The Eurozone crisis in light of the Latin American experience

Article

The Eurozone crisis in light of the Latin American experience

Rub ′en

Lo Vuolo Centro Interdisciplinario para el Estudio de Pol′?ticas Pu

′blicas (CIEPP),Argentina

Abstract

Many scholars have looked for similarities between the recent crisis in the Eurozone and the crises that have occurred in the past in developing countries and particularly in Latin America.Problems of balance of payments,public debt,overvaluation of the exchange rate and unregulated capital inflows are frequently mentioned to compare common features of different crisis events.Additionally,Continental European countries are following similar processes of welfare state retrenchment and labour market segmen-tation to Latin American cases in the past,but in different institutional contexts and with different levels of economic development.This article will discuss common features of past Latin American crises and the current crisis in the Eurozone in order to show how such a comparison could help to manage (and avoid)crises in an integrated financial world as well as to teach how a faulty institutional design can arise from a defective understanding of how financial capitalism works in a complex internationally integrated economic system.

Keywords

austerity,crisis,financial cycle,monetary policy,welfare retrenchment

Many scholars have looked for similarities between the crisis in the Eurozone and past crises in developing countries and particularly in Latin America (some of them now labelled as ‘emerging economies’).1Problems of balance of payments,public debt,Corresponding author:

Rub ′e n Lo Vuolo,Centro Interdisciplinario para el Estudio de Pol′?ticas Pu ′blicas (CIEPP),Rodr′?guez Pen ?a 557,2F,1020Buenos Aires,Argentina.

Email:ciepp@https://www.360docs.net/doc/8911371689.html,.ar

European Journal of Social Theory

2014,Vol.17(3)359–374

aThe Author(s)2014

Reprints and permission:

https://www.360docs.net/doc/8911371689.html,/journalsPermissions.nav

DOI:10.1177/https://www.360docs.net/doc/8911371689.html,

360European Journal of Social Theory17(3) overvaluation of the exchange rate,unregulated capital inflows and social policies’adjustments are frequently mentioned as common features of several crises events.

The comparison is also stimulated by another striking fact:after many crises experi-enced over three decades,from2002onwards there has been no financial crises in emer-ging market economies despite the strong negative shocks caused by the sub-prime crisis in the United States in2008–09.Meanwhile,the Eurozone remains in the middle of a profound crisis.2In a favourable international context of high commodity prices,most Latin American economies have built up balance of payment surpluses through export growth.As a result,they have now accumulated large volumes of foreign exchange reserves,seeking to compensate for the absence of a lender of last resort in international currency.Moreover,many Latin American countries learned from the past that pro-cyclical policies taken to seduce the financial markets have proved powerless to overcome the strong depressive tendencies at work.At most,the intervals of recovery following these policies have been no more than short-lived episodes.

In many ways,faced with a deep crisis,the Eurozone is repeating those pro-cyclical austerity policies that did not work in Latin America and other emerging market econo-mies in the past.Furthermore,the Eurozone is not taking advantage of those elements that were absent in past crises in developing countries.For instance,in earlier Latin American crises the absence of a lender of last resort in international currency raised the exchange rate risk as well as the risk of default on debts in international currency(both private and public).In contrast,in the Eurozone there is no exchange rate risk,at least until a member state decides to quit the zone.In this view,the main source of negative financial feedback effects in the Eurozone countries seems to be the risk of default of public debts due to an‘internal’political problem:the reluctance or inability of the Eur-opean Central Bank(ECB)to play a credible role of lender of last resort for member countries.

Even if the current institutional framework and the international position of Eurozone countries are not the same as in the Latin American countries during past crises,the use of the term‘periphery’for some of the less-developed Eurozone countries signals the presence of some comparable features.As in the case of developing countries,the dis-tinction between core and peripheral countries within the Eurozone has been used sys-tematically in official rhetoric in order to blame some less-developed Eurozone countries for their monetary and financial dependency on the most developed Eurozone partners(L′e g′e and Marques Pereira,2013).3

The comparison of different crisis events in financially dependent peripheral coun-tries could also give a lesson in how to manage(and avoid)crises in an integrated finan-cial world.In this way,it is possible to learn how a faulty institutional design can arise from a defective understanding of how financial capitalism works in a complex interna-tionally integrated economic system.

The financial cycle in peripheral Latin American economies Since the beginning of the period of financial globalization,and until the first two years of the2000s,Latin American countries experienced two severe waves of crisis(Frenkel, 2013).The first was in the early1980s,when deep financial(and currency)crises were

Lo Vuolo361 experienced by Argentina,Chile,Uruguay and Mexico,while Brazil faced a public for-eign debt crisis without a domestic financial crisis.The second wave of financial crises in Latin America began in1995with the Mexican and Argentine crises,followed by the Brazilian currency crisis in1998.On the other hand,five economies in East Asia and Russia experienced financial crises in1997–98and Argentina and Uruguay suffered financial and currency crises in2001–02.4

With the exception of Argentina in1995,under the currency board exchange regime, these crises ended in devaluations and in some cases,some type of bail-out and restructuring of the domestic financial systems were also applied,including the refinancing of private debts(bearing significant fiscal costs).This second element is crucial to understanding the post-crisis developments.For instance,since none of the Latin American debt restructuring processes in the1980s included substantial alleviation of the debt burdens,most countries experienced many years of stagnation and high inflation.Meanwhile,more successful results are found in the case of Argentina’s debt default at the end of2001,which is the major explanation for its fast recovery after the deep recession of1998–2002.

Each wave of these past crises was preceded by booms of capital inflows expanding liquidity and credit and feeding bubbles in financial and real assets(Frenkel and Rapetti, 2010).Due to the weak regulation of local financial markets,most Latin American coun-tries were net receivers of capital flows from the beginning of the financial globalization process up to the late1990s.The resulting expansion of aggregate demand led to output and employment growth,along with non-tradable price increases.In general,these price increases provoked an appreciation of the real exchange rate which reinforced capital inflows seeking to obtain a quick rent given the financial arbitrage between domestic and foreign assets.This in turn fed back into the real economy,accelerating the expansion of credit and output growth.

In Latin American countries,the boom phases preceding the crisis had important ‘non-national’components,namely,the implementation of macro-economic policies imposed by international organizations,thanks to the need to obtain their support in financial markets.These policies typically included the liberalization of the capital account of the balance of payments,the liberalization of the local financial market and some sort of exchange rate fixation(pegs or active crawling-pegs).

These processes are consistent with the main features of a financial-led growth regime which set high profitability thresholds for investment and exerted intense pressure on labour,uncoupling productivity and wage increases(Boyer,2000;Aglietta,2012).With wage growth depressed and growing inequalities in wealth and incomes,the financial-led dynamic demand was provided by the expansion of credit,supported by low interest-rate policies(and overvalued exchange rates in many Latin American coun-tries).5In this type of financial-led growth regime,the boom phase expands until the point when the economic agents’optimism about the risk exposure changes and many of them prefer liquidity and undo their positions.Thus,bubbles deflate,many agents suf-fer financial losses and a contraction process feeds back,leading to the systemic crisis.In brief,in financial-led growth the crises emerged as the culmination of the same processes that caused a growing optimism and encouraged greater risk-taking in the boom phase.

The combined effect of the real exchange rate appreciation and financial-led growth weakened exports and stimulated imports.The worsening of the trade balance together

362European Journal of Social Theory17(3) with the increase in the interest payments turned the current account into deficit.At the beginning of the cycle,in Latin American countries,capital inflows were higher than the current account deficits(and foreign exchange reserves accumulated).However,at some point the current account deficit became larger than capital inflows and the balance of payments result turned negative.These contracted liquidity and credit asset prices bub-bles gradually deflated,and illiquidity and insolvency emerged.

In Latin American countries,the contracting phase usually began with a halt in capital flows combined with the persistent increase in the current account deficit and the nar-rowing trend in international reserves.These processes threatened the exchange rate management and increased the probability of default of the foreign debt issued in inter-national currency.This is because the sustainability of that type of debt has a specific default risk associated with the potential lack of liquidity in foreign currency.This shortage can force a debt default even when the government has resources in domestic currency,due to the lack of a lender of last resort in the foreign currency.In this scenario, even after adjustments have been made in the external sector,a large proportion of the financing needs must be covered from the capital markets.Here enter the IMF,the World Bank and other international institutions which appear as lenders of some money but mainly as the guarantors that countries will apply the‘healthy’policies needed to regain financial market confidence.

This contracting phase reinforces itself because higher risk premiums and higher interest rates are needed to attract foreign capital.Thus,economic activity shrinks even more,further illiquidity and insolvency reduce the credibility of the exchange rate policy and increase the default risk.In Latin American countries the contracting phase ends in a financial and exchange rate crisis because the fall of foreign currency reserves in the Central Bank leads to changes in the exchange rate regime and commonly a bail-out or some type of debt restructuring.This crisis reinforces the power of financial organi-zations and the state has to rescue all the economic agents,including banks in the first place.

The crisis in the Eurozone’s peripheral countries

The US economy before the Lehman Brothers’bankruptcy followed most of the features of this cyclical dynamics but was fuelled by endogenous elements,which are well described in the work of Hyman Minsky on the role of financial exuberance in the con-figuration of financial crises(Minsky,1977).In the USA,the real estate bubble that started with the securitization of mortgages(and other debts)and financial derivatives fed endogenously the boom phase.The entry of China onto the world market amplified this trend,reversing the historic direction of capital flows that previously flew from the West to the emerging economies and then from China and other exporting countries to the USA.These flows fuelled the expansion of credit that was further multiplied by the growth of securitization and derivatives trading,centred on the big banks.

Crises in some Eurozone countries were also preceded by capital inflows.In contrast to the USA and similar to the Latin American experience,in the Eurozone,these capital inflows resulted from a change in a major‘non-national’macro-economic policy:the creation of the monetary union.The introduction of the common currency operated as

Lo Vuolo363 a strong incentive for arbitraging between core and peripheral Eurozone countries’assets since it reduced the interest rates spreads and promoted a sort of risk convergence.6All economic agents–including the state–benefited from the lowered cost of credit which produced huge capital inflows into countries where high interest rates had long made credit scarce.These capital inflows accelerated because risk convergence took place when global credits expanded due to new financial engineering all over the world.

However,in spite of nominal interest rate convergence,the Euro did not result in an inflation convergence within the Eurozone.In practice,countries showed different interest rates and exchange rates in real terms.As a result,in the Eurozone’s peripheral countries the lower real interest rates and the more appreciated real exchange rates stimulated credit,capital inflows,growth,external deficit and external debt.

Similar to the Latin American economies,countries in the Eurozone issued debt nominated in a currency they did not emit.In this aspect the Euro works as a foreign currency for every Eurozone economy:countries do not have sovereign money but a sort of fixed exchange rates in relation to the Euro.As a result,financial markets also doubt (and speculate on)the capability of some European countries to pay their debts in Euros, as in the past they doubted(and speculated on)the capability of Latin American econo-mies to pay their debts in foreign currencies.

This situation resembles the experience of Argentina between1991and2001,when the exchange rate was fixed by law at one peso to the dollar(Lo Vuolo,2003;Cibils and Lo Vuolo,2007).However,apart from the different level of development,there are two other important differences between countries in the Eurozone and Argentina under the convertibility plan:(1)the degree of financial integration in Europe;and(2)the role of the European Central Bank(ECB).

The Argentine banking system during the convertibility rule was relatively insulated from the international financial system,but highly dollarized and constrained by the cur-rency peg.In contrast,the large European banks played an active part in the expansion of debt and toxic assets in the USA.Indeed,when the crisis broke in2007in the USA,these European banks found themselves in a position comparable to that of the American banks.7

One of the results of the creation of the Eurozone was to foster cross-border mergers and acquisitions that have effectively integrated the balance sheets of the respective national banking systems(Toporowski,2013).Accordingly,banks in all countries of the Eurozone are exposed to risks in other countries since they have assets or subsidiaries in other countries or they have liabilities to the ECB.Not surprisingly,during crises private debts were taken over by the state,directly as in Latin America,or indirectly by support-ing banks in the Eurozone.

This is not the only difference between the Eurozone crisis and past crises in Latin American countries.In the Eurozone the economic cycle is different from in Latin Amer-ica because,in principle,the exchange rate risk plays no role in the portfolio decisions leading to capital outflows,and capital flows are not directly influenced by the evolution of external accounts(Eurozone countries do not carry stocks of international reserves and do not have risks of devaluation).But,on the other hand,public debts in the Eurozone do have a specific liquidity risk of default similar to that of public debts issued in foreign currency in Latin America.8

364European Journal of Social Theory17(3) These problems could have been stopped or at least avoided by the operation of the ECB as a credible lender of last resort for governments.However,even when the ECB did perform the role of lender of last resort to commercial banks(and indirectly to firms), for many reasons it has not eradicated the possibility of default on public debts(at least for the financial operators).

Thus,as in past Latin American crises,a large proportion of the financing needs of the debtor Eurozone countries must be covered by funds from the financial markets.This financial dependence is behind the changing rhetoric of the ECB and other European authorities with regard to the Eurozone crisis.After denying at the beginning the very existence of the crisis in the Eurozone and then arguing that it could be solved easily since there is no risk of contagion from small countries to the rest,country governments and European authorities(including the ECB)moved to the centre-periphery explanation for the crisis(L′e g′e and Marques Pereira,2013).Nowadays,the official rhetoric preaches that it is a problem of the Eurozone peripheral countries and will not last if they apply healthy fiscal adjustment and austerity measures,in order to convince financial markets that they have the power to pay their debts.

This rhetoric resembles the Washington Consensus advice to Latin American coun-tries during previous crises.Fiscal austerity is the main objective of the policy orienta-tion of the so-called‘Troika’in order to seduce the financial markets.For the IMF and its partners,all crises look similar since all indebted countries need a loan,and all need to make big changes in order to pay the debt and live within their means after a period of excess expenditure.

But the crisis in the Eurozone is not only a fiscal crisis or a financial crisis.It is mainly the result of a faulty institutional design root embedded in the Maastricht Treaty of1992. The main problem is that the Euro is incomplete as a currency,for its sovereign guaran-tor has not been realized.Each Eurozone state is responsible for the capital it has invested in the ECB,but not for its overall solvency.Briefly,‘the Eurozone has a central bank without a government,governments without central banks and banks without an effective lender of last of resort’(Toporowski,2013:2).Instead of adjusting this faulty institutional design,political authorities insist on pushing those austerity measures and fiscal adjustments that did not work in past Latin American crises.

Austerity pro-cyclical policies

Many of the measures required by the Troika in the European countries in crisis are well known in Latin America:the institutionalization of rules for fiscal policy which restricts the room for counter-cyclical macro-economic policy manoeuvre,the adoption of structural reforms such as privatization of public enterprises,de-regulation of the labour market,retrenchment of social policies,etc.

Like the Washington Consensus did in past crises in developing economies,the rheto-ric of the Troika spreads the idea that these measures will have a net expansionary effect on output due to the positive effects on private expenditures.These positive effects would result from the impact of these measures on expectations and credibility of the financial markets.However,in practice this rhetoric hides the main objective of austerity policies:debt payments.

Lo Vuolo365 National policies of fiscal austerity are undertaken because governments and the Troika wish to follow the more generalized conventions of financial market operators. For them,these policies are positive measures,even if they worsen the sustainability fun-damentals of the economies in https://www.360docs.net/doc/8911371689.html,ernments choose to confront domestic social and political conflicts arising from austerity policies,worsening the economic perfor-mance,in order to send conventional‘positive’signals to financial markets.

But even this narrow objective is difficult to attain.Austerity policies seek to force what is called an‘internal devaluation’of domestic prices(labour costs in the first place).In such a view,wage flexibility is a substitute for the impossible exchange rate flexibility in the Eurozone(Toporowski,2013).In the absence of the possibility of devaluation,due to membership of the monetary union,competitiveness should be obtained by low wages and low wages will increase competitiveness.From here comes the belief that austerity policies and wage reductions will lead in the future to growth and more employment.

Among other elements,the logical flaw in this argument is that lower wages reduce domestic demand,which is very difficult to replace by foreign demand.Moreover,with a regime of low inflation,which can turn into deflation,and without the possibility of expanding public expenses,the system has few mechanisms for eliminating the debt bur-den.Under the Troika advice and the Eurozone rules,fiscal austerity causes reductions in GDP,unless offset by trade surpluses or private sector investment(Toporowski,2013). Attempts to significantly reduce government debt when the economy is in recession can-not succeed because GDP will start to fall well before governments cease deflating their economies.At the same time,financial uncertainty and recession in Europe have a cor-rosive impact on global growth.

Time is an important element to take into account in these processes.Past crisis experiences in Latin American countries teach that the alleged expansionary effects of low wages and austerity measures have been no more than short-lived episodes.The aus-terity policies taken have proved powerless to overcome the strong depressive tendencies at work.Following these policies the crisis became systemic,affecting every part of the economy:states,banks,firms,households.

Argentina is a good example of these processes.Here fiscal austerity measures were effectively implemented for a long time and the results were catastrophic.Under the Washington Consensus’tutelage,Argentina went from one austerity plan to another.The recession began in mid-1998,default of the debt and devaluation took place at the end of 2001.In this period the country stagnated and unemployment increased to high levels. Meanwhile,the spread of public debt relative to the American interest rate reached 2,500basis points9;given the liquidity shortage,several parallel currencies appeared in the provinces(Th′e ret and Zanabria,2007).On December2001,the government ordered the freezing of bank deposits and put in place drastic foreign exchange controls. Then the government declared the default of public debt,the dollar peg was eliminated at the beginning of January2002and de-dollarization of the economy was forced.As a result of these measures,the Argentine economy started to grow in the second semester of2002and sustained a very high rate of growth in the following years.In2005,the country restructured most of the debt with an important cut in the comparative historical record(Cibils and Lo Vuolo,2007;Damill et al.,2010).

366European Journal of Social Theory17(3) The long recession makes the Argentine case particularly relevant in an analysis of the implementation and effects of the pro-cyclical fiscal policies during crisis periods. At the end of austerity measures Argentina not only defaulted on its external debt but also suspended debt payments to private creditors for about four years.Also,the crisis resolution involved a huge devaluation and the bail-out and restructuring of the domestic financial system,favouring the refinancing of private debts in the country.The lesson is clear:the longer you apply austerity measures,the worse it can be.

The case of Greece since late2009resembles the situation in Argentina between1998 and2001.Both the Greek government and the Troika denied the possibility of a Greek default while devaluation was impossible as a member of the Eurozone.They imposed policies of a sharp reduction in wages,public spending cuts,regressive tax rises and pres-sure for large-scale privatizations.The result has been a huge drop in GDP.Instead of halting the steady growth in public debt,austerity measures sent it up.Meanwhile,the cumulative recession reduced the current account deficit but not as the Troika projected.

Thus,austerity measures are not a wise road to follow during a crisis,even if one seeks to seduce financial markets.Among other reasons,national policies are not the only element to be taken into account to assess the country’s risk and to seduce capital inflows.The risk perception depends mostly on conjectures about the behaviour of the rest of the financial market and of international institutions(including the ECB).Debt sustainability then becomes a self-fulfilling prophecy of the average opinion of the mar-ket.It can change for many‘exogenous’reasons and contagion effects are important sources of volatility.In the Eurozone monetary union,these problems are more acute because of the underlying economic heterogeneity of the member states.

Also,from austerity policies many distributional conflicts emerge.These types of policy responses to the crisis foster a dangerous social political climate of winners and losers,making it more difficult to sustain the old welfare state’s social pacts.In these aspects,the Latin American experience can also teach some lessons to Europe. Austerity policies,welfare state retrenchment and distribution Processes of socio-economic and institutional change during crises cause huge problems for modern welfare https://www.360docs.net/doc/8911371689.html,tin American experiences teach that austerity measures directly affect the central supporting pillars of the welfare capitalist system,meaning employment and fiscal expansion.During crises,labour markets and social policies are confronted with critics tending to undermine their legitimacy.In times of severe eco-nomic hardship,‘insiders’protected under welfare state policies feel that their living standards are declining while the numbers of‘outsiders’rise,and their lives depend more than ever on sometimes discretional social transfers.

Social protection retrenchment in Latin America

Latin American past experience is informative on these issues.During the foundation years of social insurance policies,many Latin American governments followed similar conceptual principles to the continental European countries about institutional comple-mentarities between the economic and the social protection systems(Lo Vuolo,2012).

Lo Vuolo367 The belief was that the expansion of social policies sustained itself and was based on an implicit trust in a virtuous circle:social protection increases productivity;productivity increases growth and wages;wages increase growth and social protection.Consistently, macro-economic policies were conceived to boost depressed economies and to rapidly increase employment.The objective of fiscal and monetary policies was to preserve full employment,preventing the economies from falling into a recession and incurring a rise in unemployment.

However,the alleged virtuous circle faced many obstacles to modernizing backward sectors in Latin American countries and incorporating all the labour force in formal sal-aried relations.Social policies in Latin America developed in a fragmented and unequal manner,with severe limitations to expanding coverage and to equalizing benefits(Mesa-Lago,1978;Lautier,2006).

One of the differences between most redistributive European welfare states and Latin American countries lies in the timing and the institutional design of the political commit-ment regarding the distribution of productivity gains.In Europe,the commitment was made prior to the economic boom of the post-Second World War period;in Latin Amer-ica it was made afterwards,or step by step.While by the1940s and1950s,the process of legislative development of welfare systems was broadly complete in Europe,the main institutional structure for social protection systems was not well established in many Latin American countries before the growth period of the import substitution regime of the1960s and part of the1970s.

Even when social rights were legally established for the universe of Latin American citizens,in practice,only a few groups enjoyed the benefits and the insider–outsider conflict appeared as a structural problem in the region(Arza,2004).The informal econ-omy explains an important part of these results,constraining the possibilities for ‘decommodification’and limiting coverage for a large proportion of the population which remains outside the reach of social insurance systems.The informal economy works as a low-cost manpower provider(and fiscal credit)for employers trying to avoid paying the‘political’increase in wages and the costs of the social wage,which they have not agreed to.

In this scenario,during the1980s and1990s,most countries in the region were used as a kind of laboratory where the most extreme recommendations of the so-called Washing-ton Consensus were put into practice(Lo Vuolo,2005).The prescriptions included the joint impact of strongly pro-market rhetoric,passive monetary policy and restraints on fiscal policy,openness to international flows of trade and capital,and several deregula-tory measures in the markets of goods,finance,and labour.Deregulation of labour rela-tions was a key element in these prescriptions and an increasing number of people started to drop out of protected work patterns,while wages and labour costs decreased sharply.

Structural economic heterogeneity intensified during this period in the region,nurtur-ing more labour market segmentation,lowering labour security measures and reducing labour costs(and purchasing power).Subcontracting,part-time work or jobs without contracts,a reduction in public employment,the expansion of jobs in microenterprises, domestic service and self-employment,excessive working hours for some groups,were all part of the reconfiguration of labour markets,which did not lead to the results preached,but to a downward flexibility of wages in the formal and informal labour

368European Journal of Social Theory17(3) market(Lo Vuolo,2009).More people dropped out of‘normal’work patterns and we see no decline in the size of the informal economy across the region.

More insecure labour relations and a closer connection between contributions and benefits in social security(including privatization)were some of the recipes to boost financial markets,growth,workers’effort and employment.The universalistic aim of social policies was faced with the argument that it did not serve the best interests of the poorest groups.Thus,social policy-makers were advised to set aside such universalistic aims and boost private social insurance.The‘over-protection’that certain categories of workers enjoyed within the social security system helped legitimize policies to reduce benefits and foster selectivity,despite the social insurance legacy.The poorest groups were to receive residual subsidies by means of social assistance programmes if they proved their need through a means test.

As a result,the distribution of income worsened all over the region(CEPAL,2010). During the1990s the Gini index increased in almost every Latin American country (except for Colombia and Uruguay).At the beginning of the2000s open unemployment averaged9per cent,showing a marked growing tendency,with peaks of20per cent in Argentina and16per cent in Uruguay,Colombia and Venezuela.Public employment dropped and employment in low productivity services increased.Far from the sustain-able growth promises,the economic and social situation worsened and the second wave of crises affected many countries first around1995–97and then in2001–02.

While insecurity in labour markets,lack of social security coverage and regressive income distribution became generalized features,the demands for compensation systems grew.As a result,since the1990s the region has witnessed a general tendency to set up focalized poverty alleviation schemes with separate administration and mainly related to some means test for poverty.More recently,a new wave of targeted assistance pro-grammes known as Conditional Cash Transfer programmes has swept over Latin Amer-ica(Cechini and Madariaga,2011).Critical evaluations of the targeted and conditional income transfer programmes point to numerous problems,such as the arbitrary selection of beneficiaries,interference in people’s lives,political clientelism,stigmatization of recipients,inability to achieve universal coverage and to act preventively with regards to income poverty,fomentation of poverty traps and of informality,etc.(Lo Vuolo, 2012).

Past and recent experience in the region shows that the potential to achieve universal inclusion through separate,targeted and contribution-based schemes is inherently limited.The Latin American experience shows that the more insecure labour economies are,the more stable and well-funded income maintenance and public service systems must be in order to integrate and make economically efficient heterogeneous societies. Europe is not taking into account these lessons either.

Social protection retrenchment in Europe

Continental European countries are following similar processes to Latin America in the past,but under different institutional and economic development.Since the early2000s, a wave of reforms has been developing,showing new trends in social protection.

Lo Vuolo369 Activation of the unemployed,the limitation of early exit,measures for increasing the participation of women,older workers and unskilled workers are amongst the biggest inno-vations.Important pension reforms have also been adopted,aimed at further reducing the cost of public pensions and at favouring the development of private fully funded comple-ments.In health care,in the countries with a health insurance system,more regulatory power has been given to the state,and more competition between health insurances is being introduced.Minimum income protection has also been generalized,to protect the weakest from the further retreat of social insurance that has happened through the structural trans-formation of traditional social insurances.(Palier,2010:356)

Resembling past scenarios in Latin America,the crisis in Europe raises the debate about the alleged inequality impact of the welfare state itself.The argument is that some of the core institutions of the traditional welfare state itself are effectively responsible for the economic divergence between low and high skilled workers.For instance,minimum wages are said to be particularly harmful to the employment chances and hence(relative) living standards of less-skilled workers.Meanwhile,and even if labour markets have not been deregulated wholesale in Europe,the number of‘atypical’or‘nonstandard’employment relationships has risen sharply,as have the numbers of the working poor. The emergence of a secondary labour market made of(and for)various nonstandard employment relationships resembles what is a structural feature in Latin America.

The crisis in the Eurozone is accentuating these processes and widening differences in earnings between low-and high-skilled workers.Unemployment risk and gender inequality constitute an additional dividing line in the insider–outsider conflict in the labour market emerging from the austerity policies.In many parts of Europe,women’s unemployment risk is considerably higher than that of men and this divide is exacerbated by the cutbacks in public sector jobs,where women make up the majority of the work-force.Meanwhile,in the private sector,where women tend to have reduced paid oppor-tunities across the board,low-wage jobs are growing.

Overall,these processes have reinforced the distinction between workers who are still linked to the core labour market(even if temporarily unemployed)and those who are moving away from it.These processes generate pressures for the development of a secondary type of welfare protection.Welfare institutions and programmes have been modified,paving the way for a trend that makes them very distant from those that pre-vailed in the past(Palier and Thelen,2010).All this also has a detrimental impact on social mobility,resembling similar processes well known in Latin America(Filgueira, 2007).

As was the case in Latin America(Lo Vuolo,2002),pensions are at the centre of the welfare state retrenchment in Europe.The crisis reinforced cost-containment reforms tightening eligibility conditions,strengthening the link between contributions and bene-fits,increasing retirement ages,changing indexation rules from wages to prices,etc. (Kohli and Arza,2010).Recent reforms have strengthened the link between the amount of contribution and the volume of the benefits(through a change in the calculation formula and/or stricter entitlement rules)and usually meant a shift away from redistri-butive(horizontal and vertical)toward actuarial principles and a potential reduction in the coverage of social insurance.

370European Journal of Social Theory17(3) While unemployment insurance benefits are generally limited in time,unemployment in Europe is becoming to a large extent structural in nature.Moreover,many of the struc-turally unemployed are not even entitled to unemployment insurance benefits,since they have earned no or insufficient social entitlements.Social assistance schemes that in the past were implemented as a residual and temporary social safety net for very small population groups in Europe have now become a quasi-permanent source of income for large sections of the population.As a result,most European countries have either created or expanded and generalized minimum income guarantees,either as a general safety net, or as specific minimum incomes.

Similar to the Latin American experience,but in a different context,in Europe many of the social and labour policy changes are being framed as part of a distinction between what type of social benefits and who should remain in the world of occupational social protection(and be financed through contributions)and what type of social benefits and who should be transferred to the world of social assistance,aimed at those with atypical employment situations(and financed through taxation).As in Latin America,retrench-ment in social insurance programmes thus reinforces dualism and fragmentation in social benefits to the extent that it is accompanied by a clarification of responsibility,and a shift in funding,as the welfare system has come to rely more heavily on taxation to support the(non-contributing)working poor.

As was the case in Latin America,cutbacks to the state services are never sufficient because at the same time the economic recession means fewer taxes,creating a destruc-tive environment of winners and losers inside each country and inside the Eurozone.In this scenario,the challenge is not only to find a new optimum in response to changed economic conditions but also to avoid the increasing social divide.

The Eurozone crisis in light of the Latin American experience Latin American experiences can give some useful tips to analyse the crisis in the Euro-zone.In particular,the relevance of the financial-led growth regimes to explain the boom phases preceding the crisis and the importance of the‘non-national’elements,like the implementation of macro-economic policies imposed by international organizations and the problems derived from the institutional organization of the Eurozone.

Austerity policies are another comparable element of how governments act during crisis periods following recommendations and pressures from international organiza-tions.In both cases governments chose to face domestic social and political conflicts in order to gain the financial markets’confidence about debt payments.However,past experiences in Latin America suggest that the longer you apply austerity measures,the worse it can be,even for debt payments.In spite of the rhetoric searching to seduce financial markets in order to restore growth,austerity measures do not result in long-lasting recovery but they are the practical way to impose insecurity in labour markets, to cut social security coverage benefits and to advance more regressive income distribu-tion.In this way the very nature of the welfare state institutions and social pacts are gradually and structurally changed.

Governments in the Eurozone are applying austerity policies in order to get financial support for the common currency and in this way they are damaging the welfare state and

Lo Vuolo371 other social achievements of member states.As in past Latin American crises,indebted Eurozone governments are taught that the way out of the current crisis is either through the reduction of wages or the social wage to recover competitiveness.Otherwise,critics of this way out propose that indebted governments default on their debts and exit from the monetary union,to allow a new currency to be depreciated in order to recover competitiveness.However,both options have problems under the current institutional setting of the Eurozone.

The first option would lower demand and decrease employment and output even fur-ther as well as change the very nature of the European welfare states.The second option would cause the collapse of the banking system in the peripheral Eurozone countries who attempted such a strategy because banks holding government securities would become insolvent due to both the reduction in the value of their assets and the increase,with the devaluation of the new currency,in the value of any euro liabilities that they may retain. Those banks would probably be subject to mass withdrawals of deposits as citizens in the countries exiting from the monetary union try to obtain cash in order to keep their savings in appreciating Euros.

The resolution of this contradiction is more complicated because the ECB is not play-ing the role of a credible lender of last resort for the Eurozone.Since countries in the Eurozone issue debt nominated in a currency they do not emit,the euro works as a foreign currency for every Eurozone economy.As happened in the past Latin American crisis,even when Eurozone economies do not have exchange risk,they do have a specific liquidity risk of default similar to that of public debts issued in a foreign currency in Latin America.The negative feedback effects of this problem could have been stopped or at least avoided by the operation of the ECB as a credible lender of last resort for governments.However,this is not allowed under the current institutionalization of the monetary union.

In order to play the role of other central banks,the ECB must necessarily make polit-ical decisions about which market or financial actor to support.But unlike other central banks in the world,the legitimacy of the ECB is not grounded in any political sover-eignty and it is not even required to interact with country governments.Moreover,the Eurozone does not have any other mechanisms for region-wide macro-economic regula-tion(beyond an arbitrary and uniform limit imposed on public deficits).

What is at stake here is the very conception of money for the Eurozone authorities and for the financial world in general.Money is not only a means of exchange,but a crucial mechanism for the integration of social order.The legal enforcement of specific money implies not only the issuance of means of payments,but also the power to regulate values and distribution of values.From this conception,credit and debt are the dichotomy sus-taining any monetary system because credits and debts are valued and paid in legal money and using money implies the acceptance of all monetary values(Aglietta and Orl′e an,1998,2002).

This monetary conception maintains that money is ultimately based on the social faith that makes it unanimously accepted by a community.Each community member accepts and anticipates that all the others desire the same money.In fact,a given monetary insti-tution is never established once and for all because there is‘money competition’in the market,expressing the distrust of certain groups relative to monetary rules which they

372European Journal of Social Theory17(3) consider to be against their interests.In Latin America this is well known and is expressed in the experiences of recurrent exchange rate devaluation,dollarization and the issue of‘parallel’money mainly during crisis periods.

The interdependence of the different monetary signs in the world economy is orga-nized hierarchically within the social payments system(national and international)and gives rise to the‘routine trust’based on repeated practices,learning experiences and other rules.For these and other reasons,any monetary policy must be legitimated by its correspondence to what was termed the‘ethical source’of money trust:in modern soci-eties,money is only legitimate if it contributes to the common good of society members.

The enforcement of the euro and the current crisis of the Eurozone are an example of the relevance of this conception of money.In order to impose the euro some important things changed quite fundamentally in the Eurozone societies or are in the process of doing so.Changes are consistent with a growing divide between winners and losers as was the case of Latin America during the Washington Consensus hegemony.Thus,Euro-zone countries are facing more structural labour market exclusion,more low-paid employment,high levels of involuntary unemployment,and benefit dependency among those of working age.These are not transitory features of a transitional economy but are becoming permanent elements of Eurozone countries.

While employment remains as the sine qua non for good life chances,the institutional design of the Eurozone does not put employment at the forefront of governments’con-cerns.The development of assistance schemes shows that instead of a temporary cyclical change in the labour markets,the increasing number of atypical workers,the develop-ment of long-term unemployment and the growing numbers of outsiders are a durable phenomenon that necessitates a permanent answer.In this way,the Eurozone seems to be institutionalizing a new type of highly fragmented social protection system,resem-bling what has been the case for a long time in Latin America.

Notes

1.Emerging market economies could be seen as developing countries that have been inserted into

the expanding international financial system after implementing policies of deregulation and liberalization of their financial systems and capital accounts.

2.Some authors present this fact as evidence that current emerging market countries have

‘learned’from their past experience,making significant changes in their macro-economic pol-icies during the2000s with respect to previous years(Ocampo,2010;Frenkel,2012).

3.It is worth recalling that the Latin American structuralism school has popularized this dichot-

omy in order to stress the heterogeneity and dependence relations of capitalist development (Prebisch,1981).

4.The last two crises together with the crisis in Turkey in2001constitute so far the last financial

crises in peripheral developing economies.

https://www.360docs.net/doc/8911371689.html,ually,debt-based household spending allowed consumption to grow at a faster rate than

incomes and wages.

6.Interestingly,after the European Council ratified the list of countries eligible for admission

(May1998)in few months the spread between the10-year interest rate on public debt in Spain and the German rate fell from5per cent to zero(Aglietta,2012).

Lo Vuolo373

7.At the beginning of the US sub-prime crisis,the impact was proportional to the degree of expo-

sure of the national financial systems to toxic assets in the USA,irrespective of the countries’balance of payments situations.For instance,GDP contraction in2009was greater in Germany, which showed a current account surplus,than in other Eurozone economies showing current account deficits but less exposure to US assets(Serv′e n and Nguyen,2010).

8.This explains why the main sources of negative feedback effects in the current contraction phase of

the cycle in the Eurozone are the vicious circle dynamics of public debt ratios and risk premiums.

9.More or less the same level of Greek spreads relative to German Bunds in autumn2011.

References

Aglietta M(2012)The European vortex.New Left Review,75:15–36.

Aglietta M and Orl′e an A(1998)La monnaie souveraine.Paris:Editions Odile Jacob.

Aglietta M and Orl′e an A(2002)La monnaie entre violence et confiance.Paris:Editions Odile Jacob.

Arza C(2004)Distributional Impacts of Social Policy:Pension Regimes in Argentina Since c.

1944.London:London School of Economics and Political Sciences.

Boyer R(2000)Is a finance-led growth regime a viable alternative to Fordism?A preliminary analysis.Economy and Society29(1):111–45.

Cechini S and Madariaga A(2011)Programas de transferencias condicionadas.Balance de la experiencia reciente en Am′erica Latina y el Caribe.No.95.Santiago de Chile:CEPAL. CEPAL(2010)Panorama Social de Am′erica Latina2009.Santiago de Chile:Cepal.

Cibils A and Lo Vuolo R M(2007)At debt’s door:what can we learn from Argentina’s recent debt crisis and restructuring?Seattle Journal for Social Justice,5(2).Available at:https://www.360docs.net/doc/8911371689.html,/sjsj/vol5/iss2/33.

Damill M,Frenkel R,et al.(2010)The Argentinean debt:history,default and restructuring.In: Herman B,Ocampo J A,and Spiegel S(eds)Overcoming Developing Country Debt Crises.

Oxford:Oxford University Press.

Filgueira F(2007)Cohesi′on,riesgo y arquitectura de protecci′on social en Am′erica Latina.No.

135.Santiago de Chile:CEPAL.

Frenkel R(2012)Lecciones de pol′?tica macroecon′o mica para el desarrollo,a la luz de la experi-encia de la u′ltima d′e cada.El Trimestre Econ′omico313.

Frenkel R(2013)What have the crises in emerging markets and the Euro Zone in common and what differentiates them?Iniciativa para la Transparencia Financiera,67.Available at: https://www.360docs.net/doc/8911371689.html,.ar.

Frenkel R and Rapetti M(2010)Economic development and the international financial system.In: Griffith-Jones S,Ocampo J A and Stiglitz J(eds)Time for a Visible Hand:Lessons from the 2008World Financial Crisis.Oxford:Oxford University Press.

Kohli M and Arza C(2010)The political economy of pension reform in Europe.In:Binstock R and George L(eds)Handbook of Ageing and the Social Sciences.Burlington:Elsevier. Lautier B(2006)Una protecci′o n social mutualista y universal:condici′o n para la eficacia de la lucha contra la pobreza.In:Lo Vuolo R M(ed.)La credibilidad social de la pol′?tica econ′omica en Am′erica Latina.Buenos Aires:Min?o y Da′vila/CIEPP.

L′e g′e P and Marques Pereira J(2013)Les conflits discursifs dans la crise de la zone euro.Paper presented at Discours de la crise et crise du discours,Amiens.

374European Journal of Social Theory17(3) Lo Vuolo R M(2002)Ideology and the new social security in the Argentine.In:Abel C and Lewis C(eds)Exclusion and Engagement.Social Policy in Latin America.London:Institute of Latin American Studies,University of London.

Lo Vuolo R M(2003)Estrategia econ′omica para la Argentina.Propuestas.Buenos Aires:Siglo XXI/CIEPP.

Lo Vuolo R M(2005)Social protection in Latin America:Different approaches to managing social exclusion and their outcomes.Paper presented at Social Policy,Stability and Exclusion in Latin America,ESRC Series,Institute of Latin American Studies,University of London.

Lo Vuolo R M(2009)Social exclusion policies and labour markets in Latin America.In:Hujo K and McClanahan S(eds)Financing Social Policy:Mobilizing Resources for Social Develop-ment.Basingstoke:Palgrave/UNRISD.

Lo Vuolo R M(2012)Introduction.In:Lo Vuolo R M(ed.)Citizen’s Income and Welfare Regimes in Latin America:From Cash Transfers to Rights.New York:Palgrave Macmillan.

Mesa-Lago C(1978)Social Security in Latin America:Pressure Groups,Stratification and Inequality.Pittsburgh,PA:University of Pittsburg Press.

Minsky H(1977)A theory of systemic fragility.In:Altman E and Sametz A W(eds)Financial Crises:Institutions and Markets in a Fragile Environment.New York:John Wiley&Sons. Ocampo J A(2010)How Well Has Latin America Fared During the Global Financial Crisis?

Iniciativa para la Transparencia Financiera,56,Available at:https://www.360docs.net/doc/8911371689.html,.ar.

Palier B(2010)The long conservative corporatist road to welfare reforms.In:Palier B(ed.)A Long Goodbye to Bismarck?The Politics of Welfare Reforms in Continental Europe.Amsterdam: Amsterdam University Press.

Palier B and Thelen K(2010)Institutionalizing dualism:Complementarities and change in France and Germany.Politics&Society38(1):119–48.

Prebisch R(1981)Capitalismo Perif′erico:Crisis y Transformaci′on.M′e xico:Fondo de Cultura Econ′o mica.

Serv′e n L and Nguyen H(2010)Global Imbalances Before and After the Global Crisis.Washington, DC:The World Bank,pp.53–4.

Th′e ret B and Zanabria M(2007)Sur la pluralit′e des monnaies publiques dans les f′e d′e rations.Une approche de ses conditions de viabilit′e a`partir de l’exp′e rience argentine r′e cente.Economie et Institutions10–11.

Toporowski J(2013)International credit,financial integration and the euro.Cambridge Journal of Economics37(3):571–84.

Author biography

Rub′e n Lo Vuolo is Director of the Centro Interdisciplinario para el Estudio de Pol′?ticas Pu′blicas (CIEPP),Buenos Aires,Argentina.He has recently edited Citizen’s Income and Welfare Regimes in Latin America:From Cash Transfers to Rights(Palgrave Macmillan,2013).