Ireland, Bond Markets and Democracy

In the wake of the Irish crisis, Timothy Garton Ash passed a damning judgment on the government of Angela Merkel: “If the eurozone falls apart, it will be because Germany did not do enough to save it” (Guardian 25 November 2010).  This has a certain superficial appeal, because German inflexibility on debt management and its domestic austerity programme aggravate the economic imbalances in the eurozone.  But German policy is a symptom, not cause.  The cause is more profound and extends beyond the eurozone:  the undemocratic power of financial capital.

This power is obscured by objectification of markets, fostered by mainstream economics and in the media.  The objectification justifies a market economy free from democratic oversight, epitomized in statements such as, “the European Union is struggling to convince financial markets it has got what it takes to save the currency” (Reuters, 28 May 2010).  Making the “market” the actor abstracts from the real world of speculators and financial fraud.  It facilitates the mythology that the dysfunctional financial system is not the work of men and women (mostly the former) within institutions with socially irrational rules and norms, but a manifestation of the inexorable operation of the laws of nature that no government can change.  This objectification is ideology: it is not “markets” that seek socially devastating budget reductions in Ireland, Greece and elsewhere, but a specific collection of financial speculators whose anti-social behaviour is possible because governments removed regulations of capital markets.

The sufferings caused by the Great Depression of the 1930s, quickly followed by the horrors of the Second World War, prompted those regulations.  The catastrophic events generated a broad consensus in Europe and the United States, among social democrats, Christian democrats and liberals, of the need for public intervention to protect people against the instability and criminality that results from the accumulation of economic and political power by great corporations.  Franklin Roosevelt, four times elected president of the United States, had this dangerous power in mind when he addressed the US Congress in 1938:

Unhappy events abroad have retaught us two simple truths about the liberty of a democratic people. The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism — ownership of government by an individual, by a group or by any other controlling private power.

Especially the United States and the United Kingdom, but increasingly through the European Union, people face the danger that private power can become stronger than “their democratic state”.  So-called financial markets are the manifestation of this private power, that threatens to over-ride democratic decisions.  During and after the Second World War even prominent economists recognized the dysfunctionality and anti-democratic nature of excessive private power.  In 1947 in the premier English language economics publication, the Economic Journal, K. W. Rothschild wrote,

…[W]hen we enter the field of rivalry between [financial] giants, the traditional separation of the political from the economic can no longer be maintained. Once we have recognised that the desire for a strong position ranks equally with the desire for immediate maximum profits we must follow this new dual approach to its logical end.

Fascism…has been largely brought into power by this very struggle in an attempt of the most powerful oligopolists to strengthen, through political action, their position in the labour market and vis-à-vis their smaller competitors, and finally to strike out in order to change the world market situation in their favour.

While history does not repeat itself, it carries lessons.  The link between excessive private power (“oligopoly”) and reactionary politics is an obvious lesson.  Controlling private power in financial markets power requires fundamental reform.  The necessary reform would be no more than what Roosevelt enacted in the 1930s, or what was in the UK Labour Party programme for the election of 1945.  The basic principle was stated clearly and succinctly in the 1959 Godesberg Programme of the German Social Democratic Party, “in the democratic state, every form of power must be subject to public control”.  To this end financial institutions should be taken under public regulation to prevent their tendency to proliferate into vehicles of speculation.  The governments of the United States and the United Kingdom had the opportunity to do this in 2008 and 2009, and did not, though a Swedish right-of-centre government had provided the model for banking nationalization in the early 1990s.  A necessary complement to this domestic regulation would be tight controls on external capital flows.

Greater flexibility on public debt rescheduling and an expansionary fiscal policy by the German government would make economic management much easier in Ireland and throughout the European Union.  However, this would merely leaves us awaiting the next wave of financial speculation.

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