The sleeping volcano of global finance
Michel Rocard, Project Syndicate
The rejection of the European Union's Constitutional Treaty by French and Dutch voters was, according to all evidence, more a rejection of unregulated globalization than it was a rejection of Europe. The general instability of social relations -- most importantly, but not only, of employment -- is slowly becoming intolerable for a growing part of the population in many developed countries, not just in Europe. And there cannot be a stable economic order -- at least not in democratic countries -- if electorates reject its underpinnings.
Capitalism could be reconstructed after World War II because it was buttressed by three necessary types of regulation: Social security, which served as a principal stabilizer, at least in the developed countries; Keynesian tools to fight domestic cyclical downturns; and a universal high-wage policy aimed at stimulating general consumption, without which the genius of capitalism -- mass production -- does not work.
But the realignment of the rich, developed countries around the monetarist policies promoted by economists like Milton Friedman, which began around 1970, broke with all that. Not long after, the dollar was detached from the gold standard. Ever since, the international financial system has endured almost constant instability. Crises have multiplied, with each seemingly worse than the one that came before.
Throughout the rich world, poverty has come roaring back. Internal and international inequalities have been increasing at breakneck speed. Employment is increasingly precariousness. And where unemployment is preferred to universal job insecurity, it has become impossible to suppress.
It is to this state of affairs that the French and Dutch said "no" two months ago.
Paradoxically, however, a united Europe is likely to be needed even more in the near future than it was in the past. After all, beyond the social misery produced by the re-institutionalized cruelty of the current global economic system, the greatest danger facing the world nowadays is that very system's inherent instability. I don't see any institution other than the EU that has enough size and heft to protect Europeans from a possible implosion.
Consider the simple fact that the American economy is now more than US$600 billion in debt. The United States cannot function without being able to borrow $1.9 billion each and every day of the year, mainly from the emerging economies of Asia, and China above all.
But this support could weaken or even cease if the dollar falls too low, if the price of oil rises too high, or if the American economy backfires. In fact, the U.S. economy has become increasingly detached from reality. Its manufacturing sector now accounts for a mere 11 percent of America's GDP. Ford and General Motors are in dire financial straits.
Meanwhile, two speculative bubbles -- in the real estate market and in mortgages -- have become grafted upon each other and now dominate economic activity in the U.S. A crash, or at least a sharp spasm, is quite likely in the near future, and the consequences -- for America and the world -- may be catastrophic.
This instability also makes it difficult to address other grave problems affecting the global financial system. Sovereign debt, needed by all countries, but particularly by the poorest, suffers profoundly from erratic interest-rate and exchange-rate movements. The absence of a lender of last resort in today's world only magnifies the threat involved in each crisis.
To make matters worse, national failures can no longer be addressed without aggravating the situation. Of course -- indeed, above all -- in such circumstances the immense investments needed to overcome underdevelopment and the disabilities that it entails are increasingly forgotten by the world of international finance.
With rich countries threatened by instability and poor countries largely left to their own devices, the reconstruction of the world financial system should be at the top of the international agenda. A new Bretton Woods could not be more urgent!
The writer, a former Prime Minister of France and leader of the Socialist Party, is a member of the European Parliament.