The crisis in Greece has, for the moment, been largely contained. But efforts to resolve it have revealed old divisions amongst the European ruling classes.
Germany’s finance minister, Wolfgang Sch√§uble, last week presented a proposal for a new European Monetary Fund. Like the Washington-based International Monetary Fund, the EMF would provide a means to bail out economies in trouble.
And, like the IMF, Sch√§uble's European Monetary Fund would impose strict conditions on economies receiving assistance. Public spending cuts would be imposed to meet the EU’s tight fiscal rules.
Countries failing to meet this exacting standard could be thrown out of the Euro, under Sch√§uble’s proposal.
Effectively, the finance minister is demanding all member countries look a bit more like Germany, where budget deficits remain small, domestic consumption restricted, and a huge volume of goods is sold abroad. The price of continued Euro membership for smaller economies would be endless austerity: reduced living standards and weaker public services.
France has strongly opposed the proposal. Finance minister Christine Lagarde wants more leeway, fearing that major cuts in spending would push up unemployment and worsen recession.
France is a major deficit country, importing more than it exports and running a significant public spending deficit. Cuts in spending elsewhere could drive up unemployment in France as even fewer French goods would be sold abroad.
The inability of European leaders to set a clear direction for the EU is a result of deep-rooted imbalances across the entire European economy. A new report from the Research on Money and Finance group at the School of Oriental and African Studies makes this clear.
The Euro imposes a straitjacket on its member countries. They no longer have the option to devalue their currencies, and they lose control of their ability to set interest rates.
In return for this self-imposed restraint, European ruling classes hoped to create an economic bloc to rival the US, Japan and China, with the German economy powering the rest along. In theory, an integrated Europe would be the biggest economy on the planet.
That was the plan. As the report’s authors show, the reality has turned out rather different.
The German economy has been weak for well over a decade, with low productivity growth and significant structural unemployment in the East.
It has only been through squeezing its workers harder than other Euro economies that Germany has maintained its competitive advantage. For the last ten years, German workers’ share of what the economy produces has declined sharply. At the same time the economy has built up huge export surpluses. By paying their workers relatively less, German firms can sell more abroad.
The money earned from those export surpluses has been recycled by German capitalism as cheap lending to other Euro zone countries. Greece, Portugal, Ireland and Spain all borrowed heavily, covering their own frail economies with a splurge of debt.
A huge economic imbalance was created, with the German economy permanently in surprlus, and others permanently in deficit.
The huge public debts of the smaller Euro economies are a symptom of that imbalance. Recession-hit countries are now finding it increasingly hard to maintain repayments on it. The colossal expenditures needed to bail-out the banks from 2007 onwards exacerbated the problem.
A spiral downwards
Public services and wages are being hammered in Greece to keep its foreign creditors happy. And European institutions have not managed to offer any assistance to Greece. Even the IMF, when demanding swingeing expenditure cuts, actually delivers some cash assistance. Euro members, on current showing, get nothing.
As wages are squeezed, and public spending cut, demand in the economy will fall, worsening the recession. Only by boosting exports will this be averted. But with Euro membership making devaluation impossible, improving competitiveness means cutting the cost of labour - wages and conditions.
Austerity will create a grim “race to the bottom” across Europe, with weaker economies competing to hammer their own workers the hardest.
And there is no guarantee that this process will stabilise the economy. The whole continent could be pulled into a downward spiral of collapsing demand, similar to the one that pulled the world economy down in the 1930s. It is this prospect that is leading to rows amongst Europe’s leaders.
The Research on Money and Finance group calls, instead, for radical solutions. The option preferred by Europe’s leaders, of austerity and more privatisation, is a dead-end leading to misery for millions of ordinary people across the continent.
Instead, they suggest either the overhaul of the EU, with looser fiscal spending rules, an enlarged European budget, and progressive taxation. But global financial markets are likely to react with horror at such proposals, devaluing the Euro and undermining monetary union.
More radically still, they propose an exit from the Euro entirely, with a cessation of debt payments and the restructuring of the economy.
Delivering that will require a fundamental shift in the balance of power for workers, continent-wide. It will mean building trade unions willing to fight for their members, and political organisations able to contest the EU’s agenda - both within member states, and continent-wide.
It’s a tall order. But we now have little choice.
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).