Interdependence between core and peripheries of the European economy: secular stagnation and growth in the Western Balkans.

AuthorBartlett, Will
  1. Introduction

    The Eurozone crisis can be understood as the outcome of a structural imbalance between "core" and "periphery" countries (Lapavitsas et al., 2010). Germany is at the centre of "core" group of countries in the Eurozone, while Greece, Italy, Portugal and Spain are conventionally seen as forming the "periphery" of the Eurozone. Yet other EU member states that are outside the Eurozone also belong to the European periphery, and form what we call the "outer periphery" of the EU. Countries of this outer periphery, such as Bulgaria and Romania are just as much affected by the Eurozone crisis as the "inner periphery" countries within the Eurozone, even though they have not adopted the Euro. The fortunes of their economies are affected by developments in the Eurozone, not just through flows of trade, investment and people, but also because the financial sectors are highly integrated.

    Outside the EU, there is a further layer of countries that are neither Eurozone members nor EU members that are similarly influenced by developments in the EU and the Eurozone. Following Martin Sokol, these countries can be referred to as the "super-periphery" of the EU (Sokol, 2001). They comprise the countries of the Western Balkans and of the European Eastern Neighbourhood.

    A feature of these countries, especially in the Western Balkans, has been a widespread euroisation both among households and companies (Orszaghova, 2015). This has meant the Western Balkan countries have not been able to use devaluation as a means to improve the competitiveness of their economies. A high proportion of loans and savings are denominated in Euros, which inhibits the use of devaluation or depreciation of the currency as an instrument of macro-economic policy to improve the external competitiveness of their economies. At the same time, EU bailouts are unavailable to these countries. Therefore, the only option is internal devaluation, which requires decreased levels of prices and unit labour costs to bring about improved external competitiveness.

    In this paper we identify the extent to which these peripheral countries are connected to and influenced by the evolution of the European economy as a whole, and how they have been consequently affected by the crisis in the Eurozone.

  2. Under-consumption in the capitalist core

    The Classical economists were preoccupied with the question whether there would be enough aggregate demand to buy all the goods and services produced by business enterprises. The theme was taken up by Keynes who argued that market economies were prone to a lack of effective demand and to the possibility of unemployment equilibrium (Keynes, 1936). The under-consumption theorists furthermore proposed that market economies were also prone to "secular stagnation" (Hansen, 1955; Steindl, 1952). (1) Radical economists took this further, most notably in the work of Paul Baran and Paul Sweezy who argued that under "monopoly capitalism", employers strive to increase profits by pushing down wages, which reduces aggregate consumption (Baran and Sweezy, 1966). In a further development of the theory, they argued that the financial sector dominance has emerged as a means to maintain aggregate consumption. However, this has the unfortunate side effect of increasing instability in the economy (Minsky, 1986). The financialisation thesis suggests that financialisation generates instability and is a prime factor in economic stagnation, and can lead to debt-deflation and prolonged recession (Palley, 2007). Others have argued that stagnation is a more deep-seated phenomenon and that it is the tendency towards stagnation that generates financialisation rather than the other way round, and that a failure of financialisation to successfully play this role, the underlying tendency towards stagnation can reappear (Bellamy Foster and Magdoff, 2009). Moreover, financialisation has also generated gross inequality (Picketty, 2014), which further reduces consumption demand and reinforces the under-consumption problem.

    Governments of advanced countries have several options for escaping from the under-consumption trap (Baran and Sweezy, 1966). First they can increase government spending in various forms. Social spending (pensions, social security) can be increased, but the limits of this appear when social spending begins to undermine work incentives. The public services such as education and health can be expanded through public expenditure, but the limits of this are reached under continuous pressure to introduce private provision of services. A strong contender for generating additional demand is through military expenditure (in 2015 the US military budget was $600 billion). However, this also reaches its limits for countries that wish to pursue a peaceful non-aggressive foreign policy. Another way to generate increased demand in economies that suffer from under-consumption is to increase consumption through advertising and marketing expenditure. However, this also has its limits due to the finite needs of the population, although constant efforts are made to stimulate artificial desires.

    A further important mechanism to stimulate demand is to rely upon demand from other countries and to promote exports, through measures that build a country's competitive advantage. This form of export-led growth is usually accompanied by central control over wage costs, combined with labour market reforms to reduce wage costs and promote the flexibility of the labour force. Many other measures are available to promote exports, and some countries are more successful in doing so than others.

    However, the limit of this approach is that all countries cannot do this at the same time. Some must be net importers if others are to be net exporters. This has been a central feature of the Eurozone arrangement, where the core countries have become net exporters and rely upon demand from the periphery counties to compensate for under-consumption on the domestic market.

    Finally, additional demand can be generated through the development of consumer credit. If the workers do not have enough buying power from their wages, then they can be encouraged to take out consumer credit to fill the gap. This has led to the development of a very sophisticated market in consumer finance and to the general 'financialisation' of the advanced economies, generating additional consumption through the growth of consumer credit. But financialisation generates asset bubbles and financial crises, and so also has its eventual limits.

  3. Secular stagnation in the Eurozone

    The Euro was established in January 2002 as a monetary union without a fiscal union. Under this arrangement, the nominal interest rate set by the ECB is the same across all the member states. Since this common interest rate that is too high in some countries and too low in others, immense structural imbalances have grown over time. In particular, as Germany is a strong exporter, she has run structural current account surpluses, while the peripheral countries such as Greece, Spain, and Italy have run structural current account deficits. These deficits have led to a build up of debt in the peripheral countries that has contributed to the economic crisis that has beset the Eurozone since 2009.

    In addition, the adoption of the Euro induced investors to believe that the debts contracted by the peripheral countries were just as credit-worthy as the debts incurred by the core countries such as Germany or the Netherlands. This led to a great inflow of foreign capital into the periphery countries and enabled them to sustain either an unjustified high level of wages and consumer spending as in the case of Greece, or a high level of asset price appreciation and housing boom as in the case of Spain.

    In autumn 2009, following the election of the Pasok government, it was revealed that the Greek state had a far higher level of debt than had previously been thought. Investors suddenly realised that the periphery countries could not necessarily pay back their debts, and that more importantly, there was no guarantee that the core countries would bail out their debts within the single currency system (Pisani-Ferry, 2014). Panic ensued. The value of the government bonds in the periphery countries fell, and yields rose to unsustainable levels. Since then, the Eurozone has been involved in a vivid fire fighting exercise to restore calm. The periphery countries have been reluctantly bailed out though individual rescue schemes, culminating in the creation of the European Stability Mechanism, and the creation of a system of New Economic Governance, which has brought the fiscal policies of the individual Eurozone member states under the supervision, if not outright control, of the central authorities at the European Commission and the ECB. In addition, intra-Eurozone imbalances have been financed by the TARGET inter-bank settlement system adopted between the Eurozone central banks (Werner-Sinn, 2014).

    Since the debts that governments issued were largely held by their own banks in the periphery countries, the banks also got into difficulties. As the value of the government bonds that they held fell, and they ran into danger of bankruptcy, the banks had to be bailed out by their own governments leading to a further increase in government deficits. This negative spiral of debt and collapse between the states and the banks became a key problem in preventing the resumption of economic growth (PisanyFerry, 2014).

    The essence of the problem was that the Eurozone lacked an EU-wide "bank resolution" mechanism. When banks get into difficulties in sovereign countries, their own central banks have the ability to step in and bail them out (or recapitalise them) if needed, and can subject such banks to reorganisations and other regulatory procedures or close them down. In the Eurozone there was no single authority that had the power to step in and close down a bank in...

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