European Mythology

What exactly was decided at the recent European crisis summit? It seems no one is entirely sure because the reported outcomes seem include a set of impossible policy prescriptions that might assuage shaky markets for a couple of months (if lucky), but have no hope in hell of being implemented (the annual 0.5% structural deficit limit being an obvious example). The aim of this post is to step back slightly and survey some of the economic fundamentals behind the Eurozone crisis.

No reader need be reminded that throughout the course of the crisis there has been persistent demonization of what are daubed the ‘peripheral’ members of the EZ. Television news anchors and pundits happily label Portugal, Italy, Ireland and Spain as the ‘PIIGS’, while constantly referring to these states’ governments and populace as profligate spenders and lazy respectively. This of course flies in the face of facts, including how Greeks work the longest hours in Europe and Italian’s maintain higher household wealth and lower debt than their British counterparts.

It’s Still the Banks’ Fault

This narrative has effectively come to dominate the public discourse and attitude towards austerity measures. Not only has the fact that the current sovereign debt crisis is almost entirely due to the banking sector crash of 08 been lost down the memory hole, but many people have come to regard austerity measures as the only feasible and justified policy to deal with the economic death spiral said crash has caused. As this RMF report reminds us;

    “The collapse of Lehman Brothers in 2008 led to recession in both the core and the periphery of the Eurozone as exports and investment fell. Eurozone states faced falling tax revenues, while attempting to support aggregate demand and to rescue banks. Rising budget deficits followed, the direct result of the crisis and not of state profligacy, even in Greece.

A Balance of Payments Crisis

In a recent op-ed piece in the FT, Martin Wolf goes further in dispelling the role of debt in the Eurozone crisis.

Looking at the average fiscal deficits of 12 significant eurozone members from 1999 to 2007 showed that every country, except Greece, fell below the 3 per cent of gross domestic product deficit limit. The four worst exemplars, after Greece, according to Wolf were Italy, France, Germany and Austria.  Ireland, Estonia, Spain and Belgium were in good positions until the banking crisis. Estonia, Ireland and Spain also had far better public debt positions than Germany, again only changing after the 2008 meltdown.

Wolf goes on to point out that by looking at current account deficits over 1999-2007, this measure was a useful indicator of which member states would be most hit following the financial crisis. Estonia, Portugal, Greece, Spain, Ireland and Italy were all vulnerable on this score…

    “This, then, is a balance of payments crisis. In 2008, private financing of external imbalances suffered “sudden stops”: private credit was cut off…The failure to recognise that a currency union is vulnerable to balance of payments crises, in the absence of fiscal and financial integration makes recurrence almost certain. Worse, focusing on fiscal austerity guarantees that the response to crises will be fiercely pro-cyclical, as we see so clearly.”

Eurozone current account imbalances

Nothing can be done about this balance of payments crisis within the current structural framework of the eurozone, as Michael Burke argues;

     “It is also entirely impossible in a single currency area for all other economies to maintain government balances if one or more key countries have large current account surpluses, as is presently the case with Germany and others. Other countries must then run current account deficits and to simultaneously maintain a government balance they are faced with two unacceptable alternatives. They must either hugely increase household savings even though incomes are declining; that is, household spending must fall even faster than incomes. Alternatively, businesses must reduce investment to well below the level of its income, which could only lead to a further reduction in competitiveness and a renewed widening of the current account deficit. This is the downward spiral that countries like Greece have already entered.”

Squeezing German Workers

After dealing with the widely held fallacy that the sovereign debt crisis is entirely down to the profligacy of peripheral governments, we should analyse the interests behind the current structure of the Eurozone. It is clear that German capital has been enjoying the fruits of the current EZ framework, at the expense of workers in Germany and the periphery.

It is important that the current crisis does not offer an opportunity to inflame national rivalries any further than it already has done. German (and wider core EZ) capital has effectively been able to divide and rule workers throughout the eurozone. The Greeks and Portuguese blame harsh austerity measures implemented by their governments as dictates’ from Berlin, while German, Dutch and Finnish citizens feel aggrieved their tax Euros are being funnelled into a bailout package. The anger and distrust on both sides is understandable considering the high stakes, but Left parties and anti-austerity groups in every EZ member state (and outside) need to vigorously challenge the dominant narrative.

German workers are not creaming off the results of increased German competitiveness. The profits from this increase are going straight back to German industrial and finance capital. This has been achieved through frozen nominal labour costs in Germany, as this graph makes clear;

German real wages have decreased by 4% over the past decade, whilst inequality rose more than anywhere else in the OECD.

German industry has enjoyed the increased competitiveness the Euro has brought with it, this competitiveness being largely due to the fact that smaller economies can no longer depreciate their own currencies in the face of German exporting power.[1] Stagnation in the German economy was offset by German banks lending to today’s crisis countries, which got into debt importing German goods en masse. As Fabian Linder notes, Merkel now wants all eurozone members to follow economic policies which have caused stagnation in Germany for over a decade.

A Democratic Recovery

We have seen how the current crisis did not begin as a debt crisis, but a crisis borne of two major structural weaknesses facing the eurozone – lack of fiscal union and a corrupt global banking sector. These have combined to create the perfect storm throughout Europe, one which is likely to take decades to fully recover from if EU leaders continue on their current path of politically motivated austerity measures.

BBC Newsnight economics editor Paul Mason has highlighted how the proposed new rules on eurozone fiscal policy would effectively make counter-cyclical deficit spending illegal. The stimulus implemented in the US and Britain (prior to the 2010 election), which brought both economies back from the brink of utter catastrophe would no longer be options for eurozone governments. This is a cynical attempt to woo back the support of the bond markets, which in reality, aren’t actually stupid enough to think this can be done. Saumil H. Parikh of PIMCO (the world’s largest bond trader) warns investors of the dangers of Europe’s contracting fiscal policy;

     “…both fiscal and monetary policies ought to be expansionary, but both have actually been contractionary. With external demand weakening, and domestic demand contracting, fiscal austerity measures will cause European aggregate demand to contract even further over the next 12 months or so…”

This should be a warning to government’s (especially the UK coalition) which believe their debt reduction will somehow please or fool bond traders into thinking their respective economies are attractive investments. While ruthless, the bond traders aren’t dumb.

Nevermind what the bond markets think, it is far more important to work out economic plans and policies which would actually benefit the wider population and can be campaigned for by Leftist parties and groups. These could include a debt jubilee of the sort economist Steve Keen and anthropologist David Graeber have suggested in recent months, involving a write-off of almost all household debt, most importantly mortgages.

Of course, the entire European and global banking system needs to be brought bank under democratic control. This would require going beyond mere regulation which some bright spark at the banks will always be able to find a loophole through. Ensuring that banks service investment in productive industries, preferably green ones, is also critical. A Green New Deal implementing major structural changes in national and international financial systems, whilst also creating jobs via investment in renewable energy generation and energy conservation would be a good place to start.

Such policies could boost growth across Europe and rebalance the economy away from the grip of parasitic finance capital, which has done so much to siphon off wealth from the ‘real’ economy in recent decades. To attain such goals would require a political programme and strategy not yet evidenced in the global protests against austerity, but may develop in the coming months and years if reactionary economic policies continue to be forced onto citizens across Europe at the behest of the continents political and economic elite.

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[1] http://www.researchonmoneyandfinance.org/wp-content/uploads/2011/11/Eurozone-Crisis-RMF-Report-3-Breaking-Up.pdf

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