The Eurozone Crisis: A Warning from History

I am thinking of creating my own derivative, called a political default swap. This is how it works. We each choose a country and bet against the length of survival of its government as it tries to introduce enough austerity measures to keep the markets happy. It works like a sort of insurance policy, where the riskier the country, in this case the less able its politicians are to bear down on its people and extort their work to pay bankers' debts, the higher the cost of betting on it.

The manoeuvres by EU finance ministers in Brussels today conceal as much as they reveal and demonstrate that power is balanced between politicians and financiers. This is seen most clearly in the negotiation over the extent to which those who made risky investments in Greek debt will lose their shirts (or their hair). The risk seems to be approaching 50:50.

Harder to agree is how the effects of this on Europe's banks will be accommodated. If the banks take the full hit, the financiers argue, they will become bankrupt, leading to Credit Crunch II: Return of Debtonator. So the bank welfare fund has to be massively increased. We have grown tired of billions, yawn the financiers, we need to move into the zone of trillions.

But where is this money to be found? The devastated citizens of Europe, their bodies already straining beyond breaking point to keep the capitalist wheels turning, can offer no more. Eyes turn to the European Central Bank - can it be asked to create money from thin air, the sort of money bankers like best - power without responsibility? The Germans, with their historical fear of inflation, will not accept this option. The most likely outcome is a solution dreamed up by the very 'quants' who created this disastrous situation: a solution that uses a combination of mathematics and conjuring to make the money disappear through time, emerging at some future date enormously swollen in value.

In his masterpiece The Great Transformation, written in 1944 and reflecting on the last great capitalist disaster, Karl Polanyi describes the contortions that Europe's politicians went through in the 1930s to save the Gold Standard. They seem eerily similar to what we are witnessing today. The system must be saved, no matter what the sacrifice in terms of human lives and political stability.

In the 1920s financiers inflated a bubble which burst in 1929, but through the 1930s the economists defended the position of laissez-faire capitalism whose social costs were unacceptable to the people of Europe. The result was political polarisation, economic chaos and the rise of fascism. This crisis has already provoked the collapse of the Slovakian government, the government of Iceland, and the government in Ireland, and the Italian government could soon follow. Somehow the political system is still holding in Greece, but the massive civil unrest leaves it vulnerable. So, will you take my offer of a punt? Which country's political system would you bet on surviving this financial turmoil intact?
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Great Transformation: Phase II

I have finally overcome my inherent thrift and bought Karl Polanyi's Great Transformation, allowing me the leisure time to consider his arguments at length during train journeys, rather than in haste before his book had to be returned to the British Library stacks in Wetherby. What I found surprised and impressed me immensely.

At the level of chat, Polanyi is discussed, dismissed even, as an 'economic historian'. This is a familiar glitch in discussion of economics, where considering long-term trends is thought to undermine the quality of your contribution. After all, it might risk allowing in the possibility that there have been alternatives to the market, even that these have dominated human history and achieved high levels of well-being.

The popular view of Polanyi is of a social historian who offered an understanding of non-market provisioning systems. The motivation for his book, however, is clearly that of political economy. He begins with two chapters on the gold standard and its role in maintaining peace in Europe in the 19th century. Far from peasant economies and mutual aid, this is a story of political intrigue and the power of global finance.

Polanyi describes four institutions that held 19th-century Europe together: the balance-of-power system, the gold standard, the self-regulating market and the liberal state. He is in no doubt about which mattered most: 'Of these institutions the gold standard proved crucial; its fall as the proximate cause of the catastrophe. By the time it failed, most of the other institutions had been sacrificed in a vain effort to save it.'

While history never repeats itself, this quotation made me ask myself which of the institutions and values we hold most dear we are willing to sacrifice to support the existing reserve currency system, and particularly the power of the dollar and the euro. The political pressure required to service the needs of finance today are ripping apart the social fabric, leading to the rise of nationalism and racism, the destruction of social services, and the waste of our skilled young people to unemployment.

Perhaps even more familiar is Polanyi's judgement on the impact on equality of the currency wars of the 1930s: 'Internally and externally alike, dwindling currenices spelled disruption. Nations found themselves separated from their neighbours, as by a chasm, while ta the same time the various strata of the population were affected in entirely different and often opposite ways. The intellectual middle class was literally pauperized; financial sharks heaped up revolting fortunes. A factor of incalculable integrating and disintegrating force had entered the scene.'

It is said that Karl Polanyi is an influence on Maurice Glasman, theorist of the self-parodying ideas of Blue Labour. In such quarters Polanyi's book appears to be used unopened, as an iconic support for mutual aid and communitarianism. But if Glasman and ilk have the influence they claim on Ed Miliband, Polanyi may soon be a name worth dropping.
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