Wednesday, June 22, 2011

CSR – It is still Greek to European Banks!

Yesterday, Greek Prime Minister George Papandreou narrowly won the support of the Greek parliament for his ongoing efforts to steer the country away from bankruptcy. Whether this has given him a second political life though is an open question. Greece’s financial troubles are far from over.

As a member the EU and the Eurozone the survival of Greece within these European institutions seems still anything but certain. Last week, the debate among European heads of state and Finance Ministers on further support for Greece was tough and controversial. Finally an agreement of another multi billion Euro cash injection from mostly France and Germany paved the way for keeping Greece floating for another month or so.

A thorny nettle of disagreement between the countries was the question, in how far private sector banks should be part of the solution. Germany, whose banks exposure of some €20bn is much lower than France’s was insisting on more involvement, while France opposed this approach in fear of a downgrading of their private banks by rating agencies. The compromise turned out to appeal to banks to ‘voluntarily’ become involved – but precious little is found in the news about whether banks have actually taken up this ‘invitation’.

If we watch the footage of protests and civil unrest in Greece it is conceivable that further ‘austerity’ measures (i.e. cutting public services) – let alone an outright bankruptcy – of the Greek government will pose a serious threat to the country’s democratic institutions. Much (admittedly not all) of Greece’s current troubles are following the global financial crisis. Greece is perhaps the most visible example of what many citizens in North America and Europe think: that Governments pile up huge debts to fix the irresponsible behaviour of wealthy bankers and investors while asking the common taxpayer and middle/working class people to put up with reduced public services or – as for instance in the case of UK university students – higher prices for those services.

It reflects a recent debate in the CSR literature which was initiated by Colin Crouch, a prominent sociologist and, more recently, CSR expert at Warwick University. He argues that capitalism has been able to coexist with democracy in most Western countries only because there were mechanisms to deal with two problems inherent in capitalist market economies: first, the cyclical ups and downs of the economy, which exposes particularly middle and lower income groups to economic hardship. Second, the harmonious coexistence of both systems is only possible if the inherent inequality of income distribution in capitalist systems can be addressed in a way that some income at the top end is redistributed to those at the bottom.

For decades after World War II the mechanism to address this problem was referred to as Keynesianism. Government spending during recession as well as progressive taxation and a welfare state helped addressing these two problems. This system was somewhat obliterated in the 1980s with policies most visibly linked to Reagan and Thatcher, often referred to as ‘neo-liberalism’. Crouch though argues that those changes in fact created a policy regime of ‘privatized Keynesianism’. By encouraging and extending home ownership, pension plans based on investments in capital markets and other models of making the saving middle class to small scale investors, the two inherent contradictions between capitalism and democracy were basically to turn lower income citizens in ‘mini capitalists’.

With the so-called ‘financial crisis’ in the late 2000s though this system has proven to be no longer effective. Many lower and middle income citizens in Western countries have lost their homes and pensions – or at least have suffered a severe reduction of their value. Currently, he suggests, we see this mechanism of ‘privatized Keynesianism’ weakened, if not absent, with no real alternatives in sight.

In this situation we face two stark options. The first possibility is that similar to the 1920s and early 1930s, this absence of a mediating policy regime may give rise to political extremism, anti-democratic movements or outright the re-invigoration of fascism or left wing authoritarianism. In this light, the developments in Greece, but also the ongoing rise of the political extreme right in many European countries and the United States actually get quite a daunting character. We are not quite there yet, but the signs of far reaching unrest and despair about the effects of a global, largely unregulated capitalist system are clearly there and by all accounts, are likely to rise.

The other option though, in Crouch’s argument, is that one group among the winners of global capitalism and arguably the most powerful players step into the role of addressing the two inherent tensions between capitalism and democracy. This is exactly the point where corporate social responsibility would kick in. And in fact, as we have argued elsewhere, much of what companies are doing under the label of CSR is in fact very similar to classic welfare state activities. CSR in this perspective would see private corporations as pivotal actors in addressing those two inherent tensions between capitalism and democracy.

The reaction of European banks to support the effort of saving Greece from bankruptcy so far however shows little sign of awareness of this broader context for corporate responsibility. The Greek bailout situation is probably a blatant example of a country at the brink of severe political unrest where direct involvement of the private sector might indeed prevent a country sliding into anarchy or political extremism. So far though there are no signs that any of the European banks have seriously thought about their broader role in society. Maybe it is because the business case for this kind of CSR is so hard to make...

Picture by PIAZZA del POPOLO. Reproduced under Creative Commons Licence.


  1. "So far though there are no signs that any of the European banks have seriously thought about their broader role in society." ...
    ... but neither did the majority of European Governments, or EC decision makers, as argued currently by more than a few people.
    And indeed, it is difficult to imagine, how - in the light of the currently given conditions of largely unregulated global financial markets - voluntarily ad-hoc involvement of private European banks, as publicly claimed, could solve bailout problems of the "PIGS" for the long haul. And, even if the Boards of Directors would feel enough social responsibility to partially waive Greek, Portuguese, Spanish, Italian, Irish debts [who's next?] - even if they would, they couldn't do so, without the risk of getting hold responsible for damage to the interests of their bank, as they are basically committed to their stakeholder's profit. The stopgap of waiving a smaller part of liabilities, to prevent the risk of complete loss, is only for the short hand, obviously. But tomorrow they will start again messing around with risky papers. They have to. The fishier, the higher interests earnings are expected. And, why not, as long it is economically reasonable from banks POV, to do so, because there are still govtl back-up guarantees, to cover the worst case?
    Easy to name and shame any company for maximizing their profit by shifting the full risk to the others. As only law based regulations are able to restrict environmental pollution and unlimited consumption of environmental ressources, so can only law based regulations, put on the global financial markets, can help banks to overcome the temptation. But that's more likely to be a government's job and obligation, than it is left to CEO's, employed [or golden handshaked] on behalf of their stakeholders.

    Frank Johne
    Duesseldorf, Germany

  2. Frank,
    many thanks for drilling a bit deeper into what we can only skim over in a blog post, trying to make a different point. We agree to your description and what you adumbrate is exactly what constitutes the current mess we are in. Your central conclusion, however, falls a bit short - in our modest view. You argue: "As only law based regulations are able to restrict environmental pollution and unlimited consumption of environmental ressources, so can only law based regulations, put on the global financial markets, can help banks to overcome the temptation."
    The small problem with this statement is however that it aint gonna happen. The reason why we put corporations more centre stage in cleaning up the mess are manifold. Here are some, off the cuff:
    1. Private corporations created the mess, which led us to this, in the first place. It were private banks who lent Greece the money (most notably Lehman Brothers), and the financial crisis of 2008 (again, induced by private corporations) led to the demise of Greek bonds, as reflected in their downgrading by the rating agencies (again, private corporations). Simply from this perspective, to ask someone to clean up his/her own mess, is something most civilized people have learned by the age of, say, ten. Similar standards should apply for big corporations, one should think.
    2. The problem is, that nation state governments face limits in tackling issues at the global level. By default, as it were, corporations with multinational command-and-control structures appear to be in a position to address these issues.
    3. If banks knew that one day they were to held responsible and accountable for their global financial transactions, they would very likely not engage in many risky transactions in the first place. No major apparel brand these days engages (knowingly) in sweatshop labour anymore. Not because they are so ethical, or because governments and their laws prevent them, but simply because of their experience, that the risk to their brand is just too high to engage. So thinking about mechanisms to transfer this admittedly soft mechanism to banks is indeed something worthwhile, we would submit.

    And the latter is all our blog tries to achieve. We are glad that it succeeded in your case and we are grateful for your engaging in what is a messy and controversial debate. Looking at the recent riots in London (and elsewhere) we have the feeling our imagination will be nicely challenged over the next years in order to bring the global financial order on some new and sustainable footing. At the end of the day, it is about the survival of liberal democracy as societal government mechanisms, which by and large has served us not too badly for the last 60 years...

  3. French and German banks' exposure to Greek (and other countries') debt is often mentioned but what about the banks exposure in credit default swaps?


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