The Virtual Senate in Action

There's a concept called the 'virtual senate' in some literature on international economics and political science that is more popularly used often by Noam Chomsky.  It refers to a state of affairs when capital controls have been removed from major states allowing large lenders and investors to freely move capital from one country to another without hindrance.  In that situation, if the major institutional lenders and investors who, more or less, control capital markets are unhappy with policy in a given nation or region, they can pull their investments, and go somewhere more friendly to their narrow interests.  In a very real sense, this challenges the very basis of sovereign democratic governments by constraining the spectrum of policy decisions governments can make without facing economic disaster.

Last week, the CFR published an interview with a fellow from the Peterson Institute for International Economics named Christopher Alessi.  There are a couple key notions that even the publisher of the website found particularly important to note.  First, when asked why the European sovereign debt crisis is causing such "extreme global market volatility," Mr. Alessi replies that it is the "inability of the European authorities to act ... combined with the generalized crisis of confidence in Europe that is creating this incredible volatility that we are seeing in the global markets."  Unpacked, this statement demonstrates the virtual senate in action.  On the one hand, we could interpret him to mean that investors and lenders are like frightened children, unable and unwilling to commit their resources to economic activity in European and US markets.  When seen in that light, it seems unlikely that such a characterization is accurate when describing the nature of inconceivably large banks and multinationals.  The second, and in my opinion, more accurate interpretation of this statement is that because European authorities have been unwilling to commit to a large enough bailout for banks, and coincident severe social austerity (e.g., the end of the European social democratic state as we know it), investors and lenders have fled elsewhere - emerging markets who are experiencing good growth, US government debt, gold, etc.  I think it would be quite naive of us to perceive this sentiment as anything but a statement about the political aspirations of lenders and investors who want to keep the Euro, and reshape the political nature of the European states.

In some respects, this (perhaps) radical interpretation of such a seemingly benign statement is vindicated by his economic prescriptions.  Naturally, he calls for European authorities to "recapitalize" the banking system, and "stabilize the markets."  I was just reading a paper by Gerald Epstein and Thomas Ferguson last night on the Federal Reserve's response to the 1929 market collapse in the US, and virtually the same language, at least in the latter, was used to describe the "stability" brought to the bond markets, by propping up railroad bonds that amounted to a total of 1/3rd of major New York banks' debt investments.  In other words, and very simply, Mr. Alessi is calling for a bailout of private banks.  Naturally, at no point does Mr. Alessi contend that the banks should then be placed under national or quasi-national control, to be disassembled in an orderly fashion, or to serve the interests of policy rather than profit.  That, I should think, is truly a radical notion that cannot even be conceived if you are educated enough to work at the Peterson Institute.  Indeed, when considering whether tobail out Greece and force banks to take a large, but not catastrophic, loss, or to "recapitalize" the banks so that they are able to sustain a "more thorough restructuring in Greece" (interpret as you will), he suggests the latter because "the costs of having an undercapitalized banking system are too big."

As a final suggestion, he notes that "you need to have more fiscal integration coming out of this" and that "you have considerably more fiscal integration already."  For Mr. Alessi, the crisis has, at "a very rapid pace" already encouraged more economic integration, and notes that in the long run there might be "euro bonds."  I think his implications here are quite clear.  There has been more fiscal integration because countries like Greece, Spain, Italy, and France have all capitulated to the pressures of the central, undemocratic Eurozone leadership to implement unpopular policies of austerity.  That might be a step more towards the federated US model.  With greater fiscal integration on the horizon for the neoliberal revolutionaries in Europe, and with the virtual senate at work to undermine any European politicking for any end but the needs of profit, one is left to wonder if the post-war social democratic state in Europe is in serious danger of extinction.