Europe faces stark choice between dissolution and cohesion after Greek crisis

The Greek crisis may spur further integration in the EU, rather than signal its downfall.
Oliver Scanlan
21 May 2010

On Thursday, Greece was paralysed by a 24-hour general strike called to protest against new austerity measures introduced by the government of George Papandreou. Over 25,000 people marched through the centre of Athens, chanting ‘thieves come out’ in front of the national parliament. The austerity measures, which include raising the national retirement age, tax hikes and cuts to public sector pay, have attracted the ire of Greece’s unions, which represent more than 2.5 million workers. The emergency measures are aimed at reducing Greece’s deficit from 13.6 percent of GDP to below 3 percent by 2014. The government’s agreement to this target was a prerequisite for a combined $140 billion European Union-International Monetary Fund bailout.

The strike erupted one day after German Chancellor Angela Merkel, addressing the Bundestag, warned that the euro was ‘in danger’ with potentially ‘incalculable consequences.’ She went on to defend a unilateral move taken by Germany the previous day to ban the short selling of Eurozone government debt by German institutions. The move was slammed by financial commentators as being counterproductive and protectionist, and is thought to be aimed at assuaging domestic anger in Germany over the Greek bailout and also Germany’s disproportionate share of the 750 billion euro standby fund to shore up Eurozone government debt.

In his book The Pope’s Children, Irish journalist David McWilliams frankly describes the enabling role played by German savings in facilitating Ireland’s economic rise prior to the global financial crisis. He explains that ‘because our population is so small…we will not really make a dent in the savings of eighty million Germans’. He may have been right if Ireland was alone in this but, combined with Italy, Spain, Portugal and Greece (the so called ‘PIIGS’ countries), the situation has now come to a head.

The crisis has been long predicted, and is the product of the central contradiction in the Eurozone’s economic architecture: the pooling of monetary policy under the direction of the European Central Bank in Frankfurt, with fiscal policy remaining under the control of the sixteen national governments who share the single currency (the EU 16). The choice is now clear and will be the central point of discussion when European finance ministers meet on Friday to address the continuing crisis: a new cessation of sovereignty in fiscal policy versus withdrawal from the single currency.This ten year limbo of schizophrenic economics has not been without its benefits. Many of the PIIGS have seen substantial rises in incomes and standards of living, and there has been continuing price convergence across the EU 16. In key areas such as the automobile industry, this began after 1999: a direct result of the single currency. Thus it has not been all bad news for the Germans: with lacklustre domestic consumption, price convergence has enabled the southern countries to play a central role as a market for German exports; hence McWilliams’ reference to the ubiquity of BMWs in Dublin.

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But it has also led to a sense of drift, heightened by the current emergency, most acutely felt in the much-touted areas of a ‘European’ diplomatic identity and security policy. Hence Richard Haass’ crowing article on Europe’s disappearance as a great power and Timothy Garton-Ash’s despondent reflections on the marginalisation of the EU at the Copenhagen climate talks.

There are grounds for both optimism and pessimism in the current situation. The Papandreou government has demonstrated its willingness and, thus far, its ability to implement austerity measures in the teeth of enormous public resentment. On Thursday, the Spanish government agreed to a 15 billion euro austerity plan, including a 5 percent cut in public sector salaries. Underlying this clear willingness by the European south to get their houses in order are potential cuts to defence budgets. Greece spends over 3 percent of its GDP on defence; its defence spending is higher than Pakistan’s and substantially higher than most other EU nations. Economies of scale in providing such public goods, freeing up funds for more productive investment elsewhere, is exactly the kind of benefit that should result from increasing integration. Echoes of this can be seen in proposals being mooted to pool the UK and France’s nuclear deterrents.

The danger lies with the Germans. Reportedly, it took French President Sarkozy banging his fist on the table and threatening to withdraw from the Euro to force the eurozone bailout package through. Clamping down on short selling is, as most financial commentators have pointed out, tackling the symptom not the disease; widespread lack of confidence among investors is the reason for Europe’s woes, banning short selling will, if anything, exacerbate these worries.

Similarly, insisting on punitive austerity packages will be counter productive. The German public needs to understand the sense of injustice felt by Greek workers regarding their plight. As John Pilger has highlighted, Greek profligacy was engineered largely by the previous Karamanlis administration for the benefit of plutocrats with the full knowledge of the other EU governments and supported by EU financial institutions. The adjustment of Greece’s economy is the latest episode in the global financial crisis of privatising gains and socialising losses. Germany also needs to remember that, along with France, it was the first EU nation to systematically ignore and undermine the growth and stability pact which, in theory, should keep national deficits to below 3 percent of GDP.

Potentially, the crisis could be the making of the EU as an increasingly integrated and assertive player on the world stage; but it will require compromises from both the PIIGS and Germany. The southern countries cannot object to ceding at least some control over their fiscal policies to Frankfurt, nor to rolling back the budgets for armed forces that are simply not needed in a post-Cold War world. In return they have a right to expect that the fiscal pain they will suffer will be less than if they were sovereign countries having to negotiate structural adjustment programmes, a la Latin America, with the IMF. This will require humility and restraint on the part of the German government. Germany also needs to increase domestic consumption, dipping into its own savings, to encourage imports and therefore growth in the European south; austerity alone will not return the PIIGS’ finances to health. Boosting German consumer demand is a far healthier way of transferring surpluses than poorly scrutinised loans issued by the ECB.

Without such restraint on the part of the Germans, it is likely that at least Greece will be forced out of the Euro, either by political decision or by popular insurrection against the austerity measures. But more than that, the sense of drift will continue, as will the crises in coming years. The eurozone bailout is the price Germany has to pay to resolve the central contradiction in the EU’s economic structure by increasing Frankfurt’s influence and oversight over the EU 16’s fiscal policies. If Berlin refuses to pay this price with good grace, the European project will collapse and the EU will remain, as Eurosceptics argue it should, as a free trade area with pretensions above its station.

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