A turning point from neo-liberalism?

Submitted by Matthew on 13 June, 2012 - 9:02

Hugo Radice spoke to Solidarity about the eurozone crisis.

This version of the interview is revised and expanded from the version in the printed paper.

What concessions do you think are likely from the EU on "growth strategies"?

Some left-wing economists, for example the EuroMemorandum group, have been calling for a growth strategy throughout the crisis. But until recently most media, academic and business economists believed that a strategy of cutting public deficits would automatically lead to a resumption of private-sector growth. But by the end of 2011, not only were commentators like Martin Wolf of the Financial Times calling for more public investment, but also the financial markets started to be as afraid of economic stagnation as they are of the level of government debts. Only the German government seemed oblivious to the threat of a slide back into recession.

Now, I don't think the Germans have much choice but to change their position, because pretty much everybody else is calling for growth strategies. Mechanisms have been identified, particularly the European Investment Bank as a source for infrastructure investment. Further elements of a growth strategy would require more radical measures, for example the issuing of Eurobonds, which would mean the eurozone taking collective responsibility for each individual country's borrowing. That is likely to take much longer.

The Project Bond Initiative announced by the EU on 22 May is tiny by comparison with the scale of the crisis. The more important idea in circulation is that of stretching out the terms of deficit reduction - giving Greece and Spain, for example, more time to meet the conditions attached to their bail-outs. Even if the European Investment Bank does get moving, even if the EU budget were deployed, that will take time to implement.

If a left government is elected in Greece and repudiates the memorandum, what do you think will happen?

The assumption in Brussels, Frankfurt and the financial markets is that repudiation of the bailout conditions would automatically lead to a debt default. In the past when countries have defaulted on their debt, like Argentina in 2001-2, most investors had already covered their backs, and given the small size of Greek debt compared to the whole EU economy, it may be that the immediate losses could be absorbed without much difficulty. Given that Greece is three per cent of the EU, and the total amount of money involved in the Greek crisis is peanuts compared to the resources of the whole eurozone, it would be a simple matter for Germany alone to stump up the cash to resolve Greece's crisis.

However, if Syriza does win the Greek election, and it cancels the austerity plan and stops debt payments, there will in any case be a great deal of disruption in day-to-day financial transactions between Greece and the rest of the EU. There would have to be some sort of emergency arrangements, and something like the summit after the Lehman Brothers collapse in September 2008.

This explains why there has been so much pressure, both on the softer elements in Syriza to make it back down, and on the whole Greek electorate, with dire warnings. The Greek ruling-class strategy is to ensure that New Democracy comes first in the poll, by whatever means they can do that, and then ND forms a coalition with Pasok and the Democratic Left.

For the eurozone as a whole, the consequences of a forced break-up of the eurozone are anyway far too dangerous for the ruling classes for them to allow it for lack of transferring a few billion more euros.

The ECB made a high profile decision in December, when Mario Draghi decided to provide unlimited three-year loans available to all the banks in the eurozone; the banks borrowed €500 billion, and a further €500 billion in February. This averted a looming liquidity crisis in the banks, which were then able to help fund government deficits, especially in Spain and Italy, but in May the imminent collapse of the Spanish bank Bankia signalled that the period of respite was over. However, the ECB funding of the banks shows that it is able to make the sort of high-profile political decision it would have to make if Greece elects a left government.

In addition, the ECB acts as a clearing-house for intra-eurozone trade - this is the so-called Target 2 system - and Germany is in credit in that system to the tune of €700 billion, while Greece and Spain are debtors. One way of easing things for Greece would be to postpone settlement of those balances.

The word credit is derived from the Latin credo, I believe. If you believe it's all going to get sorted out in the end, then there are really no limits to the extension of credit. But we have to go back a bit to summer 2011. One of the main things that caused the crisis to deepen in the second half of 2011 was the withdrawal, in effect, of American investors from European markets. A lot of the liquidity provided to European banks until then was coming from America, especially from money-market funds, who could make more money by purchasing European bonds with higher yields than US Treasuries. In the summer of last year, US investors became seriously worried and began to pull their money out. That was a major reason why the European banks then faced deteriorating credit conditions up to the point of the ECB rescue in December.

There is talk of the EU having a "firewall" sufficient to block "contagion" if Greece is suspended, expelled, or exits from the euro. Is that so?

I'm not sure that the claimed EU "firewall" would work, because once Greece is forced out, the whole mystique of the eurozone is broken. In that case, it is very hard to imagine any sum of money being sufficient to reassure the financial markets, unless there is a very clear and agreed plan to ensure that the euro`s credibility problem is resolved once and for all.

This requires fiscal solidarity between eurozone member states, and that in turn needs a complete political change of heart in which eurozone governments and political elites agree to move away from competing with each other and using the old nationalist arguments to blackmail their working classes. Without that, I think the euro is finished.

The fiscal pact as designed by the Germans in December lacks any legitimacy because it needs to be underpinned by some sense of solidarity, and up until now it isn't. In contrast, in the USA the federal government has a whole range of mechanisms which redistribute the fiscal burden among the 50 states.

There is a fundamental flaw in the December pact. It is based on the notion of the structural deficit, and a rule that the structural deficit must be limited to 0.5% of GDP. But the structural deficit cannot be measured. The idea of making legally binding an indicator which can't be objectively measured is farcical.

Among the big bosses in Europe, the bosses of the major corporations, there must be an awareness that if the eurozone starts unravelling, they will face huge upheavals. Europe is too integrated to pull apart now. I think they will keep muddling through, and concessions will be made to Greece to keep it in the eurozone. The mystery is why they are taking so long to deliver the concessions that are clearly needed.

There will have to be a substantive fiscal pact and an agreement to shift a substantial part of budget decision-making to the European level. That then raises the question of the balance between the apparently democratic structures of the European Parliament, and the intergovernmental structures and the Commission. There would have to be a major reworking of the European treaties.

What should the left elsewhere in Europe say?

What do the social-democratic forces of Europe do? After 30 years of retreat before neo-liberalism, this will be the moment of truth. There is a possibility, particularly if the SPD wins in Germany, of moving towards a Social Europe Mark Two, but maybe I'm being wildly optimistic.

Trade union movements have remained essentially trapped within a national Keynesian framework in each country. There are contacts between national unions and federations, through the European TUC and its sectoral bodies, but the links are very much on a bread and butter level, sharing experiences about the evolution of collective bargaining and so on. It would take a huge change in the nature of trade unionism across Europe, and in this country more than most, for trade unions to be willing to re-enter the political arena, after having abandoned it for most of the last 20 or 30 years.

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