The most recent round of Euro-panic, centred on fears of sovereign default by Ireland, was unleashed by one brief statement of the German Chancellor, Angela Merkel. Anxious to avoid being pilloried by German voters as a transferrer of wealth from her own taxpayers to delinquent European spendthrifts, she asked private investors to contribute to the costs of bailouts of distressed European economies. Throwing down the gauntlet at market forces, she added that such an equitable sharing of burdens between solvent states like Germany and those who earn money in credit markets was necessary to establish the primacy of politics and the limits of markets.
The comments immediately sent bondholders into jittery huddles and triggered a fresh round of lending rate hikes for Ireland, Portugal, Spain, Italy and even Belgium.
Investors responded to Merkels attempt to offload some liabilities from the shoulders of the German people with decisive collective action that raised borrowing costs for debt-plagued European governments. Yield spreads between Irish and German debt rose to Euro-lifetime highs and the betting game about when and by how much the European Central Bank (ECB) will step in to save Ireland started in earnest.
That investors hold all the cards on making or unmaking the Euro zones recovery from its worst economic meltdown is now crystal clear. Merkel herself was forced to back down just a couple of days after her bravado-laced comments, as she issued conciliatory clarifications that the idea was not to leave bond holders on the hook for current crises but to establish a principle of shared responsibility for future bailouts. But the horses had bolted by then and the investor community has since jacked up pressures to teach fragile European economies and their healthier peers a lesson.
The language that bond markets are now using to tame harried European macroeconomic policymakers is quite instructive of the power shift away from states and into the hands of financiers.
Investors now demand deeper budget cuts in troubled peripheral Euro zone countries and assume that the ECB will heed their calls for more sizeable quantitative easing. Market spokespersons are saying that they need signals that the ECB is prepared to do what they wish. Investors are also relaying threats that sentiment may pivot swiftly if European authorities fail to meet their expectations.
NYT quoted a BNP Paribas Fortis economic analyst to convey the no-nonsense mood among investors as follows: The market is looking at every country, and the moment there is some weakness, theyre attacking it.
A similar development, where creditors hold all the aces and are literally dictating terms to states in charge of stagnating or weak economies, has played out in the currency markets of Japan. Despite the intervention of the Japanese central bank in September to weaken the Yen, currency investors have kept appreciating it as a haven owing to continued US economic travails. The message from free-moving capital is that it will find sweet spots in its own best self-interest, defying sovereign state attempts to redirect or rein it in.
We are at a juncture where determined state interventions do not produce desired outcomes unless public policies first please the markets. The debate over whether states have become subservient or helpless bystanders in the wake of rampant market forces has raged on since British academic Susan Stranges pioneering work on international political economy in the 1980s. Her thesis that the state is in retreat and that power in the global economy was moving into corporate corridors seems validated today, with Chinas strong state sticking out as an exception.
The irony is that markets are presently in a superordinate position over the sovereign state system in spite of the worst setback to capitalism since the Great
Depression. The masters of finance have verily converted the crisis since 2008 into an opportunity to perpetuate their dominance.
The author is vice-dean of the Jindal School of International Affairs