Eighty years ago, faced with today's economic events, nobody would have been in any doubt: we would obviously be living through a crisis in capitalism. Instead, there is a collective unwillingness to call a spade a spade. This is variously a crisis of the European Union, a crisis of the euro, a debt crisis or a crisis of political will. It is all those things, but they are subplots of a much bigger story: the way capitalism has been conceived and practiced for the last 30 years has hit the buffers. Unless and until that is recognized, western economies will be locked in stagnation which could even transmute into a major economic disaster.
Simply put, the world has trillions upon trillions of excessive private debt financed by too many different currencies whose risk is allegedly mitigated by even more trillions of financial bets which in aggregate do not minimize the systemic risk one iota. This entire financial edifice, underwritten by tiny amounts of capital, has been created over three decades backed by the theory that markets do not make mistakes. Capitalism is best conceived and practiced, runs the theory, by hunter-gatherer bankers and entrepreneurs owing no allegiance to the state or society.
This is nonsense. Business and the state co-generate wealth in a system of complex mutual dependence. Markets are beset by mood swings and uncertainty which, if not offset by government action, lead to violent oscillations. Capitalism without responsibility or proportionality degrades into racketeering and exploitation. The prospect of limitless pay is an open invitation to bad, or even criminal, behavior. Good capitalism cannot happen without referees to blow the whistle or robust frameworks in which markets can function; neither is reliably created by capitalism itself, hence the role of democratic government. Yet the world is trying to solve the legacy of the last 30 years as if none of this were true and, instead, that the practice and theories that created the mess are still valid.
US treasury secretary Tim Geithner, joining EU finance ministers in Poland as again they pondered how best to end the ongoing euro crisis, was at least recognizing today's interdependencies between countries when he urged his fellow ministers to stop bickering because the markets were terrified by the threat of a catastrophic event – with all the risk that posed the US.
George Osborne was also right to declare that a strong euro was in Britain's interests. But worrying about how a failed euro might impact on yourself is old speak. What the markets need to hear is that western politicians – whether in the eurozone or not – see the euro as part of the potential solution to capitalism's current crisis, not its cause, and that they are prepared to do all in their power to support the reforms necessary to make the euro survive and take other measures vital to make the world financial system functional again. Geithner and Osborne must put some money where their mouths are.
The euro's critics, endlessly emphasizing that it is a monetary straitjacket and that the best reform now would be its break-up, miss the point. It was not this so-called straitjacket that is the cause of today's euro crisis. It is the interaction of the euro system with a once-in-a-century crisis of capitalism that its designers and supporters, like its critics, never anticipated. Yes, what the crisis has exposed is that the eurozone needed a ¤1trillion-plus fund to recapitalize bust banks and underwrite sovereign debt write-downs; this was not written into the original treaty. And that the investment and retail banking arms of the EU's universal banks need to be ringfenced or formally separated, as Sir John Vickers's banking commission proposes for Britain –if they are to be remotely safe. But neither notion was a battle cry of the euroskeptics over the last 10 years.
In fact, the existence of the euro has, until now, been a bulwark against disaster. Suppose it had not been created and that the financial crisis in 2008 had broken over a Europe with multiple floating exchange rates and no European central bank – the euroskeptic utopia. The Irish, Portuguese, Greek, Spanish, Italian and French banking systems would have stood alone and they would have collapsed in a domino effect, interacting with the mega-crisis in Britain and the US. Even some German banks would not have been immune. There would have been a 1930s-scale slump, the break up of the EU and a rise in beggar-my-neighbor devaluations and trade protection.
We have not yet escaped that prospect. If the euro breaks up, the cascade of subsequent bank failures and debt write-downs will be no less threatening and Britain will be pulled into the vortex. The EU has created a "financial stabilization facility" to try to hold the line. But there is no urgency in launching it; it is still not a proper fund but, rather, a stop-gap provider of borrowing facilities and it is too small. As bad, the German and French governments are wedded to collective European austerity; they want to impose long-term balanced budgets not only on themselves but chilling austerity on the unfortunate states which have to borrow to support their banks and bond markets.
An entire continent is to be blighted by lack of demand in the midst of a capitalist crisis, compounded by Britain's scorched earth, deficit-reduction plans. Already, many European banks are technically insolvent, recognized by Christine Lagarde, the IMF's new managing director, if not by the banks themselves.
Last week, the Bank of England joined the US Federal Reserve, the Bank of Japan and the Swiss central bank in promising Europe's banks vital liquidity in dollars, easing the crisis for a while. Time has been bought; we are pitching in to save ourselves. But the outside world needs to go much further. Europe's stabilization facility must become a fund with a capacity to lend and intervene to see off speculators: Britain, the US, Switzerland and Japan, along with China and oil-rich Arab states, need to contribute alongside Germany.
In return for coming to the relief of the German taxpayer, we should demand two key concessions: one, that Europe sets about ringfencing its universal banks' investment banking operations to make them less vulnerable; and second, that no international cash is forthcoming unless the EU commits to a formal plan for growth in which its stronger countries, notably Germany, promise to stimulate their economies. As part of the package, Britain should agree to defer its own deficit- reduction plans and to issue bonds denominated in euros to contribute to the new euro fund.
We are living through the most dangerous confluence of economic circumstances in modern times. Trying to pretend the interdependencies do not exist or that the collapse of the euro is the answer can only make matters worse. It is a straight choice: we do all we can to help each other or risk going down in what could be the worst economic contraction for a century.