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The Consequences of the Global Financial CrisisThe Rhetoric of Reform and Regulation$

Wyn Grant and Graham K. Wilson

Print publication date: 2012

Print ISBN-13: 9780199641987

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199641987.001.0001

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(p.247) 13 Conclusion
The Consequences of the Global Financial Crisis

Graham K. Wilson

Wyn Grant

Oxford University Press

Abstract and Keywords

One common theme in the period since 2008 in both the United States and Europe was political failure to cope with the crisis, despite the success of the immediate stabilization efforts at the time of the initial collapse. Politicians always seemed to be behind the curve, reacting to events as they happened rather than developing any coherent plan of action, so that the markets increasingly lost confidence in their ability to cope and responded dramatically to any sign of trouble. The persistent eurozone crisis reflected problems of structure and agency. Germany has been resilient in the face of the Global Financial Crisis, but it has structural weaknesses and could be hit hard by a second wave of the crisis. One must be careful not to read off from current trends to suggest future economic dominance by China, as the Chinese economy has many fragilities. There has been no fundamental reform of the financial markets and a conservative set of fiscal policies. There is an opportunity for a new political vision.

Keywords:   German economy, eurozone crisis, new paradigms

In August 2011, the global economy experienced the most serious aftershock since the Global Financial Crisis (GFC). Triggered by concerns about the ability of the United States to cope with its debt, which led to the loss of its triple A (AAA) rating from one credit rating agency, but more immediately by the continuing crisis in the eurozone, it led to the biggest losses on global stock markets since the aftermath of the Lehman collapse in 2008. The FTSE Eurofirst 300 and the FTSE 100 both fell more than 10 percent in the week ending August 6, 2011, and the S&P 500 fell 7.2 percent over the same period. Investors fled to what they perceived to be safe havens such as gold and the Swiss franc. What had started as a banking crisis had been transferred on to the balance sheets of countries and become a sovereign debt crisis.

It was forecast that there was at least a 50 percent chance of a double-dip recession in the United States and elsewhere by the end of the year. Growth prospects for the world economy looked poor and there were even concerns that the effects might spread to its one thriving area, Asia. China complained vociferously about the failure of the United States to deal with its debt problems, but it was essentially a voice from the sidelines.

One common theme in the period since 2008 in both the United States and Europe was political failure to cope with the crisis, despite the success of the immediate stabilization efforts at the time of the initial collapse. Politicians always seemed to be behind the curve, reacting to events as they happened rather than developing any coherent plan of action, so that the markets increasingly lost confidence in their ability to cope and responded dramatically to any sign of trouble. Political leaders insisted that the economic fundamentals were sound, but market sentiment is not necessarily driven by anything substantive. If nothing else, the renewed crisis revealed the weakness (p.248) of democratic political leaders, even if they did contrive to act collectively, in the face of the power of globalized financial markets.

However, politicians on both sides of the Atlantic showed a worrying inability to agree. In the United States, the problem was polarization between the Republican and Democratic parties with many moderate centrists forced out of Congress by ideological mobilization in an electoral system where the real contest was often in the primary. This was reflected in the emergence of the Tea Party Republicans who, although a minority in their own party, were able to set an agenda of no tax increases and public expenditure cuts. However, it should be noted that those cuts did not tackle entitlements in the form of Medicare, Medicaid, and social security which are at the heart of the US’s fiscal problems. Moreover, most of the actual cuts will take place well in the future when they could well be reversed by a new Congress. The agreement that was produced took a long time to emerge, which is one reason why the US’s credit rating was downgraded, reflecting attempts to secure electoral advantage in relation to the Congressional and presidential elections to be held in the fall of 2012.

In many respects, however, it was the crisis in the eurozone that posed the greatest threat to the recovery of the global economy. The measures taken in July had stemmed the immediate crisis in Greece, but the focus now turned to Italy, Spain, and even Belgium and France. The €440 billion European financial stability facility simply did not have the funds to deal with a default by a large country with Italy at the greatest risk, but Germany was unlikely to sanction a sufficient increase. The European Central Bank (ECB) was initially reluctant to buy Italian and Spanish government bonds but eventually started to do so, bringing interest rates on them down to tolerable levels.

The problems that the Europeans faced were in part structural and in part ones of agency. The structural problems arose from the fact that the eurozone was not an optimal currency area and had too many divergences within it to function effectively. This implied either a smaller eurozone focused on Northern Europe or moves toward a fiscal government for Europe such as the issue of Eurobonds. However, the question was how one managed the transition in conditions of considerable turbulence. This was not helped by decision-making procedures so that all seventeen eurozone governments and their parliaments had to endorse the package of measures agreed in July.

Agency concerned the leadership of German chancellor Angela Merkel during the crisis. Admittedly, she faced some difficult choices against the background of a German electorate increasingly concerned about the costs of bailing out what to them seemed to be weak and mismanaged economies. She seemed to follow a strategy of prevaricating and seeking to muddle through in the hope that the crisis would resolve itself which only made problems more difficult to solve: saying no until she said yes as the Taoiseach (p.249) of Ireland put it. German taxpayers were increasingly exasperated at having to bail out countries like Greece where there had been chronic mismanagement of their economies, a sentiment shared by other northern European countries. However, German banks would be badly hit if southern European economies defaulted. Even more significant, German exports would be hard hit by the demise of the euro and the effective collapse of the single market.

There were, however, even deeper structural forces at work, the consequences of which were dimly perceived or at least only debated in a partial form. Major economic imbalances resulted from a tectonic shift in economic power from west to east. Not only was there competition from cheaper labor but emerging economies were forcing up the price of oil, minerals, and food as they grew and became more prosperous. The accumulation of private and public debt on a massive scale had permitted those living in the west to maintain their living standards, but it was doubtful how long this could continue, particularly given the challenges posed by an ageing population. A paper by the Centre for Economic and Business Research suggested that living standards in the United Kingdom could fall as much as by 25 percent over the next quarter century.

We have emphasized the fact there was no fundamental reform of the financial system; the edifice created in the previous few decades needed shoring up with vast quantities of taxpayer money. Surprisingly, little was given in return. The fundamental structure of the banking industry was unchanged and regulatory institutions were not significantly strengthened. As Crouch (2011: 1) notes of the banks, “They were considered so important to the early twenty-first century economy that they had to be protected from the consequences of their own folly.” The failure to initiate fundamental reforms of the financial sector has been paralleled by a lack of innovation in economic policy more generally. Governments have opted for policies of austerity rather than being seduced by Keynesian calls for expansion. The Occupy movement provided a focus for discontent about those perceived to have caused the crisis and the failure to act against them. However, it could not offer a coherent set of proposals or an alternative paradigm.

One of the mechanisms used to try to contain the aftershocks of the GFC was the stress test in which banks were required to conduct simulations of crises and assess what would happen to their financial viability. In a sense, the GFC has subjected the political economies of the world to a stress test that has revealed the tensions, fault lines, and strengths of the world’s political economies.

The stress test of the GFC raised questions about both the capacity of governments to respond to it in terms of their ability to decide on and implement policies to address it. Some of these stress tests have shown (p.250) unexpected strengths. In the United Kingdom, for example, a rigorous program of public spending cuts was adopted quickly but only because the first peacetime coalition government in eighty years was assembled to support it; coalition government in the United Kingdom had been a remote possibility previously. Whether or not the spending cuts were wise or just is debated; the point we make here is simply that the stress test of the GFC revealed a capacity in the UK political system to address challenging issues that was unexpected. The Chinese authorities also seem to have been able to adapt to the GFC effectively. Although vast numbers of workers were sent home to their villages, the regime introduced a very effective stimulus package. In contrast, the near default of the United States in 2011 showed up the incapacity of the American political system to deal with difficult and challenging issues coherently. After months of deadlock, a financial crisis was averted by hours largely through a combination of bizarre procedural moves (the creation of a special committee and the threat of truly unpalatable automatic budget cuts if in failed to reach agreement) and by pushing decisions on the details of major budget cuts into the future. The most striking case of the GFC exposing weakness was Greece where decades of incompetence, corruption, and, most importantly, deception in national accounting were brought to the fore.

The GFC also provided a stress test for political economies more broadly defined. This was a stress test not only of the capacity of political institutions to make policy but of the resilience of the broader political economy. Here, the conclusion has to be not surprisingly that those political economies that went furthest down the path of financialization have had the most difficulty recovering. The US economy has stagnated; in the last thirty years, the financial sector has become as large a share of the economy as manufacturing once held while manufacturing has declined in significance to the share of the economy then accounted for by finance. A similar story can be told of the United Kingdom. It is interesting to note, however, that the US government acted more vigorously than the UK’s to prop up its manufacturing sector after the GFC, particularly through the rescue of General Motors.

Changing Places? The GFC and the Global Distribution of Power

It has been common during the GFC to link it to a shift in global economic power. Although it might seem odd to suggest that there were any “winners” from the GFC, two countries seemed to have gained in relative power during the crisis, namely China and Germany.

China replaced Japan as the world’s second largest economy (meaning of course that two of the top three economies were in Asia) and were trends to continue, China would replace the United States as the world’s largest (p.251) economy within twenty years. Regular news stories brought home aspects of this development. In August 2011, for example, one of the great hopes of new green technology in the United States, a manufacturer of solar power panels called Evergreen, went into bankruptcy citing its inability to compete with China. Simultaneously, Vice President Biden visited China, the largest purchaser of US Treasury bonds, and attempted to convince skeptical Chinese officials that the United States would do a better job of managing its government budget and economy in the future.

The GFC did not cause the rise of China but served to highlight and accentuate change in relative economic power. As China emerged relatively unscathed from the GFC while the United States stagnated, the long-term power shift was accentuated and made more visible. Breslin (this volume) points out, however, that “There is no necessary contradiction in thinking of the crisis as accentuating China’s global power while also highlighting domestic fragilities.” Breslin highlights many of these current or threatening fragilities. China is dependent on the economies over which it has no control both in trade and finance; a continuing downturn in the United States and Europe would hurt growth unless domestic demand is boosted while the huge holdings of US Treasury bills would lose their value if the dollar collapsed. A faltering in the growth rate in the view of China’s own leaders would threaten political and social stability. Continuing confusion between the power of central and local governments and between being open to foreign capital and yet favoring domestic producers—especially state-owned enterprises—mean that there is as yet no stable “China model” as there was once a Japan model. Perhaps typically, we failed to diagnose the weaknesses of the Japan model until its failure was long evident. The contradictions and instability of power and roles within the Chinese political economy make it even more difficult for us to sense what its limitations might be. It would seem reasonable, however, to assume that unilinear projections of current trends would be incorrect.

Events in Europe also dramatized the importance of Germany as the continent’s one economic success story. In essence, the crisis of the euro turned on the willingness of Germany to spend the money required to prop up the weakest members of the eurozone. Strong economic growth in Germany in 2010 fostered hopes that it could lead the continent out of recession. We might, however, rephrase Breslin’s comment about China cited above to apply to Germany; “There is no necessary contradiction in thinking of the crisis as accentuating [Germany’s] global power while also highlighting domestic fragilities.” As one of the world’s great exporters, Germany was also very dependent on the state of economies over which it had little or no control. Moreover, its own political economy, regarded as great a success in the second decade of the twenty-first century as it had been regarded as a moribund failure at the start of the century, also had its problems.

(p.252) German Exceptionalism?

Germany represents a particularly interesting case as it is believed by many to be the only major European political economy to have emerged well from the GFC. Does this represent yet another demonstration of the strength of “Modell Deutschland,” a “label [that] refers to a particular constellation of institutional practices, workplace practices and normative values in the management of Germany’s economy and industrial relations”? (Green et al., 2012: 139) Does it show once and for all the superiority of Rhineland or coordinated capitalism over the Anglo-American liberal model, a claim which has long been at least an implicit message of the VoC school? For Hay (2011: 14), the crisis is one “of the Anglo-liberal growth model” that has exposed the “endogenous frailty at its heart.”

Matters are more complex than a simple comparison of a virtuous German model with the Wicked Witch of the West of Anglo-American capitalism would lead one to suppose. How one interprets the German recovery depends on where one starts from. There is a positive story that can be told about the German model, but it also has weaknesses which receive less attention.

Perceptions of the performance of the German economy have certainly changed. As the German Council of Economic Experts (GCEE) put it in their 2010/11 annual report (German Council of Economic Experts, 2011: 1):

Less than a decade ago Germany was widely seen as the sick man of Europe, lagging behind more dynamic economies and heaving under the strain of excessive business taxation, an ossified labour market, an overgenerous social security system and, above all, a chronic incapacity to implement radical reforms. The tune has changed now. Germany’s negotiation of the crisis has elicited respect and admiration from all quarters, especially on account of its robust employment trend. Many countries currently look to Germany as a driver of growth.

However, the picture is not quite as rosy as a 3.7 percent increase in German GDP in 2010 or a jobless total that fell below the still high figure of 3 million for the first time in eighteen years in October 2010, not all of which can be explained away in terms of the challenges resulting from the absorption of the former Deutsche Demokratische Republik (DDR). It would be wrong to explain the blight of “unemployment as a purely ‘eastern’ problem: there are significant pockets of it in western Germany too, either in such economically peripheral areas as the ports of Wilhelmshaven and Bremerhaven or in the old industrial heartlands of North Rhine-Westphalia” (Green et al., 2012: 144).

It should also be remembered that the rebound of 2010 occurred after an appalling year in 2009 when Germany felt the full force of the global recession with exports falling by over 14 percent and the economy as a whole shrinking by nearly 5 percent, a 1930s depression era figure, although there was none of (p.253) the accompanying hardship. “When assessing the dynamic progression of the upturn to date, it should be remembered that the level of GDP reached in mid-2010 merely matched that achieved back at the turn of 2006/7. The GCEE’s projection for Germany indicates that the fall in output caused by the crisis will finally have been cancelled out by the end of 2011. This means that the German economy will have taken three years to recoup the GDP losses that ensued from the crisis” (German Council of Economic Experts, 2011: 8).

The German economy is also highly vulnerable to a disorderly sovereign default by Greece, given the exposure of German banks, and the negative consequences that could be exacerbated by contagion effects elsewhere in the eurozone. Even if there was a relatively orderly default, as an export-oriented economy, Germany is still vulnerable to the economic consequences of austerity policies being pursued by other EU member states such as Spain and the United Kingdom. Moreover, substantial structural problems remain and efforts at reform are often derailed by political compromises. Nevertheless, many other countries would be happy to have Germany’s problems rather than their own.

Sozialmarktwirtschaft (Social Market Economy)

What are the key elements of the German economic story since the World War II? In essence, effective skill formation and renewal has permitted the development of an export-oriented manufacturing sector which specializes in value-added quality production in key industrial sectors such as autos, chemicals, and precision engineering. Such an economy has been able to take full advantage of the European single market, and the accession of East European states such as the Czech Republic has provided proximate low-cost settings for some industrial production by German firms. Good industrial relations, themselves facilitated by generally low rates of inflation, have helped human and physical capital formation. In particular, the system of industrial unions rather than multiple unionism, as in the United Kingdom, obviated the “hold-up problem” for investments in fixed capital (Crafts and Torlino, 2008).

Institutions have been effective in terms of the social market philosophy adhered to by successive governments, their relations with well-structured industry associations and trade unions and the historic role of the Bundesbank whose values it was hoped would be transmitted to the ECB in Frankfurt. Germany also had “an ‘insider’ financial system that fostered relationship-specific long-term investments” (Crafts and Torlino, 2008: 11), although this is a more complex story than is sometimes admitted (Grant et al., 1988), and convergence with other financial systems has increased recently. One should not underestimate the importance of having an effective competition policy in comparison to the notoriously defective (until recently) competition policy (p.254) in the United Kingdom which preferred to prioritize industrial policies that propped up declining sectors and collapsing firms. Proximate factors have helped such as the undervaluation of the deutschmark for the earlier part of the postwar period, and more recently success in driving down relative wage costs have been important. By 2005, German companies had some of the EU’s lowest labor costs per unit produced, although this has restrained domestic demand.

The adoption of the “ordo-liberalism” of the Freiburg school in Germany was no accident, while the social aspect of the social market economy chimed with the philosophy of the Christian Democrats in postwar Germany who drew inspiration from papal encyclicals on social responsibility. Both elements of the model can be seen as a reaction to the economic and political failure of the Weimar Republic (Carlin, 1996) and as a strong motivation to not replicate the conditions which gave rise to right-wing extremism in the interwar period. Thus, “the state would be anti-interventionist following rule-based macroeconomic policies, it would use anti-cartel legislation and free trade to combat rent seeking by interest groups, and it would deal with market failures by using ‘market-conforming’ instruments” (Carlin, 1996: 483).

In general, the Bundesrepublik Deutschland (BRD) has stayed true to that model, notwithstanding occasional bouts of intervention, even in the recent crisis. Admittedly, the BRD did adopt countercyclical stimulus packages for the first time in more than twenty-five years. “Nonetheless, these packages cannot be seen as signifying a complete reversal of the course of German economic policy” (Zohlnhöfer, 2011: 233). The government did rush through a law in 2008, setting up the Sondersfonds Finazmarktstabilisierung (SoFFin) to provide emergency credits and loan guarantees to the financial sector. “In practice, only a small number of institutions have actually availed themselves of its provisions, and by mid-2010, around one-third of the total available support had been committed” (Green et al., 2012: box 7.2). The government did nationalize the major property finance company Hypo Real Estate and take a 25 percent stake in Commerzbank, but although it attempted to broker a sale of the Opel branch of General Motors, it refused to take a stake in Opel or in the troubled retail and travel conglomerate Arcandor which was obliged to file for bankruptcy. This response was “much more in keeping with the tenets of ordo-liberalism” (Green et al., 2012: 149).

It should not be imagined, however, that the German financial sector was left unscathed by the GFC, although that impression is sometimes given by the “alles ist in ordnung” school of commentators on Germany. Apart from Commerzbank and Hypo Real Estate, the Landesbanken (regional wholesale banks) which are co-owned by individual federal states came close to the brink of collapse in the cases of Sachsen LB, HSH Nordbank, and West LB. These challenges are by no means over: “In the German banking system, especially (p.255) in the Landesbanken … the process of balance sheet repair and restructuring is progressing at a snail’s pace” (German Council of Economic Experts, 2011: 13).

From the mid-1990s onward, Germany moved toward a greater emphasis on short-term shareholder value. Much of the initiative came from banks who wanted to shed their traditional responsibilities and focus on what they saw as their “core business of financial services and investment banking” (Green et al., 2012: 145). There were even hostile takeovers, exemplified by the acquisition of Mannesman by the UK company Vodafone in 2000. Share ownership became a more popular form of saving and the numbers of chairs of supervisory boards from Deutsche Bank reduced from 29 of the 100 largest companies in 1996 to zero just five years later.

Nevertheless, the heart of German comparative advantage remains in place through the training that is provided in companies and educational establishments through the duales Ausbildungssystme and is exemplified by the role of the well-qualified Meister who is a member of the junior management team with a wider range of responsibilities than the foreman in Anglo-Saxon enterprises. The Mittelstand of small and medium-sized companies makes a key contribution to training, a practice which extends to the Handwerk enterprises which are responsible for artisan skills in industries such as construction. Production-related skills have been highly valued and accountancy skills less so than in Anglo-Saxon systems (Lawrence, 1980). It is perhaps no accident that German Mittlestand companies remain viable in niches such as high-quality upmarket shoe production, largely abandoned in countries such as Britain.

Structural Weaknesses

Nevertheless, the German economy does display some structural weaknesses which may become of increasing significance over time. A major weakness of the economy has been in exploiting the IT revolution and gaining productivity advantages from it, an area in which the United Kingdom has done quite well often with relatively small firms, for example, note the number of games and other software development companies in south Warwickshire or the Silicon Roundabout area in London’s unfashionable EC1. Intangible capital with a high knowledge content is an area where Germany does less well than its competitors. Intangible investment is 11.5 percent of GDP in the United States and 10.5 percent in the United Kingdom, but only 7.2 percent in Germany. Investment in computerized information accounts for 1.6 percent of GDP in the United States and the United Kingdom, but only 0.73 percent in Germany which is behind France and Spain and only ahead of Italy among major European countries (van Ark et al., 2009: 69).

(p.256) This may in turn be related to “the general level of education in Germany, which is currently merely middling by international standards” (German Council of Economic Experts, 2011: 5). As far as university teaching is concerned, it may be free, but that does not mean that it is well provided for. The system of “habilitation” or a second doctorate arguably exerts a stultifying influence on German higher education. Significant research and development activities take place outside the university system. The Max Planck institutes have a strong international reputation and the Federal Government is seeking to boost research in the universities through its “centers of excellence” initiative. The sixty Fraunhofer institutes which engage in application-oriented research play an important role: they are 70 percent funded by contract research and 30 percent by the federal and Land governments.

In the BRD, the number of welfare recipients now exceeds those in wage-earning employment. Given that they are quite generously supported by international standards, certainly compared with the United Kingdom, this makes any reduction in entitlements very difficult (although it is not easy even in the United States). The welfare benefit regime was nevertheless changed through the Arbeitslosengeld II reforms in 2005, thus tilting “the relative attractiveness of gainful employment and subsidized idleness back in favor of the former” (German Council of Economic Experts, 2011: 2). An attempt is being made to increase the retirement age to 67 to reflect changing demographic profiles, but this is being resisted.

Die Ubersicht

Anyone who had the misfortune to watch the evening news in the former DDR would be greeted by the words, “Guten Abend, meine Damen und Herren, zur Aktuelle Kamera! Die Übersicht.” (“Good evening ladies and gentleman, Topical Camera, the overall view.”) Of course, what one never got from this program was a balanced overall view of anything. But what overall view can one take of the response of the German economy to the GFC? In many respects, it has been a very strong response and one that is very different to that identified in the chapter on France by Clift. Both countries have responded in ways that are consistent with the principles that govern their approach to economic issues, even though France has flirted with liberalism and German has dipped its toe in the waters of interventionism. Germany has, however, generally adhered to an approach in which “The state has relatively little direct influence in economic governance, and devolves significant responsibilities to powerful, centralised societal actors (especially in wage bargaining), as well as to parapublic institutions, for example in the form of the Bundesbank/European Central Bank and the Federal Labour Agency” (Green et al., 2012: 141).

In some respects, the German model has become less distinctive. Britain has repaired its system of industrial relations, at least outside the public sector, and (p.257) the German financial system has moved toward, although not converged with, the Anglo-Saxon model. However, the central core of the German model, effective investment in human and physical capital leading to an export-oriented economy, cannot be easily translated elsewhere, even though the United Kingdom is trying to use a depreciated pound and a squeeze on domestic incomes to rebalance the economy in the direction of manufactured exports, a policy that will probably not fully succeed without additional policy instruments. The institutions and practices of the German economy are deeply embedded, interrelated, and have been built up over a long period of time, in many cases before the existence of the BRD.

Moreover, the German model is vulnerable. As we have seen, it is not without structural weaknesses. There is a decline in confidence in the leading political parties (not confined to Germany). There are tensions between the CDU and FPD in the coalition, the latter party having been seen to be a much less effective “on message” partner for the conservative party than the Liberal Democrats in the United Kingdom. As the government’s stock has fallen, the BRD government has resorted to popularity-seeking measures, either with particular interests (as in the case of a preferential VAT rate for overnight stays in hotels) or to public opinion (an accelerated shutdown of nuclear plants which may pose real electricity supply and cost problems, especially in southern Germany). An export-oriented economy is highly vulnerable to a second wave of the GFC. Above all, the eurozone crisis is both posing difficult choices for the German government and threatening to undermine the European project in which the BRD has invested so much political capital and which has done much to facilitate its economic success.

The Twilight of the Models?

As we noted in the introduction, previous crises have ended with the diffusion of new policy paradigms such as the Keynesian Welfare State (KWS) or the neoliberal Washington consensus. As Crouch argues, the KWS model offered a means of incorporating the manual workers in an economic and political settlement based on a capitalist system of production at a time when they were powerful, but was ultimately undone by its inbuilt inflationary tendencies. The ideas of neoliberalism were also associated with a particular class, “the class of financial capitalists, geographically grounded primarily in the USA and UK, but extending across the globe” (Crouch, 2011: 111). The initial impact of the GFC was to damage the credibility of the neoliberal project. Governments rushed to adopt Keynesian stimulus packages, to nationalize failing banks, insurance companies, and auto companies. Central banks threw out the monetarist rule book and pumped money into economies through a (p.258) mixture of previously unknown mechanisms—quantitative easing, the purchase of toxic assets, and deliberately driving down interest rates.

Yet, we have also stressed that if the previously prevailing policy orthodoxies have been dented, they have not been replaced. The American right-wing wants a return to what we might call neoliberalism on steroids, not merely returning to the faith of the late twentieth century but, through undermining New Deal programs such as Social Security, returning to the public philosophy of the 1920s. Stepping away from political rhetoric, however, what is striking is the messiness of contemporary political economy. For all the howls of protest from the Tea Party, important precedents have been set in the United States. Some financial institutions are too big to fail. The same might (more controversially) be said of giant manufacturers such as General Motors. Yet, if the American free enterprise model looks incoherent in practice, much the same can be said of other major economies. There is no “China Model” in the way that there was a Japan Model from the 1950s to the 1990s. Instead, the Chinese political economy is composed of a fluctuating mix of state-owned enterprises and foreign multinationals, and national-level attempts at economic strategy but with regional industrial policies that are often more important. France has abandoned formal dirigisme but in practice elite coordination still continues. Even the Scandinavian models are not what they were, except perhaps in Denmark, but even there inequality is increasing. Foreign-owned auto companies (Volvo, Saab) now operate where once Swedish capital reigned supreme. Sweden and Denmark have adopted their own versions of welfare reform and a center-right government rules in Stockholm, once the prime example of democratic one-party (Social Democratic) dominance.

There has always been complexity and contradiction in governance. Neither Ronald Reagan nor Margaret Thatcher was the consistent ideologue as presented in left-wing rage and right-wing adulation. Thatcher, for example, subsidized bankrupt coal mines and automobile companies for longer than most remember. For much of the three decades after World War II, politicians were not expected to outline grand strategies for the political economy; they simply tried to run it and claim that people “never had it so good” as Macmillan said in 1959. Admittedly, there were embarrassing legacies from the past that encumbered political parties. The Labour Party in the United Kingdom remained tied to a constitution that (Clause IV) promised the nationalization of manufacturing, finance, and retailing. Yet, Clause IV, long before it was abolished, was for Labour leaders rather like an Episcopalian bishop being reminded of the long history of Christians believing in damnation and the fires of Hell; we no longer believe in it but it was hard to repudiate the doctrine. (One of the original sins of Tony Blair in the eyes of the Labour left was making the Party be honest about itself.)

One might argue, therefore, that the period of the last thirty years in which politicians espoused visions of how the political economy might be (p.259) reconstructed—Thatcherism, The Third Way, etc. was unusual. Poor President George H. W. Bush who spoke contemptuously of “the vision thing” had the misfortune to be a politician in the wrong period. Perhaps in this view, the period after the GFC will be one not of a new “vision thing” but of muddling through.

It is perhaps important before reaching that conclusion to try to identify the reasons why recent decades have seen so much discussion of “isms.” Any discussion of this topic is bound to be highly speculative but a number of factors were probably at work. First, in almost all democracies, traditional bonds between parties and their supporters frayed. Politicians needed a means to distinguish themselves from opponents. Second, the crisis of the KWS not only gave birth to the new neoliberal policy paradigms but thereby obliged opponents ultimately to define their own response to both the economic and political problems that had brought it about. “Ultimately” in the case of the British Labour Party was a long time, almost twenty years before the triumph of New Labour. However, painful and therefore slow adaption was evident on the left in most countries. All of this inevitably involved more ideological debate than had been the norm previously. The downfall of the Soviet Union, the associated demise of socialism as a popular doctrine, and the shrinking of the traditional working class have all created puzzles for the left on how to proceed.

Will such conditions facilitating ideological debate continue in the future? The detachment of voters from parties will certainly continue. The signs are currently that we shall suffer a long period of low growth and high unemployment. Neoliberalism survives as the dominant paradigm but dented and damaged by events. Asking “what remains of neoliberalism after the financial crisis” Crouch (2011: 179), “the answer must be ‘virtually everything.’ The combination of economic and political forces behind this agenda is too powerful for it to be dislodged from its predominance.” Only populist far right movements such as the Tea Party can muster enthusiasm rather than resignation. However, their success will require the center-left in the United States to define a potentially successful appeal in order to avoid it seeing that only the far right has a solution to current problems. In short, there is a tremendous market for the next “vision thing.” The political entrepreneur who can produce a new vision untarnished by events has a great opportunity. As is always the case, before an entrepreneur succeeds in producing it, the exciting new vision is hard to imagine but the political rewards for producing it are high.

Crouch (2011) argues that we need to move away from an outdated obsession with the confrontation between state and market. Social democrats in particular need to abandon their preoccupation with a centralizing state. He puts considerable faith in civil society, although he is well aware of its weaknesses, contradictions, and limitations. He sees the future in a creative “tension among a quadrilateral of forces, each of which is needed to make a good society: state, market, corporation, civil society.” But he admits that such a (p.260) model “is likely to proceed under the shadow of continued dominance by corporate wealth” (Crouch, 2011: 179).

It can be hard to distinguish aftershocks from new earthquakes and an aftershock can even be followed by a new one. There may yet be massive aftershocks from the GFC. It is clear, however, that whatever the aftershocks of the GFC might be financially, a number of political buildings are badly damaged. The surprise is which buildings have been damaged.

We have emphasized the fact there was no fundamental reform of the financial system; the edifice created in the previous few decades needed shoring up with vast quantities of taxpayer money. Surprisingly, little was given in return. The fundamental structure of the banking industry was unchanged and regulatory institutions were not significantly strengthened. The most surprising outcome has been the establishment of one of the most conservative sets of fiscal policy in recent history. While the economies of the United States and most of Europe stagnate, their governments have committed to fiscal policies of retrenchment, not expansion. Far from the upsurge of populist anger at banks and financial institutions evident in the Occupy movements pushing politics to the left, the GFC has seen the center-right politicians come to power or strengthen their position in the United Kingdom, United States, Sweden, and Germany.


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