Globalized finance: The challenge to the euro

New Left Review

Volumn , Issue 8, 2000, Pages 23-46

  Grahl, John ^a  

^a NONE

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EID: 0040374726     PISSN: 00286060     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (31)

1. This article draws heavily on discussions with two colleagues at the University of North London Business School, Stuart Archbold (now at the University of Kingston) and Photis Lysandrou.
2. For a full analysis, see Robert Boyer, Le Gouvernement économique de la zone euro, CGP, Documentation Française, 1999.
3. Martin Feldman observes: 'In the past year . . . [v]irtually all of the net equity capital that came to the United States was in the form of FDI, including mergers and acquisitions as well as new investments and outright purchases of existing businesses' ('Aspects of Global Economic Integration', NBER working paper 7899, September 2000). The point is important because it suggests that euro weakness is the result of the extent to which European companies, both industrial and financial, were participating in the US expansion. This participation was itself facilitated by the sophistication of US financial mechanisms - both as regards securities (portfolio capital) and mergers and acquisitions (FDI).
4. Paul Hirst and Grahame Thompson, Globalization in Question, Cambridge 1999.
5. Of course, the classic account of this process is that of Karl Polanyi, The Great Transformation, Boston 1957 (1st edition 1944).
6. For an English language review, see John Grahl, 'Among the Vultures', International Review of Applied Economics, vol. 14, no. 3, 2000, pp. 403-7. An examination of current account figures, it must be noted, reveals a single exception to the rule that countries self-finance: the US. Since this country is usually seen as lying at the centre of global financial networks, the exception is extremely important.
7. George Akerlof, 'The Market for Lemons', Quarterly Journal of Economics, 89, 1970.
8. See the work of Jean Cartelier, for instance La Monnaie, Paris 1996.
9. The view that finance is a kind of superstructure on the base of 'production' or 'industry' is responsible for many errors in critical political economy.
10. Albert Hirschman, Exit, Voice, and Loyalty: responses to decline in firms, organizations and states, Cambridge, MA 1970.
11. Mark Granovetter, 'Economic Action and Social Structures: The Problem of Embeddedness', American Journal of Sociology, vol. 91, no. 3, 1985.
12. Alan Blinder, Central Banking in Theory and Practice, Cambridge, MA 1998, p. 59.
13. Michel Aglietta and Jean Cartelier, 'Ordre monétaire des économies de marché' in Aglietta and André Orléan, eds, La Monnaie Souveraine, Paris 1998.
14. To put the same point in more general terms: in the global market, the volume of trade in financial commodities (claims on income streams) now predominates over the volume of trade in real commodities (goods and services). See Photis Lysandrou, 'Globalization as Commodification', University of North London Business School Discussion Paper, forthcoming.
15. René M. Stulz, 'Globalization of Equity Markets and the Costs of Capital', NBER Working Paper 7021, March 1999. Stulz finds a significant reduction of capital costs, but not as great as he expected; he may have underestimated the efficacy of the voice-based mechanisms being displaced.
16. Gross flows, which include funds extracted from quoted companies, are a different matter.
17. Stuart Archbold, 'An Examination of Managerial Strategies and Motives in UK Mergers and Acquisitions', British Academy of Management Conference, 2000.
18. Thus it is by no means accurate to identify the advantages of US financial mechanisms only with phases of rationalization and disinvestment; they display a clear superiority in growth sectors such as biotech, where the capitalization of US enterprises at $320 bn is some ten times greater than that of their EU counterparts. Financial Times, 27 September 2000, p. 29.
19. Standard measures of financial flows neglect this pattern. Thus the data cited from Huffschmid above suggest that German corporations have more access to outside funds than do their US counterparts. This neglects, firstly, the extent to which US corporations have been made to finance each other through such stockmarket mechanisms as equity buy-backs and, secondly, the fact that the German and Japanese flows often represent what are in fact internal resources - internal, that is, to an industrial-financial grouping - and not funds drawn from the capital market. Nor are simple comparisons of investment volumes always pertinent: it is important to know how effectively these investment resources are deployed. Michel Aglietta presents data indicating that the productivity of corporate investment in the US (that is, the ability of this investment to raise output) has increased by 40 per cent over the period 1982-97. The corresponding figure for Germany is 12.7 per cent, for France, 6.8 per cent ('Shareholder Value and Corporate Governance: some tricky questions', Economy and Society, vol. 29, no. 1, February 2000).
20. Acts of Resistance: Against the New Myths of our Time, Cambridge 1998, p. 84.
21. 'Corporate Governance, Competition and Performance', in Simon Deakin and Alan Hughes, eds, Enterprise and Community: new directions in corporate governance, Oxford 1997, p. 171. See also Colin Mayer, 'The City and Corporate Performance: condemned or exonerated?', Cambridge Journal of Economics, vol. 21, no. 2, 1997. Mayer fails, in particular, to find evidence that insider systems lower the cost of capital: 'it is difficult to believe that the international integration of the past two decades has not brought costs of capital closely into line, at least for large companies which are able to raise funds in markets around the world.' He now argues only for a permissive policy: firms should be permitted to have concentrated, insider, ownership if they wish.
22. 'Corporate Governance, Competition and Performance', in Simon Deakin and Alan Hughes, eds, Enterprise and Community: new directions in corporate governance, Oxford 1997, p. 171. See also Colin Mayer, 'The City and Corporate Performance: condemned or exonerated?', Cambridge Journal of Economics, vol. 21, no. 2, 1997. Mayer fails, in particular, to find evidence that insider systems lower the cost of capital: 'it is difficult to believe that the international integration of the past two decades has not brought costs of capital closely into line, at least for large companies which are able to raise funds in markets around the world.' He now argues only for a permissive policy: firms should be permitted to have concentrated, insider, ownership if they wish.
23. 'Will Global Capitalism be Anglo-Saxon Capitalism?', NLR 6, November-December 2000. See also his Stock Market Capitalism: Welfare Capitalism. Japan and Germany versus the Anglo-Saxons, London 2000.
24. 'Will Global Capitalism be Anglo-Saxon Capitalism?', NLR 6, November-December 2000. See also his Stock Market Capitalism: Welfare Capitalism. Japan and Germany versus the Anglo-Saxons, London 2000.
25. Similarly, Taggart Murphy ('Japan's Economic Crisis', NLR 1, January-February 2000) gives a graphic account of the painstaking political negotiations that are slowly untangling the web of bad and dubious debts in the Japanese banking system - but Murphy writes as if this process were of little importance, a secondary phenomenon. Compare, to take a notorious counterexample, the rescue of LTCM, whose insolvency is widely seen as displaying the instability, even the irrationality, of trade in financial derivatives. Its recapitalization (strictly, a 'bail-in' rather than a bail-out since the resources came from its own creditors, not from the Fed) was complete within days. For a more developed version of this point see Photis Lysandrou, 'Globalization and the Euro: lessons and policy implications of the Asian crisis', University of North London Business School Discussion Paper 28, October 2000.
26. Similarly, Taggart Murphy ('Japan's Economic Crisis', NLR 1, January-February 2000) gives a graphic account of the painstaking political negotiations that are slowly untangling the web of bad and dubious debts in the Japanese banking system - but Murphy writes as if this process were of little importance, a secondary phenomenon. Compare, to take a notorious counterexample, the rescue of LTCM, whose insolvency is widely seen as displaying the instability, even the irrationality, of trade in financial derivatives. Its recapitalization (strictly, a 'bail-in' rather than a bail-out since the resources came from its own creditors, not from the Fed) was complete within days. For a more developed version of this point see Photis Lysandrou, 'Globalization and the Euro: lessons and policy implications of the Asian crisis', University of North London Business School Discussion Paper 28, October 2000.
27. 'Asian Crisis and the Future of the Japanese Model', Cambridge Journal of Economics, vol. 22, no. 6, November 1998.
28. Peter Gowan has suggested that this transformation of German finance was a quid pro quo for the participation of German companies in the US economy (personal communication). This is surely correct, but the desire to attract US FDI into Germany was also an important motive. More generally, Gowan's insistence on the political force used to extend what he calls the 'Wall Street-dollar system' across the globe can be accepted without denying that the resulting economic structure has an intrinsic logic of development or believing that the economic changes involved are reversible. See Peter Gowan, The Global Gamble: Washington's Faustian Bid for World Dominance, London 1999.
29. For an attempt to calibrate the overvaluation of US equities, see Sushil Wadhwani, 'The US Stock Market and the Global Economic Crisis', National Institute Economic Review, 167, January 1999, pp. 86-105. Also, Robert Shiller, Irrational Exuberance, Princeton 2000 (reviewed by Andrew Glyn in NLR 5, September-October 2000).
30. For an attempt to calibrate the overvaluation of US equities, see Sushil Wadhwani, 'The US Stock Market and the Global Economic Crisis', National Institute Economic Review, 167, January 1999, pp. 86-105. Also, Robert Shiller, Irrational Exuberance, Princeton 2000 (reviewed by Andrew Glyn in NLR 5, September-October 2000).
31. Robert Brenner ('The Boom and the Bubble', NLR 6, November-December 2000) may understate the ability of the US to manage a stock market crash, with its threat of a 'hard landing'. He considers the constraints on monetary policy but does not discuss the vigorous fiscal expansion which will certainly meet any significant downturn. US public finance is healthy enough to permit this response, which would work to limit dollar depreciation.