By Tom O’Donnell
The foolish vanity that the current crisis in the European economy and financial markets was confined to the so-called ‘peripheral’ economies of the Euro Zone has been exposed as complacent self-delusion. Among the recent development the large Belgian-French-Luxembourg bank Dexia is threatened with bankruptcy despite already having been bailed out by the governments. Crucially, yields on French and Belgian government debt have climbed to reflect the increased risk of taxpayer funds being used for further bank bailouts. Their yield premia over Germany is now equivalent to the premium paid by Irish and Greek governments as the crisis began to unfold. The crisis has migrated from the ‘periphery’ to the ‘core’.
Greek reparations
This is an important development. Aside from repeated bail-outs of the banks, the main policy response until now had been to impose further ‘austerity measures’, direct attacks on the living standards of workers and the poor. Even with the new bail-out of Greece’s creditors in May, including a 21% reduction in the banks’ holdings of Greek government debt, there was to be no benefit to Greece. In fact it is not scheduled to receive even the full proportion of the proceeds of its own privatisations in order to pay down these debts. Instead, some of the proceeds will be use to buy expensive credit insurance to benefit the remaining holders of Greek government debt.
This approach, which effectively sees Greek taxpayers paying reparations to the government’s creditors, has had the predictable and predicted consequence of pushing the economy deeper into recession and undermining any ability to service the existing level of debt. As a result, the budget deficit in the first 8 months of 2011 has risen to €18.1bn compared €14.8bn in the same period last year.
The capitalist governments of Europe seem to have overlooked a basic feature of capitalism- that banks which lend to governments are dependent on the prosperity of the economies over which they preside. Marx speaks of the ‘great part the national debt and the corresponding system of taxation have played in the capitalisation of the banks and the expropriation of the masses’. The pauperisation of the masses reduces their incomes, even for expropriation.
Crisis of the core
The governments of the ‘core’ economies are facing an urgent reminder of this fact – none more so than President Sarkozy as he enters a Presidential election year. This is because French banks have the largest exposure to Greek government debt, equivalent to US$56.7bn at the end of 2010. This is approximately equal to the combined total of the next three largest lenders combined (Germany, Britain and Portugal!).
The consequences for the French banking system from a Greek default explain the virulence of Sarkozy’s opposition to the ‘haircut’ (nominal reduction in the value of the existing debts) on Greek bondholders, which was pushed through by Chancellor Merkel in June. In fact the French banking sector is the most exposed in Europe to potential defaults from the crisis-hit countries (Greece, Portugal, Spain, Italy and Ireland), equivalent to US$646bn compared to US$533bn for Germany.
There is a two-fold deception at the heart of the discussion about the Euro Zone debt crisis. The first is that the Euro Zone per se does not have a debt crisis at all. According to European Commission data, the public sector deficit for the Euro Zone as a whole will be 4.3% of GDP in 2011, precisely half the projected deficit for Britain and compared to 10% for the US. The second deception is that the crisis arises from profligate borrowing by the crisis-hit countries – ignoring entirely the profligate lending of the core banking sector.
Yet there is the possibility that the crisis could sink not only leading European financial institutions but also some of its leading politicians (Sarkozy is consistently behind in the polls, and Merkel’s CDU/CSU has taken a drubbing in regional and state elections) and speculation persists that the Euro itself will not survive. That such a relatively manageable crisis could have such potentially far-reaching consequences highlights the structural flaw in the cornerstone of the Euro project.
The Maastricht mess
It is a law of capitalist development that it is subject to combined and uneven development. That is, as capitalism is a global system all parts of the global economy are impacted by any important development within it, but this impact is not uniform and is instead felt unevenly. This is true within economies as well as between them. So a sharp drop in the oil price, for example, would be a benefit to the oil-importing British economy and a disbenefit to oil-exporting Saudi Arabia. But within Britain it might have a greater impact in the car-producing North East than the service-dominated economy of London. This unevenness applies to relative growth rates of productivity. In this way one region or one country can become more competitive than another.
For regions, in most industrialised countries this is resolved in an unseen way by the automatic effects of fiscal policy. A region which experiences stronger growth and increased employment will automatically pay more tax revenues (on income, consumption, capital) and receive few transfers (welfare and other payments). The national, or federal government could then choose to spend the increased revenues on promoting productivity growth in the lagging region via investment or in other ways benefitting from stronger growth elsewhere.
For national economies another more or less automatic process can operate. Countries experiencing a relative decline in productivity will tend to produce increasing trade deficits which in turn will depress their exchange rates. This can restore relative competitiveness at a lower exchange rate.
The Maastricht Treaty and the subsequent adoption of the Euro effectively introduced a national currency for the Euro Zone while leaving each of its new regions’ fiscal policy as if they were still national economies. Inevitably, when one or more country experiences a deterioration in competitiveness there is no automatic fiscal transfer mechanism as there is, say, between the regions of Britain or the states of the US.
Worse, since all of the crisis-hit countries actually did incur very large trade or other external deficits, these had to be financed by increased debt. (Although, contrary to the British Eurosceptic notion, it is entirely possible to rack up huge debts outside the Euro Zone. The foreign banks’ exposure to Britain far exceeds that of any other European country – even including Italy).
This is a structural crisis at the heart of the Euro project and can only be resolved decisively either by abandoning the Euro or a large group of the existing countries moving towards a full fiscal union, including fiscal transfers under some element of popular democratic control.
To this structural crisis is added a policy-driven one. As the extreme case of Greece demonstrates, attacking the living standards of the vast majority of the population does not increase their ability to service debts but diminishes it. The ‘austerity’ policy has to be abandoned. Even then, the exactions on the Greek economy are such that only a stabilisation of the current situation can be expected. A large-scale investment programme for the Greek economy, which would also benefit the EU economy as a whole, is necessary. The level of investment in the Greek economy could be doubled for five years at a cost of €150bn. Yet EU policymakers seem determined to prioritise preserving the interests of bank bond- and shareholders with estimates for the ultimate costs of these bailouts put in the trillions of Euros.
Political upheaval
Across Europe there has been a shift to the right as a result of the crisis. But this too is expressed unevenly, with some defensive struggles and advances by the left. The European Parliamentary elections took place close to the depth of the crisis in June 2009. The biggest winners were a series of smaller parties including some far right and openly racist parties who won 25 seats compared to the 2004 elections (which the British Tories decided to ally with), closely followed by the 20 gains for the grouping comprised mainly of traditional Christian Democrats who are themselves moving rightwards. The biggest losers were the group of Social Democrat parties who lost 35 of their seats. At the same time, the liberal grouping and the leftist GUE/NGL lost 5 seats each.
Broadly, parties of the traditional right won 43.3% of the vote while Liberals won a further 11.4%. Eurosceptic parties won 4.3% and the avowedly racist right won 3.7%. Right-wing Social Democracy won 25% of the vote, while the far left won 7.3%, the same as the Greens.
That the main social democratic parties are the big casualties of the current crisis is a function of their adoption of the economics of neo-liberalism. This has continued since in office, with the Greek PASOK and Portuguese Socialist Party inflicting tax hikes, pay, pension and public service cuts on the bulk of the population. The Portuguese Socialist Party were ejected from office at the election in June, and PASOK’s implementation of Troika policies have led to a revival of the previously discredited New Democracy. PSOE, Spain’s ruling social democrats, who capitulated in 2010 to pressure for cuts look set to make significant losses in the November 20 general election. A similar fate seems to await the Irish Labour Party which is the junior party in a coalition implementing Troika policies.
Yet the main ruling parties of the right are not gaining in popularity either. The Economist dubbed the overall outcome of the regional elections as ‘Angela’s trauma’ with the big winners the Greens. In France the series of huge mobilisations in defence of pension rights appears to have produced a decisive break in the situation, with Sarkozy now decisively trailing any Socialist candidate in the opinion polls.
This point should be stressed. Whenever there has been some sustained mass struggle there is a positive political consequence. On a smaller scale, the same has been true in Britain, with the student demonstrations, mass TUC demonstration and the first industrial action all changing the political landscape in a positive direction (a halving of the Lib Dem vote, a reversal of the Tories’ gains of some switch voters for the Lib Dems and a new legitimacy of strike action respectively). Most decisively, while the Greek masses have received no benefit from their determined struggles, there is an enormous benefit to the entire European population as default and losses imposed on bondholders are now firmly on the agenda. In addition, Portugal and Ireland especially benefited from large reduction in the interest rate charged by the ECB.
The rise of racism
Unable to regain popularity through their economic measures the response of the main bourgeois parties has been the promotion of all forms of racism and xenophobia. In almost every European country some combination of attacks on, and propaganda and legislation against Muslims, black people, Eastern European or North African immigrants, Roma and travellers is taking place. In Eastern Europe there is a state-sponsored attack on often sizeable Russian ethnic minorities as well as an anti-Semitism that consciously harks back to Nazi rule. ‘Multiculturalism is dead!’ has been the rallying cry of Merkel, Sarkozy and Cameron. What is meant is that racism and xenophobia are back with a vengeance.
Of course this is irrelevant to the economic crisis. If the European governments are able to stall the growth in immigration it will only reduce the potential growth of the European economies. But this is not its purpose, which is instead to provide a distraction from the economic crisis and redirect the inevitable anger away from the perpetrators of the attacks on living standards towards some of its main victims, the oppressed populations and national minorities of Europe.
This is the biggest strategic challenge facing the European left – if it makes the wrong alliances it will end up as the left wing of reaction. There are numerous incidences to date of left parties turning their back on the most beleaguered communities and failing to respond to the racism of the right.
The main weakness of the European bourgeoisie is the effects of its economic policy – but its main weapon is racism and xenophobia. The European left must combat both in order to register any lasting victories.