Roots of Euro crisis

Submitted by Matthew on 9 July, 2011 - 6:05

John Grahl (Professor of European Integration, Middlesex University), will be speaking at “Ideas for Freedom”, 9-10 July. He talked to Solidarity.


Some of the Baltic and central and east European countries are in virtually the same situation as the eurozone crisis countries. One big difference as far as the west is concerned is that they’re not in very heavy debt to western banks, so western banks haven’t got a lot to lose. Their debts are largely to the IMF and so on.

But the debts are large relative to the size of those economies. Huge deflationary processes have been launched in the Balkans and in Hungary.

In that sense, Greece’s crisis is not unique. But Greece’s crisis would not have unfolded in the same way if Greece hadn’t joined the euro in 2001. A background factor in Greece’s crisis is its loss of export competitiveness, and if Greece hadn’t joined the euro, then that loss would have been reduced by currency depreciation. As for the credit problem — Greece would not have been able to borrow as much.

Countries like Hungary and Latvia have faced huge crises since 2008, but have voluntarily kept pegging their currencies to the euro, strictly or loosely. In some ways that’s surprising. The broader point here is that in many countries, including Iceland, the political classes are very reluctant to attenuate their links to the international financial system. East European governments keep their currencies in line with the euro because failing to do so would delay their entry into the euro. They are willing to pay a high price to get into the eurozone and gain, they hope, more investment flows.

Some people argue that the answer to Greece is for it to quit the euro, but economically there’s not much sense to that. I don’t know how any Greek government could defend a reintroduced drachma and avoid Zimbabwean-style hyperinflation. I don’t even know how a Greek government would get people to accept drachmas in place of euros, except perhaps public-sector workers who would have no choice.

Since 2008 Germany has taken a rigidly neo-liberal course and sought to impose it on the eurozone. In 2009 Germany passed a constitutional amendment banning future budget deficits; in 2010 it introduced big cuts, though Germany has no real debt problem.

Meanwhile the European Commission, with German support, wants all eurozone economies to be back within “Stability Pact” limits by 2013.

I think all that has to do with the fact that the corporations and big employers in Germany don’t see Germany as a market any more, but rather as a base from which to export. In the past they had an interest in having relatively good wages and conditions and the progressive growth of a domestic market, but they don’t care about that any more. They care only about competitiveness.

The pressure, especially on people in Germany with lower incomes and lower wages, is absolutely shameful. It goes beyond anything that was produced by Thatcherism or by right-wing administrations in the US. The inequality in Germany is unique in that it is concentrated very heavily in the lower end of the income distribution.

The German policy is very dysfunctional from the point of view of the eurozone as a whole. You can’t turn the whole of the eurozone into a big Germany. Germany can only have its current strategy because other countries don’t.

The Schuldenbremse [a clause written into the German constitution in 2009, saying that neither the federal government nor the states are allowed to run budget deficits from 2016 (federal government) and 2020 (states) onwards. Certain exceptions apply] is insane.

The first attempt to apply that sort of rule was the Bank Charter Act of 1844 [which allowed the Bank of England to issue notes only to the extent of the amount of gold it had plus £14 million — and was suspended in the financial crises of 1847, 1857, and 1866]. All such attempts have failed and will continue to fail. There’s no way you can operate a modern capitalist economy without public debt. Look at the problems posed in the US right now by a Federal debt limit which everyone knows has to be breached.

The project, as conceived by the leading governments of the eurozone, is that its problems will be resolved essentially by greater compression of costs, especially of wage-costs, in the weaker states. But that will make the debt problem worse. Growth will stop, which will also worsen the debt problem.

The EU is, in principle, saying that the rules of the Stability Pact [which stipulates that budget deficit should not be more than 3% of GDP] should be back in force by 2013. The projections simply do not make sense. It is assumed that the fiscal corrections will proceed very rapidly, while current account deficits continue, which implies a huge surge in household spending and corporate investment which is just not going to happen.

The United States is going to be more or less constrained to limit its imports. That’s the eurozone’s biggest market. Where else can the Europeans export to? The moon?

From a global point of view, the eurozone is extremely irresponsible. It should be running an overall current account deficit, which would assist with the adjustments with the US, China and so on.

Directives are being proposed, and may very well be passed at the European Parliament, which envisage a tightening of the constraints in the Stability Pact as well as more comprehensive surveillance over the macroeconomics of all countries. My fear is that this surveillance regime would primarily concern the weaker economies.

The leaders of the eurozone recognise that some measure of debt forgiveness will eventually be necessary, but insist it be linked with huge amounts of conditionality and a kind of tutelage. It would be a kind of political union, but with an essentially colonial content. That’s what emerging.

The central states are realising they won’t get their money back, and they won’t consider wiping the debt without the kind of surveillance that allows them to tell weaker states not only that their governments are spending too much money, but that their wage costs or social security costs are too high and must be cut.

I would advocate the assumption of the debt by stronger European agencies. Not simply the temporary re-financing of the debt, but the assumption of the debt. Those agencies should simply repay a large part of the debts. It’s a European problem, Europe helped to create it. It needn’t be 100% but it should be substantially above 50% of what’s outstanding.

There needs to be a coherent position from the left taking on the Europe-wide aspect of the crisis. The left needs to do the arithmetic and argue for an expansionary, employment-oriented solution as the one to go for.

The big obstacles would be governments, in Britain and elsewhere in Northern Europe, taking a populist stance against the indebted countries; but in terms of economic coherence at least the argument is very strong.

• John Grahl was talking to Martin Thomas.

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