Volume 43, Number 168,
January-March 2012
The New Financial Power
Kostas Vergopoulos*

The American economist Barry Eichengreen from UC Berkeley, showed that powerful financial influence decidedly hampers the mobility of capital as, despite rigidity in the types of currency exchange which implies an ease in transnational capital mobility, it makes any convergence between economies on a global scale difficult (Eichengreen, 2010). Financial globalization takes fixed exchange rates as a given. Nonetheless, fixed exchange rates doom real economies to diverge rather than converge which in turn demonstrates itself to be an opposing force to financial globalization. The gold standard has, throughout economic history, been an ideology, a fetish of wealth, as it has been considered a condition for prosperity. The underlying mercantilist ideology has always tried to maximize the quantity of gold and its revaluation via the contraction of production, employment, and income. This financial ideology led to the First World War (1914-1918), the Great Depression in the 1930s, and eventually to the Second World War (1939-1945). The American Economist Irving Fischer (Fischer, 1933) showed that in a context of deflation, a contraction of income implies ipso facto the revaluation of debts and of financial and printed capital. It is in effect a "deviation" from the "rules of the game" outlined by David Hume (Hume, 1776) in the 18th century and the classical economists of the 19th century. This classic theorem states that international stability is threatened by all types of imbalance, debts and surpluses alike. With this in mind there should be a certain symmetry between the deficit countries and surplus countries: both damage the international stability. Specifically, surplus countries have more means at their disposal for adjustments to restore the balance than deficit countries. According to classic theory of international stability, when there is a case of imbalance among nations, deficit countries should reduce their expenses and accept deflation to improve their competitive stance while the surplus countries should in turn increase theirs so that global demand is maintained.

Now the fallacy in this classic and almost automatic international stability theorem lies in the fact that there is no guarantee that both groups of interested parties shall follow through on their respective obligations. Likewise, there is no international framework for disciplining or punishing the offending parties so that they would be forced to comply. In other words, this automatic mechanism for re-establishing balance is delicate in practice as it ends up being completely vulnerable to the stronger parties' abuse and deviations. The current deviation comes from the surplus nations' refusal to increase their spending and recirculate their surplus, thereby leaving international equilibrium in the hands of the deficit nations. This implies a contraction of international demand which is detrimental to all members of the world market, yet the premium in fine corresponds to financial and monetary capital, which sees itself relatively revaluated due to the recession experienced by production and income. So if the gold standard leads to the spread of deflation it should be clear that world trend shall not be towards convergence, but to growing divergence, instability, and regression.

As Eichengreen pointed out (2010), the old ideology of the gold standard has now been replaced by that of a single currency. The Euro now serves as an ideology as did the gold standard in the past, albeit a much more rigid one. The difference between the two lies in that should the need arise, countries could withdraw from the gold standard system in order to proceed with the necessary adjustments while now, aside from deflation, there are no arrangements for adjustments or withdrawal from the Euro system. In the Eurozone there is currently one surplus country, Germany, while most of the other member states find themselves indebted to powers outside the Union. Furthermore, 86% of the German surplus comes from trade with countries in the Eurozone. The Eurozone takes in nine times more German exports than all the Asian markets together. Financial logic nonetheless prevails over market logic in Germany and this surplus country, which imposes austerity (even recession) upon its fellow member states, refuses to venture out and help with its surplus. It refuses all growth policies despite the import of its surplus, which it chooses to keep in the form of reserves. As the editor of The Financial Times Martin Wolf highlighted, Germany, like China, imposes demands which are extremely paradoxical on countries which are its own clients: it wants them to buy and consume and yet it denies them the credit they need to finance this buying and consumption (Wolf, 2010a). Financial logic then enters into strong contradiction with productive and commercial logic. These conditions leave, one-sidedly, the full weight of adjustment upon the shoulders of its partners who find themselves forced into deflation. This is why it is difficult to imagine any sort of convergence amongst the European economies and the trend is only going to steer further towards divergence. This is confirmed in real life by the spread's boom in the public treasury securities issued by European countries in financial markets: the yield of the securities issued by European states had a difference of no more than 40 base units in the year 2000 whilst in 2010 the difference practically reached 1000 base units. The supposedly single currency ends up having real prices, measured in terms of merchandise, which vary greatly between the different countries in the same monetary zone. There is still one official currency, but its buying power varies greatly between the different countries in the monetary zone: a cheap euro for Germany and an exorbitantly expensive one for the deficit countries in the European Union, even without Germany accepting the compensatory measures designed to ensure economic cohesion in the Eurozone as a whole). The nominal currency is still officially shared, but the real currency, when measured in terms of merchandise, registers variable worth in the Eurozone from country to country. Financial logic once more bolsters divergence more than convergence in real life applications.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
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