Variegated Capitalism, das Modell Deutschland, and the Eurozone Crisis

Abstract

This article proposes the concept of variegated capitalism as an alternative to the mainstream study of comparative capitalism. It illustrates its plausibility and potential by analysing the halting development of the European Union's initial integration of six broadly complementary ‘Rhenish’ economies to today's relatively incoherent, crisis-prone variegated capitalist (dis)order. In particular, it focuses on the organization of European economic space in the shadow of das Modell Deutschland and its insertion into a world market that is organized in the shadow of neoliberalism. This is then related to the Eurozone crisis, the crisis in Eurozone crisis management and attempts to introduce a new ‘union method’ of economic governance.

Keywords::

• crisis management
• European integration
• financialization
• Modell Deutschland
• union method
• varieties of capitalism
• variegated capitalism

Theoretical interest in comparative capitalism (CC) and varieties of capitalism (VoC) is not new (for a wide-ranging survey, see Bruff and Ebenau 2014). Most work in this area focuses on categorizing and/or comparing individual cases, types or VoC at local, regional, or national level and largely neglects their structural coupling and dynamic entanglements. The alternative approach developed below proposes instead to analyse the variegated nature of capitalist ‘space economies’ (on ‘space economies’, see Sheppard and Barnes 1990). Variegation involves complementarities and tensions among types (varieties) of capitalism in a tendentially singular, yet still incomplete and unevenly integrated, world economy. These complementarities and tensions set limits to the coexistence and co-evolution of varieties within a given space–time envelope marked by specific combinations of spaces of places and flows and of economic cycles and other temporalities. One can then examine whether the interaction of ‘compossible’ VoC in a more or less complex space economy has benign, neutral, or negative effects on their individual and joint economic performance. This more ‘ecological’ approach posits that zones of relative stability in a given space economy are typically linked to instabilities elsewhere and/or in the future that derive from differential abilities to displace and/or defer problems, conflicts, contradictions and crisis tendencies. Such differences are related in part to ‘vertical’ relations between core and periphery (Radice 2000) and to other non-trivial asymmetric capacities to shape the world market. These factors get missed in ‘horizontal’ comparisons of local, national or regional varieties (Jessop 2012). These asymmetries involve more than relative economic efficiency in the allocation of scarce resources to competing uses. For, alongside the market's sometimes not so invisible hand, differential accumulation also depends on the actual or potential exercise of soft power, force and domination. Two examples of asymmetrically interconnected economic spaces that can be studied in terms of variegated capitalism are the pathological co-dependence of the USA and China in a world market context and the increasingly dysfunctional interaction of the neo-mercantilist Modell Deutschland and the rest of the Eurozone, especially southern Europe (for details, see Becker and Jäger 2012; Weeks 2014).

European Economic and Political Space(s) in the World Market

The aforementioned emergent properties of a variegated economic space (which cannot be derived from the individual features of its varieties considered in isolation from their co-presence, interdependence and co-evolution) are evident in local, urban, regional and national economies in the European Union (EU), in the changing cross-border, international, supranational and transnational character of European economic and political space, and in the uneven integration over six decades of this heterogeneous space into wider regional, trans-Atlantic and global spaces.

When founded in 1951, the European Coal and Steel Community (ECSC) involved six mostly ‘Rhenish’ (or ‘coordinated market’) economies, with the partial exception of Italy. In this sense, the ECSC and, later, the European Economic Community (EEC, established in 1957) initially developed as relatively compatible, indeed, in key respects, already interlocking, variants of regulated capitalism, based on the emerging post-war institutionalized compromises between capital and labour as reflected in social democratic or Christian democratic Keynesian welfare settlements. While the formation of ECSC aimed to promote peaceful coexistence among former belligerents, the Treaty of Rome, which established the EEC, was oriented to integrating the six economies into the circuits of Atlantic Fordism, albeit with tensions between more Atlanticist and more Eurocentric visions of what this should entail (Bieling 2010; Cafruny and Ryner 2007; Milward 1992; van der Pijl 1984).

In particular, this project relied initially on the ‘Monnet method’ (or community method) of integration. This involved incremental, mainly supranational steps towards positive integration that served to promote Fordist growth dynamics and corresponding modes of regulation in each member state (Ziltener 1999; Bieling 2010). The resulting spillover effects of market integration were expected to deepen political integration on the basis of regulated capitalism. While apparently a technocratic process, rival economic and political forces sought to skew it and/or exploit it to their advantage. This method became more problematic with each round of enlargement. For, as new member states with different modes of growth, regulation and welfare regimes joined, heterogeneity increased. Along with Denmark and Eire, which had liberal corporatist economies at the time of accession, 1973 saw the UK join as a liberal market economy (an anomaly behind de Gaulle's earlier veto on UK membership). Its membership helped to relay Anglo-Saxon liberal market influences into the EEC and, from the 1980s, to spread the influence of deregulated international finance into the Continental heartland. Subsequent rounds of enlargement added more kinds of capitalism: peripheral southern Europe (1981, 1986), two more Nordic economies (1995), Central and East European post-socialist economies and the Baltic Republics (2004, 2007), the small island economies of Malta and Cyprus (2004) and, in 2013, Croatia (for one typology of VoC in post-socialist Europe and the former USSR, see Myant and Drahokoupil 2012). Efforts also continue severally and collectively to increase ties with the Middle East and North Africa as part of European economic space.

European economic space illustrates key theoretical and methodological principles of variegated capitalism. These include the dominance within Europe of Modell Deutschland as an export-led accumulation regime that, despite significant neoliberal policy adjustments, has remained firmly inside the coordinated market economy camp—partly because of the legacies of Ordoliberalism (on which, see Young, this issue) and partly because of the complex material interdependencies in the German space economy, which includes elements of other Rhenish economies in Northern Europe. For example, alongside its own export strengths, the Netherlands provides important commercial and business services that support Modell Deutschland; Austria and the new, post-socialist member states in Central Europe also fit into this accumulation regime. The French economy has other specializations (pharmaceuticals, aerospace, agri-food and fashion goods) and different growth dynamics linked to more dirigiste than neo-corporatist governance arrangements (Schmidt 2002). Moreover, until the Mitterand experiment with ‘Keynesianism in one nation’ failed and common currency policies developed, France relied more on competitive devaluation than German-style deflation (Aglietta 1982; van der Pijl, Holman, and Raviv, 2011; Stützle 2013). We should also note the important transatlantic links, with the USA (let alone North America as a whole) and the EU constituting a far larger trade and investment bloc than the USA and China (Hamilton and Quinlan 2013). This provides a basis for strong US interest in the forms and effects of crisis management in the Eurozone (AmCham 2012, 2014).

The problematic coexistence of these VoC was aggravated by the uneven impact of the crises of Atlantic Fordism and contrasting responses within and across national models in Europe from the late 1960s through the 1980s. These were the years of ‘Eurosclerosis’. However, because crisis has proved a crucial driver of European integration, these developments were far from fatal. Indeed, the accession of the southern European economies (especially Spain) and East and Central European economies enabled the northern member states to moderate their own crises by deepening the regional division of labour within European economic space based on the promotion of peripheral Fordism and the extension of credit. This benefitted the neo-mercantilist German bloc and French industry and also created new investment opportunities for banks and other financial institutions not only from Germany and France but also from Austria, Italy and Sweden. This strategy was spearheaded politically by the Franco-German axis and the European Commission (Stützle 2013). But the unfolding crisis of Fordism also made it harder to rescale demand management and indicative planning from the national to the European level or to establish a tripartite Euro-corporatism to support a European Keynesian welfare state. This created the space for radical neoliberal regime shifts based on a principled rejection of inherited post-war settlements in some member states and more pragmatic neoliberal policy adjustments in others. Combined with the decision announced at the Milan Summit (1985) to adopt a principle of mutual recognition, this further extended their economic and social heterogeneity.

Overall, it became harder for the Monnet method to promote incremental convergence, secure economies of scale through market integration, and harmonize economic and social policy. One response in the fields of economic and, to a lesser extent, social policy was to rely more on negative integration. However, efforts to eliminate restrictions on ‘the four freedoms’ (the free flow of goods, services, capital, and labour) tended to weaken the coherence of the respective national cores of coordinated market economies and/or to advantage more mobile transnational capital (cf. Scharpf 2010; Stützle 2013; on the neoliberal bias of negative integration, see van Apeldoorn 2002; Altvater and Mahnkopf 2007; Cafruny and Ryner 2007). Negative integration was supplemented from the 1990s by the open method of coordination (OMC), which combines centrally agreed targets with decentralized implementation that allows for economic and political variegation. This said, the OMC has been largely confined to employment, social, health and gender policies and, as labour organizations were weakened through neoliberalism and decisions of the European Court of Justice, it proved harder to defend citizenship and welfare rights through this method of governance. The community method, negative integration and the OMC are individually and jointly ill-suited to the conduct of economic crisis management in a European economic and political space with complex, entangled and variegated crisis dynamics (see below).

Das Deutsche Modell and das Modell Deutschland

The distinction between the VoC/CC and variegated capitalism approaches can be illustrated from the German case. The VoC account regards the ‘German model’ (das deutsche Modell) as the exemplar par excellence of a coordinated market economy and examines it as one national variety among others (cf. Hall and Soskice 2001). The variegated capitalism perspective highlights the neo-mercantilist character of the German accumulation regime and its mode of regulation in the context of the German space economy. To distinguish this account, I introduce the notion of das Modell Deutschland, which was adopted by the social democratic party (SPD) as a campaign slogan in the 1976 federal election. In this context, ‘Modell’ connoted a new vision (or projected model) for Germany and an actual institutional configuration (or current model) deemed worthy of emulation elsewhere in Europe (Esser et al., 1979; see also Young, this issue). This dual reference inspired the Constance School of heterodox international political economy to investigate, inter alia, the genesis, specificities and implications of das Modell Deutschland, which its scholars linked to Germany's specific insertion into European and world markets, namely, its neo-mercantilist mode of growth (see Simonis 1998). Other schools and scholars in critical international political economy have developed similar analyses.

Das Modell Deutschland as ‘current model’ is distinguished both by the sheer volume and strong share of exports in GDP compared with other trading giants, such as the USA, Japan and, later, China. Its exports are especially strong in capital goods (notably capital goods for making capital goods) and in diversified, research-intensive, high-quality consumer durables (cf. Porter 1990). Given the limited domestic market in these categories of goods, this export profile has shaped the German state's post-war domestic and foreign economic policy and its general strategy for European integration (Bellofiore, Garibaldo, and Halevi, 2010; Cesaratto and Stirati 2010; Lapavitsas 2012; Posen 2008; Schlupp 1980, Simonis 1998; Streeck 2009). For example, after the initial period of post-war reconstruction, restraining prices and wages was crucial for Germany's capacity to renew its export competitiveness. This domestic deflationary bias has been combined with neo-mercantilist foreign economic policy. In particular, German capital and the German state (initially West Germany, now the reunified state) have sought to shape the governance of the world market, especially in periods of crisis. This is reflected in the German role in regional and international monetary regimes and the problems of managing the deutsche Mark (and, later, the euro) with a view to maintaining both Germany's export competitiveness and the regional and international stability on which its exports depend. Thus, as EU integration has widened and deepened, conditions judged necessary by the German power bloc for export-competitiveness have been imposed on, or otherwise affected, the resilience and potential for growth elsewhere.

Falling productivity and declining profits prompted the Social-Liberal Coalition to pioneer the Modell Deutschland strategy (projected model) avant la lettre in the early 1970s. It aimed to enhance competitiveness through corporatist arrangements oriented to delivering austerity and ‘modernization’. It also sought to prevent economic crisis becoming political crisis by integrating the unions into crisis management so that they would share responsibility for its economic and political costs (Esser 1982; Hübner 1986). By 1981–1982, this crisis-management strategy was no longer effective (for details, see Scharpf 1991) and the resulting crisis of crisis management prepared the ground for a neoliberal turn, die Wende (1982–1983), which saw a Christian Democrat-Liberal coalition committed (at least rhetorically) to renewing the social market economy through ‘more market, less state’. This Turn reflected the exhaustion of the SPD's particular approach to maintaining the German model rather than the collapse of the neo-mercantilist, export-led strategy in general. The new coalition government adapted this strategy to changed conditions rather than trying to overturn it. The result was neoliberal policy adjustment within what remained a largely neo-corporatist and neo-mercantilist strategy (Streeck 2009).

The Hartz labour market reforms, which were introduced in 2002–2005 during Schröder's Red-Green coalition (1998–2005) as part of its Agenda 2010 programme, marked another stage in neoliberal adjustments in das Modell Deutschland. In response to slow growth, the coalition stepped up labour market segmentation, wage-restraint and efforts to lower labour costs, including the social wage, to boost export-led growth. Real wage suppression made a significant contribution to the increase in German exports to the EU in the early 2000s, aided by credit-fuelled consumer demand. Greece, Italy, Portugal, and Spain were especially significant sources of demand in this regard (Weeks 2014). It also restrained domestic demand in Germany, contributing to an increasing trade surplus. Paradoxically, then, these neoliberal policy adjustments benefitted the ‘Euro-mercantilist’ fraction of German capital (Overbeek 2012).

Economic and Monetary Union

The asymmetrical interdependence of the German and other EU economies was reinforced through the formally demanding Stability and Growth Pact. Several sovereign states engaged in deception to meet the convergence criteria and deliberate fudges allowed Italy and Belgium (and subsequently others) to sidestep the national debt-to-GDP hurdle. In addition, austerity and other measures taken by Eurozone members to produce convergence led to structural weaknesses (hidden public debt, cuts in vital infrastructure spending) and reduced expenditure on education, health and welfare to the detriment of long-term competitiveness. More generally, future structural problems were inscribed into the Eurozone at its inception because of tensions among member states that originated in incompatible accumulation regimes, patterns of insertion into European and world markets, modes of regulation and governance capacities. Yet, these tensions were overlooked in the assumptions and operations of the European Central Bank (ECB), which largely derived its policy approach from the Modell Deutschland and placed undue faith in an upward economic convergence induced by this further step to market completion.

Originally agreed for political reasons at the Maastricht Summit, Economic and Monetary Union (EMU) was also expected to advance the export-oriented strategy by extending the Deutsche Mark zone (Overbeek 2012). The Euro would be a weaker currency than the DM on its own and thereby enhance the competitiveness of French and German industrial capital, especially when reinforced by direct wage restraint, a reduced social wage and lowered domestic consumption. An expanded, more integrated European economic space would advance the interests of the kind of conglomerates represented in the European Roundtable of Industrialists, which are often connected through interlocks to German capital (van der Pijl, Holman, and Raviv, 2011), so that Europe could challenge the position of the USA, Japan and China and promote the Euro's emergence as a global currency (Overbeek 2012). Reflecting the banking tenets of Modell Deutschland, EMU operated on two key principles: first, the ECB may not act as lender of last resort to insolvent banks or indebted states, and, second, sovereign debts may only be discharged by their respective member states (Varoufakis 2013). This led Heise (2005) to argue that Germany's massive impact on the EMU governance justified the term ‘Germanic Europe’.

The Stability and Growth Pact and EMU were expected to produce convergence in economic performance by extending (presumptively) efficient free markets. Zones of relative economic stability such as the DM area depend, however, on shifting problems onto zones of instability elsewhere and/or on postponing problems into the future. This is evident in the Eurozone and its crisis. Indeed, the design of EMU was likely to exaggerate imbalances in the medium term rather than reduce them, as the less competitive, peripheral economies could no longer devalue their national currencies and would sooner or later be forced into recession and deflation. There were other grounds for scepticism too. Monetary union was not accompanied by fiscal union and, additionally, there were no credible institutional arrangements to enforce long-term fiscal discipline, compensate for uneven development and economic performance, or coordinate crisis management in a situation where conventional national crisis responses such as devaluation were ruled out. In short, the design of EMU ‘removed internal shock absorbers while … magnifying both the probability and magnitude of a future crisis’ (Sotiropoulos 2013).

This structural flaw was obscured during the 1990s ‘Great Moderation’ (linked to US monetary policies and to deflation imported from China) and the initial stimulus in the early 2000s (notably in Southern Europe) that followed the Euro's introduction. Thus the status of the Euro as a world currency and other Eurozone successes were (prematurely) celebrated just 10 years after EMU was introduced (e.g. Pisani-Ferry and Posen 2009). Yet structural incompatibilities and institutional design flaws were already evident before 2009, intensified in 2010–2011 and became acute in 2012. As Yannis Varoufakis, an astute observer of world market dynamics, notes:

The combination of accumulating profits in the Eurozone's core (due largely to the repression of Germany's wage share) and abundant toxic, or private, money minted by the financial sector (primarily by the City and Wall Street) ensured that no decent returns could be found in the sluggish Eurozone core itself. So torrents of credit rushed from the surplus to the deficit Eurozone countries in the form of loans and sovereign debt purchases. For 12 years (1997–2008), the capital inflows into the periphery reinforced themselves by strengthening the demand for the core's net exports, part of which was utilised in helping German multinationals globalise beyond the Eurozone (in Eastern Europe, Asia and Latin America). (Varoufakis 2013, 54)

Failure to address the design flaws and the emerging structural problems inherent in a variegated European economic and political space in good times made crisis management harder with the eruption of the North Atlantic Financial Crisis (NAFC), the surfacing and intensification of the Eurozone crisis and the downward spiral of private and sovereign debt–default–deflation dynamics in peripheral economies.

The Eurozone Crisis

The Eurozone crisis is often attributed to the uneven economic performance of national VoC and/or the unsustainable public and sovereign debts of southern member states (the so-called PIIGS plus, latterly, Cyprus). The argument developed above suggests that the crisis can be better understood and explained in terms of the dominance within European economic space of Modell Deutschland as a mode of organizing economic relations within and beyond German frontiers. In other words, the Eurozone crisis originates in what Dadush and Stancil (2011) term, euphemistically, ‘misaligned economic structures and lost competitiveness.’ This is reflected in a wide range of micro- and macro-economic divergences in productivity, unit labour costs, competitiveness, trade surplus and deficit positions, and other imbalances, which are often rooted in inherited, but now superseded, economic structures and roles in regional and global divisions of labour (e.g. European Commission 2010; Lapavitsas 2012). These imbalances and disproportions are linked to variations in local, regional and national restructuring and steering abilities; capacities to displace and defer contradictions and crisis tendencies; and the limited resistance of weaker capital fractions and subaltern classes to neoliberal crisis management panaceas. This has affected the form and dynamics of the unfolding financial, economic, political, constitutional and social crises from the moment that the European Single Market project was launched until the present.

In particular, the debt and deficit crises in the Eurozone can be linked to the ecological dominance of das Modell Deutschland in European economic and political space and, more immediately, to the labour market and trade policies pursued from the late 1990s onwards (see preceding section). This exacerbated imbalances in macro-economic performance and trade relations that proved unsustainable when the NAFC, which originated in neoliberal market economies, struck the continent in 2008 and produced contagion effects that precipitated debt–default–deflation dynamics that reverberated throughout the Eurozone. With the exception of Greece, public debts and fiscal deficits were not a serious problem—in contrast to mounting private debt that had been unproductively invested in consumption and Ponzi finance of housing bubbles. Nonetheless, the deepening crisis was intensified through market speculation against the perceived weakest links in the Eurozone. Thus, each new shock has highlighted further the structural incoherence within the Eurozone as well as the contagious interconnections with crisis tendencies and crisis dynamics elsewhere in the world market, making it harder to rely on fisco-financial ‘extend and pretend’ (more politely called ‘debt re-profiling’) and political ‘muddling through’.

Crises of Crisis Management

This has produced crises of crisis management on many scales with open fights among financial officials and government ministers and business lobbies (reflecting broader disputes around capitalist strategies) over how to rescue the Eurozone and the European project and/or to promote the broader world-market interests of transnational capital regardless of particular fallout and blowback effects in Europe. The Eurozone crisis has also intensified the institutional crises in European governance structures and undermined the legitimacy of the European project. Thus, attempts at crisis management are complicated by political crises at different scales, including splits in national and transnational power blocs, representational and legitimacy crises, loss of temporal sovereignty and declining institutional integration.

Initially, the deficit countries under French political leadership called for a collective mechanism to support states in financial difficulties, to create Euro bonds, and to practice comprehensive joint EU management on the basis of the existing treaties. This approach would have obliged the strong export-oriented states to reduce their trade surpluses to lessen the macroeconomic imbalances in the EU. Unsurprisingly, this was opposed by the German government, which represented surplus countries.

In response to mounting problems of crisis management, there have been halting and contested moves to establish a new ‘union method’ (sometimes designated the ‘Merkel method’), to redesign economic governance in the face of the NAFC, its contagion effects in the EU and the specific problems in the Eurozone. Because member states cannot legally use exchange rate adjustments and/or lax domestic fiscal policy to mitigate the deflationary impact of shocks, the Stability and Growth Pact and EMU locked the Eurozone economies into a politics of disinflation and competitive deflation. In May 2010, the European Financial Stability Facility (EFSF) was introduced to provide funding on request to sovereign states in difficulties. The European Financial Stabilisation Mechanism (EFSM) followed in January 2011. The intergovernmental EFSF and EFSM were replaced in September 2012—after negotiations, a treaty amendment and a special Eurozone-only treaty—by a permanent European Stability Mechanism (ESM). This has the power to advance ‘bailout’ loans in cases where sovereign debt is unsustainable or might become so and/or where governments need to borrow funds to recapitalize distressed banks, conditional in all cases on the recipient state's ratification of the European Fiscal Compact and its signature on a Memorandum of Understanding about fiscal consolidation and other restructuring measures. The Treaty on Stability, Coordination and Governance in the EMU (or Fiscal Compact) was signed by all but two member states in March 2012. When fully implemented, it will constrain national economic sovereignty by setting binding limits (0.5% of GDP) on the structural deficits in the annual budgets of individual member states and thereby constrain national sovereignty. By extending disciplinary neoliberalism, the Fiscal Compact constitutionalizes and entrenches the power of capital, limits states' political autonomy and transforms budget-making into a more technocratic process subject to legal sanctions as well as market pressures. The Swiss and German precedents for such a debt brake show that it is hard to measure structural deficits, operate the brake and avoid political manipulation.

As indicated above, the union method is an ad hoc response to the limited treaty powers available to the Commission and/or the ECB to manage the Euro-crisis. In this sense, it corresponds to a state of economic emergency by introducing features of a state of exception (Ausnahmestaat) while efforts are made to find ways to restore stability and growth. This has led two commentators to locate these developments in a broader trend towards ‘authoritarian neoliberalism’ (Bruff 2014) or ‘authoritarian constitutionalism’ (Oberndorfer 2014) as recent variants of ‘authoritarian statism’ (Poulantzas 1978). The union method involves concertation, based on their respective competences, among the European Council, Commission and Parliament. This new mode of economic governance subverts the division of competences between member states and the EU that was enshrined in the Maastricht Treaty. It is steered through intergovernmental consensus reached in the shadow of German economic and political power with French support (and cover) after Germany rejected France's efforts to represent deficit countries and Merkel team insisted on the ‘no bail-out’ clause of the Lisbon Treaty. This locked Germany, France and their allies into preserving the Eurozone ‘at all costs’ but having to extemporize to achieve this. The Merkel method reproduces and, indeed, reinforces asymmetries between the Eurozone core and periphery, reflecting the size and power of states and their creditor and debtor positions. It also extends ‘new constitutionalist’ practices (Gill 1998) to budgetary and fiscal policies and, in this context, requires and legitimates the imposition of conditionalities set by the ‘Troika’, namely, the ECB, European Commission and IMF. This approach to crisis management also created the space for technocratic governance in southern member states, whether through EU and ECB-inspired coups d'état (Greece and Italy) or through de facto or formal governments of national unity (Spain, Portugal).

In addition, from December 2011, the ECB was released from the ban on acting as a lender of last resort and was authorized to engage in long-term, yield-lowering refinancing operations to prevent any serious bank failure. After the ‘Grexit’ (Greek Eurozone exit) scare, which led the Troika to offer two further bailout packages (in February and November 2012) to prevent a Greek default, the overall strategic line in crisis management remains consistent with Modell Deutschland principles. For example, from September 2012, the ECB implemented a controversial (especially in Germany) outright monetary transactions programme to purchase, albeit only in secondary markets, unlimited amounts of bonds issued by states involved with the EFSF and/or ESM. The crisis in Cyprus led to further crisis measures that included a partial bail-in of bank depositors. In November 2013, the ECB reduced its bank rate to 0.25% as a further boost to recovery.

In general, the Troika has sought to impose the greatest austerity on the weakest member states (Greece, Ireland, Portugal and, latterly, Cyprus, the economic size of which renders all four more vulnerable to such pressures than Spain and Italy), even though this reinforces imbalances and increases debt–deflation–default risks. This reflects the more general paradox that a Eurozone organized in the shadow of a neo-mercantilist Modell Deutschland is resorting to recession-led neoliberal restructuring that imposes cuts in direct wages and the social wage as well as privatization and other neoliberal measures in the periphery in order to save distressed banks in core states. This is legitimated by reference to the sovereign debt crises that were created or intensified by public bailouts of financial institutions. Moreover, adopting the terms of neoliberal economic and political discourse, ‘painful adjustments’ are just as necessary in strong economies, whether in the Eurozone or not, as they are in economies vulnerable to financial collapse and sovereign default.

The continued ‘muddling through’ seen in the union method is reflected in a chaotic sequence of ad hoc emergency measures, taken in response to successive shocks, declining confidence and the debt–default–deflation dynamics that ensure that austerity measures are counter-productive and spread through their ‘blowback’ effects to a shrinking core of northern economies. On balance, market forces and political pressures discouraged weaker member states from exiting the Eurozone even though partial default and competitive devaluation might have provided some relief from savage austerity measures and facilitate restructuring that did not conform to neoliberal policy prescriptions. In the short and long term, it was also cheaper and less damaging politically for surplus states to do ‘whatever is necessary’ to preserve the euro. At the same time, ‘extend and pretend’ policies on private sector debt and use of fiat credit to bail out the private sector created time for private financial entities to reorganize loan portfolios and/or transfer risks to hedge funds, vulture capital and sovereign states. Conversely, mounting resistance in southern Europe and elsewhere against austerity policies has also altered the calculations in the power bloc. This has led to modulated crisis interventions that vary by conjuncture and levels of popular resistance and has prompted further moves towards a post-democratic authoritarian statism.

Conclusions

This article posits the existence of a fractally variegated capitalism within a tendentially integrating world market that can be studied at different scales and over different periods. I have tried to make this argument plausible by exploring aspects of European economic space. This is organized in the shadow of neo-mercantilism but has been increasingly integrated into a world market organized in the shadow of a finance-dominated neoliberalism. As Cafruny and Ryner (2008, 60) remarked:

The EU's aspiration to build a monetary union to promote competitiveness, sustained growth, regional autonomy and social cohesion is self-limiting because the Maastricht design of the EMU is inherently connected to a neo-liberal transnational financial order that displaces socio-economic contradictions from the US to other parts of the world, including Europe. Europe's subordinate participation within this order pre-empts the possibility of resolving structural problems of … post-Fordist society in a manner consistent with Europe's social and Christian-Democratic accords. Economic stagnation, uneven development, and the widening gap between new forms of governance and social citizenship amplify legitimation problems and political conflicts, with adverse effects on the EU's political ability to mobilize as a counterweight to the US.

While the problems of ‘Club Med’ economies in the Eurozone are partly related to the impact of das Modell Deutschland within European economic and political space, Germany's own room for manoeuvre is limited by the path-dependent effects of its dominance within Europe and the global ecological dominance of neoliberal, finance-dominated accumulation as well as the political struggles over the right approach to crisis management and crisis prevention. In short, divisions in Europe's variegated capitalism are reflected in continuing struggles with important economic and political stakes over how to solve the Eurozone crisis. Past proposals include: a unilateral return to the Deutsche Mark by Germany; the separation of a strong Northern European bloc centred on Germany from a weaker ‘Club Med’ bloc, that might have been centred on France; the expulsion or self-exclusion of Greece as the ‘weakest link’ in the EMU chain or, more broadly, temporary exits from the Eurozone from weaker economies followed by re-entry after restructuring has restored them to robust neoliberal good health; and political union through treaty change. Treaty considerations apart, all these proposals are contraindicated by the dense web of bank loans and credits that creates complex interactions with unintended effects, thanks to the exposure of private and public financial institutions to weak economies and now indebted sovereign states. This creates further exposure to rating agencies and the mighty bond markets, with risks of wider contagion and speculation.

This explains why there are increasing calls for fiscal union to be complemented by economic and even political union. Despite obvious disagreements among member states about the details, key elements of an institutional fix for the EU would include: ‘a quasi-finance ministry to set and enforce fiscal rules; the ability to raise its own resources; common banking supervision, regulation and deposit insurance; common representation in international institutions; and a mechanism for ensuring the democratic legitimacy of these processes' (Leonard 2011). But such an institutional fix would not magically reconcile the contrasting interests of different fractions of capital, of centre and periphery, of deficit and surplus economies, of capital and workers, of insiders and outsiders, in Europe's variegated capitalism.

Reflecting these fractal complexities within the world market, European economic governance has become a crucial site and stake for contending political forces within and beyond the EU. They are seeking to shape its overall strategic direction, specific economic and social policies, and, notably, its approach to crisis management. The EU has been a vector for American neoliberal pressures to redesign the world order as well as for counter-hegemonic attempts to promote an alternative European model. This invites the question whether the Eurozone crisis can be solved through greater economic, fiscal and political integration—the usual response to crises in the EU—or involves a more lasting structural, perhaps terminal, incompossibility. For the moment, it seems that the balance of forces favours neoliberalism redux, but structural problems remain and may yet take their revenge.

Acknowledgment

This research has benefitted from discussion with participants in the EU-Cost Action, including Hugo Radice, and from the well-informed comments of two anonymous referees for this journal.

Additional information

Funding

Research for this article was undertaken during the tenure of a Professorial Fellowship funded by the UK's Economic and Social Research Council (grant number RES-051-27-0303).