Why Save the Bankers?

1. The financial crisis revealed flaws in the European monetary union

A single currency with seventeen different public debts and seventeen different interest rates on which markets are free to speculate, while governments are unable to loosen the vise by devaluing their currency, doesn't work.

Fundamental design flaw. The Eurozone was created with a common currency but without corresponding fiscal and political integration. This left member states vulnerable to speculation on their individual government debts, without the ability to use monetary policy tools like devaluation to address economic shocks.

Consequences of fragmentation:

• Diverging interest rates between countries
• Inability to coordinate fiscal responses
• Prolonged recession in southern Europe
• Growing distrust in EU institutions

Proposed solutions:

• Mutualization of public debt above 60% of GDP
• Creation of Eurobonds
• Establishment of a Eurozone parliament for democratic fiscal governance

2. Central banks play a crucial role in stabilizing economies during crises

To save the banks, the monetary authorities lent to them with no questions asked, at interest rates of 0 or 1 percent. They were right to do so.

Lender of last resort. During the 2008 financial crisis, central banks like the Federal Reserve and European Central Bank took unprecedented actions to prevent a collapse of the financial system and broader economy. This included massive liquidity injections and near-zero interest rates.

Key central bank actions:

• Doubling balance sheet sizes in months
• Expanding lending to non-bank institutions
• Purchasing government bonds to lower interest rates

Debate over limits: While these interventions were necessary to prevent economic catastrophe, they raise questions about the appropriate role and independence of central banks. There are concerns about potential inflation and moral hazard from "bailing out" financial institutions.

3. Inequality has risen dramatically, especially in the United States

Between 1976 and 2007, 58 percent of U.S. growth was thus absorbed by 1 percent of the population (this figure reached 65 percent between 2002 and 2007).

Concentration at the top. Income and wealth inequality have grown substantially in recent decades, particularly in the United States. This trend undermines social cohesion and the ideal of meritocracy that underpins democratic capitalist societies.

Factors driving inequality:

• Technological change and globalization
• Declining unionization and labor bargaining power
• Tax policies favoring high earners and wealth
• Financialization of the economy

Consequences:

• Stagnant middle-class incomes
• Reduced social mobility
• Political polarization
• Economic instability due to reduced consumer demand

4. Tax systems need reform to address wealth concentration

The right tool to regulate this potentially explosive dynamic would be a progressive wealth tax at the global level, with moderate rates on small fortunes, in order to favor emerging entrepreneurs, and much higher rates on big fortunes, which grow all by themselves.

Progressive taxation. To address growing wealth inequality and ensure a more equitable distribution of economic gains, Piketty advocates for more progressive tax systems. This includes higher rates on top incomes and, crucially, taxes on wealth itself.

Key tax reform proposals:

• Global wealth tax with progressive rates
• Higher top marginal income tax rates
• Elimination of tax loopholes and havens
• Improved international cooperation on taxation

Challenges: Implementing such reforms faces significant political obstacles and requires international coordination to prevent capital flight and tax competition between countries.

5. Europe needs stronger political and fiscal integration

To return to growth and social progress in Europe, they must be fundamentally rethought.

Democratic federalism. The Eurozone crisis revealed the need for greater political and economic integration to make the monetary union sustainable. This requires moving beyond the current system of intergovernmental decision-making towards more democratic and accountable EU-level institutions.

Proposals for integration:

• Eurozone parliament with budget authority
• Common Eurozone finance minister
• Harmonization of corporate taxation
• Expanded EU-level investment programs

Obstacles: National governments are often reluctant to cede sovereignty, and there are concerns about democratic legitimacy at the EU level. Overcoming these challenges requires building public support for a more integrated Europe.

6. Democratic control of capitalism is essential for social progress

To reconcile citizens with the banks, something more than grand speeches will be needed.

Rebalancing power. The financial crisis and subsequent policy responses highlighted the need for stronger democratic oversight of economic institutions. This involves both reforming existing structures and exploring alternative models of corporate governance and ownership.

Areas for reform:

• Stricter financial regulation
• Enhanced shareholder rights and stakeholder representation
• Public investment in strategic sectors
• Support for cooperative and employee-owned enterprises

Benefits: Greater democratic control can help align economic activities with broader social goals, reduce short-termism, and rebuild public trust in institutions.

7. International cooperation is needed to regulate global finance

To force the tax havens' hands and, more generally, to institute the financial, social, and environmental regulations we need to take control of a globalized capitalism gone mad, trade will surely be an indispensable weapon.

Coordinated action. In an era of globalized finance, effective regulation and taxation require international cooperation. This is particularly crucial for addressing issues like tax evasion, financial stability, and environmental protection.

Key areas for cooperation:

• Automatic exchange of financial information
• Common standards for corporate taxation
• Coordinated financial regulation
• Global environmental agreements

Challenges: Achieving meaningful cooperation faces obstacles from national interests, regulatory competition, and the influence of powerful financial actors.

8. Alternative forms of corporate governance can promote broader interests

In all cultural and educational sectors, and on every continent. To my knowledge, no one has proposed transforming Harvard (whose endowment is bigger than the capital of the largest European banks) into a stock corporation.

Beyond shareholder primacy. Traditional corporate models focused solely on maximizing shareholder value have come under scrutiny. Alternative structures, particularly in sectors like education, media, and culture, can better balance different stakeholder interests and social goals.

Examples of alternative models:

• Non-profit and foundation ownership
• Worker cooperatives
• Public benefit corporations
• Stakeholder representation on boards

Benefits: These models can promote long-term thinking, protect important social institutions from short-term market pressures, and better align corporate behavior with broader societal interests.

9. Emerging economies face unique challenges in development and inequality

Brazil was the last country to abolish slavery, in 1888, at a time when slaves were nearly a third of the population, and nothing has really been done by the wealth-holding classes to overturn this heavy legacy of inequality.

Historical legacies. Many developing countries struggle with extreme inequality rooted in colonial histories and uneven development patterns. Addressing these challenges requires tailored approaches that go beyond simply replicating Western economic models.

Key issues for emerging economies:

• Balancing growth with inequality reduction
• Overcoming historical injustices and social divisions
• Building effective state institutions
• Managing relationships with foreign capital

Policy approaches: Successful strategies often involve a mix of targeted social programs, investment in education and infrastructure, and efforts to broaden political participation and representation.

10. Political movements on the left offer hope for European reform

Rather than rejecting them, we should work with them to formulate the outlines of a democratic reconstruction of the EU.

New political forces. The rise of left-wing movements like Syriza in Greece and Podemos in Spain represents a challenge to the European status quo. These parties offer the potential for reimagining European integration in a more democratic and socially-oriented direction.

Key ideas from new left movements:

• Rejection of austerity policies
• Emphasis on democratic reform of EU institutions
• Focus on reducing inequality and unemployment
• Support for green investment and ecological transition

Opportunities and risks: While these movements offer fresh thinking on European challenges, their ability to implement change faces significant obstacles from established political and economic interests. Their success or failure will have major implications for the future of European integration.

Last updated: November 20, 2024