The road to Europe: the making of the Union’s crisis

Yes, European leaders could all agree when it came to imposing austerity on Athens, Dublin, Lisbon and Rome, ‘reassuring’ financial markets, saving creditor banks, increasing countries’ financial burdens and putting public enterprises on the market at sale prices. But such policies make exiting the crisis impossible.

Mario Pianta
Mario Pianta
24 August 2011

The urgency of the European crisis has stimulated debate on the ‘The road to Europe’ in the Italian daily Il Manifesto and on a website committed to economic alternatives, Sbilanciamoci. openDemocracy joins this debate, beginning with three opening contributions this week from Rossana Rossanda, Mario Pianta and Donatella della Porta. We invite your responses both in comments and article submissions:


Protest against austerity measures in Greece. Georgia Panagopulou/Demotix. All rights reserved.

The making of the Union's crisis

Mythology tells of a girl, Europa, whom Zeus espies: he turns himself into a bull, has her climb on his back, and brings her across the sea to Crete, where he abuses her. Today the bull is the symbol of financial markets, and the seizing and raping of Europe is a strong metaphor for what is happening. Our Europe is not a young girl, but the world’s largest economy, with 27 countries in the Union and 17 in the eurozone, a complex political construction, a global power. How could it happen that the bull of finance could drag her over speculative waves, bend her to his will, and throw her into a deep depression?

The questions raised by Rossana Rossanda open up a debate on the road to Europe, on the crisis of a project that was designed for strengthening its economies, political autonomy and social model. Let us explore some of the mechanisms that have led Europe’s journey into the impasse of these days.

Firstly, European integration

On February 7, 1992, European governments signed in Maastricht the Treaty on the European Union that opened the way to the Economic and Monetary Union and the creation of the euro. At the same time, the Single Market, a much closer integration of trade, and the total liberalisation of capital movements were introduced. The Cold War was over, the regimes of Eastern Europe had collapsed, Germany was re-unified. Neoliberalism and finance had become pole stars in the firmament of European integration. The retreat of labour and the power of profits and financial rents was on the agenda. Markets were at the centre of the European project, which relied on their ability to generate growth through greater efficiency and investments fuelled by mobile capital. The necessary conditions included the slashing of inflation and interest rates, stable exchange rates, cuts in public deficit and debt, so that European economies keen on joining the Monetary Union could be drawn closer together in terms of financial ‘fundamentals’.

In other words, European governments were giving up the ‘Keynesian’ policy tools that had supported the highly successful postwar growth -public expenditure and exchange rate devaluation - and counting on the strength of private demand and exports in a rapidly globalising economy. Such plans immediately fell into the trap of finance. Six months after the signing of the Treaty a major crisis led to the exit from the European Monetary System - the currency agreement of the time - of the British pound, the Italian lira and the Spanish peseta, with devaluations of up to 30%. Drastic policies were introduced in all countries - cuts in wages and public expenditure, the privatisation of public enterprises, in order to balance public budgets and foreign accounts, reduce inflation, and stop speculation against national currencies. In countries such as Italy such policies inaugurated the most visible phase of economic decline. In Europe, it was the birth of a Monetary Union where finance ruled supreme.

Twenty years later, what has happened is clear to all. Europe did not find an alternative source of demand - exports to the US and Asia worked for Germany and few others only. Investment had a modest growth and was mainly directed to financial activities promising much higher returns than in industry and services. Consumption stalled, as real wages did not increase and inequality jumped. Public expenditure was, almost, stopped by the constraints of Europe’s Growth and Stability Pact.

As a result, growth has been sluggish and increasingly uneven in the old continent, and job creation in quantity and quality far below what was needed. True, the launch of the euro as a world currency has been a success - the first currency that is not backed by gold and reserves. True, the European Union is the world’s largest economic area. True, eurozone countries have remained far from the financial excesses of the US and the UK.

But the new space for a common European economic policy has not been used. Half of the action - fiscal policies - was missing. No tax harmonisation was introduced; within the EU we still have tax havens. No public expenditure at the Union level that could compensate for national cutbacks is in place. It is no surprise that growth was sluggish and uneven. In this process at least ten percentage points of Europe’s GDP went from wages to profits and financial rents. Europe has drawn closer to the US model of financial capitalism, has lost jobs, social rights and welfare.

Secondly, the centre and periphery

Within Europe, such a model of neoliberal integration disregarded the real economy, the strong differences across countries in terms of production and export capacities, technologies, the market power of large firms, productivity, employment, wages. Open and efficient markets were expected to offer growth and jobs to all in the same way, provided that liberalisation was introduced everywhere. The liberalisation of product markets was the only policy affecting the production system – and ended up destroying small domestic producers in countries of the periphery. The liberalisation of labour markets forced ‘flexibility’ upon workers and unions, and ended up increasing precarious work and lowering wages. The very idea of industrial policy was blacklisted. Policies that could guide change in what European countries produced, and how they produced, were deemed unviable, inefficient and dangerous. All this while, the diffusion of information and communication technologies and the unsustainable nature of our economies were making such change all the more important and urgent. Markets, again, were seen as the only force capable of efficiently driving change in European economies.

In a context of slow growth, single market and single currency, the strong economies of Europe grew stronger. German exports, supported by high technology and productivity, and no more hindered by an appreciating exchange rate, invaded the rest of Europe. Economic and political power became increasingly concentrated. Germany, France (barely) and northern Europe became the centre. Southern Europe (Italy included), Ireland and the East were the periphery. The United Kingdom placed itself more outside - close to the US finance-driven model - than inside Europe.

Third, trajectories of the periphery

At the start of monetary union, countries of the periphery dealt with the new setting each one out for itself. Greece and Portugal used debt-financed public expenditure to provide jobs and incomes, taking advantage of the initially low interest rates made possible by the euro and getting around the Growth and Stability Pact. Their loss of productive capacity worsened foreign accounts; public debt ended up being financed by foreign banks, who fearing a default, have now unleashed the crisis.

Ireland, a true tax haven for world corporations, grew rapidly thanks to inflows of foreign capital that soon moved into financial speculation and a housing bubble. The crisis of 2008 has left the country in ruins, with mass unemployment, poverty and new waves of emigration. Spain’s growth was supported by a wave of late modernisation, high public spending and a huge housing bubble. Here, the crisis has exposed its financial frailty and led to the highest unemployment rate in Europe.

Italy entered the monetary union with a ‘second Republic’ marked by deep political change. Since 1994, the centre-right governments of Silvio Berlusconi have adapted neoliberal rhetoric and policy to privilege the élite. The Italian landscape became one of industrial decline, with a few export niches of ‘made in Italy’ fashionable goods, plunder of public enterprises and services, easier tax evasion, the opulent consumption of the rich, precarious lives for the young, and the impoverishment of the South. Four short-lived centre-left governments did try some correction, but never questioned the neoliberal agenda. Their record includes the privatisation of public assets and services including water provision, rejected by the referendum held in June 2011, phasing out of the inheritance tax, the lowest tax rates on financial incomes, wage agreements and pension reforms that made workers poorer, no industrial policy, and no limit to inequalities. The result has been a decade of stagnation: today Italy’s real GDP is the same as in 2001. But its distribution did change, shifting income, wealth, life prospects from 90% of the country - employees, youth, the South - to the 10% of richest Italians. With a modest expansion of finance, a limited role of the Stock Exchange and pension funds, the impact of the crash of 2008 has been lighter on banks and savings, but heavier on the Italian economy. With a deeper recession, in spite of modest public spending, the public debt to GDP ratio inevitably returned to 120%.

While in Italy about half the debt is funded by domestic savings, and turns out into private assets, the sheer size of the debt - now at 1900 billion euros - has opened the door to the speculative attacks of July and August 2011, with record interest rate spreads with German bonds. The European Central Bank eventually moved in to buy Italian (and Spanish) bonds, dictating 45 billions of higher taxes and spending cuts, so that the budget can be balanced in 2013.

In spite of national specificities, the crisis of Europe’s periphery is a common fall-out of the 2008 crash. The pressure for high financial returns did not subside; opportunities for huge speculative gains were identified in attacks on the public debt of the frailest economies. But such debt is mainly held by the large banks of the European centre, whose assets fell, swinging the pendulum of speculation back to the downward spiral of Stock Exchanges in August 2011. The crisis has been made worse by Europe’s inaction. If the steps belatedly taken in the summer of 2011 - the creation of the European Financial Stability Facility (EFSF), the buying of government bonds by the European Central Bank, and so forth, had been immediately taken at the start of the Greek crisis in May 2010, the public debt of EMU countries would have been saved from speculation. The economic power of Europe could have easily protected one of its most valued creations.

Four, the misadventures of EMU

The road travelled by European Monetary Union (EMU) has led to an impasse. European leaders believed crises could not happen, and had to hastily patch together intervention funds unnecessarily involving the International Monetary Fund. They cannot agree on the actions to be taken, divided as they are between the urge to protect the euro, big banks, or the statute of the European Central Bank. The latter’s rigid ‘autonomy’ makes policy decisions impossible even when all governments agree. Yes, European leaders could all agree on imposing austerity on Athens, Dublin, Lisbon and Rome, ‘reassuring’ financial markets, saving creditor banks, increasing countries’ financial burdens and putting public enterprises on the market at sale prices. But such policies make exiting the crisis impossible: cuts in wages, public expenditure and consumption prolong the recession, investments stop, tax revenues collapse, servicing foreign debt becomes impossible. Default, managed or otherwise, becomes more likely.

If a eurozone country declares default, creditor banks would go under, precipitating a greater financial crisis. International capitals would stop flowing to risky economies: the euro would be overwhelmed. For countries in trouble, Argentina’s experience shows that default provides some breathing space. Taxes need no more be used to service foreign debt, and the economy can grow again. But with no possibility to devalue the currency, ‘euro-periphery’ countries cannot rely on rising exports. As to the noises about Greece or other troubled economies leaving the euro, they generally sound like a threat when they come from the centre, or nostalgia for the good old days of devaluation when they come from the periphery. Nobody would gain from it. Germany cannot afford such a huge blow to the credibility of the euro. By returning to a national (devalued) currency, troubled countries would gain little from exports and would lose a lot in paying euro-denominated foreign debts. Moreover, no procedures for such a ‘divorce’ exist, and it would take a general collapse to set this process in motion. Equally unlikely are the proposals for making the EMU split between centre and periphery explicit – a strong North euro and a weak South euro. The former would lose strength and the latter would find no limit to its weakness.

In fact, the engineering of currencies and finance can only get Europe so far. What matters in the longer term, for the strength of currencies as well, is the real economy, and much more attention should go to its rebuilding, with more sustainable production, more domestic demand, more jobs, less trade and financial imbalances, and less centre-periphery divide. Current policies lead in the opposite direction: a deep recession fuelled by the austerity imposed on one third of the continent. If one takes into account the parallel downturn and financial turmoil of the US economy, we could well be on the verge of a depression.

European countries can hardly address this challenge by each looking out for itself. Those in the periphery have no apparent way out. But the same is true for the European centre. Where would German exports go in such bad times? The need to take dramatic decisions raises the question of how such decisions are made, the question of democracy, a longstanding weakness of European construction. For how long will the unaccountable power of leaders of larger countries and technocrats of the European Commission and Central Bank be tolerated when what the EU delivers is a depression? For how long can countries of the periphery be denied not just economic growth but the very practice of national democracy? An austerity without future, imposed by Brussels and Berlin on parties of all colours in all troubled countries is a recipe for turning populist waves into a violent rejection of democratic politics and Europe. Similarities with the 1930s are really too many to ignore.

Finally, five ways ahead

The hot summer of 2011 has melted the illusion that a European Union founded on neoliberalism and finance could work. Rules have to change, European integration has to be steered in a different direction. And change is already under way:

- Stopping the exposure of weak European countries to speculative raids is the necessary starting point. This can easily be achieved by stating that all debt by EMU member-governments is collectively guaranteed by the power of the world’s largest economic bloc, the euro, the policy action of the European Central Bank and national governments. With the planned expansion of the European Financial Stability Facility (EFSF) and the buying of State bonds by the ECB, this is already happening by stealth, without calling it by its true name, a statement that would make Europe’s debt safe from speculation.

- Finance must be cut down to size. Financial assets cannot expect real returns of 5-10% that are way out of line with returns from activities in the real economy. The lessons, and losses, of the 2008 crash need to be fully taken into account. A return to strict regulation of finance, a financial transaction tax - possibly at 0.05% on all buying and selling of financial assets and currencies - and the creation of a publicly controlled European rating agency could be major steps in this direction.

- A revision of the Growth and Stability Pact is needed; it now only works as a brake, and an accelerator is needed. Union-wide public expenditures, funded by eurobonds, targeted to converting European economies to sustainable production are a sensible step to take; national public spending with the same goal should be exempted from the Pact’s constraints.

- Governments, true, should put their finances in order, but resources should come from the assets of the 10% of richest Europeans that in the last decades have kept for themselves all increase in the continent’s wealth. Taxing companies’ and individuals’ real and financial assets, and returning to high inheritance taxes, could be the only way to avoid a depression.

- The real economy should take centre stage, but growth should not be an end in itself. Europe needs an economy that is more socially – not just environmentally – sustainable, with higher quality, better paid and more stable jobs. European resources, including the strength of the euro and the money created by the Central Bank - should go not towards saving banks from their speculative folly, but to fund an economic change consistent with the values and politics of European societies.

All this needs the democratic decision making, in town halls, civil society forums, national and EU parliaments, that Europe has never had. Less finance and inequality; more jobs, sustainability and democracy can be the pole stars of a new road to Europe.

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