lighter burdens. Frustrated, guilds revolted in the cities and peasants rebelled in the countryside. The Jacquerie in 1358, the Peasants’ Revolt in England in 1381, the Catalonian Rebellion in 1395, and many revolts in Germany, all served to show how seriously the mortality had disrupted traditional economic and social relations.
Neo-liberalism in the past quarter century created conditions that manifested themselves in violent political protests all over the globe, the extremist form being terrorism. But at least the bubonic plaque was released by nature and not by human ideological fixation. And neo-liberalism keeps workers unemployed but alive with subsistence unemployment aid, maintaining an ever-ready pool of surplus labour to prevent wages from rising from any labour shortage, eliminating even the cruelly derived long-term benefits of the Black Death.
Bashing of the State
The Washington Consensus has since been characterised as a “bashing of the state” (Annual Report of the United Nations, 1998) and a “new imperialism” (M Shahid Alam, “Does Sovereignty Matter for Economic Growth?”, 1999). But the real harm of the Washington Consensus has yet to be properly recognised: that it is a prescription for generating failed states around the world among developing economies that participate in globalized financial markets. Even in the developed economies, neo-liberalism generates a dangerous but generally unacknowledged failed-state syndrome. (Please see my February 3, 2005 10-part series: World Order, Failed States and Terrorism – Part I: The Failed State Cancer)