GEOFIN Blog #13 – Conference news: Thirty years of capitalist transformations in Central and Eastern Europe: inequalities and social resistance (by Zsuzsanna Pósfai)

This was a conference organized by the Institute for Social Solidarity at the Babeș-Bolyai University, Cluj, Romania. Originally planned to happen in April 2020, postponed multiple times due to the Covid-19 pandemic, and eventually organized online in May 2021, this conference was a great gathering of critical scholars working on the Central and Eastern European region. Keynote speakers were Dorothee Bohle (European University Institute, Florence), Jonathan Hopkin (London School of Economics), and Costas Lapavitsas (SOAS University of London). The recordings of their presentations are accessible here.

Together with Márton Czirfusz (Periféria Policy and Research Center), I presented a paper entitled “Dependent housing financialization in Hungary through the case of household debt”.

We were part of a panel on Uneven Urban Development, Subordinated Housing Financialization and Racialized Inequalities in the European Semi-Peripheries. The session was a very friendly and lively exchange on how pressures of financialization shape local possibilities of access to housing (or expulsion from housing) in Serbia, Romania and Hungary. Enikő Vincze and George Zamfir spoke about the trajectories of evictions in Cluj and the formation of a segregated Roma neighborhood. Ioana Florea presented a paper they are working on together with Mihail Dumitriu on the four phases of the financialization of housing in Romania from 2001 until today. Ana Vilenica and Vladimir Mentus presented the case of evictions in Serbia, as a way of dismantling social infrastructure.

In our presentation, we first spoke about how broader processes of financialization are connected to household debt, focusing on the post-2008 situation. Our main aim was to highlight how the peripheries of Europe play a special role in this process: how the broader relations of dependent economic integration also play out in how households become indebted. Hungary is often cited as an example of post-crisis housing de-financialization, but in our view this merely meant a process of shifting to nationalized forms of financialization on the housing market. We then went on to analyze differences between just household debt (or loans), and household over-indebtedness, which is a different category, focusing on how much debt results in economic difficulties for the given household. Over-indebtedness also has its specificities in peripheral Europe, such as the very high level of utility arrears, the importance of consumer loans, or the growing size of the debt-collection market in post-crisis years. We finished our presentation by outlining a few potential progressive policies, such as steps to de-financialize housing and livelihoods more generally.

The presentation can be downloaded here.

Dr Zsuzsanna Pósfai
Research Fellow
GEOFIN research
https://geofinresearch.eu/

 

Fig 1. Dr. Zsuzsanna Pósfai delivering her presentation online on 21st June 2021. Photo by Martin Sokol (used with author’s permission)

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How to cite:

Pósfai, Z. (2021) Conference news: Thirty years of capitalist transformations in Central and Eastern Europe: inequalities and social resistance. GEOFIN Blog #13. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

 

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GEOFIN Blog #12 – Financialisation of households in the ECE region: what can we learn from the secondary statistical data? (by Alicja Bobek)

The financialisation of households in East and Central Europe (ECE) is a relatively new phenomenon which is often described as part of a process of ‘catching up’ with countries in Western Europe. The delayed nature of household financialisation in the ECE region is evident in the secondary statistical data. As I have written in a recent GEOFIN Working Paper (Bobek, 2021a), such data remains limited, particularly in relation to long-term trends[1]. Nevertheless, the available data shows an interesting picture of recent trends in household financialisation in the ECE region, and it allows for some comparisons with the ‘Old’ EU member states.

There are different measures of household financialisation. These include household debt to GDP ratio and household debt ratio to their disposable income. In both cases, countries in the ECE region started from a relatively low base in the mid-1990s. For example, in 1995 household debt as a percentage of disposable income was as low as 3 percent in Poland; this compares to the ‘Old’ EU average of nearly 85 percent in the same year. While this ratio reached an average of 63 percent among countries in the ECE region by 2016, it remained much lower than the ‘Old’ EU average of almost 150 percent in the same year.

As argued by many scholars researching the subject of financialisation, housing and mortgage markets constitute one of the most important elements of the financialisation process, particularly in relation to households. It needs to be emphasised that mortgage markets for retail customers in the ECE region were almost non-existent during the socialist period and did not start to develop until the late 1990s. Prior to the transition, most ECE countries were characterised by the ‘East European Housing Model’, with public housing and housing estates as dominant models. However, due to the mass privatisation of housing which occurred after the collapse of communism, these countries experienced a major shift towards homeownership.

Indeed, ownership is a dominant form of tenure across all ECE states (Fig. 1). The average rate of homeownership in this region remains higher than the average rate of homeownership in Western Europe. Quite importantly, however, most households in ECE countries can be categorised as ‘owner with no outstanding mortgage or loan’. Nevertheless, the percentage of ownership with mortgage or loan in this region has been growing since the early 2000s. This suggests that ownership is still a desired form of tenure, but new entrants to the market have no other choice but to take on a mortgage. Furthermore, relatively higher levels of material deprivation among those who rent in the private market may suggest that ownership, even with a mortgage, is more ‘attractive’ than renting.

While the growing importance of mortgage markets in the ECE region is perceived by some as a positive development, there are also issues that require further consideration. These include the proportion of Foreign Currency (FX) loans, which grew at a rapid pace between 2004 and 2010. While the share of FX loans granted to households in selected countries in the region has decreased since 2010, rates recorded in 2014 were still relatively high. This can be problematic, especially when we take into account the low levels of so-called ‘financial literacy’, at least in some ECE countries (Fig. 2). Even though the concept of financial literacy itself can be controversial, it can be useful for highlighting the problematic nature of promoting complicated financial products in societies where the availability of any financial product was very limited until the mid-1990s.

Finally, it needs to be emphasised that the data not only shows us the overall trends among ECE countries, particularly the relatively low rates of household engagement with financial markets when compared to Western Europe, but also highlights some important variations within the region. What emerges from the secondary data are the differences between countries in the ECE region and also possible variations within each of these countries. Significant differences observed between ECE countries call for more scrutiny in analysing household financialisation as a unified and equal process occurring across this region. Variations on sub-national levels are more difficult to capture due to the data limitations, however some of the regional data on Poland (for details see Bobek, 2021c) suggests possible differences in financialisation of households between NUTS regions, and between the capital city and the rest of the country. All these should be taken into account in future research on the financialisation of households in the ECE region.

Alicja Bobek
Research Fellow
GEOFIN research
https://geofinresearch.eu/

 

[1] This data is also available as part of two databases available on the GEOFIN website – for details see Bobek 2021b and 2021c

 

References:

Bobek, A. 2021a. Financialisation of households in East-Central Europe: Insights from secondary statistical data. GEOFIN Working Paper No. 12. Dublin: GEOFIN research, Trinity College Dublin.

Bobek, A. 2021b. Financialisation of households: secondary statistical data. GEOFIN Database No. 2. Dublin: GEOFIN research, Trinity College Dublin. URL: https://geofinresearch.eu/outputs/databases/ (accessed 19/04/21).

Bobek, A. 2021c. Financialisation of households: secondary statistical data. GEOFIN Database No. 3. Dublin: GEOFIN research, Trinity College Dublin. URL: https://geofinresearch.eu/outputs/databases/ (accessed 19/04/21).

Klapper, L., Lusardi, A. and van Oudheusden, P. 2015. Financial Literacy Around the World: Insights from the Standard and Poor’s Ratings Services Global Financial Literacy Survey. FinLitt. URL: http://gflec.org/wp-content/uploads/2015/11/3313-Finlit_Report_FINAL-5.11.16.pdf?x87657, (accessed 23/08/18).

 

 

Fig. 1. EU: Tenure Status (2019)

Source: Eurostat

 

Fig. 2. Financial literacy levels, EU (2014)

Source: Klapper et al., 2015

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How to cite:

Bobek, A. (2021). Financialisation of households in the ECE region: what can we learn from the secondary statistical data? GEOFIN Blog #12. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

 

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GEOFIN Blog #11 – The post-pandemic city: what could possibly go wrong (by Martin Sokol)

The Covid-19 pandemic has reignited debates about the future of cities. Optimists hope that – in response to the pandemic – our cities can become greener, healthier, smarter, more pleasant to work and live in, more economically resilient and more sustainable. This blog post argues that while such positive goals are potentially achievable, there is also a good chance that things could go horribly wrong. Indeed, in a ‘pandemic city’ scenario outlined here, the pandemic leads to a vicious circle where the health crisis is compounded by economic, financial, social, political and ecological crises, accompanied by a ‘technological apartheid’.

As a starting point, it is worth remembering that cities and city-regions now operate within the framework of a financialised economy, where finance has growing power over the economy and over society. The so-called ‘real economy’ is now sandwiched between financial markets and real estate markets (that are themselves increasingly financialised). Households, firms, banks and states are all caught up in a web of ‘financial chains’ (Sokol, 2017) driven by a profit-making imperative. The future shape of city-regions is thus inextricably linked to the operation of financialised financial flows (Fig. 1).

The pandemic has, of course, severely disrupted these financial chains (e.g. see Sokol, 2020; Sokol and Pataccini, 2020), but the logic of financialisation remains largely intact. In fact, one could argue that under the conditions of pandemic-induced economic stress, the emphasis on profitable financial streams will only intensify. The year 2021 was supposed to be a year of hope – the expectation being that with the arrival of vaccines the battle against the pandemic can eventually be won. But let’s just imagine for a moment that, for whatever reason (vaccine supply delays; vaccine hesitancy; new virus variant; etc.), the pandemic is not going to be brought under control as hoped. What happens then?

In the ‘pandemic city’ scenario outlined in this blog post (Fig. 2), coronavirus will continue to cause a major health crisis (both directly and indirectly). The continuing health crisis will in turn inflict further economic and financial damage, with severe implications for people’s jobs (and joblessness) and homes (and homelessness). The economic and financial hardship will not be felt equally across society, however. Indeed, there is good reason to believe that parts of society will be hit much harder than others and, as a consequence, social polarisation will grow. This social polarisation will go hand in hand with spatial polarisation – both within and between cities. Simply put, some cities and some parts of cities will do much better than others. The financialised nature of property markets will only exacerbate this process. Uneven social and economic impacts will, in turn, fuel political polarisation. Extremist forces will become mainstream within an increasingly fragmented and unstable political scene. Amid such political polarisation, it will be impossible to find a much-needed consensus on how to tackle the climate emergency. As a result, the environmental crisis will deepen. It is not inconceivable that amid growing environmental chaos (compounded by the economic, financial, social and political crisis), law and order will disintegrate. The collapse of law and order in cities (or parts of cities) will also mean that it will become increasingly impossible to impose any public health measures to control the spread of the virus. This will only serve to accelerate the pandemic and will further deepen the multiple aspects of the crisis.

Faced with such a dire situation, attempts will undoubtedly be made to implement technological solutions. However, these ‘solutions’ will only cause further polarisation within cities. A ‘technological apartheid’ may emerge where some people will enjoy a growing range of exciting online services and technology-enabled solutions, while others will be completely disconnected from digital services and face increasing social and economic marginalisation. The divide will not just be digital. Technology will also act as a spatial barrier: physical access to certain facilities, transport systems, particular zones or whole neighbourhoods of cities will be controlled by ‘smart’ IT systems (using digitalised personal health records and increasingly intrusive surveillance methods). However, it is unlikely that such a ‘technological apartheid’ will succeed in ending the pandemic. Indeed, as long as pockets of disease continue to persist in parts of the community, Covid-19 and its mutations will continue to threaten to reinfect the whole city. Under this scenario, there will be no such thing as a post-pandemic city. Instead, the pandemic will become permanent, and cities will be epicentres of its perpetuation. The vicious circle will continue with devastating consequences.

This ‘pandemic city’ scenario may appear rather extreme and disturbingly dystopian. But it would be hard to completely dismiss it as unrealistic. In fact, it is possible that various elements of the vicious circle described above are already in operation in many cities. The longer the pandemic lasts, the harder it will be to reinstate anything resembling the ‘normal’, let alone achieving the more optimistic and more sustainable visions. In order to break the emerging vicious circle, bold actions are needed. In the context of financialised economies, the critical players are central banks (see Fig. 1). Indeed, it is only gargantuan monetary interventions by central banks that have so far prevented a total economic and financial meltdown (by propping up financial markets). We now urgently need central banks not only to provide financial muscle to beat the pandemic, but also to devise ways to support green recovery and just transition, in which cities will be key battlegrounds.

 

Dr Martin Sokol
Principal Investigator
GEOFIN research
https://geofinresearch.eu/

 

Note:

This blog is based on a presentation entitled “European cities beyond Covid-19: Critical reflections” (Sokol, 2021), delivered as part of the ‘European cities beyond Covid-19’ webinar organised by the Trinity Development & Alumni office within the Inspiring Ideas @ Trinity series. You can find the recording of the full webinar on the Trinity Development & Alumni website: https://www.tcd.ie/alumni/news-events/webinars/ ; or watch back on YouTube here: https://www.youtube.com/watch?v=K22RsC9FzA4 .

 

References:

Sokol, M. (2017) Financialisation, financial chains and uneven geographical development in Europe: Towards a research agenda. Research in International Business and Finance. Vol. 39, Part B, pp. 678-685. DOI: http://dx.doi.org/10.1016/j.ribaf.2015.11.007

Sokol, M. (2020) From a pandemic to a global financial meltdown? Preliminary thoughts on the economic consequences of Covid-19. GEOFIN Blog #9. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

Sokol, M. (2021) “European cities beyond Covid-19: Critical reflections”. Presentation for the ‘European cities beyond Covid-19’ webinar, Inspiring Ideas @ Trinity webinar series, 10th February 2021. Dublin: Trinity Development & Alumni, Trinity College Dublin. Available online at: https://www.tcd.ie/alumni/news-events/webinars/ (or via YouTube at: https://www.youtube.com/watch?v=K22RsC9FzA4 )

Sokol, M. and Pataccini, L. (2020) Winners and losers in coronavirus times: Financialisation, financial chains and emerging economic geographies of the Covid-19 pandemic. Tijdschrift voor Economische en Sociale Geografie111(3): 401-415. DOI: 10.1111/tesg.12433,  https://doi.org/10.1111/tesg.12433 [OPEN ACCESS].

 

Photo 1. Dublin under lockdown during the pandemic.

(Photo © M. Sokol, 2021)

 

 

Fig. 1. Financialised economy

Source: Sokol, 2021

 

 

Fig. 2. The ‘pandemic city’ scenario

Source: Sokol, 2021

 

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How to cite:

Sokol, M. (2021) The post-pandemic city: what could possibly go wrong. GEOFIN Blog #11. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

 

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GEOFIN Blog #10 – Western banks-led financialisation in Croatia: A paper delivered at the workshop for Ireland-based postgraduate students researching Central and Eastern Europe (by Sara Benceković)

Writing a PhD thesis is an individual endeavour, but that does not mean one has to do it alone. Often, I find that I can advance my dissertation when I work together with my colleagues, discussing puzzling topics or stuck-points over coffees or running my notes on different readings. This drive towards making my PhD more sociable explains my jump of joy when I heard about an annual workshop that brings together Ireland-based graduate students working on Central European, Eastern European and Eurasian topics. This year’s workshop was themed Central and Eastern Europe: Past, Present and Future, and was hosted by the University of Limerick on 28 February 2020. I decided to present the thesis chapter I have been working on at the moment on the transformation of banking in the post-socialist Croatia.[1] This paper is an account of the post-socialist historical conjuncture in Croatia, in specific relation to the country’s banking system and its credit-making activity.

Particularly, the presentation describes the transformation of socialist financial institutions into joint-stock companies, accounts for their subsequent privatisation and records the changing ownership structure. Moreover, the paper locates key local banking crises and traces how the big, Western financial groups used these crises to make their move on the region. Indeed, the emphasis of the paper is on consolidation processes by which the Croatian banking system came to be foreign-dominated (see Figure 1) and increasingly concentrated. The article also notes certain particularities of the Croatian financial system. Some of the unique points feature the Independence war being constitutive of the Croatian-type of financialisation, the Croatian kuna effectively acting as an exchange system rather than a currency under the influence of FX-loans, and the development of state debt-collection system carried outside the legal system by public notaries. Nevertheless, the paper locates Croatia as the country of subordinated and peripheral-type of financialisation, by the feature of being foreign-led, developmentalist, and over-indebted. Banking and lending make up the backbone of a society and are a vital facilitator of its prosperity. This way, breaking down the order of wealth ought to be one of the critical tasks of a researcher interested in regional development. The feedback I received at the workshop showed to be indispensable, and the knowledge of the other issues faced by the region made me better apt in framing some of the features of Croatian financialisation. In the next paragraph, I will tell you more about the workshop itself.

The workshop consisted of two special lectures and six panels. At the opening, prof. Joachim Fischer (University of Limerick) introduced us to Valeska Grisebach’s movie ‘Western,’ which eased us into the theme of a cultural clash between the East and the West through a storyline of German construction workers in Bulgaria. Panels that followed worked out the theme of East-West divide through their particular fields, namely the financial sector, inter-ethnic relations, EU accession and Europeanisation processes, memory and myth, as well as the post-Soviet transition. The presenters together painted a picture of CEE as a complex political landscape, constituted through the dialectical relationship with the West, involving tensions, struggles and interplay between contrary tendencies, and still in becoming. The closing lecture by Dr Sinisa Malesevic (University College Dublin) on Balkan wars, state formation and nationalism struck me as a central piece of the event, carrying a message: Pay attention to what was there before. Indeed, as of my concern, legacies of any one area play into the type of financialisation that takes place. That question now lingers over my chapter, and for that, I am truly grateful for the opportunity to attend this workshop.

Sara Benceković
PhD Researcher
GEOFIN research
https://geofinresearch.eu/

[1] For a brief summary of the aims of my PhD project see GEOFIN blog #8 – Financialisation and sub-national banking geographies in Croatia (by Sara Benceković). https://geofinresearch.eu/blogs/geofin-blog-8-financialisation-and-sub-national-banking-geographies-in-croatia-introducing-my-phd-research-by-sara-bencekovic/

 

Fig. 1. Bank ownership by assets in Croatia (1990-2018)

 

 

 

 

 

 

 

 

 

Data source: HNB (Croatian National Bank)

 

Fig. 2. Workshop in Limerick

 

 

 

 

 

 

 

 

 

 

 

Source: Photo courtesy of workshop organisers

 

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How to cite:

Benceković, S. (2020) Western banks-led financialisation in Croatia: A paper delivered at the workshop for Ireland-based postgraduate students researching Central and Eastern Europe. GEOFIN Blog #10. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

 

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GEOFIN Blog #9 – From a pandemic to a global financial meltdown? Preliminary thoughts on the economic consequences of Covid-19 (by Martin Sokol)

While fighting against Covid-19 continues and saving lives must remain the priority right now, some unavoidable questions are starting to bite: What will be the economic consequences of the pandemic? Are we heading for a wide-spread economic collapse? Is a global financial meltdown coming? In the current fast-evolving situation, with global infections and death toll rising each day, with over half of the planet’s workforce under movement restrictions or lockdowns, with economies coming to a halt and financial markets in disarray, it is difficult to predict how this will end. One thing is increasingly clear though: the hope that economic life will quickly return to normal once the health emergency has passed, is fading away. Indeed, even if a vaccine or a magical cure was found tomorrow and the pandemic was somehow successfully brought under control globally, the economic tsunami that has already been unleashed will be difficult to contain, with potentially devastating consequences. Will this unprecedented situation force us to rethink the ways in which our economic and financial systems are organised? My fear is that unless a fundamental paradigm shift is adopted, the coming crisis will further exacerbate social inequalities and deepen economic disparities at multiple geographical scales, while also failing to put us on a sustainable development path.

 

Unprecedented economic impacts

In terms of the immediate economic impact, it appears that we are entering unchartered waters. While an economic slowdown has been predicted, the speed and severity of the economic collapse in the leading economies have taken many by surprise. An expectation of a quick V-shaped recession (in which a rapid sharp decrease in economic activity would be followed by an equally quick rebound once the health emergency is over) has evaporated[1].

For Nouriel Roubini, one of the economists who predicted the last crisis, the economic contraction we are seeing now is neither V-shaped, U-shaped or even L-shaped (the latter being a sharp downturn followed by stagnation). Rather, he observes, “it looks like an I: a vertical line representing financial markets and the real economy plummeting”[2]. It is still unclear just how deep this free-fall will be. But it is already becoming obvious that the coming economic calamity may be similar or bigger than that caused by the Great Recession/Global Financial Crisis of 2008. Indeed, there are serious warnings that the coronavirus-triggered credit crunch will make the 2008 crisis look like ‘child’s play’[3]. Kenneth Rogoff, another prominent economist, observes that the 2008 crisis increasingly resembles “a mere dry run for today’s economic catastrophe”[4]. Rogoff also contends that the collapse of the global economic output witnessed today “seems likely to rival or exceed that of any recession in the last 150 years”. Adam Tooze, meanwhile, suggests that while the last global economic crisis was a ‘financial heart attack’, the coronavirus crash might be a ‘full-body seizure’[5]. Worries grow that instead of a recession (technically defined as two consecutive quarters of falling output) we may be heading for a depression – a much more serious, longer-term crisis. Comparisons have already been drawn with the Great Depression of the 1930s. For her part, Kristalina Georgieva, the IMF chief, anticipates “the worst economic fallout since the Great Depression”[6]. Meanwhile, Roubini (‘Dr. Doom’) is predicting that the current crisis will be greater still. According to him we are heading for a ‘Greater Depression’[7].

One of the most striking and visible aspects of this economic calamity is a dramatic increase in unemployment in all major economies. The speed and the size of the labour market collapse seem unprecedented. Within the first three weeks of Covid-19 emergency in the US, 16 million workers were laid off, with the predicted unemployment rate soon reaching 15%[8], breaking post-War and post-Depression records[9]. In the UK, the Institute for Employment Studies estimated that up to 2 million people lost their jobs within the first month of the crisis, with unemployment jumping from 3.9% to 7.5% of the workforce, already surpassing the peak of the last recession[10]. Here in Ireland, the Central Statistics Office estimated that a new COVID-19 Adjusted Measure of Unemployment (which includes those receiving Pandemic Unemployment Payment) was as high as 16.5% in March 2020[11]. These figures are likely to grow, hitting disproportionally low-pay and precarious workers, and driving social inequality to new highs.

 

Extraordinary policy responses

The realisation that this crisis is threatening the entire economic edifice has been reflected in the policy responses seen so far. Proposals that would ‘normally’ be considered as unworkable ‘loony-left’ fantasies, have now been rolled out, with a speed of light, as mainstream policies on both sides of the Atlantic. In the US, the neo-liberal mantra of ‘small government’ has been swiftly abandoned in favour of the $2.1tn rescue package, the biggest economic stimulus in history. Much of this will of course be used to bail-out failing US corporations, but the US Government is also sending a $1,200 cheque to every adult earning less than $75,000 per year. While this may not be enough, the unprecedented state intervention has already been described as ‘pandemic socialism’[12]. In the UK, similarly, a bazooka-style ‘whatever-it-takes’ approach has been taken. Rishi Sunak, the UK’s Chancellor of the Exchequer, took “unprecedented measures for unprecedented times”[13], spending some 7.5% of GDP on coping mechanisms[14]. The rescue package includes a job subsidy scheme through which the state will provide employers with 80% of a worker’s wage up to a limit of £2,500 a month to prevent workers being laid off due to the pandemic[15]. The scheme also extends to the self-employed. It has been noted that the scheme is “more generous than some of the high welfare Scandinavian countries” – a move described as “an incredible intervention for any British government, let alone a Conservative one”[16]. Faced with the pandemic, many other countries have adopted extraordinary, socialist-like policies (e.g. free childcare in Australia) as part of their response.

In addition to such unprecedented fiscal interventions, we are also witnessing a dramatic mobilisation of monetary policy instruments. Indeed, the massive government spending in countries such as the US and UK is being matched by colossal interventions of their central banks. Apart from slashing interest rates, both the Fed and the Bank of England are pumping billions of dollars and pounds into financial markets in order to keep them afloat, while also expanding credit lines to their governments in order to cover their extraordinary expenditure. The money creation programmes of quantitative easing (QE) which helped to contain the Global Financial Crisis have been activated again, on a gargantuan scale. It is likely that, without such decisive actions, financial markets may have already collapsed – demonstrating just how central the central banks really are in sustaining contemporary financialised economies and their ‘financial chains’ (see Fig. 1).

 

Eurozone convulsions

The economic response of the Eurozone to the pandemic threat did not get off to the best of starts. Christine Lagarde, the European Central Bank (ECB) chief, made an unfortunate comment at a press conference on 12th March about the role of ECB saying “we are not here to close spreads”[17]  – referring to the worrying divergence between the borrowing costs of Germany and those of crisis-hit Italy. The press conference was supposed to calm the markets, but achieved the opposite. Lagarde’s slip of the tongue sent spreads on Italian bonds  sharply higher and caused political outrage[18]. While Lagarde quickly rowed back on her comments, the ECB’s commitment to Italy has been questioned[19]. The ECB President’s seven words may come down as being the most expensive in history yet. It has been estimated that they could cost Italy €14 billion in interest payments over next ten years – i.e. €2 billion per word![20] Since then, on 18th March, the ECB announced a massive €750bn Pandemic Emergency Purchasing Programme (PEPP) to step up its purchases of sovereign and corporate debt[21]. With other measures already in place this will go some way to help eurozone economies to cushion the impact of the crisis[22].

However, the Lagarde slip-of-the-tongue incident put in sharp focus one of the key weaknesses in the Eurozone architecture: the lack of a common debt instrument – ‘eurobonds’ – which would allow member states to borrow on the same terms. Eurobonds were previously proposed by Greece as a way out of the eurozone sovereign debt crisis in the wake of the Global Financial Crisis (but rejected mostly due to Germany’s strong opposition). Now, in the face of the coronavirus pandemic wreaking havoc across Europe, such a eurobond mechanism would make even more sense[23]. The crisis is a perfect opportunity for Europe to demonstrate its usefulness and strength. Economic solidarity is what is needed right now. With this in mind, on 25th March, nine eurozone countries (France, Italy, Spain, Portugal, Ireland, Greece, Luxembourg, Slovenia and Belgium) proposed the so-called ‘coronabonds’, a position backed by the ECB[24] and reportedly winning support of further five countries (Latvia, Lithuania, Estonia, Cyprus and Slovakia)[25].

Unfortunately, the proposal to create such a common European bond has been strongly opposed by the “frugal four” – Germany, Holland, Austria and Finland. Their position is, of course, self-defeating. A failure to agree on mutualised European bonds could rip the Eurozone apart[26] [27] [28]. As the Spanish foreign minister Arancha González poignantly put it: “We are in this EU boat together. We hit an unexpected iceberg. We all share the same risk. No time for discussions about first- and second-class tickets … History will hold us responsible for what we do now” [29].

Unfortunately, such pleas have largely fallen on deaf German and Dutch ears. The EU’s economic response to Covid-19 thus for now basically mirrors the fragmented and uncoordinated response to the health emergency itself (which included a collapse of a common travel area due to widespread unilateral closures of internal EU borders by individual member states). Without ‘coronabonds’, each EU member state is left on its own devices when it comes to borrowing money to fight the pandemic’s economic fallout. However, to use the above metaphor, some countries hold first-class and other countries second-class rescue tickets – duly reflecting the uneven economic geography of Europe. This uneven geography is likely to be further exacerbated by the pandemic. It is unclear at this time which rescue boat Ireland will be in.

 

Economic geography of pandemic Europe

The first-class and second-class tickets in Europe are traditionally distributed along a long-established division line between the economic ‘core’ and the ‘periphery’, or geographically speaking, between Europe’s north and south. This, of course, is an oversimplification of a rather more complex economic geography of Europe (e.g. see Sokol, 2001). But the fact remains that there are significant economic differences between the core (e.g. Germany) and southern periphery (Portugal, Spain, Italy, Greece). Unfortunately, decades of European integration have not managed to eradicate these differences. The Global Financial Crisis of 2008 and the subsequent sovereign debt crisis in Europe have brutally exposed, and further deepened, the north-south divide. EU-imposed austerity may have stabilised the eurozone as a whole, but left the southern periphery weaker and more vulnerable.

In 2019, Germany’s output was 16% higher than in 2007, while Italian GDP was still 4% lower[30]. Italy, having gone through three recessions since the 2008 Global Financial Crisis[31], is also shouldering the largest sovereign debt load in Europe (and the fourth largest in the world)[32]. The Italian banking sector also happens to among the most fragile in Europe – overburdened by non-performing loans and heavily exposed to the Italian government’s debt[33]. As Jerome Roos notes, it is a “cruel irony” that Italy has also been the most heavily affected by the pandemic[34]. The economic consequences for Spain, in turn also heavily hit by Covid-19, will be dire too. Unemployment in Spain was already 14% before the pandemic (second highest in the EU after Greece and contrast with Germany’s 3.2%) and Spanish joblessness rate is likely to increase significantly, perhaps to over 20% (while German unemployment is expected to peak at 6%)[35]. Indeed, the economic and employment structure of the southern periphery makes it extremely vulnerable to the current crisis. Tourism accounts for a significant proportion of employment in Greece (over 25%), Portugal (over 20%) as well as Italy and Spain (nearly 15%), yet this is the sector that is taking a massive hit. The southern periphery is also more dependent on small businesses which may have a harder time surviving the crisis or taking advantage of any employment protection schemes[36]. It is not surprising that, in the absence of any significant EU support, the outlook for Southern Europe is bleak. One prediction is that the eurozone’s overall GDP will fall by about 10% in 2020 – with Germany performing a little better than average and recovering moderately in 2021, while Italy’s and Spain’s GDP will fall more than average and recover less[37]. Thus, the uneven economic impact of the crisis combined with the uneven recovery, playing out on an already uneven terrain, could mean that the pandemic will drive the north-south divide to new levels.

In the absence of a strong supporting mechanism, such as the ‘coronabonds’ discussed above, this can lead to unpredictable outcomes. Indeed, the trouble, according to Wolfgang Münchau, is that Italy’s falling GDP combined with rising debt could push its debt-to-GDP ratio from the current 135% to between 160% and 180%, in turn raising doubts about Italy’s solvency and potentially leading to a default[38]. A similar scenario has been described by Yanis Varoufakis, highlighting an “impossible conundrum” for countries such as Italy, being hardest hit by the pandemic, yet “being the most indebted and thus the least able to shoulder the necessary new debt”. In this instance “the new debt needed to revive the private sector will push the state into default, so destroying the banks whose capital is mostly government debt and, in short order, the rest of the private sector”[39]. Such a scenario highlights the way in which key economic actors (in this case the state, banks and firms) are interlinked by ‘financial chains’ (Sokol, 2017a). One could add that the vulnerability of the system will be further underlined by a direct transmission mechanism between firms, households, and banks, as soon as both firms and households start defaulting on their debts[40]. As Willem Buiter observed, “[b]anks and non-bank financial intermediaries did not start the crisis this time, but they will inevitably become a part of it”[41]. It is likely that the pressure on banks in the southern periphery will be enormous. And, during a crisis, as Emma Clancy rightly argues, “capital flees to the ‘safe’ countries’ banks”. Inside the eurozone, she observes, “the trend has been for capital flight from banks in the periphery to the core, particularly Germany”[42]. This may mean that German banks will benefit at the expense of their southern European counterparts, further exacerbating the problem while highlighting the international dimension of ‘financial chains’ and their contribution to uneven economic geographies. However, there is only so much economic inequality that a single currency area can take. A sovereign debt default by Italy or any other country in the southern periphery could rip the eurozone, and the EU, apart. Such a grim scenario is of crucial concern to EU member states in the ‘eastern’ periphery of Europe.

 

East-Central European dimension

It is worth remembering that one of the key reasons post-socialist countries in East-Central Europe were keen to join the EU was to help them to catch-up economically with their Western European counterparts. Closing the economic gap between the ‘West’ and the ‘East’, however, has been proving challenging. Deep ‘transition’ recessions in the early 1990s that followed the collapse of state-socialism have meant that the economic divide between the Western and Eastern halves of Europe has actually grown larger, as have differences within the East itself. Through the combination of old historical legacies and uneven effects of transformation processes, Central and Eastern Europe has established itself as a ‘super-periphery’ of Europe while itself displaying increasing divergence of economic fortunes (e.g. see Sokol, 2001). From the ‘varieties of capitalism’ perspective, the economies of East-Central Europe (ECE) have been described as ‘dependent market economies’ (Nölke and Vliegenthart, 2009) – their productive capacity became dominated by Western European FDI and their financial systems became heavily dependent on Western European banking groups. The economic fortunes of the entire region have thus became inextricably linked to those of Western Europe. In the early 2000s this dependence helped to foster a remarkable economic revival and rapid catching-up of many ECE countries. Part of this boom was related to increasing financialisation, not least through the Western banks that were instrumental in rapidly expanding credit across the region, on the back of newly created ‘financial chains’ (Sokol, 2017b). The effects of the credit boom seemed like a fast-track upgrade from third-class to first-class.

However, for many people and places, all this came to a rather abrupt end when the Global Financial Crisis hit in 2008. The economic damage caused by the crisis was enormous (e.g. see Smith and Swain, 2010), in many cases wiping out any gains made in the previous decade. The impacts, however, were unevenly distributed, as was the recovery. Poland, for example, emerged as the only country in the entire European Union to avoid a recession, while Baltic countries experienced deep falls and took nearly a decade to get back to pre-crisis level (e.g. see Pataccini and Eamets, 2019; Pataccini, 2020). For many ECE countries, even the best performing ones, the prospects of fully converging to GDP levels of Western Europe appear as distant as ever. In parts of the region, the disillusionment with the European project have grown.

The coronavirus-induced crisis will be the third major economic calamity in as many decades and perhaps the biggest yet. Indeed, the impact could be explosive – both economically and politically. Economically, the crisis will be playing out on an already uneven economic terrain and is likely to have uneven impacts. The exact contours are hard to predict at this time – but much will depend on the way in which economic and financial links with Western Europe will unfold. The exposure of ECE economies is both to the northern core (e.g. German automotive industry) as it is to the southern periphery (e.g. Italian banking). It remains to be seen in what ways the existing ‘financial chains’ will survive, be disrupted, transformed and/or replaced. One way or another, the crisis is likely to exacerbate some existing inequalities while also creating new ones – both between and within countries. Indeed, social inequalities and regional disparities within ECE countries are likely to get worse.

Crucially, many ECE states may find it harder than Italy or Spain to borrow money to fund their recovery, let alone to worry about social inequality or regional disparities. Major economic upheaval in the ‘eastern’ periphery which would further increase disparities between the East and West could, in turn, put additional strain on the European integration project. Centrifugal tendencies and Euro-sceptic sentiments (already well entrenched in Poland and Hungary, for example) may grow. Without a comprehensive European approach to tackling the fallout of Covid-19, the future of Europe will be at stake. ‘Left-behind places’ have a proven ability to deliver crushing blows to even the most honourable causes. After Brexit, can the EU afford Huxit, Polend or Czechout? It is useful to remember that economic dependencies usually run both ways: a core needs a periphery as much as the periphery needs the core.

 

Beyond Europe

A big concern here is that if Europe itself is incapable of finding a common ground in dealing with this unprecedented emergency, there is little hope that a consensus will be found at a global level. This is extremely bad news because while the economic impact of the pandemic on the advanced economies of the Global North is likely to be massive, the impacts on the Global South will be catastrophic. Indeed, emerging and developing economies have a much weaker capacity to deal with either the health crisis or the economic one. The twin crises will most likely feed off each other, with devastating impacts. Meanwhile, as workers everywhere are being asked to stay put, capital has been moving freely around the globe – mostly from the Global South to the Global North – rapidly abandoning the sinking ship in a capital flight of unprecedented scale. This will sink developing economies ever faster. The financial outflows will trigger a range of knock-on effects. Worries grow that a global ‘debt deluge’ may be unavoidable[43] [44]. There is a high risk that many indebted countries in the Global South will simply not be able to repay their debts. This, combined with a word-wide pile of corporate debt that has accumulated since the last crisis but now may be defaulted on, will threaten the stability of the global financial system. A financial meltdown cannot be ruled out. Finance may not be where this crisis started, but it may be where it will end.

 

Concluding remarks

Will this force us to rethink the ways in which our economic and financial systems are organised? The post-pandemic instinct of policy-makers will be to try to return to ‘normal’ as soon as possible. But going back to ‘normal’ will mean continuing an economic and financial system that creates grotesque inequalities (both social and spatial) and that is bringing us ever closer to environmental collapse. Returning from the Covid-19 emergency back to ‘normal’ would be returning straight to global climate emergency. If there is one positive thing about the pandemic, it is that it showed that governments can take brave decisions and adopt measures that would previously have been unthinkable. We need to find new ways of organising our societies – societies where ‘the economy’ is not at odds with humanity and the environment. As Nelson Mandela would remind us, “it always seems impossible until it is done”.

 

Dr Martin Sokol

Principal Investigator

GEOFIN research

https://geofinresearch.eu/

 

Fig. 1. Financial chains in a financialised economy

 

 

 

 

 

 

 

 

 

 

 

Source: Adapted from Sokol, 2019

 

References:

Nölke, A. and Vliegenthart, A. (2009) Enlarging the Varieties of Capitalism: The Emergence of Dependent Market Economies in East Central Europe, World Politics, Vol. 61, No. 4, 670–702.

Pataccini, L. and Eamets, R. (2019) Austerity versus pragmatism: a comparison of Latvian and Polish economic policies during the great recession and their consequences ten years later. Journal of Baltic Studies, 50:4, 467-494.

Pataccini, L. (2020) ‘Western banks in the Baltic States’. GEOFIN Working Paper No. 11. Dublin: GEOFIN research, Trinity College Dublin. (forthcoming).

Smith, A. and Swain, A. (2010) The global economic crisis, Eastern Europe, and the Former Soviet Union: models of development and the contradictions of internationalization, Eurasian Geography and Economics, 51 (1): 1–34.

Sokol, M. (2001) Central and Eastern Europe a Decade After the Fall of State-socialism: Regional Dimensions of Transition Processes, Regional Studies, Vol. 35, No. 7, pp.645-655. (ISSN Print 0034-3404).

Sokol, M. (2017a) ‘Financialisation, financial chains and uneven geographical development: towards a research agenda’, Research in International Business and Finance, 39:678–685.

Sokol, M. (2017b) ‘Western banks in Eastern Europe: New geographies of financialisation (GEOFIN research agenda)’. GEOFIN Working Paper No. 1. Dublin: GEOFIN research, Trinity College Dublin. Available on-line at: https://geofinresearch.eu/outputs/working-papers

 

[1] E.g. see the views of Angel Gurría, OECD secretary general – https://www.bbc.com/news/business-52000219

[2] Nouriel Roubini, 25/3/2020, The Guardian – https://www.theguardian.com/business/2020/mar/25/coronavirus-pandemic-has-delivered-the-fastest-deepest-economic-shock-in-history

[3] Martin Farrer, 20/3/2020, The Guardian – https://www.theguardian.com/world/2020/mar/20/coronavirus-crisis-could-lead-to-new-credit-crunch-as-companies-struggle-with-debt

[4] Kenneth Rogoff, 8/4/2020, The Guardian – https://www.theguardian.com/business/2020/apr/08/the-2008-financial-crisis-will-be-seen-as-a-dry-run-for-covid-19-cataclysm

[5] Adam Tooze – Foreign Policy – 18 March 2020 – https://foreignpolicy.com/2020/03/18/coronavirus-economic-crash-2008-financial-crisis-worse/

[6] https://www.bbc.com/news/business-52236936

[7] https://markets.businessinsider.com/news/stocks/coronavirus-could-spark-greater-depression-dr-doom-nouriel-roubini-warns-2020-3-1029027839

[8] https://www.theguardian.com/business/2020/apr/09/us-unemployment-filings-coronavirus

[9] https://www.bloomberg.com/news/articles/2020-04-10/economists-see-drawn-out-u-s-recovery-after-unemployment-surge

[10] https://www.employment-studies.co.uk/resource/getting-back-work-0

[11] https://www.cso.ie/en/releasesandpublications/er/mue/monthlyunemploymentmarch2020/

[12] Willem Buiter, 9/4/2020, Project Syndicate – https://www.project-syndicate.org/commentary/covid19-pandemic-requires-socialism-by-willem-h-buiter-1-2020-04

[13] https://www.bbc.com/news/business-51982005

[14] Philip Inman, 28/3/2020, The Guardian – https://www.theguardian.com/business/2020/mar/28/coronavirus-bailouts-need-to-be-paid-back-or-do-they

[15] Larry Elliott, 20/3/2020, The Guardian – https://www.theguardian.com/business/2020/mar/20/the-third-uk-budget-in-nine-days-and-the-most-crucial

[16] https://www.bbc.com/news/business-51984470

[17] https://www.ecb.europa.eu/press/pressconf/2020/html/ecb.is200312~f857a21b6c.en.html#qa

[18] https://www.reuters.com/article/us-ecb-policy-italy-minister/italy-furious-at-ecbs-lagarde-not-here-to-close-spreads-comment-idUSKBN20Z3DW

[19] Christopher Marsh, 13/3/2020, The General Theorist – https://thegeneraltheorist.com/2020/03/13/ecb-what-just-happened/

[20] Christopher Marsh, 13/3/2020, The General Theorist – https://thegeneraltheorist.com/2020/03/15/loose-lips-cost-ships-lagardes-language-and-italys-eur14-billion-bill/#more-649

[21] Emma Clancy, 10/4/2020, Tribune – https://tribunemag.co.uk/2020/04/the-eurozones-coronavirus-debt-crisis?fbclid=IwAR3gtIbiDiUGeOv5IoVEuafFuqgyudyu8F6wSmJ0xSjERCFNiYMhgz5E6NU

[22] See also Lagarde’s official blog post of 9th April 2020 on ‘How the ECB is helping firms and households’  https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200409~3aa2815720.en.html . It remains to be seen if these interventions will be enough.

[23] See also Adam Tooze’s opinion piece here https://www.ft.com/content/d7d08772-7583-11ea-95fe-fcd274e920ca?segmentid=acee4131-99c2-09d3-a635-873e61754ec6

[24] Emma Clancy, 10/4/2020, Tribune – https://tribunemag.co.uk/2020/04/the-eurozones-coronavirus-debt-crisis?fbclid=IwAR3gtIbiDiUGeOv5IoVEuafFuqgyudyu8F6wSmJ0xSjERCFNiYMhgz5E6NU

[25] David Adler and Jerome Roos, 31/3/2020, The Guardian –https://www.theguardian.com/world/commentisfree/2020/mar/31/solidarity-members-eurozone-coronavirus-dutch-coronabond

[26] Adam Tooze and Moritz Schularick, 25/3/2020, The Guardian –  https://www.theguardian.com/commentisfree/2020/mar/25/shock-coronavirus-split-europe-nations-share-burden?CMP=share_btn_tw

[27] David Adler and Jerome Roos, 31/3/2020, The Guardian – https://www.theguardian.com/world/commentisfree/2020/mar/31/solidarity-members-eurozone-coronavirus-dutch-coronabond

[28] See also an excellent analysis by Emma Clancy https://tribunemag.co.uk/2020/04/the-eurozones-coronavirus-debt-crisis?fbclid=IwAR3gtIbiDiUGeOv5IoVEuafFuqgyudyu8F6wSmJ0xSjERCFNiYMhgz5E6NU

[29] David Adler and Jerome Roos, 31/3/2020, The Guardian –https://www.theguardian.com/world/commentisfree/2020/mar/31/solidarity-members-eurozone-coronavirus-dutch-coronabond

[30] Adam Tooze and Moritz Schularick, 25/3/2020, The Guardian –  https://www.theguardian.com/commentisfree/2020/mar/25/shock-coronavirus-split-europe-nations-share-burden?CMP=share_btn_tw

[31] Hung Tran, 10/3/2020, Financial Times – https://www.ft.com/content/0cc94fb6-8b35-427d-9f98-dc727303ebbf

[32] Jerome Roos, 22/3/2020, Tribune – https://tribunemag.co.uk/2020/03/the-coming-debt-deluge

[33] Jerome Roos, 22/3/2020, Tribune – https://tribunemag.co.uk/2020/03/the-coming-debt-deluge

[34] Jerome Roos, 22/3/2020, Tribune – https://tribunemag.co.uk/2020/03/the-coming-debt-deluge

[35] Martin Arnold and Daniel Dombey, 12/4/2020, Financial Times – https://www.ft.com/content/ff31b665-22e7-4439-817f-75477bc77082

[36] Martin Arnold and Daniel Dombey, 12/4/2020, Financial Times – https://www.ft.com/content/ff31b665-22e7-4439-817f-75477bc77082

[37] By Wolfgang Münchau, 12/4/2020, Financial Times – https://www.ft.com/content/ddb02110-7b24-11ea-af44-daa3def9ae03

[38] Wolfgang Münchau, 12/4/2020, Financial Times – https://www.ft.com/content/ddb02110-7b24-11ea-af44-daa3def9ae03

[39] Yanis Varoufakis, 11/4/2020, The Guardian – https://www.theguardian.com/world/commentisfree/2020/apr/11/eu-coronavirus-relief-deal-enemies-debt-eurozone

[40] See also Katharina Pistor – https://www.theguardian.com/commentisfree/2020/mar/18/debt-relief-coronavirus-crash

[41] Willem Buiter, 9/4/2020, Project Syndicate – https://www.project-syndicate.org/commentary/covid19-pandemic-requires-socialism-by-willem-h-buiter-1-2020-04

[42] Emma Clancy, 10/4/2020, Tribune – https://tribunemag.co.uk/2020/04/the-eurozones-coronavirus-debt-crisis?fbclid=IwAR3gtIbiDiUGeOv5IoVEuafFuqgyudyu8F6wSmJ0xSjERCFNiYMhgz5E6NU

[43] Jayati Ghosh, 19/3/2020, Social Europe – https://www.socialeurope.eu/the-covid-19-debt-deluge

[44] Jerome Roos, 22/3/2020, Tribune – https://tribunemag.co.uk/2020/03/the-coming-debt-deluge

 

 

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How to cite:

Sokol, M. (2020) From a pandemic to a global financial meltdown? Preliminary thoughts on the economic consequences of Covid-19. GEOFIN Blog #9. Dublin: GEOFIN research, Trinity College Dublin. Available online at https://geofinresearch.eu/outputs/blog/

 

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GEOFIN Blog #8 – Financialisation and sub-national banking geographies in Croatia – introducing my PhD research (by Sara Benceković)

Being a part of the GEOFIN project, my PhD focuses on financialisation as one of the key, yet severely understudied, features of capitalist penetration into the East-Central European countries since the dissolution of the old state-socialist system. Aiming to explain the particular ways in which financialisation penetrates and manifests itself in the East-Central European periphery, my research project examines subnational banking strategies of West-European banking groups operating in East-Central Europe, with a particular focus on Croatia. Herewith, I remain particularly receptive to the most recent appeals coming from critical scholars for researchers to start making sense of “how capital functions across a wide variety of spaces and scales” (Hardt & Negri, 2018, p.440). Coupled with the insights that financialisation is remaking East-Central European economic landscapes (e.g. Becker et al. 2010), my research examines the organization of Western financial groups’ retail banking operations in the post-socialist space, as well as the provision of financial services to households, with a focus on lending at a sub-national/regional scale. In doing so, my research aims to contribute to debates on how financialisation plays out in the specific context of ‘transition economies’. The key is to understand social and economic changes in places where finance and banking groups have removed and replaced the old systems of authority and power, and to examine the ways in which they have assumed importance in social and economic lives of East-Central European citizens. Furthermore, my research explores the extent to which local characteristics, post-socialist legacies and alternative financial movements/models influenced the form financialisation has taken in this particular context. Finally, my PhD examines what this means for the economic and financial stability of Europe as a whole, as well as for its balanced regional development. Some preliminary findings (e.g. Benceković, 2018a, 2018b, 2018c) reveal that, while each of the post-socialist countries followed a different model of ‘transition’ towards a market economy, a pattern of dependent, financialised and credit-led development by and large informed the post-socialist transformation. Perceiving ‘transition’ in this way enables us to shift the focus of attention from a ‘common European market’ to inequality that is essential to its sustenance and reproduction. Building on the concept of ‘financial chains’ (Sokol, 2017), my research operationalizes credit and debt dynamics as a fundamental structure of the uneven power between the European West and its East-Central European (semi)periphery. In these ways, my PhD research aims at contributing to the current knowledge on economic and social process by which financial capitalism reproduces itself at different scales, from local/regional to national and supra-national.

Sara Benceković
PhD Researcher
GEOFIN research
https://www.geofinresearch.eu/

 

References:

Becker, J., Jäger, J., Leubolt, B. & Weissenbacher, R. (2010) Peripheral financialization and vulnerability to crisis: A regulationist perspective. Competition and Change 14(3-4), 225-247.

Benceković, S. (2018a) Finance and financialisation in the context of ‘transition economies’: West-European banking groups in Croatia. Paper for the 9th Annual Conference in Political Economy (IIPPE – International Initiative for Promoting Political Economy). Pula, Croatia, 12-14 September 2018.

Benceković, S. (2018b) Geographies of finance and financialisation in East-European periphery: Preliminary reflections on subnational banking strategies in post-socialist Croatia. Paper for the Fifth Global Conference on Economic Geography (GCEG), Specialist session on: Finance and financialisation in post-socialist Central and Eastern Europe. University of Cologne, Cologne, Germany, 24-28 July 2018.

Benceković, S. (2018c) Housing and finance in the context of the European ‘semi-periphery’: transformation of banking strategies in two decades of Croatian transition. Paper for the “The financialization of housing in the semi-periphery” Workshop. Central European University (CEU), Budapest, Hungary, 20-22 July 2018.

Hardt, M. & Negri, T. (2018) The Multiplicities within Capitalist Rule and the Articulation of Struggles. Triple C, 16(2), 440-448.

Sokol, M. (2017) Financialisation, financial chains and uneven geographical development: Towards a research agenda. Research in International Business and Finance 39, 678-685.

 

Fig. 1. The City of Zagreb, Croatia

Photo by Sara Benceković

 

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GEOFIN Blog #7 – ‘Subordinated Financialisation’? The Role of Credit and Debt in Everyday Lives of Households in East-Central Europe (by Alicja Bobek)

“The issue of household financialisation, and financialisation of everyday life, has gained increased interest over the past few decades. It has been argued that financialisation of households is part of a broader socio-economic transition, which involves an overall growing importance of financial institutions and logics. At the core of this shift is the withdrawal of the state provision of welfare, especially in relation to housing. This consequently results in the financialisation of home ownership and expansion of mortgage markets (Aalbers, 2008). Furthermore, in line with some of the classic theoretical accounts, debt has become an inevitable part of the life-cycle (e.g. Ando and Modigliani, 1963) and access to credit constitutes a crucial aspect of the optimization of cash flows and well-being of households (Beck and Brown, 2012).  However, it has also been argued that over-indebtedness can have negative effects on individuals, households and communities (e.g. Montgomerie and Tepe-Belfrage, 2017).

Quite importantly, while the impact of these processes on individuals and households is relatively well documented in ‘Western’ societies, literature on financialisation of households in East-Central Europe (ECE) remains rather limited. Yet, households in this region may increasingly be a subject of what was termed ‘subordinated financialisation’ (Lapavitsas, 2013), which has a significant impact on everyday lives, especially in relation to commodification of services previously provided by the state.

In this paper (Bobek, 2019), which I presented at the 17th Polish Sociological Congress in Wroclaw (10-14 September 2019) I further explored the issue of the household financialisation in the ECE countries. As discussed in this paper, financialisation in ECE region is often regarded as part of the ‘catching up’ process with the West (Andre, 2015; Chmelar, 2013; Sainsot, 2015). I argued, however, that this view may be over-simplistic. First, the levels of households’ financial debt in this region remain relatively low. This is especially the case of the mortgage-related debt, as most homeowners in ECE countries have no outstanding mortgage or loan (Fig. 1). Nevertheless, household debt in most of these countries has been growing over the past few decades (see Fig. 2). In this case, financialisation should be analysed as a process rather than a social fact. The impact of debt on households can also have different consequences compared to households in Western Europe. This can be further problematized in the light of so-called ‘financial literacy’ and trust in financial institutions. Finally, processes and the effects of financialisation in the ECE region can also be ‘uneven’ and need to be scrutinized in relation to geographical locations and to social structures. In particular, regional differences, as well as rural-urban divisions, should be further examined.”

Dr Alicja Bobek

Research Fellow

ERC GEOFIN research

https://www.geofinresearch.eu/

 

References:

Aalbers, M.B. (2008) The financialization of home and the mortgage crisis. Competition and Change, 12(2): 148-166.

Ando, A. and Modigliani, F. (1963) The ‘life cycle’ hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1): 55-84.

Andre, C. (2015) Household Debt in OECD Countries: Stylised Facts and Policy Issues. Polish National Bank.

Beck, T. and Brown, M. (2012) Foreign Bank Ownership and Household Credit, S/BF-HSG Working Papers on Finance No. 2012/6. Swiss Institute of Banking and Finance.

Bobek, A. (2019) ‘Subordinated financialisation’? The role of credit and debt in everyday lives of households in East and Central Europe. Paper for the 17th Polish Sociological Congress: Me? Us? Them? Subjectivity, Identity, Belonging, Wroclaw, Poland, 11-14 September 2019.

Chmelar, A. (2013) Household Debt and the European Crisis. ECRI Research Report No. 2013 June 2013. European Credit Research Institute.

European Mortgage Federation (EMF), Hypostat. (2015) A Review of Europe’s Mortgage and Housing Markets, p.90.

Eurostat. (2018) Distribution of the Population by Tenure Status (EU-SILC Survey), URL: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_lvho02&lang=en (accessed 27 June 2018)

Lapavitsas, C. (2013) Profiting Without Producing: How Finance Exploits Us All. London and New York: Verso.

Montgomerie, J. and Tepe-Belfrage, D. (2017) Caring for debts: how the household economy exposes the limits of financialisation., Critical Sociology, 43(4-5): 653-668.

Sainsot, R. (2015) A Convergence Process in Household Credit in Central and Eastern Europe. ECRI Commentary No. 16, October 2015. European Credit Research Institute.

 

Fig. 1. Tenure status in the European Union (2017)

(Author’s elaboration; Data source: Eurostat (2018))

 

Fig. 2. Outstanding residential loans to GDP ratio, European Union (2003-2014), Index (2007=100)

(Author’s elaboration; Data source: European Mortgage Federation, (2015))

 

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GEOFIN Blog #6 – Financialization of the State: Preliminary Analysis for Croatia – Presentation at the Croatian National Bank (by Marek Mikuš)

“Financialization of the State: Preliminary Analysis for Croatia” was the title of a presentation I delivered for the Croatian National Bank in Zagreb on 6th June 2019 as part of GEOFIN’s stakeholder engagement and outreach. My talk, delivered in Croatian, was the 30th iteration of the Bank’s occasional Economics Workshop (Ekonomska radionica) series, which hosts experts from outside of the Bank and provides a platform for a dialogue between the Bank staff and the “outside world”. The invitation to present my research findings was extended by Mr. Vedran Šošić, the Chief Economist of the Bank. I opened my presentation by briefly explaining the basic concept and objectives of the GEOFIN research project as well as my own role within it. In the second part of the presentation, I explained the concept of the ‘financialization of the state’ and discussed the scholarly state of play (with a particular focus on East-Central Europe) on the state-centred processes most closely connected with financialization: monetary and fiscal policies; public debt; provisioning of public services and goods; law-making and regulation; and investment policy. In the final part of the presentation, I outlined a preliminary analysis of the financialization of state in Croatia based on secondary quantitative data and existing literature and using other countries of East-Central Europe as the comparative frame of reference. My presentation highlighted the following relative characteristics of the financialization of the Croatian state: higher levels of public debt and debt servicing costs; larger shares of high-cost forms of debt (especially foreign-currency and short-term debt); and more advanced financialization of the pension system through the expansion of capitalized pension funds, which are crucially also important creditors of the Croatian state. These processes were part of a broader, distinctly peripheral financialization of Croatia’s economy, based on massive inflows of foreign interest-bearing capital that drove a major credit and assets boom in the 2000s. The state maintained a macro-economic environment conducive to these processes, especially through its long-standing anchoring of monetary policy in a managed exchange rate and its successful inflation-targeting. This mode of financialization was one of the key causes of the accumulation of macroeconomic imbalances (external debt and current account deficits) and Croatia’s increased vulnerability to external shocks. The implications of both became visible in the aftermath of the global financial crisis when a reversal of capital flows set off a long recession and a period of rapid expansion of public debt and debt servicing costs. My presentation was followed by a lively discussion that involved many members of the diverse audience of about 25 experts, including the Bank staff, experts from other public sector organizations and academics. Participants engaged intensively with the concept of financialization, which was previously not familiar to all of them, and posed searching questions about its causes and connections with global economic and social transformations, including the current environmental crisis. At the same time, they questioned some of the critical arguments about the nature and the effects of Bank’s policies and called for a more careful interpretation of particular statistical indicators. Overall, the event succeeded in being a venue for an open and engaged dialogue between public finance practitioners and academic research communities.

Dr Marek Mikuš

Research Fellow

ERC GEOFIN research

https://www.geofinresearch.eu/

Fig. 1. Croatian National Bank in Zagreb, Croatia. Photo by Suradnik13 (Licensed under the Creative Commons Attribution-Share Alike 4.0 International, 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license).

Fig. 2. Dr Marek Mikuš delivering his presentation to the Croatian National Bank in Zagreb on 6th June 2019. Photo by Petra Rodik (used with author’s permission).

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GEOFIN Blog #5 – Western European Banking Groups in East-Central Europe: A Preliminary Overview (by Martin Sokol)

“Western European Banking Groups in East-Central Europe: A Preliminary Overview” is a title of a joint paper with Dr Dal Maso which I delivered at the 6th FinGeo Global Seminar in São Paulo, Brazil (Dal Maso and Sokol, 2019). Our paper was part of a special session on ‘Finance and uneven development in Eastern Europe’, which also included three other conference papers by the GEOFIN team. Our paper provided a preliminary overview of a banking transformation in East-Central Europe (ECE) that had opened the gates for the financialisation of the region. The paper highlighted the fact that, following the collapse of state-socialist regimes in ECE, a dramatic ‘transition’ of the entire region towards a market economy had begun in 1990s. This included a wholesale transformation of banking systems that were previously geared towards completely different societal aims. State-owned ‘monobanks’ were abandoned in favour of a market-oriented banking system involving an independent central bank and a range of commercial banks. This transformation was further encouraged by the EU accession process, which most ECE countries completed by 2003. All this resulted in ECE becoming a region with the highest level of foreign ownership of the banking sector in the world. Indeed, by early 2000s, foreign ownership of bank assets was well over 70% in most ECE countries, with some countries (e.g. Estonia) displaying near 100% foreign share of ownership (see Fig. 1). The only country that bucked the trend was Slovenia, which saw only very slow increase of foreign bank asset ownership. The 2008 financial crisis seem to have halted, and in some cases reversed, the growing dominance of foreign banking capital in several ECE countries, but the region’s banking sector remains heavily foreign-owned. What is striking, is that the foreign banks that came to dominate ECE region are, with few exceptions, Western European. Indeed, it could be argued that the Western European banking groups became a driving force in the financialisation of post-socialist ECE, not least through a dramatic expansion of credit to East European households (which in some countries have continued despite the global financial crisis). Our paper thus offered a preliminary overview of the penetration of the major Western European banks in East-Central Europe. In doing so, it also highlighted a particular parent-subsidiary structure that characterizes the operation of Western-European banks in ECE. It could be argued that these parent-subsidiary arrangements form part of wider ‘financial chains’ (Sokol, 2017) – linking the West-European core with the ECE semi-periphery and reshaping uneven development in Europe.

Dr Martin Sokol

Principal Investigator

ERC GEOFIN research

https://www.geofinresearch.eu/

 

References:

Dal Maso, G. and Sokol, M. (2019) Western European Banking Groups in East-Central Europe: A Preliminary Overview. Paper for the 6th FinGeo Global Seminar (Geography, Finance and Uneven Development). Special session: Finance and uneven development in Eastern Europe. University of São Paulo, São Paulo, Brazil, 15-17 May 2019.

 

Sokol, M. (2017) Financialisation, financial chains and uneven geographical development in Europe: Towards a research agenda. Research in International Business and Finance. Vol. 39, Part B, pp. 678-685. DOI: http://dx.doi.org/10.1016/j.ribaf.2015.11.007

Fig. 1: Foreign ownership of bank assets in 11 ECE countries.

Source: Dal Maso, G. and Sokol, M., 2019 (Data: Claessens and van Horen, 2014; and ECB Statistical Data Warehouse).

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GEOFIN Blog #4 – Public debt, capital flows and financialization of the state in East-Central Europe (by Marek Mikuš)

The expansion of public debt and changes in its regulation were key processes through which states have been financialized in past few decades. Through increased costs of debt repayment (and in some cases risk of default), financial markets discipline states and potentially subject public policies to their interests, norms and ideas. States, for their part, increasingly adopt finance- and market-based approaches to how they deal with their debts. In post-socialist East-Central Europe (ECE), however, scholars mostly discussed “peripheral financialization” of the region’s economies in general and did not focus on the financialization of the state more specifically. They linked peripheral financialization especially to prominent cross-border inflows of capital before the global financial crisis, their reversal after the crisis, and the leading role of Western European–owned banks in these processes. In this paper (Mikuš, 2019) which I presented at the 6th FinGeo Global Seminar in São Paulo, Brazil (15–17 May 2019; http://fingeo2019.com/en/home/), I asked how public debt fits into the model of peripheral financialization in the region and especially how its dynamics related to the dynamics of capital flows. To do so, I examined secondary quantitative data on public debt and financial account in 2000–2017 in the 11 post-socialist East-Central European member states of the European Union (ECE-11) and compared it with the same data on the 15 EU member states before 2004 (EU-15), which served as a proxy of the Western European core. The analysis confirmed the basic assumption of the model of peripheral financialization: ECE-11 states indeed experienced significant capital inflows before the crisis and their reduction or reversal after the crisis, compared to significantly less cyclical dynamics in EU-15. However, public debt (as a share of GDP) in ECE-11 states on average decreased before the crisis and substantially increased after the crisis, in 2009–14. In other words, the increase in the levels of public debt in ECE-11 was not associated with the inflows of capital but rather with their reduction/reversal. This could potentially be interpreted as states playing their role of the debtors of last resort in crisis situations, as indicated also by the growing share of government liabilities in total liabilities in the same period. This process appears to have been more prominent in ECE-11, considering the faster growth of public debt and government liabilities after the crisis than in EU-15. To conclude, then, public debt dynamics in East-Central Europe appears to have been related to the cycle of financial flows typical for peripheral financialization, but in a more indirect and complex manner than a simple linear correlation between capital inflows and debt increases. In addition, there was also a substantial variation between the debt trajectories of the countries in the region, suggesting a need for fine-grained case studies of the underlying national-level conditions, developments and outcomes.

 

Dr Marek Mikuš

Research Fellow

ERC GEOFIN research

https://www.geofinresearch.eu/

 

Reference:

Mikuš, M. (2019) Public debt, capital flows and financialization of the state in East-Central Europe. Paper for the 6th FinGeo Global Seminar. University of São Paulo, São Paulo, Brazil (15–17 May 2019).

Fig. 1: Financial account balance as a share of GDP, ECE-11, 2000–17. Deficits indicate cross-border capital inflows, surpluses outflows. Source: Mikuš, 2019; Graphic support: Petra Rodik.

 

Fig. 2: Budapest Stock Exchange. Hungary is one of the most indebted East-Central European countries. Source: Wikimedia Commons – Photo by Globetrotter19, used under a Creative Commons Attribution-Share Alike 3.0 Unported license.

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