Debt downgrades and failed Greek negotiations show Europe on the brink. James Meadway looks at the consequences.

Parti de Gauche protest at the downgradeStandard and Poor, one of the major credit rating agencies, has downgraded nine European economies’ credit ratings – including, critically, the core European power of France, a country that has not defaulted on its debt since 1812. S&P believe the nine are now more likely to default on their sovereign debt.

Meanwhile, negotiations with Greece’s creditors over a managed reduction of its debt have broken down. Private creditors are unwilling to take a bigger hit than the 50 per cent reduction already being negotiated. Talks are due to restart on Wednesday. If they are unsuccessful, Greece will have little option but to stage a default by March, when another block of loan repayments is due.

A mere day after Mario Draghi, unelected head of the European Central Bank (ECB) had claimed the euro crisis was receding, it is back with a vengeance. All the demons of last year have returned to plague Europe’s ruling classes: the crisis of their own authority; the failure of their preferred solutions; and the threat of default and further financial crisis.

Systemic failings

The credit rating agencies are being widely excoriated this morning. But blaming the credit ratings agencies at this point is like shooting the messenger. They played a woeful role in the debacle of 2008, happily stamping toxic CDO sludge as grade-AAA quality debt – and pocketing a pretty penny for doing so.

But the problem is systemic. All the ratings agencies are doing at this point is making this uncomfortable truth public. It is the weakness of the state system and political institutions that make them appear powerful. European states are weak relative to the system as a whole – and becoming relatively weaker – and their leaderships are incapable of confronting finance, even in the interests of capitalism more generally. This weakness has created a vacuum of public authority, into which the private ratings agencies have stepped. They, too, are weak; they can command a power of narrative, where governments appear incapable. But they do not change the economic fundamentals.

Calls for reform of the agencies, then, are of little use, for all the howling in Paris. Breaking the crisis will now require precisely the event that the agencies are warning about: default, and default on a wide scale.

The need for default

Europe is incapable of repaying the public debt that the financial crisis created over 2008-9. Austerity, as bitter experience now shows, is self-defeating. Cutting spending in a recession makes the recession worse. As the recession worsens, the debt becomes more – not less – of a burden. Greece in 2009 had a ratio of debt to national output of 130 per cent. After two years of austerity, its national debt is 189 per cent of GDP. Other European countries are suffering the same fate.

Moderately high inflation, if sustained, could steadily eat away at the debt. If prices are rising, but the debt price is fixed, the debt becomes relatively less of a burden. This is how Britain, for instance, managed to eat away at its World War Two debt. Decades of inflation higher than interest rates chewed away at the mountain of national debt. But this process could take decades. It is not clear Europe as a whole could sustain it. We would be due another two or three major financial crises before it was over; and the signs from the dominant European power of Germany now point towards deflation – falling prices.

Greece is already headed towards default. The only issue remaining there is when, and on whose terms. The terms matter greatly. A renegotiation of its debt last summer resulted in a rise in its total real debt burden. Greece’s creditors had to be bribed to accept a reduction in their immediate payments – while stepping up the austerity measures. A creditor-led default is not a pleasant thing. Far better for default to be lead by the debtor, and in the interests of the 99 per cent. The sooner this is done, the better. Austerity can end and Greece can have some hope of recovery.


The process cannot now stop at Greece, however. The whole continent is in deadlock: between a financial system bloated with bad debt; weak real economies being strangled by austerity; and political institutions without the capacity to tackle the crisis. The preferred solutions of Europe’s rulers – austerity everywhere and floods of cash for the banks – are totally misconceived. Austerity, as we have seen, destroys real economies, while pumping cash into banks has lead only to terrified banks sitting on the money, refusing to lend. The more the ECB has pumped in, the less effect the cash is having. But austerity looks like the only game in town for a political system, continent-wide, locked into free-market solutions and unable to break the grip of finance.

The only real hope for the existing set up is of a sudden, spontaneous return to growth. Growing economies pay more taxes and spend less on benefits. Paying more taxes means national debts can be repaid.

This isn’t going to happen. European economies have been sclerotic for decades. There will be no miracles here. Instead, it is necessary now to make a radical break with the past, for the benefit of workers and their allies across the continent. End austerity. Default on illegitimate and unpayable debt. Use public investment to create green, sustainable jobs. And place finance under democratic control. Only a mass, anti-austerity movement across Europe can win this


James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).