## Joseph Vogl

## ABSTRACT

Starting from the premise that the financial regime has become a power in and of itself-a fourth, 'monetative' power as it were-this essay gives an account of the ascendancy of finance and the shift from geopolitical to geo-economical order, within which there is no democratic legitimacy and no legal accountability and within which a new class conflict also emerges. It goes on to advance five theses on this new financial sovereignty, concluding that sovereign is he, who can transform his risks into other's dangers and position himself as the creditor of last resort.

## KEYWORDS:

Finance, Sovereignty, Power, Geo-economical order, Democracy, Class

Modernity  has  given  rise  not  merely  to  the  sovereign  state apparatus,  to  international  trade  companies,  to  influential financiers, to decentralized markets. It has also witnessed the formation of a particular type of power-the financial regimethat  cannot  be  properly  described  in  terms  either  of  political structures  or  of  economic  strategies.  This  type  of  power  is constituted,  instead,  by  the  interpenetration  of  these  poles. From  the  integration  of  private  creditors  into  the  politics  of early modern states, to the creation of central banks and public credit, all the way up to today's capitalism of financial markets, we can trace the emergence of a type of 'economic governance' that ultimately has immunized itself against the democratization of  political  power.  We  find  ourselves  in  a  situation  in  which, above all, the financial regime has taken on the character of a 'fourth power' and the accumulation of capital power is intimately associated  with  the  deployment  of  power  capital.  Insofar  as crises  are  intellectual  windfalls,  driving  forces  out  of  latency that,  under  normal conditions, remain inconspicuous, the last financial and economic crisis offered an apt illustration: in it a style of government could be observed that merits the title of a 'coup d'état'.

This means two things. On the one hand, from 2008 to current Euro policy, we have been dealing with decision-making bodies consisting of state representatives, international organizations and private companies, which have joined together in informal committees, operating outside the legal framework, to represent the  interests  of  creditors.  One  particular  example  has  been provided by the so-called Eurogroup, which directly dictates the fate of European debtor countries. In response to the question, on  what  legal  basis  they  intended  to  enforce  their  decisions against resistance by individual members, the secretary of the Eurogroup retorted: 'the Eurogroup does not exist in law […]. It is an informal group […] of the eurozone member states. Thus there are no written rules about the way it conducts its business, and therefore its president is not legally bound.' 1

On  the  other  hand,  the  measures  taken  have  manifested themselves as quasi-sovereign acts. In the Eurogroup, but also the European Stability Mechanism and the Fiscal Pact, legislative procedures were circumvented, creating a secondary structure without  legal  formalization,  which  acted  as  a  transnational executive, suspending budgetary powers, intervening in tax law, social policy, labor law, and so on. The results are well known: In  Greece,  for  example,  economic  output  collapsed  by  28%, unemployment rose to 27%, youth unemployment to 65%, and average wages fell by nearly a quarter.

What is going on here? How could such an ostentatious alliance between finance capital and government power come about? How did this  fusion  of  informal  consortia,  sovereign  competencies and transnational executive authority emerge? What components comprise the current financial regime?

To  begin  with,  it  was  formed  through  a  process  that  has, for  some  time  now,  been  referred  to  as  'financialization'.  Its beginnings reach back to the 1970s and are characterized by a confluence of disparate actions and events. A first condition was the collapse of the Bretton Woods Agreement in the early '70s, leading to floating exchange rates, new financial instruments (like currency derivatives) and expanding financial markets. Then came the  so-called  'Volcker  shock',  when  the  Federal  Reserve  under Paul Volcker drastically increased the fed funds rate, redirecting profits from surplus countries (like Japan and Germany) to Wall Street, while at the same time forcing a fall in wage costs. This was supplemented by liberal economic reforms under Thatcher and  Reagan:  deregulation  of  financial  markets,  tax  privileges for  interest-bearing  assets,  and  privatization  of  social  security systems.  In  addition  to  further  interventions  which  allowed finance capital to break out of its containment by the welfare state (reduction of corporate taxes, reform of labor markets, financial market promotion laws), two additional components came into play.

On the one hand, a new and dominant role for international organizations and treaties in the financial world -as was most evident  in  the  role  of  the  IMF.  Since  the  1970s  the  IMF  had been given a very special field of activity, namely monitoring adherence to 'stability criteria' in the face of floating exchange rates. The heyday of 'structural adjustment programs' had begun: granting loans to developing and emerging countries subject to strict  conditions,  including  budgetary  discipline,  tax  reform, privatization  of  state-owned  enterprises,  investor  protection, liberalization  of  capital  markets,  and  facilitation  of  foreign investment.

On  the  other  hand,  a  reorientation  of  central  banks  was undertaken -as  can  be  seen  in  particular  in  the  founding  of the  ECB.  The  ECB  considers  itself  to  be  the  guarantor  of  the financial and monetary system: it provides services to banks and financial markets, while operating as an independent enclave of governance, immune from other governmental bodies. And its orientation is therefore conspicuously one-sided: While it is no way accountable to European parliaments and governments, it answers to the financial public. It is obligated to those investors and  actors  who  dictate  the  dynamics  of  financial  markets  to safeguard currency and monetary value. In other words, the ECB offers a kind of 'minority protection' to the representatives of the financial sector; through central banks, financial markets have become an integral part of governmental practice and manifest themselves as para-democratic.

This picture certainly does not capture all the elements of the current financial regime (for instance, e-commerce, shadow banks,  and  the  dominant  economic  doctrines  should  not  be forgotten). But, of course, it raises the question: What are the characteristics of the financial regime, past and present? What kind of governance does it represent? What kind of power? Let me just formulate a few theses concerning the present situation.

First. The ascendancy of finance is due to an intense interplay between public and private agencies and cannot be described by the opposition of the state and the markets. Here, the antagonism of state and capital is weak or absent altogether. The financial regime must be defined as a special kind of modern power, as a special technology in the execution of modern power, modern government: that is the conversion of state power into capital (and vice versa), which guarantees perpetual scenes of primitive accumulation. This has led to a movement as powerful as it is ambiguous.  Just  as  the  modern  state  secured  its  permanence through  the  perpetuation  of  public  debt  and  taxation,  so  the financial  regime  obtained  a  quasi-sovereign  power  in  fiscal affairs. At the same time, through a permanent state of emergency (that  is,  a  permanent  dependence  from  private  financiers  and creditors),  this  power  evaded  sovereign  intervention  and  later obtained institutional form in national, central and note issuing banks.  This  indicates  the  precarious  status  of  the  financial regime. In it, the alienation or privatization of state resources comes up against the political occupation of private finance. It is this two-way public-private interplay that gives the financial regime its special status. On the fiscal side, this regime claims arcane components and sovereign dignity; as the embodiment of private capital, on the other hand, it resists acts of arbitrary political power. The formation of the sovereign state unleashed, together with private business, a dynamic which manifests itself in an eccentric becoming-sovereign of the financial regime. With finance, a reserve of sovereignty forming a category of its own established itself alongside and apart from state authority.

Second. When we speak today of the financial system, we are not referring to a purely economic matter, a special market system. The present financial system is rather a conglomerate of government bodies, central banks, international organizations (IMF), and privileged private corporations (investment groups, rating agencies), an ensemble of public, semi-private, and private actors. One could speak here of 'regulatory capitalism' 2 and of a transnational, trans-governmental executive, which is to say: of a power that makes and implements political decisions, which intervene  directly  in  national  economies  and  in  the  politics of  traditional  nation  states.  As  a  power  of  its  own  kind,  the financial  regime  structures  a  global  space  in  which  sovereign competencies, business, and market mechanisms are converging. This characterizes a shift from geopolitical to geo-economical order  which  distributes  areas  of  exploitation  and  zones  of accumulation, establishing a new class conflict: mobile investors, or super-citizens, against earthbound sub-citizens.

Third. In the history of finance, essential ruptures are not marked by the 'resounding' events of recent crises. Rather, the historic break took place in the seventies when secular trends reversed. Up to this date, progressive taxation, solidary social insurance,  and  strong  trade  unions  fought  for  a  continuous reduction of inequalities in the distribution of revenues and assets. Financialization reversed these dynamics and caused a situation in which a maximum of private fortune confronts a maximum of private (and public) debt. 3 Two aspects are noteworthy. On the one hand, an increasing portion of profits and credit was invested in financial products causing an offensive deindustrialization (e.g. in the UK and the USA), a movement which is reinforced in present platform capitalism, creating high market values for companies that  are  increasingly  unburdened  by  liabilities  against  fixed capital and labor. On the other hand, the financial regime installs a transfer system which turns the lower part of the population into payers of net interest in favor of finance capital. This process was accompanied by the passive inclusion of wage earners in the financial economy: expansion of consumer credits, mortgages, privatization of social security. One could observe one of the results in the Euro crisis: The weakest countries and groups had to bear the costs of the crisis -an internal colonization of European populations. The dynamic of finance not only released centrifugal forces in politics and economy; it also eroded social milieus of solidarity -one of the most important resources of democracy.

Fourth.  This  raises  a  related  problem  which  has  already become a major preoccupation for economists today: namely, the  devolution  of  the  monopoly  on  regulating  liquidity  from states and central banks to financial markets themselves. We are witnessing a transition here from a financial system regulated by governments to a system of financial governance regulated by markets. This has two consequences. For one thing, central banks are increasingly losing control of interest rates and the money supply in circulation. Money creation now happens in the market itself; even the vast quantities of cheap money injected into the economy by the ECB have barely been able to counter deflationary tendencies in recent years. For another thing, financial markets have become a 'prison' for governments, states, and societies. This has become particularly apparent in the policies of the ECB: the ECB is subject to a rule blocking it from purchasing bonds directly from the European member states; government bonds can only be purchased indirectly, through markets. That's why states are now evaluated by these markets, setting up a kind of reputation or beauty contest among them. An automatic profitgenerating mechanism has been set up: the ECB supplies private banks with cheap money, which they pass on to governments at higher interest rates. Using the threat of capital flight, interest rate  disadvantages  and  reduced  investment,  financial  markets have thus become a fourth power (we can call it 'monetative' -besides legislative, executive, judiciary powers 4 ), a creditor of last resort.

Fifth. All this gives rise to a double dilemma. According to the  prevailing  dogma,  economic  growth  can  be  financed  by low  interest  rates  and  cheap  money  (this  has  been  the  ECB's strategy,  also  the  Fed's,  for  years;  zero-interest  rate  policy (ZIRP),  quantitative  easing).  But  this  very  policy  leads  to  the accumulation of future risk potentials: cheap money is less likely to be invested in industry and infrastructures, and more likely to flow into capital and real estate markets. The symptoms are already  on  the  horizon:  stock  market  booms,  explosive  real estate  prices.  So  the  very  effort  to  generate  economic  growth summons the next financial crisis. But there is also the shadow of a political dilemma; a dilemma concerning the scope available for  political  decision-making. The depolitization of monetary politics (now dominated by the financial markets) is accompanied by the privilege of the financial industry, which may determine the distribution of wealth by money creation and the very special structures of financing. The anticipation of market preferences dictates the direction of political decisions. The concern of the democratic voting public is limited by the concern of a powerful minority, the financial public. This political and social cleavage will undoubtedly continue to occupy and afflict us. One might say, in fact, that the financial public today is pitted in class struggle against the entire rest of the population.

This inevitably raises older questions of sovereignty. Although we must come to terms with a global situation in which sovereign authority today can be exercised only in a restricted, distributed and fragmented way, some questions persist. In such a situation, we should first of all be wary of false friends, who offer answers to questions which they are not able to pose. One figure is posed by liberalism, which, by pointing out the blessings of a market order, systematically overlooks the concrete power relations of the financial regime. The other false hope is that placed in the old nation-state. For in addition to the essential role this entity has played in the creation of the current financial order, it is already in the process of concluding the most aggressive of alliances, one currently being tested in the USA: the alliance of the financial industry  and  plutocratic  lobbies  with  a  politics  of  national ressentiment .

How can  the  persistent  deformation  of  democratic  principles in  the  financial  regime  be  prevented?  On  the  one  hand,  for  a moment,  good  prospects  had  emerged  in  Europe  after  2008: Big banks were voluntarily nationalized, solidarity movements were founded, and sound proposals were amassed concerning the long overdue coordination of monetary, fiscal and economic policy. But all that is a thing of the past: the separation of retail and  investment  banking  demanded  by  all  experts  is  only  the most recent casualty. On the other hand, the financial regime has asserted its supremacy as an even more efficient combination of private value creation and the use of sovereign reserves of power. Therefore our pessimism today can hardly be great enough, that is  to  say:  what  is  at  stake  is  the  intensification  of  a  pessimist realism which mistrusts attempts at appeasement, which does not consider financial capitalism to be the best of all possible worlds, and which makes the power of the financial regime appear so  illegitimate  and  unacceptable  that  it  becomes  accessible  to interventions, contestations and struggles. This is not how we wish to be governed.

For the rule of the financial regime is: the sovereign is he, who can transform his risks into other's dangers and position himself as the creditor of last resort.

- 1 Yanis Varoufakis, Adults in the Room: My Battle with the European and American Deep Establishment (New York: Farrar Straus and Giroux, 2017), 447.
- 2 See David Levi-Faur, 'The Global Diffusion of Regulatory Capitalism,' The Annals of the American Academy of Political and Social Science 598, no. 1 (2016): 1232; Fabrizio Gilardi, 'The Institutional Foundations of Regulatory Capitalism: The Diffusion of Independent Regulatory Agencies in Western Europe,' The Annals of the American Academy of Political and Social Science 598, no. 1 (2016): 84-101.
- 3 Thomas Piketty, Le capital au XXIe siècle (Paris: Éditions du Seuil, 2013).
- 4 See Aaron Sahr, Keystroke-Kapitalismus. Ungleichheit auf Knopfdruck (Hamburg: Hamburger Edition, 2017), 154.