The official line almost everywhere is that the world-economy will look good again soon, if only we do this or that. The fact is that no one - neither governments nor megabanks, not even blinkered economists - really believes this. The world is in a depression, teetering on the edge of a really major crash. No one anywhere will be exempt from the negative effects of this crash, even if a few lucky ones manage to make money out of it. The prime concern of every government is not how to do well, but how to do less badly than other states.
The world press's attention has been focused on very public debates in the United States, the Eurozone, and yes China. But this doesn't mean that other states - big or small, apparently growing or obviously stagnant - are not equally concerned, if often less able to maneuver than the biggest players. In July, amidst great drama, the Eurozone seemed to enact a political compromise of sorts. Will this enable the European Union (EU) to do ‘less badly’ than its many competitors? I think it may. But to see what really went on, we have to move past the complicated economic decisions. No one seems to agree what was really agreed upon, and even less whether this will do any good in terms of the economic dilemmas that the Eurozone countries face.
The compromise was political, not economic, and the major consequence will be political. What the Eurozone countries managed to do was to save the euro as a single currency. Some think this marvellous; others a disaster. But the point is that they saved it. And in terms of the ongoing geopolitical struggles in the world, this will enable Europe to remain a major player. Carsten Volkery, writing in Der Spiegel, summed up the decisions this way: "European leaders on [July 21] pushed through a second bail-out package for debt-stricken Greece, one which includes a surprisingly high level of private participation. In addition, the Eurozone backstop has been given new powers, making it look suspiciously like a European IMF."
The prior economic debate about the Greek debt (and that of other Eurozone countries) had all the standard ingredients. At one extreme were those preaching full faith in the ‘market’ no matter what the consequences. The most extreme of these wanted to push Greece out of the Eurozone (although legally this seems almost impossible). At the other extreme were those preaching economic solidarity based on a neo-Keynesian emphasis on (re)creating effective demand - a ‘mini-Marshall Plan.’
The underlying political problem was the internal politics of different countries. A Keynesian solution was deeply unpopular in Germany and Mrs. Merkel reasonably feared electoral disaster if she went along with it. A neo-liberal solution risked severe popular unrest in Greece, Spain, and eventually many other countries. The great compromiser turned out to be none other than France's Nicholas Sarkozy, who fought for the new powers given to the European Financial Stability Facility (EFSF) and celebrated publicly what he termed the beginnings of a European Monetary Fund. Even Mrs. Merkel agreed that the comparison was not implausible.
Mrs. Merkel won the concession she wanted - involvement of private investors. And the European Central Bank (ECB) finally agreed to give its blessing too. The EFSF will issue its own bonds and those who hold Greek bonds can exchange them for these new bonds, whose interest rates will presumably be lower. The IMF through its new director, Christine Lagarde, agreed that the effect of all this would be positive for everyone. Of course, this new arrangement allows the IMF to be less involved, at a time when its own resources are stretched. Even Great Britain, not a member of the Eurozone, applauded the compromise.
Is this some kind of magic that will ‘save’ Europe? Not at all. First of all, there are still players trying to undo the compromise. The electoral consequences are yet to be seen. Why did Sarkozy, the post-Gaullist heir of De Gaulle, become the architect of a compromise that moved Europe closer to a common governance structure? Two reasons really. On the one hand, after a series of political setbacks, it looks good, in terms of France's next elections, that Sarkozy has achieved something in foreign policy. The French polls indicate that his ratings did in fact go up. The second reason, however, is quite Gaullist. De Gaulle was opposed to more federalism in Europe because he thought it served US interests at the expense of France's interests. But today, more ‘federalism’ in Europe serves Europe's (and France's) interests at the expense of US interests. A collapse of the Eurozone would have eliminated western Europe as a major player in the interstate system - and strengthened the dollar at a time that the dollar needs all the help it can get.
Voices on the left of the left constantly complain that the Eurozone is basically a neoliberal institution, protecting the banks and hurting the little guys. This is largely true. What I have never understood is why anyone thinks the left would do better with a series of totally separate states. It seems to me that the neoliberal forces would be all the more powerful if the European Union were to disappear.
The bottom line is that the EU and its Eurozone will do ‘less badly’ in the major collapse that is coming soon. That's perhaps not much of an achievement, but in the race to the lifeboats, Europe may at least be guaranteed to launch one.