Equality as a driver of inequality? Universalistic welfare, generalised creditworthiness and financialised housing markets. West European Politics. 43(2)

Equality as a driver of inequality? Universalistic welfare, generalised creditworthiness and financialised housing markets. West European Politics. 43(2)

When the 2007 global financial crisis hit financial markets, European leaders were quick to point the finger at US markets, excessive risk-taking, and insufficient regulation. However, it soon became apparent that European banks were more exposed than their Wall Street counterparts. With massive dollar liabilities, European banks were dependent on the US to act as a global lender of last resort. The crisis revealed a level of transatlantic interdependence that had been unknown to most observers and policymakers prior to the crisis. We argue that this represents a paradox, given that the project of the European Monetary Union was partly motivated by a desire to make Europe more independent from the US dollar. The euro was a response to the challenge of “it’s our dollar, but it’s your problem.” In this article, we examine how the European vulnerability to the US dollar that began post-Bretton Woods did not, in fact, disappear with the creation of a European currency. Instead, through financialization and deregulation, European financial markets developed new, complex interactions with US financial markets. This financialization of transatlantic banking flows created a new type of interdependence. As European banks were so heavily invested in US markets, this gave the US authorities a direct interest in bailing them out. While cross-border banking flows have decreased since the crisis, the interdependencies remain, and currency swaps were used once again to handle the economic fallout from Covid-19. In the area of financial and monetary policy, the transatlantic relationship remains strong and stable within a dollar hegemony.

What, how, and why did Comparative Political Economy (CPE) lose sight of the sources of growing macro--economic and political instability? Those political and economic problems encompass a growing financial bubble and then crash in the housing market, a period of sluggish growth that plausibly constitutes secular stagnation, and a crisis of political legitimacy manifesting itself in the rise of anti--system 'populist' parties. A gradual shift in CPE's research agenda from macro--economic to micro-economic concerns, and from demand--side to supply explanations, diminished CPE's ability to adequately analyze the central economic and political problems of the past 20 years. We trace this evolution through successive 'supermodels' that constituted core research foci for CPE. To understand the current crises CPE needs to revisit and update its original roots in Keynes, macro--economics, and the demand side. This is already happening at the margins, as CPE scholars struggle to understand the current crisis. Acknowledgements: Schwartz thanks Aida Hozic for a smart comment back in the 1990s that informed his contribution to this article, and Steve van Holde for the title; the authors thank the anonymous reviewers. Conflicts: none declared Funding: InlandThinking about thinking about comparative political economy: from macro to micro and back Scientific analysis is not simply a logically consistent process that starts with some primitive notions and then adds to the stock in some straight--line fashion. It is not simply progressive discovery of some objective reality - as is, for example, discovery in the basin of the Congo. Rather it is an incessant struggle with creations of our own and our predecessors' minds and it 'progresses', if at all, in a criss--cross fashion, not as logic, but as the impact of new ideas or observations or needs, and also as the bents and temperaments of new men, dictate. Joseph Schumpeter 1 OverviewWhat, how, and why did Comparative Political Economy (CPE) lose sight of the sources of the growing macro--economic and political instability marking the past two decades? Those political and economic problems encompass a growing financial bubble and then crash in the housing market, sluggish growth that plausibly constitutes secular stagnation, and a crisis of political legitimacy manifesting itself in the rise of anti--system 'populist' parties. We argue that CPE reflected and reacted to changes in the economy by generating a series of economic governance 'supermodels' - stylized accounts of what CPE argued was the optimal institutional form and policies for economic governance. These models typically arose owl of Minerva--like just as their real world referent reached the dusk of its optimal performance. The subsequent deterioration of a given supermodel's performance then set a series of critiques in motion. Thus, CPE as a body of knowledge traveled down a quasi--kuhnian path, in which efforts to account for anomalies generated new research fields with scope conditions that excluded older knowled...