How the United States, Japan and Germany are crushing the EEC

Figures 1 and 2

First published: Spring 1993

The electoral collapse of the French and Italian Socialist Parties signals the demise of Euro-socialism, the dominant current in the West European labour movement for the last decade. This is simply the latest symptom of the crisis of the European Community. The EEC is being ground between the external competitive pressure of the United States and Japan, and the internal dominance of the unified Germany. Rather than offering reforms, Maastricht proposes to dismantle the welfare state in Western Europe. The rise of the extreme right and the collapse of Euro-socialism are logical results.

In Europe imperialism is suffering its first substantial reverses since Gorbachev came to power in the Soviet Union. At the beginning of 1992 imperialism recorded an historic triumph with the installation of a capitalist government under Yeltsin in Russia. But a year later Yeltsin had lost his majority in the Congress of People’s Deputies. George Bush failed to secure re-election in the United States, Japan faced financial crisis and the European Monetary System came apart at the seams. Thus the re-charged imperialist system, which delivered Washington’s triumphs at the end of the 1980s, has started to exhaust itself.

Through the 1980s United States capital had imposed a specific structure on the world capitalist economy, on which Ronald Reagan’s domestic political success rested. Its function was to restore US supremacy after its defeat in Vietnam and its loss of economic competitiveness relative to Japan and Germany.

The aim of Reagan’s policy was to accelerate the arms race, including by the deployment of a new generation of Cruise and Pershing nuclear missiles in Europe, to such an extent that the Soviet economy would crack under the strain. This, it was hoped, would both open up Eastern Europe to capitalism and remove the principal strategic ally of every revolution since 1917 – a non-capitalist USSR. These goals naturally united the major imperialist powers who all stood to benefit from extending the field of capitalist operation.

Between 1989 and 1992 this strategy bore fruit with Gorbachev’s foreign and domestic policy, the re-introduction of capitalism into Eastern Europe, the Gulf War and finally Yeltsin’s attempt to bring capitalism to Russia itself.

The economic mechanism which underpinned these successes was a vast flow of capital into the United States from Japan, East Asia and the third world, peaking at more than $150 billion in 1987. This financed Reagan’s colossal military build-up, without forcing the American population to foot the bill – while causing the economic dislocation that is spreading famine, disease and war, with millions of deaths, in the third world.

As the UN’s 1992 world economic survey accurately observed: ‘The free international flow of capital has meant that the US has been able to have an investment rate exceeding its saving rate by running a current account deficit… Because the US has such a large economy, persistent and large current account deficits can pose a drain on world resources large enough to have a significant effect on world real interest rates…’

By the end of the 1990s it had became impossible for the rest of the world to continue to prop up the United States at the level required – the inflow of capital into the US dropped dramatically. Flows of capital from the third world had reached their limit, and the US’s main imperialist financier, Japan, began to experience strain in its domestic economy, forcing it to cut back on capital flows out of the country. The dam broke with the 1987 stock market crash. Germany, and later Japan, raised interest rates, and the flow of capital into the US fell sharply (figure 1).

This inevitably led to a collapse in American investment towards the levels of US domestic savings – the lowest of any industrialised state.

As a result US investment collapsed to the lowest level in post-war history and the US economy was plunged into recession (figure 2).

Figures 1 and 2

George Bush lost the presidency because he could not revive the domestic economy. His attempt to do so did however have very definite results for the world economy. Bush cut interest rates to their lowest levels since the 1960s and sharply devalued the dollar. This made US exports more competitive and improved the trade balance, with serious consequences for Western Europe, but the resulting growth of exports was not remotely sufficient to compensate for the collapse in investment in the US. So Bush went down to defeat.

Bill Clinton was elected on a pledge to put the US economy first. But the problem he faces is that, other than appropriating the savings of the rest of the world, or cutting military spending to a degree that would undermine US world dominance, there is no painless way of rebuilding investment.

Without the scale of inflow of capital which sustained Reagan, US investment, its world military role and the servicing of its $4 trillion debt will have to be paid for out of the surplus value produced by the American working class. That is the meaning of Clinton’s plan to raise taxes and cut benefits. But cutting the US working class’s living standards will create something Reagan was able to avoid – political instability in the United States itself, its first manifestation being the defeat of Bush.

That is why Clinton’s presidency got off to such a rocky start. Clinton will try to minimise his political problems at home by extracting as much as possible from Europe and Japan. Hence the sharply rising trade tensions over aircraft, agriculture, steel and so on. Hence also Washington’s demands for a direct military contribution by Japan and Germany to US-led policing of the third world.

Underlying this is the relative decline of the competitive position of the United States compared to its major imperialist rivals.

The cornerstone of the new world order established by the United States after 1945 was the US’s colossal economic, and therefore political, predominance – in 1945 the United States alone produced more than the rest of the world put together.

Since then, the US position in the world economy had declined on every major index. Its share of world exports declined from 22 per cent to 11 per cent between 1945 and 1980. Its share of the export of manufactures fell from 20 per cent in 1958 to 13 per cent in 1980. Its share of value added in manufacturing fell from 55 per cent in 1955 to 21 percent in 1980.

US imperialism is no longer strong enough to organise the entire capitalist world under its hegemony in the way it did until Vietnam. But neither will any other imperialist power be able to challenge US dominance for the foreseeable future.

A typical example of what results is the recent paralysis of the Group of Seven (G7) richest countries set up to co-ordinate policy: ‘A specific weakness sapping the G7’s strength is the imbalance arising from the increased strategic and political clout of the US relative to its economic power. The US is now the world’s one undisputed superpower. But its share of world output has slipped to about a quarter from a half since the second world war. A decade of deficit spending under presidents Reagan and Bush has created constraints on economic policy making… the US aspires to lead in G7. But its economic weakness results in its policy makers usually producing ideas that require others to pay the bill. The result has been acrimonious disputes over burden-sharing between Germany and the US in particular’ (Financial Times 18 January).

This is placing enormous strain on the entire imperialist system and posing a new historic process of reorganisation. The final outcome of this depends in large part on the outcome of the struggle in Russia, but some of its immediate consequences are already apparent.

The most horrific are in the third world. The massive outflow of capital from the third world to the US meant that investment and living standards collapsed during the 1980s. According to the UN, per capita income declined in 1990 for 1,000 million people, nearly a fifth of the world’s population, and the 1980s ended with third world income per capita lower than at the beginning of the decade. With falling living standards came the famine, disease, social dislocation and wars which continue to sweep Africa, the Middle East, parts of Asia and Latin America.

The political result is the new colonialism – direct imperialist military intervention in Latin America, Africa and the Middle East to prevent the resulting chaos developing into attacks on imperialist interests. Its ideological by-product is the resurgence of racism – justifying both imperialist interventions and the exclusion of those fleeing the crises. Just as the decolonisation struggles after the Second World War undermined racism in the US and Europe, the highest expression of this being Malcolm X, so the new colonialism has fed a new wave of racism, with daily TV and newspaper reports discovering the latest African country that can’t be trusted to run its own affairs.

The second consequence is the stepped up inter-imperialist competition, given impetus by the overtures in Eastern Europe and the Soviet Union. The existence of the USSR forced the imperialists to subdue their own conflicts confronted with a more dangerous enemy, the organised military power of a state representing different class interests.

This increased inter-imperialist competition takes place in the context of immensely superior US power but, nonetheless, is reflected in the emergence of three major trading blocs: the EEC, the North American Free Trade Area (NAFTA), and Japan, the NICs and East Asia. The last of these, with China, is by far the most economically dynamic region of the world. Japanese Prime Minister Kiichi Miyazawa opened the year with his ‘Look East’ policy, saying Asia will be ‘the world’s brightest spot over the next century’.

On the military level, Washington’s intention is to end the economic advantage given to Japan and Germany by the US military umbrella. Now it demands that they deploy their military forces, under US leadership, against the third world in exchange for possible permanent seats on the UN Security Council. In both countries moves are afoot to change constitutions which limit their international operations. Kampuchea now has the first Japanese troops deployed outside Japan since 1945.

These moves threaten the inflated world roles of Britain and France. Hence their efforts to use their military clout to play the leading European roles in the Balkans and the Middle East.

In enforcing its demands, despite its relative decline, Washington has considerable leverage which it used throughout the 1980s to regain ground vis-à-vis Japan and the EEC. It remains by far the largest capitalist economy, accounting for 37.6 per cent of the output of the 24 major industrialised economies, compared to Japan’s 15.2 per cent and Germany’s 8 per cent.

Secondly, while Germany and Japan have been catching up on US productivity levels, particularly in manufacturing, the US remains overall leader. In certain sectors, notably agriculture, the US is far in advance of both Europe and Japan – hence Washington’s campaign to open up these markets.

Most important of all, only the US can act as guarantor of the functioning of the world capitalist economy as a whole, economically, politically and militarily. You simply have to look at the location of Japan in relation to China and Russia to grasp its dependence on the US – better to be a slightly poorer capitalist than not to be a capitalist at all. Similarly, whilst the EEC can engage in economic competition with the US, it remains militarily dependent on it – as both the Gulf War and the civil war in Yugoslavia illustrate.

There is no capitalist alternative to US leadership – whatever the price it exacts. Without it one of capitalism’s greatest strengths in the post war period – its ability to avoid the scale of inter-imperialist conflict which dominated the period from 1914 to 1945 – would no longer exist. Imperialism was able to face the political crises after 1968, the economic crises after 1973, the crisis in Eastern Europe and the USSR after 1989 and the Gulf War in a relatively united way. This ability to maintain the fundamental mechanisms of post-war imperialist collaboration intact – relatively free international trade, the international monetary system based on the dollar, NATO – rested on the supremacy of the United States but strengthened all the imperialist powers against the working class.

With the US less and less able to take the strain of organising this world capitalist system, it uses its qualitative dominance to obtain the maximum concessions from the other capitalists – every billion dollars taken from Japan or Europe is a billion dollars less that has to be screwed out of the US working class by Clinton.

The limit on this, however, is the ability of its imperialist rivals to meet its demands. This has been greatly reduced. Every concession made to the United States increases their own political problems – as, for example, in the reaction of the French and Japanese farmers to US proposals to open their agriculture markets.

Japan is facing its most serious financial crisis since the Second World War. This reflects the fact that even Japanese capitalism could not take the strain of propping up the US economy in the latter half of the 1980s. Low interest rates demanded by Washington created an economic bubble of soaring stock market and property prices. At its peak at the end of 1989 the Tokyo stock market was valued at 30 per cent more than the value of all of America’s listed companies. When the bubble burst, property prices plummeted and the Tokyo stock market has fallen by more than half.

This undermined the banking system as the value of its property and stocks market assets collapsed. By September 1992 the top 21 Japanese banks had bad loans amounting to 18 months’ operating profits. This will make it more expensive for Japanese companies to raise capital. Japan’s economic growth fell to 1.5 per cent in 1992, the slowest for 18 years. Industrial output fell by more than eight per cent.

But Japan is sufficiently competitive to respond to a domestic contraction by expanding its trade surplus with the rest of the world – for the first time ever exceeding $100bn last year.

Washington’s response to Japan’s growing trade surplus has been both to ‘talk up’ the value of the yen – making Japan’s exports less competitive – and to impose bilateral agreements on key goods, like semi-conductors.

For Europe, the consequences are worse. The EEC is caught between the devaluation of the dollar and stepped up Japanese exports. But what makes the situation doubly intractable is the coincidence of these external pressures with the impact of German unification. High German interest rates, to attract capital to finance unification, have plunged the rest of the EEC into recession and strained the European Monetary System to breaking point.

Underlying this immediate situation, however, is the erosion of the EEC’s competitive position since the beginning of the 1970s. From 1945 to 1973 economic growth was faster, and unemployment lower, in Western Europe than the United States. After 1973 the US struck back with the oil price increases, dollar devaluations and then Reaganomics. As a result EEC economic growth fell behind that of the US till the end of the 1980s.

Again, after gaining on the US in terms of productivity through most of the post-war period, after 1979 the EEC countries stopped catching up with the United States and also fell behind Japan.

Most fundamentally of all, the EEC has been unable to match the far higher levels of investment, and resulting productivity growth, of Japan and the Asian Newly Industrialising Countries. In 1991 EEC gross domestic fixed capital formation was 20.25 per cent of GDP compared to 31.4 per cent in Japan – more than 50 per cent higher. And far from closing the gap, the EEC has been falling further behind since the mid-1970s (figure 3).

Within the EEC, Britain is in a special category of its own. Britain never succeeded in catching up with even Western Europe’s post-war level of investment. Each attempt to do so overstrained the economy and had to be abandoned. UK gross domestic fixed capital formation collapsed to 15 per cent of GDP in the second quarter of 1992 – 25 per cent lower than the EEC average (figure 4).

Figures 3 and 4

Since German reunification the situation of the EEC as a whole has deteriorated further. The EEC’s share of world export markets for manufactured goods has fallen by a cumulative 6.3 per cent during 1990–92, according to OECD estimates. The EC’s trade deficit with the rest of the world almost quadrupled to $71bn between 1988 and 1991. Japan’s trade surplus with the EC rose 17 per cent in the first 11 months of 1992 to $29.2bn.

Previously the deficit with Japan was balanced by a surplus with the US. But, as a result of the devaluation of the dollar, a $16.2bn trade surplus with the US in 1987 had become a $24.4bn deficit in 1991.

These figures reflect the basic weaknesses of European capital vis-à-vis Japan and the US. One aspect of this is that the relation of forces between the working class and capital is more favourable to the former in Western Europe. This was expressed in the fact that the dominant military power on the European continent after 1943 was a non-capitalist state – the Soviet Union – whilst the most powerful capitalist power, Germany, was divided. Only the US military presence could counter-balance the Soviet Union.

In line with this, to restabilise capitalism in Western Europe after the war, capital had to concede the welfare state – which does not exist in Japan and the United States.

Furthermore, although the EEC represents an economic space of comparable size to the United States, European capital is not organised in a single state and, as we are seeing, there are immense obstacles to it becoming so. Finally, productivity in agriculture, whilst in advance of Japan, lagged far behind the US.

Naturally, the new relationship of forces in Europe, with the reintroduction of capitalism into eastern Europe since 1989, has given European capital the opportunity to try to roll back the concessions it had to make to the working class after 1945. The entire project codified in the Maastricht Treaty is to dismantle the welfare state, to weaken the labour movement and create a more unified economic and military organisation of European capital.

Economically the attack on the welfare state is the heart of Maastricht. The figures make this clear. Final government spending in the EEC is double the level of Japan – 18.1 per cent compared to 9 per cent of GDP (1990 figures). The difference is more or less equal to their different levels of investment. Hence, the strategy of European capital, put simply, is to drive up the level of investment by dismantling the welfare state. That is the purpose of Maastricht’s ceiling of three per cent of GDP on government budget deficits. Implementing this would require massive cuts in public spending in the great majority of EEC states – as well as those like Sweden seeking to join.

This will particularly hit women, who apart from losing direct benefits, will find that their unpaid labour at home is what has to substitute for the services of the welfare state.

As this policy will be resisted, key levers of economic policy are to be handed to an independent European Central Bank, with a view to preventing governments from being able to reverse Maastricht’s policies.

The attack on the welfare state dovetails with the goal of driving down the real level of wages. Throughout the 1980s European capital followed a deflationary policy, enforced by the Bundesbank through the ERM, whereby wage levels were depressed by the highest levels of unemployment in the industrialised world. Cutting social security is, for capital, a way to relieve the strain on public finances imposed by the recession, and, at the same time, reinforce the downward pressure on wages. This is what the OECD calls ‘active labour market policies’ – such as time limits on social security to the unemployed and single parents to force them to take work at any level of pay on offer. The effect of such policies on the trade unions is obvious – and far outweighs any supposed benefits of the Social Chapter.

The fulcrum around which this whole political and economic attack will turn is Germany – the country straddling Eastern and Western Europe.

German capital is constructing a low-wage hinterland in Eastern Europe comparable to that of Japan in East Asia. This will be used directly to drive down wages and social provision in Western Europe. A study by Morgan Stanley, the US investment bank, spelled this out: ‘Workers in these countries [Poland, Hungary, Czechoslovakia] receive in a month what the average skilled German worker receives in five hours. Little wonder that Mercedes Benz has indefinitely postponed its planned truck plant in Eastern Germany. German companies will increasingly shift their manufacturing investment eastward.’ Thus, the promises which Kohl made to win the East German electorate to rapid unification are now being reneged upon. Unification created a boom for West German industry as East German suppliers were eliminated. West German GNP growth reached 4.5 per cent in 1990. The corollary was the destruction of the East German economy. One typical estimate is that there will only be 400,000 manufacturing jobs left in a labour force of six million by the end of 1993.

Then, as the unification boom ran out of steam, the Bundesbank and government have rapidly moved to put the squeeze on wages and welfare spending in the West. Economic growth fell to 0.8 per cent in 1992 (the worst rate since 1982) and is projected to fall by at least one per cent in 1993. In 1992 German business confidence registered a greater decline than in any other post-war recession.

The engineering employers announced on 18 February that they were revoking their agreement with Germany’s trade unions to raise East German pay to West German levels. Helmut Kohl has also called for the reversal of the reductions in working hours won by German trade unions in the 1980s. Other targets include ending restrictions on weekend and night-shift work.

The Bundesbank states explicitly that the precondition for cutting interest rates is agreement with the unions and the SPD on cutting social provision, holding down wages and increasing taxes – the so-called ‘solidarity pact’.

Alongside this, the chief responsibility for the outpouring of racism since unification lies with Kohl’s orchestrated campaign against asylum seekers – to which the German Social Democracy rapidly capitulated.

Finally, German capital demands that its political and military role be brought into line with its economic muscle.

In both Western and Eastern Europe, German capital is gaining by economic means what it failed to win militarily in the First and Second World Wars. Its spread into Poland, Hungary, the Czech lands and Yugoslavia is the main external force promoting the disintegration of these states. A Prague joke captures this accurately: ‘What will the Czech lands be called after the break up of Czechoslovakia?’ ‘East Germany!’

The German demand for immediate EEC recognition of Slovenia and Croatia unleashed the civil war in Yugoslavia.

Europe is being reorganised under German hegemony. One German banker put it like this: Germany after unity should be considered akin to a python that has swallowed a sheep – a little discomfort before emerging all the stronger for the meal.

The Franco-German axis, whereby French capital aimed to control Germany and dominate the EEC, has become the mechanism of German capital’s ascendancy. Hence the Bundesbank’s concern to keep the French franc within the ERM while forcing devaluation on the lira, pound, peseta, escudo and punt.

The other EEC states face, therefore, both the external pressures from the US and Japan and the ability of German capital to enforce its own economic priorities irrespective of their consequences for the rest of Europe.

Hence, at the exchange rates imposed by the ERM, only Germany could compete with even the US: Germany ran a trade surplus of $1.3bn with the US in 1991 but Spain ran a deficit of $4.16bn, the Netherlands 5.95bn, the UK 6.13bn and France 6.82bn.

The deflationary impact of the ERM thus took effect not only in terms of the impact of high interest rates on domestic economic growth, but by blocking devaluation to offset the fall of the dollar. The high German interest rates necessary to fund German unification and the fixed exchange rate system of the ERM prevented other EEC states dropping their interest rates to avoid recession and devaluing their currencies to compete with the US, let alone Japan.

This worked through directly in the unemployment figures – EEC unemployment reached 9.5 per cent in the third quarter of 1992 whilst West German unemployment was still only 4.7 per cent.

This situation is generating the tide of discontent shown by the sharp increase in opposition to the Maastricht treaty starting with the Danish referendum in June last year, the strikes and demonstrations in defence of jobs and welfare provisions in Italy, Greece, Spain, France and, in Britain, against pit closures.

By September last year the economic and political pressures imposed on the weaker EEC economies by the combination of the dollar’s devaluation, Japanese competition and high German interest rates became uncontainable. The EEC split in two between Germany and its periphery and the rest. To date, countries representing 45 per cent of EEC GDP have been forced to either devalue their currencies or leave the ERM altogether.

First Britain and Italy, followed by Spain, Portugal and Ireland, devalued their currencies. As the American magazine International Businessweek commented: ‘Europeans expected to unveil a unified economic and political superpower to rival the US and Japan. Instead, 1992 turned into a year of fragmentation’ (11 Jan).
When it came to the crunch, with the exception of the French franc, there was no German subsidy on offer to bail out the ERM’s weaker currencies. On the contrary, the coup de grace was administered by judicious Bundesbank press leaks.

This was borne out in the Financial Times’ investigation of the ERM debacle: ‘Even if it is ratified by all EC member states, the Maastricht Treaty looks more like a formula for establishing a two- or multi-speed Europe than a blueprint for union. However, while others have dallied, one institution has emerged with a clear idea of what it wants from the wreckage. The Bundesbank sees a monetary future for Europe: it will be designed and largely made in Germany. In a series of speeches over the past two months, Mr Schlesinger, Mr Tietmeyer, and Mr Otmar Issing, the Bundesbank’s chief economist, have spelled out a vision of Europe’s future that amounts to monetary Darwinism, or survival of the fittest.’ Tietmeyer ‘explicitly rejected the myth that all EC nations could proceed together to union. The Bundesbank president has also attacked aspects of the ERM’s operations, notably the obligation on strong currency countries to provide unlimited support for weak currencies at their lower intervention points.’

Within this framework the Bundesbank has tried to keep France on board – because the Franco-German axis is the vehicle for Germany to get its way on all decisive issues within the EEC. However, even this may not be possible. The consequence of trying to maintain the franc’s parity against the D-mark in the ERM has been a decade of austerity. France’s unemployment stands at 10.4 per cent and rising. Its unemployment benefit system is nearly bankrupt. This is the basis upon which Jean Marie Le Pen was able to build the largest fascist party in Europe.

The Socialist Party government which has presided over this policy was predictably crushed in March’s parliamentary elections.

The squeeze on France is magnified by the devaluations of the pound, lira, peseta, escudo and punt which undermine French exports hence Jacques Delors’ denunciations of ‘wildcat devaluations’.

But whether or not the franc can keep its parity against the D-mark, the consequences of the ERM have been even more devastating in the less competitive economies – those destined for the second or third tier in the new Europe – including Italy and Britain.

The Italian government, whose budget deficit of 11 per cent of GDP is more than three times the Maastricht maximum, has adopted the biggest attack on health and social security spending since Italy’s welfare state was set up after the war, including a wage freeze for 3.5 million public sector workers. Health care and pensions are to be cut. These steps are the economic driving force of the disintegration of the Italian political party system in recent months. As the OECD’s latest survey of the Italian economy put it: ‘Meeting the Maastricht convergence rules implies for Italy a speed of fiscal consolidation which has no precedent among major countries.’

Britain is heading for a budget deficit three times the Maastricht limit. The government’s response has been the public sector pay freeze, tax increases and the threat of massive cuts – but in circumstances where its political weakness makes it difficult to carry them out.

Major cuts in public spending are also planned in the Netherlands, Belgium and Denmark – not to mention the onslaught taking place in Sweden which is taking apart the post war model for social democracy.

Six million Italian workers took part in a general strike against such measures on 13 October. There have been general strikes in Spain, Italy and Greece against attacks on services, wages and jobs in the public sector.

This economic and social process is churning up politics in Western Europe and giving birth to two qualitative shifts. In the labour movement the decade of ‘Euro-socialism’ – symbolised by Mitterrand, Craxi and Gonzales – is ending in disaster. At the same time, it has created the social basis, and, with Euro-socialism’s failure, the political conditions, for the emergence of the racist extreme right on a scale not seen since the 1930s.

The scale of attack on the petty bourgeoisie and the welfare state is also fracturing the base of the national bourgeois parties. This is leading to anti-Maastricht currents within them – the part of the Gaullist party which led the campaign for a ‘no’ vote in the French referendum, the anti-Maastricht wing of the Tory Party, and so on. And, also, of course, the emergence of significant new parties to their right – Le Pen’s French National Front, the Republicans in Germany which polled 8.3 per cent in the March elections in Hesse, the Freedom Party in Austria, the Vlaams Blok in Belgium and the Northern League in Italy (where in addition the fascist MSI continues to win 5–6 per cent of the vote). Not only are the main pro-Maastricht parties fanning the racism on which the extreme right feeds.

One of Euro-socialism’s most gross crimes is the way it has capitulated to racism – in many EEC states, notably France, not even extending elementary civil liberties, such as the vote, to immigrants – thus weakening the part of the working class which has the most immediate interest in fighting the racists and fascists.

Increasingly outflanked on the left and the right, the parties of the ‘Maastricht bloc’, are forced into closer collaboration, remaining the largest, but now declining, combination of political forces in the major European countries.

This bloc comprises, first the pure party representatives of big European capital – such as the German Free Democrats and the British Liberals – a minority in all countries. Secondly, the largest part of the traditional national main bourgeois parties – the Tories, the Christian Democracy, the French Gaullists – with growing, right wing currents within these, opposing Maastricht or its effects, reflecting the pressure of the petty bourgeoisie and small capital.

Third, Euro-socialism – the attempt of the European Social Democracy to build a bloc of big European capital and the better off sections of the working class against the rest of the working class and the petty bourgeoisie.

In France, Italy, Spain, Belgium, Netherlands, and most recently Ireland and Denmark, social democracy is either the major or a leading government coalition partner presiding over rising unemployment and the attack on the welfare state. Elsewhere, while not in government, its support has been essential to carrying through this attack. In Germany the SPD’s Solidarity Pact with the government means it shares responsibility for the key proposal in the pact – a 7.5 per cent tax increase – guaranteed to further discredit the SPD.

In Britain, Labour under John Smith is as committed to Maastricht as John Major, and Smith has already started his own softening-up exercise against the welfare state with his Commission for Social Justice.

The rise of Euro-socialism was based on the fact that through the latter half of the 1970s and the 1980s Germany’s trade surplus subsidised the EEC and particularly investment in southern Europe. This, together with the US’s economic blows against its European rivals, was the material basis of Euro-socialism’s eclipse of the directly Atlanticist currents within Social Democracy and of the Communist Parties outside of them.

Today, the squeeze on the EEC by US, Japanese and German capital, together with the reintroduction of capitalism in Eastern Europe, is destroying the material basis of Euro-socialism. Rather than offering improvements, Euro-socialism today stands for dismantling the most important reforms of the post-war period. Its electoral collapse is the logical result. In Britain, on this policy, Labour could not even win the 1992 general election in the context of the longest recession since the 1930s.

As a result Euro-socialism’s system of alliances is being out-flanked. That is what happened in the Danish referendum, nearly happened in the French referendum and, most spectacularly of all, is now taking place in Italy. Here the entire post-war party political system is being smashed to pieces, with a quarter of the country’s MPs, particularly Socialist Party members, threatened with corruption charges. As a result the right wing Northern League is now the biggest party in the north of Italy and the second largest party in the whole country, while both the Christian Democrats and the Socialist Party are suffering spectacular reverses.

In the first round of the French parliamentary elections in March, the electorate passed its verdict on Mitterand’s ‘franc fort’ policy as the Socialist Party vote collapsed below 20 per cent, less than half that of the main bourgeois parties. Le Pen’s National Front took 12.52 per cent. The Communist Party sustained 9.21 percent and 7.7 per cent went to the Greens. That result is an eloquent balance sheet of ten years of Euro-socialism.

In Spain, Gonzales’ party is likely to lose its parliamentary majority this year in spite of the extreme fragmentation of the bourgeois parties in the Spanish state. In Germany the SPD have put up no serious opposition to Chancellor Kohl since unification, responding to racist attacks by supporting restrictions on asylum seekers, associating themselves with tax increases and attacks on social provision through the ‘solidarity pact’ negotiations and even discussing the issue of the deployment of German troops outside the NATO area – a proposal which only has the support of 15 per cent of the electorate. As a result, although in opposition, the SPD did even worse in the Hesse state elections, losing 8.4 per cent, whilst the Christian Democrats only fell 2.3 per cent.

In short Euro-socialism is collapsing. Its fall coincides, logically, not just with the rise of the far right, but since the middle of last year, with the first movement of the relation of forces in favour of the working class after the historic defeats of 1989.

The first sign of this was the mass movements against the Gulf War throughout the third world, and also, on a lower level, in the United States and Western Europe, where it brought together left social democrats, the left wing of the former communist parties, the Greens, peace movements and left trade union currents.

The really qualitative development, however, began in the middle of last year as the Russian working class, as always the vanguard, clearly moved onto the offensive against Yeltsin’s government – whose position has deteriorated ever since. That movement has still only taken its first steps, but the defeat of capitalism in Russia would completely transform the conditions of the class struggle everywhere in the world. For that very reason the political recomposition in Russia will shape the future of the entire international labour movement.

Finally, since the Danish referendum and then the ERM crisis in September, the crisis in the EEC has reached a level which threatens the strategic project of European capitalist integration. This is bringing together not only socialists, but those who simply want to defend the welfare state.

In line with this has been the revival, emergence or stabilisation of minority currents to the left of Euro-socialism. In Eastern Europe, capitalism has no economic concessions to offer and so social democracy has established no mass support on either the electoral or the trade union fields. In all recent elections former communist parties, sometimes allied with smaller new left currents, have been dominant on the left. Similarly the main trade union organisations are the former official trade unions which, in Russia, for example, have been democratised and played a leading role in the opposition to Yeltsin’s policies.

In the former USSR this trend is even more pronounced – witness the victory of the left in the Lithuanian elections – and growing strength of the left around the newly reformed Communist Party and the trade unions in Russia. In a number of these countries new left currents, former communists and trade unionists are working together. For example, the collaboration of the Party of Labour with the trade unions and Roy Medvedev’s party in Russia. Boris Kagarlitsky is now political advisor to the chair of the 65 million-strong Russian Federation of Trade Unions. The Left Bloc in the last elections in Czechoslovakia represented a similar alliance.

In Germany, SPD went flat out to eliminate the Party of Democratic Socialism (PDS), the successor to the East German communists, and failed. Unlike the SPD, the PDS took a clear stand in defence of refugees and Germany’s black communities against racist violence. The PDS includes, in addition to former communists, other left wing currents in its leadership.

In Western Europe, left currents out of the former Communist Parties have also retained a foothold and even regained some ground – most clearly in Italy’s Party of Communist Refoundation, which incorporates both the left wing of the PCI and the far left Democratia Proletaria, and has major influence in the trade unions.

In Britain, the Morning Star and left communists have worked with the Labour left in leading the campaigns against the Gulf War, in support of the Anti-Racist Alliance, supporting democratic socialists in the former Soviet Union and against Maastricht. This alliance has been formalised in the Socialist Forum.

The opposing pole of this recomposition – the part of the left which started by celebrating capitalism’s advance into Eastern Europe, whether they originated as communists, social democrats or Trotskyists – has been marginalised. In Eastern Europe, currents on this line are participating in the destruction of living standards and social welfare of millions of people.

In Britain, [the Socialist Movement and its paper socialist], which acted as a trojan horse for this line in the British left and united those like Socialist Organiser and Socialist Outlook who considered the post-1989 events in eastern Europe an advance, has blown apart over Maastricht.

The second major current which has consolidated its position to the left of Euro-socialism in a number of countries is the Greens – ranging from quite left currents in Germany to the more right wing Greens in France. The Green vote in France and reaching 11 per cent in the Hesse state elections in Germany in March.

In Italy, Spain and Britain the Greens have not made this kind of progress – in part because the ground to the left of Euro-socialism is occupied by the Labour left in Britain, the left Communists in Italy and the left nationalist and other currents in Spain.

Finally, there are left currents in the Socialist Parties themselves, in particular, on the Gulf War, the Maastricht Treaty, against racism and now defending the welfare state, most clearly in the British Labour left, centred on the Campaign Group, which over Maastricht and the welfare state has been able to make wider alliances as with Bryan Gould. In France, Jean Pierre Chevènement led a minority of the SP in opposition to the Gulf War, and then for a No vote in the French Maastricht referendum.

Two distinct processes are involved in this political recomposition. The first is the convergence of socialist currents – driven together in opposition to capitalism in Eastern Europe, opposing the imperialist attacks on the third world and building wider mass movements around the immediate issues confronting the labour movement in Western Europe. This is part of an international process and is most advanced in Russia and some parts of Eastern Europe. It is developing also in the collaboration between forces like the Cuban Communists, Central American revolutionaries and the Brazilian Workers’ Party, in the Latin American São Paolo Forum. In Western Europe it was reflected in the coalitions of different currents against the Gulf War and, partially in the collaboration of different currents in the German PDS, the Italian PCR and the Socialist Forum in Britain.

This socialist recomposition is leading towards the creation of new national and international socialist currents – with its tempo determined by that of the international class struggle and, in particular, the outcome in Russia.

To this process of socialist re-alignment is added a second process. Significant left reformist forces oppose the attempt to dismantle the welfare state in western Europe, and want to fight racism, not capitulate to it. It is obligatory for the socialist left to make common cause with this wider, ‘welfarist left’ to maximise the forces which can be mobilised on these issues.

The next steps in this process are clear:

• to expose and oppose the imperialist military interventions in the third world and Eastern Europe, linking up with the peace movement to campaign for massive cuts in military spending, and, in Germany, attempting to block the new drive to deploy German forces internationally;

• to create the widest possible mass movements against racism, with the leading role in them of the black communities, and drawing in the trade union movement – the Anti-Racist Alliance is a model in this respect;

• to mobilise the labour movement in opposition to the Maastricht Treaty and create the strongest possible defence of the welfare state, in particular, highlighting the disastrous consequences for women of its destruction; every major struggle of the working class, whether directly to defend welfare provision, in defence of jobs, against pay freezes and pay cuts, or in defence of trade union organisation, objectively feed into the opposition to the entire plan of European capital embodied in Maastricht.

1992 saw the tide start to turn for the working class in Europe. First the Russian working class started to hit back, shaking the imperialists’ hold on developments in Russia, and secondly, in western Europe the project embodied in the Maastricht Treaty began to come apart. These developments are first steps on a long and difficult road, but they have opened a crack which the labour movement must drive into, forcing it as wide as possible.