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James Meadway: The Euro crisis of 2011 is a prelude to financial chaos in 2012. Efforts to prop up the system have failed, threatening a fresh financial crisis and perhaps the collapse of the Euro itself. A mass movement against austerity must be built.

Euro cracked

Mario Draghi, President of the European Central Bank (ECB), warned this week of the serious risk of financial contagion across Europe, driven by the debt crisis. The ECB has described tensions in bond markets as reaching the “systemic crisis proportions” seen in the run-up to 2008’s financial crash.

Heavily-indebted European nations have an enormous volume of debt to rollover in the first months of the New Year. Should fearful private bond markets refuse to extend credit to euro members, or do so only at exceptional rates of interest, those countries may default on their debt – fail to make the expected payments.

Their creditors are very largely European, with major financial institutions like BNP Paribas holding substantial volumes of European debt. That means any default – or even a threat of default – immediately hits the European financial system. A further financial crisis could result, and spread rapidly through electronic, liberalised financial markets. This is contagion: the spread, as if in an epidemic, of financial and economic chaos from country to country across a region, as investors panic and speculators move in for the kill.

At present, the fear of contagion is creeping through the financial markets. All players know that the major European institutions are wobbly – sitting on billions of euros worth of creaking sovereign debt. So they are all less and less inclined to make loans, insisting on better quality collateral from potential debtors before they do so. Normally this would include sovereign debt from stable economies, like those in the eurozone. But since that sovereign debt is now considered increasingly dangerous, available collateral is disappearing. And with collateral disappearing, credit is drying up. The machine is grinding slowly to a halt.

But if the credit machine doesn’t move, it collapses. By attempting to shore up their own battered reserves and clamping down on their lending, the major financial institutions are bringing their own demise closer. This is the irrationality of the market at work. What makes sense for one institution is calamitous for the system as a whole.

As of 21 December, the ECB has stepped in to oil the financial wheels, providing nearly €500bn in short-term loans at low interest rates to hundreds of European banks. This is, however, addressing a symptom of the malaise, not its immediate cause: the immediate cause is the weakness of banks’ assets – all those dodgy loans now sitting on their balance sheets. That weakness is then leading to the drying up of credit. Addressing only the symptom can only work temporarily. Just days after the emergency loans were made, European banks appear to have squirreled most of the cash straight back into the ECB, depositing €412bn with the Bank by mid-week – a record sum. They prefer the safety of the ECB’s deposit accounts to the risks of the rest of the system. Far from expanding the flow of credit, European banks, nervously eying each other, have used the emergency funds to prop up their own weak positions. By failing to deal with the underlying issue – bad assets on banks’ balance sheets – the emergency funding will make next to no difference.

Tackling bad assets would mean purging the banking system of bad debt, through default. That would necessitate the nationalization of banks to prevent their collapse, with national governments backing them up as needed. Strict controls on the movement of capital would be needed to halt contagion. And the costs of the process should be pushed as far as possible onto the bankers and bondholders themselves. It is only through a direct confrontation with finance that the whole operation can be performed successfully. It therefore will not be.

Short of this cleansing, the system will limp onwards to the abyss. The capacity of the ECB to continually offer more credit, with its own limited capital reserves and no sovereign power behind it, will start to run dry as confidence crumbles. With economic recovery crippled, defaults become an inevitability, bringing with them a further financial collapse. The euro itself would be under immediate threat.


The prospect of euro disintegration is real. Bank of England deputy governor Charlie Bean has warned of the risk of eurozone break-up. IMF head Christine Lagarde thinks that the euro crisis is “escalating”.

The prospect terrifies some. Lurid claims from one investment bank warn of GDP shrinking by 50 per cent if the euro goes – or even civil war. Yet the euro cannot hold in its current form. The cycle of failed summits and worsening panics are testament to its unstable, unworkable structure. For over a decade of its existence, the euro acted as a very effective means for fixing and deepening imbalances across Europe. Germany, where productivity growth has remained low, nonetheless successfully clobbered its workers’ real living standards under successive governments. This reduced the cost of its exports into the rest of the eurozone. Southern countries bought comparatively cheap imports from the northern exporters. Surpluses in the north were matched by deficits in the south – and those surpluses were recycled, through the European financial system, as debt into the south, enabling the cycle to continue.

This imbalance went critical after the financial crash of 2008-9, which trailed both bailouts and a sharp recession in its wake. Government deficits skyrocketed, as did government debts. But these were being lathered onto an already unstable system. By October 2009, the system began to implode: with Greece in the lead, sovereign default had become a genuine possibility. As the crisis wore on, with stagnation spreading across the continent and debts continuing to swell, it became a certainty for Greece and highly likely elsewhere.

The efforts by the EU, the IMF and the ECB “Troika” in the two years since have been in vain. They attempted two tasks – one futile, the other actively dangerous. It was futile to offer alleged “bailouts” to heavily-indebted countries in order that they can continue meeting their creditors’ demands. This merely prolonged the agony, at best. But it was actively dangerous to enforce austerity – tight spending cuts.

Austerity does not just ruin lives. It wrecks whole economies. As government spending falls, markets shrink. Firms sell less. They cut wages and make redundancies. Demand falls still further. A spiral of decline sets in. This is the mechanism that helped drive stagnation in the 1930s, just as it is driving it now. And if the economy shrinks, the debt burden grows.

Greece is the acme of the Troika’s failure. Bailouts kept the payments flowing to its creditors at the same time as austerity hollowed out the economy. At the end of 2009, Greece had a debt to GDP ratio of around 130 per cent. Cue panic. After nearly two years of bailouts and strict austerity, it has a debt to GDP ratio forecast to hit 189 per cent next year. And the social cost of this wretched failure is immense: to pick only one indicator, the Greek suicide rate has increased 40 per cent in a year. It is now the highest in Europe.

The most recent EU deal, from which Cameron absented himself, is the same black farce with the volume turned up. Bailout funds to keep the repayments flowing, matched up by legally-binding austerity: a recipe for permanent stagnation across the continent. Worse yet, the deal makes explicit the commitment of the EU to avoid “haircuts” – losses – for private sector bondholders in the event of bailout funds being used. In other words, the entire cost of the package is pushed back onto the rest of European society. The deal is vile, but it looks at present unlikely to hold, with good reason.

Happy families

For capitalist Europe is not a single, happy family, but an ill-assorted melange of competing national capitalisms. As the crisis intensifies, the antagonisms between the different elites have spread. Instead of a fictional equality between nations, a clear hierarchy has emerged, with the German ruling class at the top – and heavily-indebted peripheral Europe very much down below. As the Research on Money and Finance group have argued, the deepening crisis has pushed member states’ banking systems back towards their own national governments for support, increasing tensions. Far from promoting European unity, the euro, the EU and the crisis are driving countries apart. Ugly new nationalisms and old xenophobias have followed in train.

Europe’s ruling classes are approaching a crossroads. One path leads towards a decisive lurch into fiscal union – attempting to correct the major international imbalances through transfers of taxes and spending between governments. That, in turn, might provide the basis for the European Central Bank to credibly offer enormous volumes of its own continent-wide, joint-liability “Eurobonds” – something blocked at present by German’s rulers, who fear (correctly) that they would foot the bill in the event of default. The EU would, under effective fiscal union, have taken major steps towards becoming a state in its own right.

This won’t happen. The political will or capacity to deliver does not exist within the current EU – and, with national tensions rising as the crisis continues, it will become an increasingly distant dream. Instead, we will continue on the same path – bailouts for the creditors of the indebted, no losses for bondholders, and ever-tighter austerity. The status quo, in other words, of the last few years.

But since this does not and cannot work, the second path is starting to dimly appear from the gloom. The costs of maintaining European monetary union are rising ever higher for Europe’s rulers. For deficit countries, these appear principally as the deadly combination of permanent austerity and an overvalued exchange rate. For those in surplus, the costs of bailouts and possible defaults drive upwards. The costs of exit for Europe’s elites are unknown. But they start to appear lower than the alternative. A renewed financial crisis, as is growing more likely, could decisively shift that balance of costs and benefits – especially if sovereign defaults become necessary.

A movement against austerity

The situation is urgent. The sclerotic politics of Europe are forcing the march into austerity: without the capacity to act decisively against finance, and with the imminent danger of a financial crash, austerity becomes the only route out for ruling classes across the continent. And the more it is enforced against unwilling populations, the greater is the squeeze on democracy. Greece and Italy already have unelected Prime Ministers imposed to oversee the dismemberment of their welfare states and the impoverishment of their populations. The most recent EU deal, as noted above, attempts to make anything but austerity illegal within the Union - a dramatic hollowing out of the fundamental principle of the great early liberal revolutions: that sovereign people decide their own taxes and spending.

The immediate task is to create, everywhere, movements against austerity - and so for democracy. There has been popular resistance to the initial steps taken by the European powers. Great strikes have broken out, most spectacularly in Greece, while the Occupy movement has everywhere raised the demand for real democracy. This mass movement must look across borders, counterposing real international solidarity to the disintegrating faux-internationalism of the EU, not just as a moral claim but as an integral part of its strategy. The Coalition of Resistance’s Europe Against Austerity conference, back in October, was part of the first steps towards this. The movement cannot confine itself to solely the ranks of the trade unions, but must draw on the experiences of those currently outside the organised working class – from library cardholders defending public access to books, to those camped in the world’s financial districts.

An effective defence of the welfare state and democracy will collide, in short order, with the critical strategic barriers: the role of the financial system, as a motor for austerity across Europe, and the role of the state as its defence. To break austerity means a halt to cuts, and public investment to create sustainable jobs; it means a serious and sustained redistribution of wealth; it means democratising finance, placing key decisions about investment and credit under popular control; and it means a defence of the democratic gains that have been won.

Europe’s ruling classes are afraid. Even the UK’s Treasury, a bastion of neoliberal orthodoxy, is reported to be drawing up plans for the introduction of limited capital controls in the event of the euro’s collapse. No doubt other sacred cows could be clumsily lined up for the slaughter if the situation spirals further. But as we have seen with the nationalisation of banks, what might once have appeared unthinkable radicalism can be stripped of its progressive content. The struggle over the year ahead will be over the content of that response to renewed crisis. A mass movement against austerity, with class politics at its heart, must now be built.

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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