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  • Published in Analysis

As long as Europe's leaders offer nothing but austerity to solve the eurozone crisis, they will only deepen the economic turmoil. A Greek default is inevitable, but the left has to ensure that it benefits the people, not the bankers, writes James Meadway.

The European economy is grinding slowly into a slump of world-historic proportions. Its major institutions and its major economies have, for over a year, proved themselves incapable of resolving the crisis. Even the German economy, once almost the sole bright point in a dark continent, appears to be fading.
But this is not, contrary to the lies being peddled by national governments, a crisis of profligate spending – of bloated states lavishing welfare on their pampered citizens. It is in the first instance a product of the financial crash that enveloped the world economy in late 2008. The bailouts and the sharp recession that ensued everywhere forced up public debt. Governments found themselves massively indebted.

Deep, structural weaknesses lurked inside the eurozone, built up over a decade. With relative exchange rates inside the eurozone fixed on its creation, and monetary policy fixed for the entire area, existing imbalances between national economies progressively worsened. Germany and northern Europe exploited relatively cheap exchange rates to build up massive export surpluses against relatively expensive southern Europe. The European financial system kept the wheels turning by recycling these surpluses as debt back into southern Europe, enabling the whole economy to keep ticking over. Rising surpluses in the north were matched by rising deficits in the south.

Financial turmoil pushed this entire unstable system into crisis. It is sufficiently deep that the existing institutions of the EU itself are threatened – just as, across the world, the old international economic order is being undermined.

No solutions

Like others on the left, Counterfire has warned, over the last year, that the “solutions” peddled by the EU, IMF and European Central Bank are nothing of the sort. Austerity cripples growth. The bailouts merely prop up banks’ own balance sheets. And the risk of default can spread through Europe’s dysfunctional financial system.

All those elements are now synchronising. A leaked report from the Greek finance ministry last week  bluntly stated the truth: that Greece’s debt is unsustainable, and that default is therefore inevitable. The official in charge of the office responsible was hastily sacked, and the Greek government has done its level best to dismiss the report.

But the breakdown of negotiations between the IMF and that same government the following day shows just how deep the crisis is. All sides now know that, at some point, Greece will default on its debt. With interest payments scheduled to hit 15 per cent of GDP over the next year, it is close to a mathematical impossibility that the debt can be repaid.

Austerity measures - demanded by the EU/IMF/ECB “troika”, supported by Parliament, opposed by the great majority of Greek people – have dragged the whole economy still further into slump. The Greek economy shrunk by over 7 per cent last year.

Nor is the crisis confined to Greece. Portugal and Ireland have also been placed under heavy manners by the troika, with demands that drastic spending cuts are put in place to repay their national debts. Those cuts have, in turn, mired both economies deeper in recession. The very much larger economies of Spain and Italy, this summer, were subject to speculation around their own debt positions.

The prospect of a default on European sovereign debt is rattling banks across the northern Eurozone. French and German financial institutions in particular hold enormous quantities of debt from peripheral Europe. If that debt turns sour, those banks are themselves at risk of collapse. They will require further bailouts from their own governments. It is this threat that recently led to speculation over France’s own credit rating. The risk of major French bank failure menaces in turn the solvency of the French state.

The bailouts did not end the financial crisis of 2008-9. They merely transformed a crisis of private debt into one of public balances. But since public debt is, in turn, held by private financial institutions, the poison is leaking back into the financial system.

A systemic failure

It is not that Europe’s rulers particularly desire recession. Some, doubtless, see a deep recession as a golden opportunity to shatter, once and for all, welfare states continent-wide, thus “liberating” European capital from the shackles of social expenditure. They are ideologically committed to a free market. But the spiral of debt and austerity is not driven by ideology. It is the result of a collision between the deep crisis of the financial system, and the structures of the eurozone itself.

Austerity is the attempt, by ruling classes across Europe, to protect the private financial system by desperately reducing public debt holdings. They are privileging, in effect, the value of financial assets ahead of not just public services and public spending, but also real economic activity. And as austerity bites, it squeezes the real economy that is meant to produce the value that will repay the mountainous piles of debt.

Some on the left have argued for a collective solution. Since the immediate issue inside the eurozone is collapsing demand, it is up to governments to follow the old Keynesian strategy of supporting demand – maintaining or increasing public spending, or cutting taxes, both of which result in more money flowing around the economy. To do this inside the eurozone would require those countries, like Germany, currently running surpluses to transfer that income to those economies with deficits, like Greece and Portugal. It would require, in other words, the creation of a European fiscal authority able to enforce transfers of value right the way across the continent.

There is no sign of such a creature coming into existence. The political will to create it does not exist. Since Europe still consists of competing national capitalisms, crudely lashed together by the euro and the European financial system, they are unable to arrive at a collective solution of this kind. The real national interests of the national ruling classes trump the largely notional interests of “Europe”. And since the European financial system is itself overloaded with bad debts and shaky assets, the most plausible route for them to follow becomes austerity – public spending cuts, made in an effort to support that creaking financial system. Yet each round of austerity makes such support all the harder to mobilise, since it undermines economic growth.
The competitive logic of capitalism is destroying capitalism’s ability to heal itself. Systems and rules intended to promote international economic co-operation are tearing under the strain.

International breakdown

One recent symptom of this breakdown is the introduction of a ceiling rate for the Swiss currency, the franc.
With the eurozone in deep – and worsening – crisis and stagnation in the US, panicked investors are looking for safe places to hold their wealth. They have settled on the franc and, to a lesser extent, the Japanese yen. The price of gold, always an indicator of panic, has also hit record highs.
Rising demand for the franc has pushed up its price – its exchange rate – relative to other currencies. But that makes Swiss exports much more expensive. To prevent this happening, the Swiss central bank has announced it will sell its own reserves of Swiss francs to flood the market and keep the exchange rate below the ceiling.

The currency ceiling is unlikely to hold. Short of the eurozone sorting itself out very soon, Switzerland will remain an attractive option. Speculators will be willing to bet against the willingness of the Swiss National Bank to continue selling expensive francs and buying cheap euros, since this implies very substantial losses.

It has, however, set a marker for other countries to follow. Japan could move to devalue the yen. Across the world, countries’ rulers are looking to insulate themselves from economic turmoil elsewhere. But devaluing your currency means pushing up the relative price of others’. It is likely to spark other economies to try and devalue their own national currencies. Each country gets trapped into a race to the bottom.

The international co-operation needed to maintain the world economy starts to fragment. “Currency wars” are the result – and hostile currency devaluations can provoke further hostile action. Currency wars can become trade wars. Trade wars can turn, in extremis, into real wars.
To break the cycle of beggar-thy-neighbour devaluations requires co-operation, or an economy sufficiently strong to enforce its rules, as the UK was in the late nineteenth century, or the US was after the Second World War. No single economy can assert itself in the same way today. Capitalism, organised as competing national economies, can fall into deranged competitive battles in which no-one is the eventual winner.

It is the threats to the existing international order that mark this crisis as epochal. Old powers, like the US and Europe, are in clear decline. New ones may be emerging. An international economy structured around old centres of power is subject to terrible strains. The epicentre of this conjoined crisis of economies and institutions is in Europe.

Against democracy

The economy of Europe is on a downwards spiral. Further sovereign debt and financial crises will only accelerate that decline. But the European elite’s only response to this is to impose greater austerity. Europe’s rulers are trapped by their own logic.

There are moves to institutionalise this drive. The Europlus Pact, now signed up to by countries across the EU, seeks to enforce closer monitoring and surveillance of individual nations’ taxation and spending, with punishments against those breaking from “fiscal discipline”. Austerity will be still more rigidly enforced.
Yet this is austerity that must be increasingly enforced against the wishes of the people. No-one elected the troika currently demanding immense sacrifices in Greece. Jean-Claude Trichet and the other ECB officials currently pronouncing judgement are bureaucrats subject to no popular mandate. The EU notoriously lacks minimal democratic oversight. And the IMF’s version of democracy is a sick joke, in which richer states hold more votes than the poorer.

Governments can rule by consent, or rule by force. Liberal democracies have historically operated a balance largely in favour of the former, with state violence restrained by hard-won rights and democratic freedoms. If consent cannot be secured that balance changes. As austerity worsens, governments lose popular consent.

For austerity to operate, democracy must be disabled. Each turn of the spiral downwards – of bad debts, failing economies, and austerity  – provokes another turn against democratic freedoms. Preserving the EU means removing it still further from popular control. Outside of the eurozone, here in the UK, the same grim logic is playing itself out. The fight against austerity across Europe is also a fight for democracy in Europe.

The alternative

At some point, Greece will default. Its own ruling class will have no choice. The debt is unpayable and  austerity measures are tearing society apart. The rule of law itself is endangered. Like Argentina’s rulers in December 2001, they will eventually prefer to save their own skins ahead of their presumed international obligations. The process of default can either be managed to the benefit of ordinary Greeks – or, left to the tender mercies of the troika, as far as possible for the benefit of European finance.

It will, in either case, be a cataclysmic shock to the eurosystem – and wider. The steady march towards European integration, from the Treaty of Rome onwards, would be thrown into reverse. A Greek exit from the euro, and the end of the euro as currently constituted, is evidently under discussion. The official denials that any such move is being considered, alongside near-hysteria from at least one of Europe’s dysfunctional banks, makes this obvious.
There should be few tears shed. There is no reason for Greek society – or, for that matter, Irish, Spanish, or Portugese society – to bear the financial sins of Europe’s elite. Ordinary people should not be made scapegoats for a systemic failure.

There is no guarantee that economic chaos benefits the left. Historically, it has not. A new radical right is emerging in northern Europe: anti-EU, anti-migrant, anti-bailout; closer to the US Tea Party than classical European fascism. As the costs of the crisis are pushed onto ordinary Europeans by a distant political elite, their appeal can grow. The electoral success of the True Finns demonstrated this.

The winners, in this situation, will be those who can present a clear route out of the mire. For the left, that means support, where needed, for a people’s default – writing off national debts to the benefit of society, not the bankers. It means supporting increased public spending to sustain demand and create jobs, and seriously taxing the wealthy to reverse growing inequality. And it means radically transforming the European financial system: breaking up the banks, clamping down on speculation, and imposing controls on the movement of capital to halt the spread of financial chaos.

None of this will happen without a political movement. There is an urgent need, now, to start to create a movement across that can articulate demands like these and break the economic deadlock. That task starts at the European Conference Against Austerity in central London on 1 October, now attracting support right across Europe. It will be the first gathering of the national movements since the crisis broke. It could help shape the future of the whole continent.

James Meadway

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).

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