Across the eurozone, whatever flavours go into the recipe for government – left, right, liberal or a dash of Green – we only hear one answer to the economic crisis: austerity. There is no alternative, ‘TINA’, the old refrain, is regurgitated again and again by Brussels, the IMF and the European Central Bank. And when austerity doesn’t work and governments, despite all their cutbacks, continue to be cut off from capital markets, what is the answer? Well, let’s vomit TINA back up again. Austerity must be ‘bolder’, ‘deeper’, more radical in order that countries shed themselves of debt.
But however impregnable the official consensus, the toll of this response to the debt crisis on the public sector and ordinary people will be immense, and so this narrative must be interrogated. And what is revealed when we do is that government accounts were not pushed so far into the red by public sector profligacy, but rather by the wholesale transfer of private, speculative debt on the part of banks and developers to the public purse.
One must be careful not to lapse into cheap Germanophobia, but however pleasant it may be to go inter-railing from Amsterdam to Athens and not have to change currency, the construction of the euro benefited German financial and industrial elites at the expense of peripheral economies.
The root of the euro crisis is that a single monetary policy, with its one-fixed-exchange-rate-fits-all, is perilous for a group of countries at different stages of development. A lesser-developed economy lashed together on the same exchange rate as one as developed as Germany will inevitably lose out. Its weaker products, with higher per-unit labour costs, will be massively over-priced. Meanwhile the products of Germany’s export-oriented economy appear tremendously competitive throughout the EU.
This has two effects. First, it undermines development in the periphery by squeezing out less productive competitors. Second, it allows the core country’s export surplus to soar, which then convinces German policy-makers there is no need to develop domestic demand, which could begin to soak up exports from the periphery.
Normally, this could be rectified by currency devaluation, but strapped into the single currency this option is unavailable.
In the 1990s, during the run-up to the single currency, and throughout the 2000s, all European countries ‘liberalised their labour markets’ (which means they battened down wages and loosened the regulations on companies). But it was Germany that won the mad dash to the bottom. Berlin could access the cheap-as-chalk ex-GDR and the still cheaper eastern states, drastically heightening Germany’s competitive advantage.
The massive gap in competitiveness resulted in a massive, and as it turned out, permanent, structural current‑account deficit in the peripheral economies. Essentially, they had to buy a lot more stuff than they could sell. They borrowed to make up the difference.
It’s the European equivalent of the US trade deficit with China, whereby the US is importing more than it exports and China is lending it the money to do so. Germany, as even the conservative US economist Irwin Stelzer has put it, is the China of Europe.
Eurozone periphery households made up for this gap by borrowing on their credit cards and against their houses. Household debt in Spain, Greece and Portugal increased between 2002 and 2007 at an average annual rate of 5.34 percent, 4.48 percent and 3.1 percent of GDP respectively, while in France the rate was 1.77 percent and in Germany it actually declined by 0.71 percent.
Just as in the US, where predatory lending to those with poor credit ratings gave great returns to lenders pretending that these households were triple-A rated, lending by EU core countries to enterprises, banks and households in the EU periphery also brought the money rolling in. These lenders imagined, now that the peripheral debtors were in the eurozone, that they were as trustworthy as those in Germany. They pretended that they were, in effect, mini-Germanies.
As with China and the US, German and other core-nation banks lent – indeed became massively overexposed – to Spain, Greece, Portugal, Ireland and Italy, so that these under-competitive countries could pay for their imports from the core. While the eurozone rescues of Greece and Ireland – and perhaps eventually Portugal and Spain – have been sold as bailouts of these countries, in effect they are a second bail-out of core European banks.
Tied into the euro, these countries cannot devalue to regain competitiveness with Germany. The only policy option left to them is what is called ‘internal devaluation’ – otherwise known as austerity. By cutting wages and stripping the public sector to the bone, internal demand is sharply reduced. A sort of balance is restored and products become cheaper – but at enormous human cost.
Lord Robert Skidelsky, the economic historian, author and one-time member of each of the UK’s Labour, Social Democratic and Conservative parties, has recently returned to the bestseller shelves with his slim volume explaining the economic crisis to the layman via a Keynesian framework, Keynes: The Return of the Master. He is scathing about the ever-impoverishing strategy chosen by Brussels.
‘As a general principle, if you impose austerity on an already weak economy, one that has suffered severe shocks, then you destroy your recovery mechanism as you are decreasing aggregate demand,’ he says. ‘In Ireland, the government will be taking an extra £5 billion out of the economy, and I don’t see where you get the growth.’ Growth in these countries will likely be arrested, pushing them further into debt as they fail to meet interest payments and putting further strain on the eurozone, making default perhaps inevitable.
Skidelsky worries that the EU will become synonymous with brutal austerity in the minds of its citizens: ‘It is a huge political gamble to associate the European project with years of austerity. In my view the current path will substantially reduce political support for the single currency, and for the whole European project.’
Although he doesn’t think it will happen immediately, he believes ‘the most likely outcome is that some countries will have to devalue, which means leaving the eurozone. Germany’s domestic policy doesn’t allow any other option. What I don’t know is whether the initial thrust for this will come from a Germany where people are fed up with bailouts or from the peripheral states where people are fed up with continuous austerity.’
Rather than disintegrating entirely, Skidelsky thinks the eurozone may splinter, perhaps with Germany and other surplus member states, such as the Netherlands, Austria and possibly Finland, on the one hand and the periphery on the other. It is an open and important question as to which side the others, France, Belgium and the rest, fall.
Costas Lapavitsas, a radical Greek economist with the University of London, is of a similar mind: ‘Being in the eurozone with its current structure is a trap. It offers no option other than austerity. The response must be radical, in both Greece and Ireland, and probably the rest of the periphery. They simply cannot handle the present scale of their debts and must default.’
Going further than Skidelsky, Lapavitsas hopes that the break will come from within the peripheral states, so that conditions are determined by the debtors rather than the creditors. If default is creditor-led, he argues, the required significant reduction of debt would be highly unlikely as creditors would ensure that their losses were as minimal as possible.
Such an option is anathema to Germany and other core countries because of the staggering losses it would impose on their banks. And there are profound political ramifications resulting from such a move. As Lapavitsas recognises, ‘Of course the issue of membership in the euro will be put on the table and will have to be considered.’
As far as EU elites are concerned, however, the euro is not an optional part of the European project anymore: it has woven itself into the very fabric of the EU. If there is no eurozone, can there still be an EU?
This may be an illegitimate worry, as such a shock to the system could force the EU to confront its malformed construction. ‘This might be an opportunity for a profound shift in the direction of economic development away from the disastrous road of the past,’ says Lapavitsas.
He notes that Argentina faced a similar sovereign debt situation, with its peso pegged to the dollar, in 2001. The sky did not fall in when it decided to suspend payments on its entire $144 billion public debt and abandon the dollar peg. Initially the fallout was severe – GDP declined by 11 per cent in 2002 – but the economy rebounded rapidly. From 2003 to 2007, GDP per capita grew at 8-9 per cent annually. The bogeyman of being cut off from capital markets also never materialised. In 2006, when international debt markets to the country were re-opened, Argentina sold $500 million worth of bonds. In 1999, in a similar situation, Russia defaulted on its external debts with an accompanying rapid devaluation of the rouble, but it took only months for the economy to return to growth.
Costas Lapavitsas does not counsel this option lightly, saying that there would be ‘serious implications’: for a period, economic output would likely decline and unemployment rise. Additionally, those with home mortgages from foreign banks would see their personal debts skyrocket. There would have to be supplemental measures to protect these households.
‘It is essential to have a frank public debate’ over the costs and benefits of such a move, Lapavitsas says. Citizens would have to consciously choose this path, fully informed and cognisant of the difficult days that would lie ahead. The key, though, is that instead of austerity being imposed on European citizens, it is time that European citizens imposed austerity on the banks.