Wednesday, May 10, 2017

France's Election And The Euro, Onward To A Hollow State

France's Election Provides Only Short-Term Relief For The Euro

Emmanuel Macron is the new president of France. The 39-year-old political shooting star got 66.1 percent of the votes in the second round of the presidential election last Sunday. His opponent, Marine Le Pen, secured just 33.9 percent of the votes. 
The pro-EU and pro-euro camp is rather elated, actually delighted: The French are not going to withdraw from the community project — as it had to be feared if and when Mrs. Le Pen made it into the Élysée Palace. For Mr. Macron is seen first and foremost as a fervent supporter of the European project. But is there really a reason for cheering?
According to the Institut de Recherches Economiques et Fiscales in the first round of the presidential election 55 percent of voters supported a market-hostile collectivist course — from the nationalist Marine Le Pen, the Gaullist Nicolas Dupont-Aignan to the socialist Benoît Hamon, and communist Jean-Luc Mélenchon. In other words: More than half of the French voters want France and Europe to move away from a free market economy, preferring an interventionist-collectivist type of economic order.
In the second round of voting, the French put Macron into power largely because they wanted to prevent Le Pen, not because they had a particular liking for Mr. Macron’s political agenda. That said, Mr. Macron will face quite a few challenges at home. He needs the support of the French National Assembly. However, his political movement "En marche!" has basically no basis in France’s lower house of parliament. The election of the 577 deputies will take place on June 11 and 18. Whether Macron will succeed in forming a stable coalition is questionable.

From what little is known about his economic views, the new president seems to have a liking for a Keynesian-style economic policy. The state is, according to Mr. Macron, supposed to run more credit-financed expenditure programs to spur output and employment. What is more, an economic and finance ministry should be set up for the euro area; "social dumping" should be prevented in the EU; a "Buy European Act" should be created, protecting "strategically important" companies from foreign competitors; and “euro bonds” should be issued.

It is hard to see how Mr. Macron’s presidency could help fix the EU and the euro currency in particular. Yes, it may well provide some short-term relief: Financial markets seem to have been pricing out an immediate break-up of the euro zone for now. However, the root cause of the euro problem remains unsolved: The credit boom, which has been created by the European Central Bank (ECB), has crashed, and it has left behind over-indebted states and banks, capital destruction, and uncompetitive firms in many countries.

The modern nation-state is in a secular decline, made inevitable by the rise of a global market system. Even developed nations, like the US, are not immune to this process. The decline is at first gradual but then it suddenly accelerates until it reaches a final end-point: a hollow state. The hollow state has the trappings of a modern nation-state ("leaders", membership in international organizations, regulations, laws, and a bureaucracy) but it lacks any of the legitimacy, services, and control of its historical counter-part. It is merely a shell that has some influence over the spoils of the economy. The real power rests in the hands of corporations and criminal/guerrilla groups that vie with each other for control of sectors of wealth production. For the individual living within this state, life goes on, but it is debased in a myriad of ways.

The shift from a marginally functional nation-state in manageable decline to a hollow state often comes suddenly, through a financial crisis. This crisis typically has the following features:

  • Corporations and connected individuals systematically loot the nation-state of financial assets and natural resources through a series of insider/no cost deals. These deals are made to "save" the nation's economy or financial system from collapse.
  • Once the full measure of the crisis is known, the nation-state's currency falls precipitously, it's debt becomes expensive, and it is forced to submit to international oversight/rules.
  • The services the state provides rapidly evaporate as its bureaucracy is starved for cash/financing. This opens up a window for the corruption of government employees unused to deprivation.

The Dynamic of Primary Loyalties
The decline from a functional nation-state to a hollow state appears sudden to observers. For individuals, the experience is a sustained decline in the standard of living. Over time, critical items and services become increasingly inaccessible -- healthcare to housing. Small business disappear, or become prey to connected companies/individuals with access to the remaining coercive power of the nation-state. As the deprivation becomes commonplace, people turn to primary loyalties for support and services -- loyalties to a corporation, tribe, gang, family, or community. These groups, energized by new levels of loyalty but deeply obligated to reciprocate this loyalty with support, become extremely aggressive in pursuit of their survival. Once this shift in loyalty is made, a self-generating cycle of violence, crime, and corruption (fueled in large part through connections to the global market system) becomes entrenched. The nation-state, at that point, becomes irretrievably hollow.

The Looting
It's instructive to view the US Treasury's plans for a bail-out of the global financial system through the lens of the hollow state. By this measure, the bailout as it stands today, is a form of financial looting of the US Treasury (it isn't socialism, since the government isn't nationalizing the financial system). Trillions of dollars in government monies ($700 billion to begin with) will be infused directly into the coffers of corporations and wealthy individuals (via hedge funds). Specifically, the plan buys toxic assets at inflated prices and sells them back for nearly nothing -- no equity or assets of real value are provided in exchange for the purchase. The national debt will likely grow 20-30% in a single year, with obligations extended to many trillions more in guarantees.

Given this, one potential next step forward is a decline the credit rating of US debt (which radically increases the costs of US borrowing), a collapse in the dollar relative to more stable global currencies, and a rapid decline in government services. Other scenarios achieve the same result with different timing. Regardless, our (the US and the UK) journey to a hollow state has officially begun. 
NOTE: Philip Bobbitt got it wrong in his book, "The Shield of Achilles." The prosperous market-state he envisioned through constitutional reform isn't possible. The REAL market-state, the form of governance that that has truly embraced the global market system, is hollow. In effect, a state that doesn't place any barriers between itself and the global marketplace. As a result, the only real opportunities created by the emergence of the market-state are opportunities to steal extreme wealth.

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