Premise

This short note tries to address four key questions posed by seminar organizers in preparation to the event. Each question is quite broad and would require a specific dissertation.

I tried to encapsulate under each question some concepts already expressed in preparation to a civil society event last May (“EU in crisis”) by making more explicit some points when thought to be more relevant for the type of seminar that Rosa Luxemburg Foundation is kindly convening in November.Some specific references will be mentioned directly in the text.

– How to explain financialisation as a systemic transformation of capitalist modes of production and living? (in the above-mentioned complex meaning)
We live in a time of finance capitalism, when trading money, risk and associated products is more profitable and outpaces trading goods and services for capital accumulation. That is in short what people often refer to as “financialisation” of the economy. This has huge implications for where capital is invested and the everyday exposure of people to capital markets, as more and more aspects of everyday life – from home ownership to pensions and schooling – are mediated through financial markets rather than just markets.

Financialisation is now penetrating all commodity markets and their functioning and expanding from areas like social reproductive systems (pensions, health, education, housing) into natural resources management (what can be regarded as the financialisation of nature). Just as the privatisation of public assets and services served as a building block for the financialisation of the economy, so the further commodification of the natural commons is the basis for the further financialisation of the economy and nature.

However financialisation should be regarded as more than just a further stage of commodification or privatisation.

Financialisation as a systemic transformation of capitalism

The crisis of 2007-9 resulted from a financial bubble marked by weak production,  expanding bank assets, and growing household indebtedness. For these reasons the crisis casts light on the financialisation of capitalist economies.

The literature on financialisation generally links weak production with booming finance; according to some, causation runs from weak production to booming finance, while for others it runs in the opposite direction. As shown by Lapavitsas in several works, however this dicotomy is becoming more and more misleading, given that there likely be no direct causation between booming finance and weak production. Rather, financialisation would represents a systemic transformation of both capitalist production and finance, which ultimately accounts for the crisis of 2007-9.

This systemic transformation has three main features:

–        less reliance of large corporations on banks (i.e about half of profits of all US corporations in 2007 were generated on financial markets and similarly corporations get financed more and more through financial markets than the traditional banking system);

–        banks shifting their activities toward mediating in open markets and transacting with individuals (through the establishment of a shadow banking system for this purpose);

–        increasing implication of individuals and households in the operations of finance (as shown by the growing credit card and consumer debt and related securitization practices or the recent diffusion of retail derivative products).

A crisis of accumulation

The need for a systemic transformation of both capitalist production and finance represents an answer to the ongoing crisis of accumulation started during the ’60s and then not structurally solved until today.

As lively described by David Harvey and others in the last years, in the ’60s the overproduction of the US economy comparing with existing markets coupled with lowering returns on new investments triggered the “globalisation” process as an answer to overcome these limitations to capital accumulation: Thus the creation of much larger global markets through extensive international liberalisations and privatisations as well as deflationary policies against labour to reduce costs of production (in short neoliberalism). This answer soon generated new problems at the end of the ’80s (see the 1987 financial crisis) when aggregated demand was still low, following the reduction of labour income, and financial elites got instead empowered by benefiting from the existance of a new global capital market. This in fact has been the first global and thorough market to be built after the break-up of the Bretton Woods monetary system and related removal of controls on movements of capital in the ’70s; and still today the global capital market is much deeper and larger than any other global market of goods and services.

In order to overcome again the same crisis of accumulation manifested itself again, given the still dominant neoliberal ideology banning any direct state intervention in the economy in order to support global demand, a new answer was developed: An unprecedented “private Keynsian” response aimed at boosting aggregated demand through the indebtedness of corporations, banks and households. This triggered financialisation in the form we know it today and that affects any major actor in the spheres of both production and finance.

The current crisis of accumulation – too much wealth accumulated chasing too few investment opportunities in new profitbale assets – which emerged again in 2007 through the sub-prime crisis, has reached a further stage: a structural lack of financial, and not just productive assets, to invest into. Hence the current obsession by capital markets to create new asset classes to invest in and keeps the accumulation process going. The last stage of this long-term crisis has thus shown the brutal “take, don’t make” strategy followed in the last decade by global capital, through which a possible decoupling from the over-supply or under-supply crisis took finally place – contrary to what happened in the last decades when the lack of enough assets to invest in was coupled with over-production against available and limited aggregated demand. That means current accumulation strategies would be delinked from any productivity increase, even though labour deflation policies are still strongly advocated.

Financialisation as a cyclical transformation of capitalism

By taking a longer view financialisation could be regarded not just as a systeic phenomenon, but also as a cyclical one in the history of capitalism. Some theorists argue that profit crises, financialization, and attempts to ‘internalize’ threats to business expansion created by previous expansions have unfolded time and again over many centuries in varied ways. Arrighi, for example, posits a succession of global ‘systemic cycles of accumulation’, each with a different geographical centre and each characterized by a different attempt to bring certain (emergent or long standing) ‘costs’ within the ‘economizing logic of capitalist enterprise’.

According to these theories, we would live in the financialisation stage of the US-dominated cycle in which oil-based processes of suburbanization, globalization and Green Revolution agriculture became crucial. This cycle internalized not only protection (Dutch hegemonic cycle) and production costs (British hegemonic cycle), but also transaction costs, vertically integrating business organizations within a single organizational domain in a way that made the costs associated with the transfer of intermediate inputs through the long chain between production and consumption more predictable and calculable. Once a profitability crisis followed by about of speculative excess and financialization began in the ’70 – as described above – the ferment out of which yet another mode of organization, with its own physical infrastructure, is now growing.

It could be added that it is becoming quite evident that in the current cycle financialization is a “super-commodification”, as defined by Larry Lohmann. “In general, it takes commodities that have been created through commensuration procedures and puts them through a further round of commensuration, putting them in the same pot with other commodities according to rates of return established in finance. They are further privatized, alienated, individuated, made abstract, revalued, displaced or liquified in ways that allow them to earn quick rents more easily or serve as collateral for other things. From being entities whose value is realized when they face each other as commodities, they become entities whose value is realized when they confront each other as claims to the future value which supposedly will be produced in future activity and realized in future exchange.”

In this context “growth increasingly appears to derive from the incessant flow of abstract numbers independent from the production process. As mortgages and debt are sliced, diced, combined, and sent over unprecedented distances, and carbon gets bundled with oil and wheat in corporate strategies and index fund rosters, and infrastructure development and other conditions of production – such as ’natural‘ waste sinks, biodiversity and the rule of law itself – are increasingly ‚internalized‘ into free-standing commodity status, farmers and oil companies find themselves competing against Goldman Sachs; industrial firms find themselves dependent on their financial divisions for profits; private equity firms take over infrastructure development; host government agreements are enacted; and hedge and pension funds become the biggest forestland holders.

The effects reach all the way down into the physical bodies of land, animals, plants, humans and the earth itself. Asset-stripping increasingly becomes the norm in agroecology as well as nature conservation, just as private equity firms‘ asset-stripping becomes the norm in industrial sectors.”

At this point it is legitimate to wonder whether – in a sort of renewed “primitive accumulation” – it is the natural commons that will be internalised in the capitalist enterprise, allowing in this way to to bypass the ecological and economic limitations unprecedently emerged in the last 40 years. In this regard, the accumulation by dispossession of livelihoods, which we are facing so strongly in this new stage of financialisation –  and that according to David Harvey has even prevailed on the traditional exploitation of labour in value extraction and asset stripping – could be the dangerous prevailing feature of the capitalist enterprise in the next cycle.

However, it remains quite difficult to prove today whether this prediction will be right and evaluate the political, social and cultural implications of it. Or to consider instead that this transformation could open the way to a new set of different capitalist cycles, or even the end of capitalism (and the related accumulation process based on never ending growth) as we knew it so far.

What we could conclude however is that the acceleration of the financialisation process that we are living in the current cycle, with a specific focus on the dispossesion of the natural commons, is instrumental to delay the end of the fossil fuel-based cycle and the US hegemony dominating it, while generating new accumulation dynamics and crises from which new transformation will begin.

– What role do the EU and especially the EMU (European Monetary Union) play in financialisation?
(In this context EU-Directives, the Treaties and EU funding (ESF and other funds) are of special interest)

Several indicators show that the EU is being badly hit by the crisis of accumulation, to some extent even more that the US. In short, the European economy got heavily financialised in the last 15-20 years, in particular when heavy constraints have been put on public finance and public policy making from the Maastricht Treaty onwards.

The role of the Euro in promoting financialisation

The establishment of the European Monetary Union in the ’90s and then the introduction of the Euro a decade ago have been a powerful accelerator of the financialisation process in Europe. In particular, the construction of the single currency as a “strong global currency”, and not just a common “internal” currency. This was planned in order to attract global capital as well as to have a new reserve currency,  that is a means of payment and hoarding in the world market.

The Euro has produced deflationary policies on labour, which today deepen through austerity measures, and served the interests of the major states that command it as well as of the large financial and industrial enterprises that deploy it internationally. But, by the same token, the euro has crystallised the tensions and imbalances of European capitalism, acting as the epicentre of crisis.

In particular the European monetary union has produced a profound transformation of the banking system in European continental countries. That’s why the Lehman Brothers collapse hit badly the European banking system and also today the debt crisis dimension remains strictly linked with the European banking crisis (more than what is happening in the US). And today it is through the tensions over the Euro that this banking crisis is being transposed into a new frontier of financialisation, the transformation of public finance.

At the same time the financialisation drive has also boosted the EU obsession of fostering global trade and in particular within this further investment liberalisation in developing countries. Investments and intellectual property rigths are at the centre of the EU export-led economy policy today (primarily moved by Germany). Such a push often seen just in the sphere of the productive economy is closely linked with the idea of generating new asset classes through foreign investments which can then be financialised at the convenience of capital markets. And thus again the sphere of the economy and that of finance work together in the financialisation transformation.

Tacking the specificity of the European crisis

Beyond the rethorics on recovering growth, the imposition of dogmatic austerity measures and further labour deflation, both leading to further recession, confirms that economic and financial elites ruling in Europe now do not see so crucial any longer to support aggregated demand in Europe. As at the end of the ’80s the answer was to financialise corporations, banks and households, today the answer is to  promote a further financialisation of global markets and create new asset classes by letting the financialisation unfold on nature, public finance and infrastructures (both in Europe and abroad).

Therefore in this context two major specific structural problems remain at the root of the Euro crisis: the weakness of the European banking system and regional economic imbalances due to the German export led model. These are not being questioned yet (decision-makers talk about a banking union, but not about restructuring the European banking system, and similarly about addressing regional imbalances, but not about common industrial policy by reviewing the export led growth dogna) but just refined and adapted to the new needs of the financialisation process, in particular hoping that the transformation of public finance, the boosting of infrastructures and the “green economy” (all the new frontier of financialisation) will help Europe get its way out of the economic crisis.

In particular, the model of export-led growth, which creates so deep unbalances in most of European countries, is being coupled more and more with new investment provisions aimed at building a global financial market infrastructures supporting private sector international investments. This is the case, for instance, of the new EU energy security policy or the EU Raw material strategy, which will not simply produce further extractivism and negative impacts in the global South, but will help building a new capital market infrastructure locking in extractive projects and large scale infrastructure for the decades to come. In this regard it is important to note that there is a growing pressure on legislators in emerging economies to relax constraints on investments by national pension funds in order to mobilise larger private liquidity to finance private infrastructure and foreign corporations‘ investments.

At the same time the European banking system is trying to recover from heavy losses occurred in the recent crisis by driving investments in the new areas of financialisation and advocating on new legislations at European level and in developing countries. That’s why many European financial actors have been strongly supporting the “Natural Capital Declaration” promoted for the Rio+20 Conference, as well as are closely involved in refinancing European countries public debt. In this regard significant European countries of the “periphery”, such as Spain and Italy, are still seen too big to fail so that their high interest treasury bonds remain profitable assets for European banks and other financial investors (thus extracting more wealth from citizenship who has to repay this costly debt in the future).

– Why and how does the EU/ Euro crisis promote financialisation?

Concerning the answers put in place by European decision-makers to address the crisis, beyond an ongoing push for further labour deflation across all Europe and shrinking of welfare state, a strong enphasis has been put on the need to establish new financial mechanism to intervene in order to rescue either banks or States. Even more than what happened in the United States – taking aside the intervention of the European Central Bank or FED – all new proposed mechanisms are purely based on the functioning of capital markets, so that what is seen as a short term state intervention will turn out to be in the long run a strong state boost for financial markets expansion and further financialisation of the economy, public finance and society as a whole. For example it could be argued that the establishment of the new ESM is a way for creating new financial assets worth 500 billion Euro, something capital markets facing a crisis of accumulation are very happy with.

Therefore it is important to understand what are the new frontiers of the financialisation process – of if you like the second stage of the current financialisation phase, of the current capitalist cycle – and in particular what is the specific leadership that EU exerts in promoting it at home and worldwide.

The new frontier of financialisation and the leadership of the EU in driving it

Since the beginning of the decade, after the dot.com bubble, financialisation has been looking for new asset classes in which to invest huge and growing private wealth accumulated. New key areas in which financialisation started unfolding thus have emerged: natural resources (soft commodities and new commodities, such as “carbon”) and public finance itself, meant as a mechanism to produce new financial assets to extract more value and profits from citizens and taxpayers. Within this also development finance is being financialised and more important infrastructure financing as well.

Concerning infrastructure, the financialisation approach is leading to a third wave of privatisation, with the first being the privatisation of public assets at a discounted value and the second the creation of PPP vehicles to help privatised companies finance their business given their difficulties to do this and make new investments in infrastructure development. Given the blatant failure of the PPP approach in many sectors, a third wave of privatisation is being conceived as the creation of a financial system suited to finance, through capital markets, private infrastructure which just serve private sector interests.

European countries are leading this new frontier of financialisation. In particular, the European debt crisis can be read as a further extraction of wealth from public finance in favour of rich private actors. Similarly European proposals to boost the role of private financial actors in development finance (in particular the use of financial intermediaries and the leverage of public aid on capital markets) and to promote a new generation of EU project bonds to finance infrastructure development should be seen as an attempt to systemically put public finance in the hands of capital markets.

The European Union is also a major drive for the further financialisation of natural commons, by supporting proposals for a further expansions of failing carbon markets and the establishment of ecosystem services trading and payments systems at the Rio+20 Conference next June. And the EU  is similarly promoting water trading schemes in Europe and abroad, with water being one of the few existing commodities less financialised up to today.

All these proposals aim at generating new asset classes for investing accumulated wealth thus once more trying to overcome the same crisis of accumulation we live since late ’60s. Under this perspective the 2007-2009 crisis, which was due to the solutions used to overcome the previous 1987 crisis (due to the solutions used to overcome the crisis of late ’60s), is getting an answer which sees new legislations at national and regional level as a key instrument for creating new asset classes and financial market infrastructure to (temporarily) overcome the crisis of accmulation.

Legislations are needed to create new commodities and their new markets (see the case of ecosystem services trading), for creating new capital market infrastrcuture to finance infrastructures and “development” operations within and outside the EU, for transforming public debt and finance management. In a way, contrary to the common sense, neoliberalism and then financialisation built on it did not aim to destroy the state, but require a strong state to create markets and today financial markets and new asset classes. Something that the private sector alone can’t do. And the whole construction of the European integration has been channelled more and more into this direction, which is more and more financialisation of the economy and society, also today to get out of the crisis (at least for few more years…).

– Which are the conclusions from this analysis for agencies interested in solidarity and emancipation, how can they act effectively from a given situation of political defensive?

Financialisation is a systemic transformation of both production and finance in capitalist economies.  This is a slow, pervasive process, which far from being halted by the 2007-2009 crisis, found new energy and drive to unfold on new areas, such as nature, public finance and infrastructure.

The European Union and its policies are fully part of the financialisation answer to the ongoing crisis of accumulation that we live since the late ’60s. And today proposed answers to the crisis are still in line with the objective to meet the new “needs” of the financialisation process, to “boost” grow and the creation of new assets and sustain the accumulation process.

Regulating European financial markets, despite hardly needed, won’t be enough the address the scale of the problem we face. Similarly poromoting new European monetary policies and institutions, by regaining public control on the European Central Bank, as well as a new approach to European economic and fiscal integration can help but will not solve the underlining structural causes of the crisis.

In order to identify a different response to the crisis of accumulation affecting the global economy and the European one in particular, at first it is central to fight in the new battlegrounds opened by the financialisation process, in which the European Union is a key drive today (both within and outside the EU): financialisation of nature, financialisation of public finance and financialisation of infrastructures. In this regard, it is central to reflect about how to implement a strategy for excluding financial markets by several spheres of society. More specifically, it is key to prevent that new asset classes be created so that capital markets will inevitably get stuck and blocked to the point that it would be easier to get leverage and control them more, possibly by going back to control cross-border movements of capital at national and regional level.

It should be stressed that it is not an issue of creating new campaigns for definancialising the economy and society, but it is important that this perspective is adopted by already existsing campaigns, possibly by strengthening them and making them more strategic and connected each other (i.e. struggles against water privatisation, pension privatisation and reform, carbon markets, and so on).

As a second and more “offensive” step it is crucial to work for a redefinition of public finance, with the aim of developing new public finance mechanisms able to rechannelled under public interest policies a large part of the existing private wealth and liquidity constantly chasing highly profitable and often socially and environmentally devastating investments. In short this would mean to tap the existing massive liquidity in global markets and rechannel it to support public policies out of market logics. The establishment of public investment banks and similar mechanisms operated outside of market logics – while imposing conditions on markets – at national and regional level is central to this strategy. Such an approach would inevitably require to work for building a new cultural egemony which not simply reaffirms the need to have a public intervention into the economy, but which redefines the meaning and structure of the “public”, and in particular of public finance, starting from a perspective of reclaiming, promoting and creating new commons.

Finally, it is important to address the two major areas which have been transformed by the establishment of the European monetary union: the export-led growth model (coupled with investment liberalisation and financial infrastructure building) and the integration of the European banking system. Both areas require radical responses in order to not just halt the new frontier of financialisation, but definancialise European economy and finance and open up a space to pursue alternative public interest policies in favour of labour and the environment. As a matter of the fact the ultimate solutions to the crisis of accumulation will not be in finance but in rethinking and transforming the current failing economic and development model.