The Financial Crisis and the Re-Regulation of the European Financial Service Markets: The Hour of Heterodox Political Economy
Political Science University of Muenster Muenster, Germany
The efficient market hypothesis, the cornerstone of neoclassical economics, and its focus on perfect markets, is likely to turn out the biggest and most expensive error in the history of economics. Since the deepening of the financial crisis, the benefits of financial market liberalization and, in particular, the underlying assumptions about the self-regulating capacity of the market are no longer accepted. The "methodological imperialism" defining human beings as rational actors seeking to maximize their utility is not confined to the economics profession. It has also laid the groundwork for the rational choice dominance in political science. But the financial melt-down could turn out the hour of heterodox political economics to offer alternatives to the abstract theories and mathematical modelling of global finance and instead focus on the real world.
The paper focuses on the role of European states to restructure Europe´s financial industry. The challenge facing Europe is whether this will be a coordinated process among EU´s leaders to empower the Lamfalussy process without resorting to a national fragmentation of Europe´s financial service industries. With the creation of the so-called Lamfalussy architecture for financial regulation in 2004, the European Union has started a process of coordination among the member states. But the present call for the nation-state to rescue the banking structure has re-ignited the debate on the role of the nation state. This of course begs to questions whether the "pro-competitive state" has even the capacity to regulate international capital flows. What "state" are we talking about? Is the present purpose of state intervention only to bail out failing institutions? Has globalization impacted upon governance structures in such a way that it has altered dramatically the parameters of the likely mix between state, market, and networks? A question addressed in this paper is thus whether the call for state intervention in regulating the financial sector can be understood through the existing analytical tools or whether we need new paradigms in order to understand the causes of the global finance/credit crisis and to embark on a new global financial architecture.