A famous quotation that is commonly attributed to
Paul Volcker, former Chairman of the US Federal Reserve,
is ''In my next life, I want to be all-powerful. So
I want to be reborn as the bond market.'' Over the
past half century, various developing and ''emerging''
markets were forced to learn about this power of financial
markets the hard way, as volatile inflows and outflows
of capital (in the debt markets and in stock markets)
created boom and bust cycles that often left a trail
of devastation in real economies.
People in these countries also grew familiar with
their own government representatives looking nervously
over their shoulders for signs of financial market
approval or disapproval, and tailoring their policies
to meet the expectations of these markets. The desire
of governments to attract global capital, and then
to prevent capital outflow, dominated over the justified
demands of citizens for fulfilling their social and
economic rights in terms of basic needs and dignity.
Despite electoral systems and the need for government
to establish some public legitimacy, politically,
there was little doubt about which of these forces
has been stronger.
The media in most developing countries were not just
chroniclers of this trend of the growing power of
finance to affect national economic policy making.
They were also active (and often enthusiastic) participants
in the process, vesting financial players with significant
public voice. The behaviour of the stock market (which
rarely if ever reflected the real economy) was treated
as important news at almost every hour and given a
lot of prominence in daily news; opinions of those
representing financial markets in different ways were
given a great amount of time; even the analyses of
media persons were coloured by the perspective of
finance capital. Merchant bankers and hedge fund managers
would raise their eyebrows at the size of the fiscal
deficit, or at some proposed taxes on capital, and
governments would quake and rush to modify their measures.
Worst of all, the dominance of the markets appeared
to permeate the political system to such an extent
that whichever government happened to be in power,
the economic and financial policies would be broadly
the same. Governments that alienated the people by
privileging the interest of capital over the people
would get defeated by the electorate; the newly elected
government would come in and do the same thing. Since
''technocratic'' leaders were more favoured by financial
markets, governments led by supposedly apolitical
''technocrats'' less affected by political pulls and
pushes, and more subject to the supposedly iron laws
of the markets, also became more common.
But all this was for developing countries, the subalterns
of the global system. In the ''mature'' democracies
of rich capitalist countries, however much the will
of the people was actually thwarted by economic processes,
the formal structures of democracy were not just retained
but also given explicit recognition and importance.
That was then. Things have changed quite a bit in
a relatively short time. In economic history books
of the future, November 2011 may well be remembered
as the month when European leaders explicitly placed
the appeasement of financial markets over the requirements
of political democracy.
Consider two countries at the centre of recent action.
In Greece, the elected Prime Minister George Papandreou,
and his Socialist party government, had already put
in place severe budget cuts and other austerity measures
designed to reduce the public deficit so as to appease
the financial markets sufficiently to bring down the
rising yields on Greek government bonds. Greece had
already availed of bailouts from the IMF and the European
Central Bank, and requires still more infusion of
funds. But the measures being insisted upon are essentially
counterproductive, because they force an economy that
is already into a downward spiral into further contraction,
and thereby make the deficit to GDP and public debt
to GDP indicators look even worse.
It is evident that some debt restructuring is inevitable.
And so the European Union, in a major first, negotiated
directly with bankers - through the Institute for
International Finance in Washington DC, a global association
of financial institutions. This resulted in yet another
package designed to ''save'' Greece, but actually to
save the bank responsible for overlending, with a
declared 50 per cent write down of debt (though in
fact the loss faced by banks would be much less) and
further severe austerity measures to be imposed on
Greece in the effort to ''rebalance'' the economy.
These measures are not just macroeconomically misguided.
They are also deeply unpopular with the Greek public,
who see themselves as being forced to pay for irresponsible
banking practices, with massive unemployment, falling
real wages, reduced public services. (Incidentally,
the widespread myth in northern Europe - about lazy
Greeks lying in the sun drinking ouzo while hardworking
Germans support them - is completely false. Real wages
in Greece are significantly lower than in Germany;
average working hours in Greece are significantly
longer than in Germany; the rate of productivity increase
in Greece in the decade preceding their crisis was
one of the fastest in Europe.)
The simmering anti-austerity mood in Greece finds
expression in strikes and street protests, which have
become commonplace. When the latest round of such
cuts was insisted upon by the EU, Papandreou announced
that he would have to take strategy to a popular referendum.
Of course, this should have been done much earlier.
It is not even clear if he intended to phrase the
question in such a manner as to ensure a ''yes'' vote
to give legitimacy to further cuts. But the very possibility
of such democratic referral and the associated uncertainty
created outrage and fury among European bosses.
Like an errant schoolboy, Papandreou was quickly summoned
to Cannes where G20 leaders were meeting. According
to reports, he was subjected to a humiliating dressing
down by the Gang of Four of Angela Merkel of Germany,
Nicolas Sarkozy of France, Christine Lagarde of the
IMF and Jean Claude Juncker, head of the eurozone
group. He was told in no uncertain terms that any
such moves to refer to public opinion amounted to
''disloyalty'' that would not be tolerated, and that
Greece would not receive the next crucial tranche
of EU-IMF money of 8 billion euros if it persisted
with this plan.
Papandreou returned to Athens, cancelled the referendum,
and even resigned in the process, as his position
had now become untenable. A ''government of national
unity'' has been set up, to be run by former banker
Lucas Papademos. No career politician was found acceptable
by the markets, only an insider (he has been Governor
of Greece's Central Bank and Vice President of the
European Central Bank) whose stated priority is to
keep Greece in the eurozone at all costs, with no
mention at all of what the people of Greece might
happen to want.
In Italy, where bond markets next turned their attention,
the head to fall was that of Silvio Berlusconi, whose
period in power has been more noted for salacious
scandals and aggressive buffoonery. Bond yields in
Italy touched the declared danger mark of 7 per cent;
other European leaders then announced openly that
Berlusconi had to go. As it happens, he should have
gone much earlier, for a variety of other crimes.
But the EU leaders now felt that his departure was
necessary ''to calm the markets''. And so go he eventually
did, announcing that he would resign once the Parliament
passed further austerity measures that were also ''required''
by the markets.
The new government in Italy is even farther from any
democratic norm than that in Greece. It is headed
by another economist/banker, Mario Monti, who has
the added advantage for the markets of having worked
for a trusted institution like Goldman Sachs (which
was heavily involved in helping the earlier Greek
government to fudge its accounts to conceal the extent
of its debts and deficits). Mr Monti runs a government
composed entirely of ''technocrats'' rather than any
representatives of political parties: bankers, businessmen
and former bureaucrats, who are completely in tune
with the expectations and requirements of finance
As if these examples are not enough, elected leaders
in Europe are now more openly expressing their intellectual
and policy subservience to financial markets in different
ways. Recently, Finland's Minister for Europe has
argued that the eurozone's six Triple A-rated countries
should have a greater say in economic affairs within
the single currency and act as its inner decision-making
core, because ''a country that is not triple A rated
is not going to be the best one to give you advice
on your public finances.'' So now credit-rating agencies
are going to decide which governments in Europe get
to make the decisions for all of the eurozone!
Note that these credit rating agencies have almost
universally underperformed massively especially in
the past decade, missing signs of fragility, over-reacting
after the event and generally behaving in procyclical
and herd-like ways that are typical of financial market
functioning in general. Yet elected leaders in Europe
are seriously suggesting that they hold the key to
which governments can be more ''trusted'' to make crucial
decisions for the people of Europe.
It is hard to see how any of this can be taken seriously,
but this is actually the way that governments in Europe
are currently responding to the advancing crisis.
It does not follow that these efforts to placate finance
at all costs will be possible, though, since this
subservience to financial markets is now more questioned
by the people. Governments may have decided to sacrifice
democracy to the markets, but the people may still
not let this happen.