Euro-leaders set course for worse crisis

Submitted by martin on 12 December, 2011 - 6:38

By Martin Thomas

David Cameron's veto, on 9 December, of the plan for a new economic treaty backed by all 26 other European Union governments, may shake British politics and Britain's future relations with the EU. The 9 December summit itself may shake more. The 26 adopted a plan which has little chance of smoothing the financial crisis shaking the eurozone, and may make it worse.

Felix Salmon, economic commentator for Reuters, was the sharpest of many mainstream economists who saw it that way: "A continent which has risen to multiple occasions over the past 66 years has, in 2011, decided to implode in a spectacle of pathetic ignominy. Its individual countries will survive, of course, albeit in unnecessarily straitened circumstances. But the dream of European unity is dissolving in real time, as the eyes of the world look on in disbelief. Europe’s leaders have set a course which leads directly to a gruesome global recession..."

Kevin Authers in the Financial Times (10 December) posed the "mundane question": "Has it [the 9 December plan] done enough to get us through to Christmas?... Probably not".

The plan is mostly a souped-up version of the Maastricht Treaty of 1992, which on paper committed all EU states (including the two who "opted out" from commitment to join the euro at some point, Denmark and the UK) to limit budget deficits to 3% of GDP and accumulated government debt to 60% of GDP.

Even supposing that is a good idea long-term (and it's not), it has little relevance short-term. Its only short-term relevance could be that it provided an excuse, or "cover", for the European Central Bank to do what it has so far refused to do, i.e. really "bail out" the hard-hit governments of Europe in roughly the same way as many central banks "bailed out" stricken commercial banks in 2008. The ECB is theoretically independent, so the EU summit could not directly and formally decide what it would do.

But the day after the 9 November Euro-summit, ECB chief Mario Draghi declared that while the ECB is the lender of last resort for Europe's banks, it is not prepared to play the same role for Europe's governments.

Far from replacing the inadequate European Financial Stability Facility (put together in 2010 as a sort of substitute for the ECB in the business of bailing out governments), the 9 December summit only noted that the plan by the last Euro-summit, on 27 October, to boost EFSF funds to 1000 billion euros, had proved unworkable. The EFSF will be lucky to get half that.

Draghi did promise easier credit for European banks, who at present are running nearly 200 billion euros short on new loans they planned to raise this year to repay bonds (fixed-term IOUs) issued in previous years and falling due for repayment in 2011. But the credit backstop for European governments in difficulty is weaker, not stronger, than was promised in the inadequate 27 October plan.

It is conceivable, I suppose, that greater ECB aid to the banks could ease the whole crisis. The banks' credit crisis and the governments' credit crisis are interwoven, since governments stretch their credit to support banks (the Irish government's debt crisis is entirely one caused by its actions to stop Irish banks collapsing), and banks' difficulties are increased when the government bonds which they hold lose value.

However, to me, and to many mainstream economists, it seems unlikely that increased ECB aid to the banks will be enough to stave off catastrophe.

Wolfgang Münchau, the Financial Times's commentator on the European economy, wrote: "All they [the EU leaders] did in the early hours of Friday morning was to create a new crisis without resolving the existing one".

Kevin O'Rourke, professor of economic history at Oxford, wrote: "The 'fiscal stability union' that [the Euro-summit] proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers [i.e. spending to offset slumps], the version on offer would constitutionalise pro-cyclical adjustment [cuts to worsen slumps] in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a 'fiscal union', as some have done, constitutes a near-Orwellian abuse of language.

"What is needed to save the eurozone in the immediate future is a European Central Bank that acts like a proper monetary authority". The 9 December plan does not include that.

Looking at the shape of the 9 December plan before it was finalised, Martin Wolf of the Financial Times wrote that easing the eurozone crisis "requires a buoyant eurozone economy, higher inflation and vigorous credit expansion in surplus countries [i.e. countries like Germany exporting more than they import]. All of this now seems inconceivable" (6 December).

The Euro-leaders' action on 9 December - pushing for more cuts - will, if anything, worsen the crisis. It may also be ineffectual in its own terms. The new treaty they planned may well be overtaken by crisis, and never emerge, or emerge only with drastic changes; and even if it does emerge, its enforcement mechanisms will be at best erratic.

The Euro-leaders' inaction (no ECB bail-out for governments) increases the probability that at some point, possibly soon, Greece or some other government will just not have enough cash to pay its debts falling due. At that point, either the Euro-leaders will change course, or, in some way or other, the ECB will repeal the license for the Greek central bank to issue new euro notes (i.e. to pay its way by ECB IOUs). Rich Greeks will rush to get their euros out of the country (even more than they have done already).

The Greek government will have to print its own new money - new drachmas, or whatever - to sustain current operations, and compel Greek government employees and suppliers to accept it for wages and payments. For some period Greece will have a dual-currency economy (some things will be available only for payment in euros, though drachmas will be the official money), but Greece will be out of the eurozone.

If that happens, financiers already demanding sky-high interest rates to buy Italian, Spanish, Portuguese, and Irish bonds will be even more reluctant to lend there rather than elsewhere in the global markets. There will probably be a domino effect. One government after another will be unable to raise the new loans it needs to repay old bonds coming up for repayment (usually after ten years). The domino effect could go far. If Italy fails to pay its debts falling due, then many French banks will be ruined, and could drag the French government down with them.

The Euro-leaders know the dangers, but see them in a blinkered way.

There is a tendency among Marxists to think that all the phenomena of capitalist crisis are rigidly determined by the basic contradictions of capitalism itself, or, to put it another way, that capitalist government policies in crisis are always the most rational (in capitalist terms), or make no difference.

That is not true, and Karl Marx himself did not think it was true. He wrote at length in Capital volume 3 about the effects of the misguided 1844 Bank Act in making crisis worse in Britain. Even the wisest policies (in capitalist terms) by the Euro leaders would leave capitalist Europe in trouble, but the 9 December policies are unwise even in capitalist terms.

German chancellor Angela Merkel declared her priority as being "show that Europe is a 'safe place to invest'" (FT, 5 December). This is the characteristic priority of neo-liberal government policy, or, in other words, of the dominant trend of capitalist government policy since the early 1980s except in the brief "Keynesian moment" of 2008.

Economically, Governments aim at establishing their countries as good sites for quick-moving global capital, not as relatively-autonomous, relatively-integrated economic complexes. Especially if they are relatively high-wage, high-tech economies, the governments will want to develop infrastructure and education; but keeping regulation light, keeping social overheads low, creating new investment openings by privatisation, keeping their currency as a reliable, easily-traded token in global markets, and ensuring that their government bonds figure in markets as reliable and easily-traded, are their first principles.

The real risks of a sizeable decline in the value of the euro relative to other currencies (dollar, yen, etc.), and of bigger inflation across the eurozone, loom very large in the minds of most Euro-leaders.

They genuinely believe that the root of the current crisis is that some European governments "overspent". In fact, the countries with the worst debt crises have big deficits and debts as a consequence of the crisis, not crisis as a consequence of big deficits.

As Martin Wolf has pointed out in the Financial Times, on the "Maastricht" criterion of budget deficits less than 3% of GDP, all the crisis-hit countries were doing fine before the global crash, except Greece (on revised figures, though not on the figures cited at the time). The four "worst" governments for deficits were Italy, France, Germany, and Austria.

If the ratio to GDP of stock of debt, rather than flow of deficit, is taken as criterion, then Estonia, Ireland, and Spain were doing much better than Germany.

Thomas Catan summed up in the Wall Street Journal: "If public debt is your yardstick, then the Spaniards were paragons of virtue. They borrowed lightly despite the fact that their euro-zone membership gave them an all-you-can-eat buffet of financing at bargain-basement rates" (9 December).

Government overspending was not the cause of the crisis. Rapidly cutting government deficits now will harm, not help. But, proverbially "Germans don't read Keynes" (the great mid-20th century bourgeois economist who showed that capitalist governments can best deal with slumps by deficit spending, not cuts). On the Amazon online bookstore, Keynes's General Theory ranks no.11,572 for the best-selling list in Britain (quite high for a difficult book of economic theory); it is no.21,950 in the USA, and (in translation) no.24,089 in France, as high as no.5,911 in Italy, but... no.102,749 in Germany.

The textbooks of Greg Mankiw, the Harvard professor whose students recently walked out of a lecture to protest at his conservative bias, sell much better in Germany. Karl Marx's Capital, and other socialist economic theory, sell well in Germany, but not to the people who influence Merkel.

Capitalist leaders, and especially the hegemonic capitalist leaders of Europe, in Germany, think in neoliberal blinkers, and that has warped their response to the crisis. That is the problem, rather than (as some have it) a nationalist drive for German domination (an explanation which makes it hard to see why 25 of 26 other leaders backed Merkel, and Cameron dissented only on special-interest grounds).

David Cameron's government is as blinkeredly neoliberal as any, and his objection to the 9 December plan was not its neoliberal doctrine.

On 9 December, he made little comment one way or another about the content of the proposed new treaty as it was discussed. When the discussion was moving to a close, about 2am, he abruptly announced that he would veto the plan unless it was agreed that the treaty would include specific promises to Britain on financial-market issues.

He wanted guarantees written into the treaty that the EU would not proceed with a "Tobin" or "Robin Hood" tax on financial transactions, and that it would not introduce rules to force firms making financial-market transactions in euros to do them through a financial centre in the eurozone. (At present, most of those transactions are done in London, outside the eurozone).

Both "Tobin" tax and re-siting of euro transactions are under discussion in the EU, but quite separately from the new treaty plan. Cameron responded like a US Senator refusing to vote for some major federal legislation unless some earmark of federal funds for a particular project in his or her electorate is attached. He had made no effort to convince other governments, or to round out his stance so as to broaden support.

Even then Merkel, keen to get all 27 on board, was "willing to offer declarations and assurances" on Cameron's gripes. Unsurprisingly, however, she was not willing to complicate things by having them "in the treaty" (Guardian, 10 December). No-one else backed Cameron.

I think Cameron probably decided in advance, and because of Tory party pressure, that he didn't want to sign up to a new treaty. He then "found" the demands which would give him a pretext for refusing, and announced the demands in a way that guaranteed they would not be accepted.

It appears to be a matter of Cameron being sensitive to the special demands of the City, but I think it's not just that. As early as 10 December, the Financial Times reported that many City financiers thought that Cameron's stance would backfire.

As Wolfgang Münchau explains, a new treaty area "will have to develop a highly integrated financial market with a single financial supervisor. [It will not] allow a situation to persist where its main financial centre is located offshore. It will also want to set labour market rules and co-ordinate tax policies". If Britain is outside the treaty area, then the City is likely to find itself outside the financial markets of the treaty area, and deprived of the political leverage it would otherwise have to maintain its historic advantages.

Many Tories would find that a fair price to pay. Some of them genuinely believe the nationalist rubbish put out by the Daily Mail and the Daily Express after 9 December.

Others think that Britain, with closer economic links to the USA than any other EU country, and a uniquely overdeveloped global financial centre, would do better with a status similar to that of Switzerland, Norway, or Iceland, which would allow it to escape EU social regulations.

In a catastrophic outcome, the treaty plan of 9 December will probably come to nothing, or be drastically revised. A full destruction of the capitalist semi-integration of Europe achieved over the last half-century and more is a remote danger, barring further huge shocks. More likely is a shrinking of the eurozone (by way of countries falling out of it), a closer integration of a reconfigured "core" Europe, and a larger division between that "core" and a second-tier Europe, or maybe an untidy multiplicity of tiers.

Such a division already exists. Iceland, Norway, Liechtenstein, and Switzerland are not in the EU, but have agreed to accept most of EU law. They comply with most of the conditions about free movement of people, goods, services and capital that apply to full member states (only they have no say in formulating the details of those conditions). They pay into the EU budget (but don't get anything back in regional development funds or the like).

One possible development from the coming tumult is a redrawing of the division, this time with more countries, including Britain and some debt-defaulters, in the outer tier.

That possibility does not correspond to the stupid bluster of former Sun editor Kelvin Mackenzie about Britain standing alone as "an island nation, a warrior nation". Other Tories also use nationalist bluster, but probably in a cynical way. Their real position is to favour the "Swiss option" as a matter of cool calculation.

Since 9 December, Lib-Dem leader Nick Clegg has declared that the Lib Dems will not leave the coalition government, but in a way that indicates that he has seriously considered it, and rejected it only because the Lib Dems would be wiped out in the quick general election which it would force. The Lib Dems want Britain in core Europe, and many of them, including probably Clegg himself, are Lib Dems rather than Tories because of that issue. It is a big deal for them.

By 11 December, Clegg was openly attacking Cameron. He was "bitterly disappointed by the outcome", denied claims that he had approved Cameron's stance in advance, and declared that "things would have been different" if he himself had been in Brussels. He said he would try to reverse Cameron's opt-out, loudly welcomed by Tory MPs, with a "strategy for re-engagement".

Further euro-shocks, which are likely, will strain the coalition further, and maybe open up splits in the Tory party too.

Three things are important for the labour movement's response:

• To understand that this crisis has seriously weakened the coalition government;

• To reject the nationalist bluster of the Tories, which is still too often echoed on the would-be left;

• To counterpose to it not, of course, support for Merkel-Sarkozy's botched treaty plan, but a working-class programme for the reconstruction of a united Europe, centred round European-wide democracy, European-level public ownership and democratic control of the banks and financial institutions, and social "levelling-up" of rights and conditions across the continent.

Add new comment

This website uses cookies, you can find out more and set your preferences here.
By continuing to use this website, you agree to our Privacy Policy and Terms & Conditions.