The title of this essay implies some definite answer – and thus  more than can be delivered. Whatever neo-liberalism is, the economic,  social, political, and ideological factors that constitute it are too  complex to be adequately accounted for in one relatively short piece.  This by itself would be a banal truism, were it not for the frequency  with which the term is bandied about in contemporary political discourse  – usually as one of denigration. Given the extent to which economics is  now supposed to be governed by ‘neo-liberal’ ideas, and our political  situation characterized by ‘the fact of neo-liberalism’, it is quite  reasonable to want to know what this amounts to. Yet the label  neo-liberal covers a bewildering range of ideas and happenings, usually  coupled with yet more terms of putative clarity, which are in fact  sources of confusion: ‘Anglo-Saxon model’, ‘monetarism’, ‘Reaganism’,  ‘Thatcherism’, ‘globalization’, and so forth. Stipulating that we get  clear on what neo-liberalism is threatens to plunge even honest and  informed conversation into a miasma of confusion.

Nonetheless, what I want to do here is to try and better see what neoliberalism is by considering some of the things that it is not.  This approach has very obvious limitations. But it is, I think,  illuminating. In any case, the central contention I wish to make is that  whatever neo-liberalism is, it is not the shift towards a world  in which political actors give greater reign to free markets as compared  to the recent past. This will likely come as a surprise. Most people,  if asked to try and specify what neo-liberalism is, would likely put  ‘more free market economics’ high up a list of factors. And this is  quite understandable, given the rhetoric and policy-presentation that  has come to dominate political discourse, in America and the UK  especially, since the 1980s. Nonetheless, it is deeply misleading. What  has changed is the way that politics interferes with economic exchanges under ‘neo-liberalism’, not the fact of interference itself.

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Some recent work on the 2007-8 financial crisis and its aftermath is  particularly illuminating in these regards. The crisis that brought the  world economy to its knees – and continues to blight the living  standards of millions, with no obvious hope of short- or medium-term  improvement for the majority – had complex origins. But it was  undoubtedly a financial crisis, and one that demonstrated how  fragile the world of modern international finance is, and just how  susceptible to its destabilising effects the ‘real’ economy is in turn.  To some, this has been proof positive of the fundamental instability of  neo-liberalism, where that is understood as a set of ongoing policies  allowing ever more unregulated, i.e. free-market, transactions in  financial services, which eventually imploded when the market failed.

The problem with this view – that free-market economics, in  particular financial de-regulation, caused the financial crisis – is  that it is too simplistic to be adequate. This is brought out clearly in  Helen Thompson’s China and the Mortgaging of America: Economic Interdependence and Domestic Politics (2010).  Thompson demonstrates the enormous importance of imbalances in the  global economy, in particular between China and America, and the crucial  role that American domestic politics played in creating the ‘sub-prime’  mortgage market that underpinned the fragility of the financial system  by 2007. That story is roughly as follows.

Following the Asian financial crisis of 1997-8, South East Asian  countries, and in particular China, decided to protect their economies  from external shocks by holding large reserves of foreign currency, and  adopting aggressively export-led economic policies. In practice this  meant holding large volumes of US dollar assets in reserve and exporting  cheap goods to rich western countries. These economies thus ran current  account surpluses (they sold more than they bought, and were  economically in credit). From the early 2000s, however, the Bush  administration in America, through a combination of tax cuts on the one  hand, and enormous expenditure on the Afghan and then Iraq wars on the  other, turned the modest US current account surplus inherited from the  Clinton years into an enormous deficit: America was spending more than  it earned. This was financed in large measure by borrowing from South  East Asian economies, especially China, where US government-backed loans  were seen as incredibly safe due to the negligible risk of default. In  essence, cheap Chinese credit funded huge levels of US borrowing.

A particularly important facet of this relationship was the role of  two nominally independent, but in reality state-backed, American  mortgage-lending companies: Fannie Mae and Freddie Mac. The primary  purpose of these organizations was to assist homeowners in America to  acquire mortgages (Fannie Mae was established during the Great  Depression as part of the ‘New Deal’ to aid economic recovery; Freddie  Mac in the 1970s to increase the pool of money made available in the US  mortgage market, thus expanding availability). Prior to 2007, the  official line was that these were independent companies who lived and  died by the law of the market: economic competition. In reality,  everybody knew that they were ultimately state-backed, and investors  (correctly) believed that the US government would never allow them to  fail. As a result, lending to Fannie and Freddie was seen as equivalent  to lending to the US government, i.e. super-safe with guaranteed future  returns. And lend they did, on an enormous scale: from 2000-7 Fannie and  Freddie’s liabilities jumped from $2482.2bn to $5772.7bn, with the  percentage of this held by foreigners growing from 7.3% to 21.4%.

But Fannie and Freddie were never politically neutral entities when  it came to the domestic US mortgage market. On the contrary, successive  administrations saw the two companies as central to increasing US  home-ownership (a goal shared by Republicans and Democrats), and in  particular used them to promote the availability of ownership to  minority groups (a cause particularly championed by Democratic  administrations). The two organizations were central to ongoing domestic  political agendas. Furthermore, this was coupled with a wider trend in  the US economy: allowing and encouraging cheap credit to be made  available to consumers, in order to prop-up economic demand at a time  when real wages were stagnating or falling, and export industries were  in decline. That is, using cheap credit to generate economic growth, and  hence keeping unemployment at bay, which otherwise could not be  achieved.

Fannie and Freddie came into their own through their ability to  borrow extremely cheaply on international markets, because investors saw  a loan to them as effectively a loan to the US government. This was  coupled with political direction from successive US administrations,  which encouraged Fannie and Freddie to offer mortgages to households  whom ordinary, private mortgage lenders would have deemed too risky to  qualify. Those households made up the so-called ‘sub-prime’ mortgage  market, which boomed from the 1990s into the mid-2000s. But as is now  well known, that market proved to be a disaster. It was in particular  sub-prime mortgage debts that financial trading companies were  repackaging as part of ‘safe’ loans to be made to other institutions,  but which turned out to be worthless, and indeed toxic, when the ‘credit  crunch’ of 2007 put an end to the long party of cheap credit – and  nearly brought down the world’s richest economies as a result. As  Thompson puts it:

The sub-prime mortgage boom that lay at the centre of the  crisis was as much the product of the drive by successive American  Presidents and the Congress to expand home ownership as it was new  financial derivatives devised on Wall Street. American politicians  wanted more home ownership and by definition that meant that they wanted  banks and other financial corporations to lend to people who previously  had not been given mortgages.

Because many of these people were African-American and Hispanic, the  lending was politically protected (sometimes aggressively: critics of  Fannie and Freddie were often accused of racist motivations). The point  Thompson urges us to draw is that the financial crisis cannot in any  accurate way be seen as just a failure of markets, and a  consequence of financial deregulation (though it certainly was that  too). Successive US administrations systematically manipulated  the US mortgage market, for political purposes. As Thompson makes clear,  they thereby engineered outcomes the market itself would never have  brought about, and which helped generate the calamitous consequences  with which we are still dealing.

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This leads to an important wider conclusion. If any country  represents the apex of ‘neo-liberalism’, it must surely be America in  the 1990s- mid-2000s.  Yet when it came to the providing of loans for  the purchase of property – a central function of modern capitalism – the  US government did not allow a free-market: indeed, quite the opposite.

Another salient recent example, albeit of a different sort, is that  quintessentially twenty-first century industry, which in its own  self-presentation would have outsiders believe that it is a paragon of  successful free-market innovation and resultant explosive growth in the  absence of government: the tech sector as centred especially in Silicon  Valley. Regardless of the libertarian propaganda espoused by its leading  billionaire figures, Silicon Valley could never have achieved what it  has without the vast spending and infrastructure investment first  delivered by the U.S. government with U.S. tax dollars, as a direct  function of military research in particular. Indeed, no honest  assessment of America’s political-economic functioning can get by  without emphasizing just how central to much of its recent history the  promotion of defence and its consequences have been. Yet not only is  defence left to anything but the free market for its supply, America’s  awesome military capacity (and apparently endless desire to sustain it)  has inevitable knock-on effects upon its wider economic functioning. The  libertarian dream that the state can be a ‘night-watchman’, providing  only defence whilst withdrawing from all private interactions, is simply  facile: when there is defence, there is state spending, and that  spending distorts markets and has multiple knock-on effects. When that  spending is enormous, as in the case of America, so are the distortions,  whether they be on balance good or ill.

The clear implication is that what governments do under  ‘neo-liberalism’ is not simply to withdraw and allow markets to operate  unfettered, but rather to interfere with them in different kinds of  ways. This prompts the obvious yet important question: ‘different from  what?’ – and we shall return to that below. But first, it is worth our  considering another thing that neo-liberalism is not: the Eurozone.

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Martin Wolf’s The Shifts and the Shocks: What We’ve Learned – And Have Yet to Learn – From the Financial Crisis  (2014) is a devastating critique of both the orthodoxy that allowed the  2007-8 financial crisis to occur, and what Wolf sees as the inadequate  policy response in the aftermath. Wolf views present governments as  still in thrall to the political ideologies and orthodox economic views  that have been discredited by the financial crisis. They have failed to  understand that modern financial systems necessarily cause  massive ‘shocks’ to the economic system if they are not tightly  regulated and constantly over-seen. And policy-makers have also failed  to grasp that the global economy has ‘shifted’ in fundamental ways as a  consequence of the liberalisation of modern macroeconomic policies,  rapid technological transformation, and ageing populations, especially.  His dour warning is that if this is not recognised and dealt with soon, a  second – possibly much worse – financial crisis, followed by severe  economic downturn, is only a matter of time.

Wolf reserves particular ire, however, for the ongoing political  project that is the single European currency, which he describes as ‘a  disaster. No other word will do’.  With regards to the hope of trying to  find out better what neo-liberalism might be by being clearer on what  it is not, Wolf’s analysis of the European crisis is interesting because  few would describe the Eurozone as a prime example of neo-liberalism.  It therefore offers a potential counterpoint for intellectual  comparison. Indeed, when the 2007-8 financial crisis broke, many in  Europe initially dismissed it as a problem of  ‘Anglo-Saxon’ economics,  and assumed that the alternative European model would be left relatively  unscathed. This, of course, turned out to be fantasy. European banks  were as exposed to the collapse in the financial system as their  ‘Anglo-Saxon’ partners and competitors, whilst the Euro was revealed as a  piece of grand folly which has severely exacerbated Europe’s subsequent  economic downturn.

There is a notable irony here. The European Union – or rather, the  European Economic Community as it was originally, revealingly, titled –  was traditionally viewed by many of those on the left (who now typically  bemoan the rise of ‘neo-liberalism’) as a leading threat from the  political and economic right. The original aims of European integration  were quite openly to encourage cross-border economic co-operation by  creating free (or at least more free) markets in goods and services,  eventually also allowing people to move freely, for expressly economic  purposes. The old left was suspicious of the EEC, seeing it as a  capitalist project – hence why many Labour MPs and trades unionists  voted against Britain’s membership in the 1975 UK referendum. The fact  that opposition to the EU in Britain today is largely the preserve of  the hard right, with pro-European attitudes predominating on the  left-of-centre, is a relatively recent reversal of political positions.

This reversal can in large measure be traced to the Maastricht Treaty  of 1992, when the emphasis on economic integration moved decisively in  the direction of political rather than primarily economic aspirations:  the goal of an ‘ever closer union’, one apparently amounting to a  federal European state in the ambitions of leading integrationists. In  particular, Maastricht set in place provisions for what culminated in  European Monetary Union, the Euro, in 1999. The motivations behind the  single currency were undoubtedly political, not economic: the idea was  to promote the stated goal of ‘ever closer union’ by binding the  countries who shared a single currency closer together. The idea seems  essentially to have been that if EU countries shared a currency, then  they would be encouraged to work more closely together because they  would share the same interests, and thus find political and economic  harmony. That this now sounds unbelievably naïve and utopian – to the  point that one finds it hard to believe that there really wasn’t once  anything more to this project than the hubristic politics of wishful  thinking – is sadly only a confirmation that the entire project was  always as ill-advised as it now clearly appears. As Wolf grimly relates,  the economic consequences have been disastrous across the continent but  particularly in the southern economies of Spain, Portugal, Italy, and  Greece – and the political ones might in time be yet more so.

The fundamental problem with the Euro is that it is monetary union  without fiscal union. Member countries share a currency, interest rates,  and exchange rates, but remain separated when it comes to national tax  and spending policies. This means that the European Central Bank (ECB)  has relatively limited resources when it comes to stimulating the  European economy: it can control the money supply and change interest  rates, but does this independently of all the different member  countries’ abilities to tax and spend. This makes economic management  extremely difficult, and also ensures that policies set by the ECB are  likely to be out-of-sync with those desired by at least some member  states, who are pursuing their own sectional position, and which may  diverge from what the ECB thinks best. Worse, because Germany is the  dominant country in terms of economic strength and political influence,  the ECB has a tendency to adopt policies that favour Germany, at the  expense of other countries.

This is exacerbated by the fact that in certain regards Germany is to  much of Europe what China is to America: the surplus economy from whom  the debtors have borrowed. Wolf is scornful  of the self-congratulatory moralism that has accompanied this fact  since 2008. If the Germans were willing to lend to Italy, Greece,  Portugal, and so on, then they are just as much at fault for entering  into unsustainable economic transactions as those countries. Yes, it has  turned out that many of these debtor countries had weak underlying  economies, and, following the financial crisis, are in a parlous fiscal  condition. But Germany profited from that for many years, and should  have known the risks associated with whom it was lending to, before the  wheels fell off. Haughty moralism about the virtue of saving and the  vice of borrowing is simple hypocrisy if you’re the one lending to a  client you ought to know will likely struggle to repay when the good  times end. Unfortunately such hypocrisy plays well in politics, and  German voters are deeply unwilling to take any economic hit in the name  of improving the situation for their economic partners. Politics  dominates the Eurozone, and in practice that means domestic German politics rules the European agenda. This only exacerbates the inadequacy of a monetary union without fiscal union.

The situation is especially bad however because the fact of the Euro  prevents the natural adjustment that would otherwise have occurred  between member states experiencing different economic situations. Prior  to monetary union, Germany’s strong economic position would eventually  have caused the value of its currency to rise – making exports more  expensive, but imports cheaper. By contrast the position of (for  example) Italy would be the reverse: its currency would depreciate in  value, making it more competitive internationally when trying to sell  its goods and services. Italy could see an export-led recovery, whilst  Germany would enjoy cheap foreign imports, until a healthier balance was  restored, allowing Italy to grow its way out of recession. With the  Euro in place, what happens instead is that Germany’s position is not  weakened by an appreciation of the currency (or rather, if the currency  appreciates, it does so also for struggling states like Italy, Greece  etc.,) and so the systemic imbalances are not self-correcting. This is  the situation at present: within the Eurozone there are massive  disparities between the economic situations of Germany versus the weaker  states, whose public finances were especially devastated by the 2008  crisis, and who are now trapped by the Euro and effectively doomed to  economic stagnation due to their lack of international competitiveness.  German politicians have no serious incentive to make Germany  internationally less competitive (this would hurt their own economy, and  thus the welfare of their own people), simply for the benefit of those  nations branded as profligate and undeserving.

But as Wolf explains at length, there is no realistic prospect of the  Euro being brought to an end. Any country seeking to exit would  immediately see massive runs on its capital reserves, as investors would  predict (correctly) that an independent successor currency would be  worth dramatically less than the surviving Euro. Mass capital flight  would ensue, likely crippling an exiting country’s economy, with dire  consequences likely to follow as the politics of fear and desperation  take hold. Less dramatically, a coordinated abandonment of the Euro by  all member states would still cause similar problems, as investors  realised that the Euros they held in any one country were to be divided  into the successor currencies of nation states. In any case, none of  this can be openly discussed as a policy option, as member states must  profess absolute and unconditional confidence in the Euro, because any  hint that the currency could be allowed to fail would likely trigger a  collapse in financial confidence that might actually cause it to  fail. In Wolf’s terms, the Euro is a very bad marriage, but one with no  realistic possibility of divorce. The great challenge of the next decade  is of trying to find a way to make it work better than it is on course  to do at present, and before the political dissatisfaction of individual  nations catches up with the economic inadequacies of a naïve dream that  became a living nightmare.

Looking to Europe for an alternative to neo-liberalism is thus in  fact only minimally illuminating. Although the Eurozone hardly  represents what most would now think of as neo-liberal economics, it is  difficult to say what it does represent – apart from a gigantic  mess born of entirely avoidable political wishful thinking. We can get  only a little comparative purchase here: whereas before 2008 it might  have seemed plausible to try and discover what neo-liberalism is by  contrasting it to some kind of close real-world rival, that is no longer  feasible in the case of the Eurozone. But what is clear is that Europe  has been no more free from political interference than the so-called  ‘Anglo-Saxon’ approach, and likely considerably less so. This in itself  is perhaps hardly surprising. But what should be noted by critics of  neo-liberalism (whatever that turns out to be) is that good political  intentions are no guarantee of avoiding the ravages of bad economic  outcomes. As Wolf demonstrates, whilst the political and economic  challenges facing Britain and America over the coming decades are  extremely serious, it is the Eurozone which faces the biggest dangers of  all. In any case, the complexities of modern political economy can only  be understood as a result of the combination of markets plus politics, not under any binary of markets or politics.