James Meadway: Europe’s continuing economic woes are starting to pull apart the austerity consensus amongst its elites
The resignation of the French Prime Minister, and the expected formation of a new government this week, is the most dramatic sign yet that Europe’s continuing economic woes are starting to pull apart the austerity consensus amongst its elites. PM Manuel Valls entered office only five months ago, to great fanfare, as a Tony Blair-like “reformer” able to push through austerity and break with the half-cocked austerity-lite President Francois Hollande had attempted during his two years in office. Valls’ resignation was prompted by the publication of an interview with left-leaning economy minister, Arnaud Montebourg, in which he called for “resistance” to the “economic aberration” of austerity, imposed by Germany on the eurozone. It is expected that, in an attempt to reassert their authority, the new government will exclude Montebourg, threatening further rifts inside the Socialist Party.
The dissolution comes just a week after latest figures show the EU as a whole failed to grow at all over the last three months. Even worse, the supposed powerhouse, Germany, posted negative growth, its economy shrinking by 0.2% over the same period. Europe has entered a full-blown economic depression, comparable (indeed, arguably worse) than that of the 1930s.
It is this woeful economic performance, with stagnation and the threat of further crisis now dragging into its fifth year, that is provoking political convulsions, top and bottom. On Friday last week, Mario Draghi, European Central Bank (ECB) President, hinted at the annual central bankers’ gathering at Jackson Hole, Wyoming, that there might be a case for easing off on the austerity that European elites have insisted, to date, is the only cure for Europe’s woes.
Of particular concern is the risk of deflation – the opposite of inflation, meaning falling, rather than rising prices. This is bad for two reasons. First, although generally falling prices are likely to make workers feel better off in the first instance, firms will be under intense pressure to cut costs and make redundancies. Incomes for most are liable to be pulled down in turn. Second, if prices and incomes are falling, but debts still have to be repaid, the real burden of those debts increases: proportionately more of any given money income will be needed. Where debts are already high, as they across Europe, this “debt deflation” can create a downward spiral into outright collapse: prices and incomes fall, the real burden of debt rises, squeezing spending and so leading to further declines in prices and incomes, and so on.
It is increasingly likely that the ECB will attempt some form of quantitative easing (QE), just as the Bank of England and the US’ central bank, the Federal Reserve, have been doing since shortly after the crisis first broke. The mechanism can vary, but at its heart QE boils down to letting the central bank create new, electronic money and then supplying this to the rest of the banking system. The hope is that, by flooding the banking system with new cash, economic activity will pick up, and prices begin to rise. Implementing such a program inside the eurozone will prove difficult, however; member states will need to agree to it, and there are questions over the legality of such a scheme. In the shorter term, the ECB will probably stop short of full QE, and instead extend some of its existing schemes.
None of this is likely to be successful in resolving the underlying problem. The eurozone is stuffed full of bad debt, sitting in eurozone banks (notably France) and threatening them with collapse. A sudden return to growth would ease the problem here, allowing debts to be repaid more easily; but, since the debt is itself a major barrier to growth, with demands for repayment holding back spending more generally, and banks still shaky, this is less than likely. Flooding the system with extra cash is likely to make banks feel better, just as it has in the UK, but less likely to spark wider economic growth. Previous efforts by the ECB to make borrowing easier inside the eurozone, and promises from Draghi to do “whatever it takes” with monetary policy in mid-2012, staved off the single currency’s outright collapse, but, as we now see, did not lead to recovery. A return to anything like growth will almost certainly require debt write-offs, but since these will immediately hurt Europe’s banks, they remain unlikely
With options for monetary policy limited, debate at the top has turned, slowly, to the possibility of using fiscal policy – government spending. This has been ferociously opposed by Germany, where the fear is that increased government spending across the eurozone in general may imply rising future liabilities for the German state in particular. Meanwhile, Germany’s export-led economic strategy has depended on suppressing wage growth for most Germans, average real wages having stagnated for the last 15 years, and cost-cutting attacks on welfare to preserve German capitalism’s competitive edge. A weak eurozone economy means a weaker euro, and therefore reduces the costs of German exports to the rest of the world. Sustained expansion, particularly in southern Europe, could threaten that. More generally, the crisis has revealed a clear hierarchy inside the eurozone, with Germany at the core and southern European countries acting as a periphery – unable to set their own economic policy, and subject to austerity seemingly in permanence.
The continuing economic malaise is steadily pulling apart support for the broadly neoliberal centre that has dominated European politics for the two decades or more. One side of that has been an increase in support for the radical right, with France’s Front National topping the recent euro elections on a racist platform that played up its guise as “defender” of French workers against the EU and “globalisation” generally. The other side, significantly less well reported in the UK, has been the re-emergence of a radical left: Syriza coming at the head of the Greek euro poll, the sudden eruption of Podemos into Spanish political life, and, more recently, the new United Left in Slovenia winning its first seats in that country’s parliament. Current ructions inside the French government reflect the growing disaffection inside the Socialist Party, with Montebourg’s intervention clearly intended to position himself at its head – and most likely line up for a Presidential challenge in 2017.
Short of an economic miracle – desperately unlikely under current circumstances – this slow-burn economic depression will continue to produce political crises of every sort. The mass disaffection with the neoliberal centre is creating the terrain on which anti-neoliberal politics can be won for the radical left, if it is organised and prepared to fight for them.
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).