At opposite ends of the continent, voters in France and Greece decisively rejected austerity over the weekend. Francois Hollande, first Socialist French President for 17 years, elected with a clear mandate to overturn swingeing spending cuts; in Greece, over 60 per cent of votes cast for anti-austerity parties and candidates, with Syriza, the Coalition of the Radical Left, making the biggest gains. Hollande has promised to rewrite the Merkel-Sarkozy “fiscal compact”, drafted and signed in December last year, that seeks to make austerity in Europe permanent and legally-binding. Syriza, in rejecting offers of a coalition with the defeated parties of austerity, has sparked fresh panic over a Greek exit from the euro.
These are decisive moments in Europe’s crisis. Three factors will determine the course of the next few days and weeks. Two are strictly political. One, purely economic. In first place is the political desire on the part of both France and Germany’s rulers to maintain their strategic alliance. The Franco-German axis is the pivot around which the institutions of Europe turn. It has been the centrepoint of foreign and economic policy for both nations now for sixty years. Francois Hollande and Angela Merkel will do nothing to seriously jeopardise it.
Hollande wishes to include stronger commitments to growth in the fiscal compact, while Merkel is resolutely opposed to any deviation from austerity. Barring the untoward, and as both parties have been carefully briefing, the desire to maintain European unity will take clear precedence. A compromise will be reached, with watery new commitments to supporting investment and growth – perhaps through the European Investment Bank – barely troubling the compact’s drive to impose balanced budgets, continent-wide. This much appears to be widely expected by the financial markets, who have scarcely ruffled themselves over the arrival of Hollande at the Elysee Palace. An initial panic has currently subsided.
The second political factor is in Greece. The centre-right New Democracy, whose collapsed vote placed barely them above Syriza, has failed to form a pro-austerity coalition. New Democracy and Pasok, cohabiting in power since the exit of Prime Minister George Papandreou late last year, do not between them hold enough seats to form a stable majority, while other, smaller parties have rejected a deal outright. Under the Greek constitution, the mandate to form a government passes to the second-place party. Syriza will now attempt to put together a coalition government, reflecting the anti-austerity vote in rejecting the IMF/EU/ECB Memorandum of Understanding, which committed Greek governments to still more dramatic cuts in spending.
Attempts to stabilise the European crisis at the centre will be damaged by instability from the south. It is close to impossible to predict the outcome of negotiations taking place, or to second guess the probable result of a second election. An anti-austerity coalition rejecting the Memorandum could reasonably expect to receive no further bailout funds from the official sources. Greece would, in these circumstances, be forced into a so-called disorderly default and, more likely than not, out of the euro. As things stand, however, no stable coalition looks likely to be formed, but this merely increases the uncertainty ahead of fresh elections. And uncertainty in Greece can transfer straight back to the north.
The final factor, and the one which determines the whole situation, is economic. Europe’s prolonged debt crisis broke out in October 2009, as the then-newly elected Pasok government revealed Greece’s public debt to be far larger than previously thought. For over two years, efforts have been made to contain and manage the creeping chaos. The EU and European Central Bank, aided and abetted by the IMF, have pursued with ferocious dedication the path of austerity, forcing swingeing public spending cuts and tax increases on crisis-struck countries. The peripheral euro members of Portugal, Greece, Ireland and Spain, alongside no-growth Italy, have been dragged – with the connivance of their national governments – down a road that has led them precisely nowhere: or, more accurately, led them backwards into the mire.
Austerity breeds stagnation. By cutting spending and raising taxes, governments choke off demand. When demand is throttled, firms sell less. They make redundancies, cut hours, chop wages. The unemployed and those on short time spend less. Demand collapses further. An economic death-spiral is established – just as it was in the Great Depression, when national governments attempted to pursue the same course. The crisis deepens, making austerity counterproductive: the clearest example is Greece, where a debt of 130% of GDP in late 2009 has ballooned, after two years of austerity and the recession it worsened, to something approaching 160% of GDP.
The crisis was never, in any case, one of excessive public spending. Portugal, Spain, and Ireland, for example, all ran surpluses on their government accounts over the last decade, spending less than they raised in taxes. The debt crisis emerged as a direct result of the crash of 2008. With financial systems failing, and a recession of exceptional severity breaking out, government debts and deficits ballooned. On top of ten years of chronic trade imbalances and consequent debt-driven growth inside the Eurozone, the situation became critical. Older imbalances ran into newly swollen public balance sheets. Sovereign default – the cancellation of public debt – suddenly became plausible.
But those debts were themselves held inside the European banking system. Banks, as creditors to states, found their once-safe assets that had turned highly risky. Tremors in public finance threatened private banks. French and German banks had huge exposures to peripheral European state debt. A default, or even the risk of default, threatened those banks with collapse. It has been the perceived necessity of preventing a generalised banking failure, akin to that of the 1930s, that has concentrated the minds Europe’s elite. Finance is to be protected from the consequences of its own stupidity, whatever the cost to European economies and society. Austerity, backed up where needed with bailouts intended to keep repayments flowing, was the order of the day: the wrong medicine, for the wrong diagnosis, for the wrong patient.
With no real prospect of an economic recovery in sight, the crisis will continue. Spain’s banking system is threatening to fold under the weight of its bad debt, the government now attempting to arrange a bailout of its third-largest bank. The ECB, whose “Long-Term Refinancing Operation”, launched before Christmas, flooded European financial systems with cheap liquidity, is running out of monetary firepower. But where once purely economic factors drove the maelstrom onwards, they are now joined by the political. The rejection by Europe’s voters of austerity measures is forcing a reckoning on Europe’s institutions and accelerating the pace of collapse.
That collapse will be the result of a stagnant economy, a dysfunctional single currency, and a failed financial system. Its costs should not be carried, through austerity, by European society. Three things need to happen to prevent that. First, austerity must immediately end, across the continent. Second, bad debts must be written off, unilaterally if necessary, led by a Greek default. Where banks fail in consequences, they will need nationalising and controls on the movement of capital introduced. Third, continued euro membership is unsustainable for peripheral Europe. Exits should be arranged.
Once the muck is cleared, the prospect of a sustainable recovery is opened. Breaking the crisis requires a complete break with a failed past. Elections and the rise of an anti-austerity movement bring the prospect into sharp focus. Another Europe is possible.
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