The Curse of Globalization

I am living in Puch near Weiz, a small village in Styria. Some tourists who spend their holidays here will describe the place as dreamy, although local people are by no means idle dreamers, but hard-working men and women. The attentive observer will notice this wherever he looks: Houses and gardens are well-kept and testify to prosperity, the absence of external boundaries such as hedges and walls suggests good neighborliness. The ordinary people in particular tend to be friendly and courteous. There is tolerance towards strangers, which benefited me and my family when, towards the end of the 1980s, I decided to leave Berlin and take up residence here – about 40 km from Graz, the next larger city.

In this region, prosperity is by no means a matter of course

Until about half a century ago, children here still walked barefoot to school. Servants and maidservants, who no longer exist today, were omnipresent and were forced to lead a life which was more than poor – it was miserable. An eighty-year-old neighbor of ours, whose brother had died in the war, was a mere child when she led the ox to plough the field. Nevertheless, people just got enough from their land as to prevent them from starving. Nobody here would speak of the “good old days”. Really good days first emerged in the second half of the past century. One would like to say that all of a sudden people entered an entirely different world.

Imagining that the whole of humanity could live in dreamy villages, but with modern-day comfort, would be a reason for optimism. We could be satisfied with our lives, because everything seems to be immune to frivolous change, made for satisfaction and even for beauty. Here, nobody would think of overthrowing the existing social order, of creating a “new man”, let alone of starting a bloody revolution. Admittedly, there remain enough reasons for grudge as everyone measures his or her own wellbeing and status against those of their neighbors. Invariably, some of these are better off than oneself, so there are never limits to one’s desires and hopes. But these are the usual stories of envy and competition that always existed and probably will continue to do so till the end of time.

Yet the idyll is deceptive

Years ago, chancellor Helmut Schmidt had noted with due amazement that German agriculture is subsidized with an amount that corresponds almost exactly to its real net output. In other words, it is the industry that allows Germany to afford an agriculture that would no longer exist if the farmers had to manage without such aid. German as well as Austrian farmers could not sell their products on foreign markets or compete with agricultural imports if they were not subsidized by that sector of the economy that creates the wealth of their countries, namely its highly efficient industry. The burden is nevertheless hard to bear, so attempts are being made to reduce it by forcing small farms to join together in order to form ever larger and more efficient agricultural units. The result is visible in the plains: fields that extend to the distant horizon, livestock farming on an industrial scale. Where such enlargements are difficult to achieve, as in the mountainous region where I live, the forest recaptures large areas that were once under the plough. Post offices are closing, communities and police stations are being merged, public transport is steadily reduced. Recently, the former ubiquitous inns, which were of so great an importance for municipal life, have also started to disappear. In smaller villages a sense of desolation is spreading, as most of the shops become desolate. People migrate to the larger cities. While it continues to be beautiful and even to impart the impression of bourgeois prosperity, the country idyll started to be gradually dismantled about two decades ago. Now it is in a process of steady erosion, young people are running away.

The self-confidence of the people

was based on the feeling that they were the masters of their own destiny. Thanks to their diligence, almost all (including the former male and female servants) acquired their own houses and soon started a life that was not only secure but indeed opulent in comparison with the past. Such comforting self-confidence in the success of one’s own achievement and strength is today only found in the rich northern parts of Europe and even there only in the more favored classes. Self-confidence has emigrated, it has, so to speak, been outsourced to the emerging Asian states, above all to China and India. There, people are now experiencing a process of ready expansion and the redemption of a majority from thousands of years of poverty and dependence. In Europe this feeling has almost disappeared, in its southern periphery reaching from Greece to Portugal it is even dramatically reversed.

Why did optimism fade in the West?

Because it is not only agriculture that confronts us with a doubtful idyll, but – much more dangerous for the future – industry too, the very basis of our material ascent and wealth. The largest German corporations registered in the Dax are no longer owned by the former Deutschland AG (i.e. Germany’s leading banks), more than half of the listed stock belongs to the portfolios of international creditors or/ and to American shadow banks. These may at any time dispose of their shares and thus devalue them, in case Germany (or Austria) would no longer provide them with the hoped-for profit. This happens, when workers and employees demand higher wages or when governments dare to pursue politics of welfare, education or health that creditors deem too expensive as they diminish their profits. Investors then urge industries to migrate to cheaper locations like Eastern Europe, or they make them leave the Old Continent altogether. Government is powerless against such decisions as listed companies are beyond their jurisdiction – they are the property of private shareholders.

Ulrike Herrmann, a shooting star in fashion-prone business journalism

has her own particular ideas on the matter. If we did not already know it, she teaches us that not only politics but economics – always susceptible to all kinds of ideology – may easily turn populistic. Herrmann calls for a policy of higher wages like other call for higher pensions, shorter working hours or longer holidays. Bravo! The message is simple, and it makes sense at first glance. After all, no reasonable person will doubt that higher wages for the most disfavored strata, as well as an active support for those threatened by poverty, should be the main concern of a government with social concern. A variety of studies has amply shown that a growing cleavage between rich and poor is the breeding ground for extreme ideologies and even social upheaval. So, people of all political colors may be sure to appeal to a wide audience when demanding higher wages, but populists will, of course, never ask whether under prevailing conditions there is any hope for their realization. The current political amateurs at the head of the Italian government are just celebrating a lesson in what must be called a stubborn denial of reality. They promise an unconditional basic income and the introduction of a flat tax, but they have to pay for this manna with the money borrowed from international investors, who transform the adventure into a zero-game. Creditors are still willing to provide the money required but at the same time they increase the interest rate, so that at the end of the day Italy will have paid more to their creditors than what it got from them for the coming two or three years.

Germany and Austria

are far ahead of Italy due to their inventiveness and engineering competence, but in many respects they are similar to their southern neighbors. In their case too, international creditors determine how far government and companies may go in caring for the wellbeing of their people. The nations of Europe may follow their sovereign will when it comes to drifting to the extremes of right or left. Anti-Semitism and xenophobia or, vice versa, tolerance and democratic procedures – here the range of possibilities is determined on the national level and ranges from Orban to Angela Merkel. Instead, the material welfare of people in Western countries is no longer decided by democratic will, but by global players with economic power, that is by international creditors. Ulrike Herrmann is right when calling for a stronger government that represents the interests of globalization losers. But this call comes decades too late. In both Germany and Austria, the leading parties never opposed the creeping erosion of economic self-determination. The neo-liberal Commission at the head of Europe is actively promoting it even today.

German Chancellor Gerhard Schröder

had recognized this loss of autonomy much more clearly than todays blue-eyed populists. Before he pushed through the so-called Agenda 2010, Germany was considered a patient, more precisely it was called the “sick man of Europe”. Schröder decided to let the welfare state shrink, i.e. he made it cheaper. International creditors (who own most of government and corporate debt) thanked him immediately. After that, the German economy was back on the path of ascent. No doubt, under prevalent conditions of international dependence, Schröder had done the right thing at the right moment. But he was the wrong man from the wrong party to do so. Up to the present day, Social Democrats do not forgive him that it was a chancellor of the left who took the first step towards dismantling the greatest leftist achievement, that is, the welfare state. Schröder had helped the German economy out of a recession, but to Social Democrats he bequeathed a heritage that may well turn out to be a kiss of death.

Populism is most aptly described as a repression of facts when these are in conflict with wishful thinking. Even economists such as Heiner Flassbeck and Ulrike Herrmann are not yet ready to accept what the facts clearly demonstrate: Due to their dependence on private global creditors, Western states have fallen into a trap out of which they may not escape by mere wishful thinking. Not even such elementary demands as a higher taxation of international companies can any longer be enforced by individual states.

The dependency was prepared long ago

Successful industrialized countries have increasingly accessed foreign resources. Oil and gas continue to be pumped into the Western world in growing quantities (only the United States finds itself now in a better position due to domestic shale gas production). Soon industrial production was no longer sufficient to pay for the immense fossil thirst. Western states were forced to pay with shares of their leading companies – in other words, they paid with a loss of autonomy. In earlier writings (such as “Energiewende”, Popyläen), I pleaded for a liberation from this dependence. A Europe relying exclusively on solar energy could once again make itself the sovereign of its own destiny. But this is no easy step as it runs counter to the interests of industry because it would set limits to its further expansion. So, up to this day, such proposals evoke condescending smiles at the best. Therefore, I equally prophesized that globalization will not be curbed until the US, its driving force up to now, turns into its opponent.

Meanwhile, this turnaround has taken place: The US is adopting  protectionism

This did not happen because economists have come with a new theory. Capital should be invested where it achieves the best results, this elementary textbook truth is held to be as valid today as it was in the past, all the more as it seems to be vouchsafed by economic reality itself. Not only the former Asian “Tiger States” have achieved a stunning success, but they were followed by the two population giants China and India. While government sponsored development aid remained largely ineffective, private capitalism did change the destiny of millions of people almost overnight by pouring technology and investment into those places where people were willing to work under the hardest conditions and at the lowest wages for their own benefit and that of their country.

In an ideal world this could indeed have been a win-win-situation, in the world as it is, benefits and losses soon turned out to be unequally spread. Economic theorists tend to overlook real-world complexity when it contradicts their beautiful formulas. Americans have outsourced much of their manufacturing industries – and at the same time the very technologies that once gave their country its lead and its wealth. By now, they have realized that it will take no more than two or three decades for China to overtake them in all sectors and areas (including the military) if development continues as in previous years. In the Middle Kingdom, new industries are springing up incessantly, China is expanding its military presence on land, at sea and in the air, it has turned into a space power and is now the world’s most efficient workbench. Its resounding success presents a marked contrast with the United States, where once leading industries have become rotten rust-belts, that present Americans with a medieval specter of “Memento mori”. Everybody knows that until recently China protected itself with high tariff barriers against foreign industrial imports, but leading American supermarket chains such as Walmart are filled up to 90 percent with goods coming from the Far East. Things could soon be similar in Europe, whereto China now exports more goods than to the US.

The real difference between the two countries is, however, that the autocratic and even dictatorial Chinese regime has pulled the great mass of the poor out of their misery, which is why they do not revolt, but follow its leadership. On the other hand, the powerful American elite managed to endanger even the middle class, so that many fear a lapse into poverty. That is why the democratic regime of the United States is threatened by internal dissent and even disintegration.

Donald Trump is a misfortune for his country in many ways

and he could easily become so for the rest of the world too, but he has grasped one evidence more clearly than most of his rivals: the decline of his country. His demand “America first” expresses the intent to remedy this state of affairs. Trump’s policy of protectionism does indeed meet with approval by a majority of Americans – even in the opposition camp. “Many democrats tend towards protectionism, even if they don’t say so openly… Bernie Sanders, if he were president, would not act differently,” says Harvard Professor Kenneth Rogoff. *1*

The man does, however, falsify the truth whenever it suits him, so he deliberately conceals the fact that the deindustrialization of the United States is not due to any machination by hostile foreign powers but was systematically carried out by America’s economic-political elite for its own profit and power. 1991 the new doctrine had been theoretically approved by Robert Reich in “The Work of Nations”, at about the same time it was officially endorsed by the so-called “Washington Consensus”. American companies and their creditors had discovered that they could maximize their profit if they no longer manufactured industrial goods in their own high-wage country, but had them produced by low-wage labor in developing countries like China. This had serious consequences for Europe as well. Once the US-companies embarked on outsourcing Europe had to follow suit if it wanted to remain competitive on world markets.

The effect was the same as in the US, American and European workers lost their jobs to workers in the Far East who sold their labor much cheaper. Ever since, the gap between rich and poor has been widening in all Western states.

Ulrike Herrmann offers a simple populist solution

similar to that currently practiced by Italy’s political amateurs with triumphant self-acclamation: Let’s spend more money! Let’s simply ignore international creditors! I agree with Mrs. Herrmann that a fundamental change is needed even in Germany, at the moment still a remarkably successful country. The German car industry, which due to its great engineering achievements has done so much for the country’s wealth in past decades, finds itself at a crossroads. Gasoline and diesel cars will be out in ten to twenty years at the latest as climate change will no longer allow us to further indulge in the fossil potlatch. However, technologically speaking, electric cars are primitive gadgets; other countries can produce them just as well as Germans. What is more, Germans have almost given up research on batteries, although they once were pioneers in the field.

These are Doomsday reflections

Higher wages for the disadvantaged classes would be the order of the day, and this is equally true for greater freedom of government action. But neither of these goals is likely to be reached unless we drastically reduce our dependence on foreign raw materials, first of all our dependence on gas and oil from the Middle East and from Russia. In other words, no serious change is to be expected or even possible unless Europe switches from fossil to solar energy in the shortest possible delay. As everyone knows, the steps we have taken so far are completely inadequate.

So, I have no choice but to enjoy a still beautiful façadepresenting us with the enticing charm of an almost unspoiled idyll.

1 Kenneth Rogoff in an interview 12 October 2018 given to the German Handelsblatt.