Trapped in the eurozone: For Ireland, Greece, Portugal and Spain, defaulting on their debt is no longer unthinkable

ΠΗΓΗ: GUARDIAN

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  • Costas Lapavitsas
  • guardian.co.uk, Friday 1 October 2010
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Only a brave person, or an appropriately paid official, would be optimistic about the future of the eurozone at present. Austerity has spread and there is a risk of long-term stagnation with high unemployment across Europe. Social tensions are on the rise, and frictions among member states will probably intensify. A taste of things to come was given by the marches and strikes organised by trade unions across the continent this week.

Much of the trouble originates in the peripheral countries of the eurozone – Greece, Spain, Portugal and Ireland. All went into recession during 2008-9 as the global crisis unfolded, narrowly avoiding disaster thanks to public intervention. But before they had properly recovered Greece, Spain and Portugal were forced by the EU to cut public expenditure, reduce public employment, and further liberalise markets. Ireland had gone down the same path earlier, though very much in line with EU thinking. The disastrous implications were demonstrated this week: the Irish economy has contracted and, to make things worse, further gigantic cuts are planned in order to rescue banks.

There is method to this madness, though it takes a bit of discovering. The eurozone is dominated by a few core countries: Germany, France, the Netherlands and Belgium. They have imposed the stability pact, which places an arbitrary 3% limit on public deficits. They have also fostered a race to the bottom in labour markets. These neoliberal policies buttress the euro and promote the global activities of large banks and corporations of core countries.

Over time the outcome has been catastrophic for peripheral countries. They have lost competitiveness as Germany has squeezed its own workers and kept wages practically frozen for years. As a result Germany has chalked up large current account surpluses, mostly within the EU. In contrast, peripheral countries have faced large deficits. Their response was to boost private consumption and encourage real estate bubbles. For a while it seemed to work, and growth rates were high. But it was false success, due mostly to cheap credit. Total debt in the peripheral countries has vastly increased.

In short, the roots of eurozone problems lie in the private, rather than the public, sector. This might sound surprising given the torrent of references to the "bloated" public sector in the periphery, especially Greece. In Spain the public sector has actually obeyed the strictures of the stability pact more rigidly than Germany, which invented them. Even Greece has a rather respectable record on public deficits in the 2000s, if you believe the numbers. Of its total debt in 2009, 58% was private and 42% public.

The main beneficiaries of the explosion of debt were the banks of both the core and periphery, who profited handsomely. Indeed, German and French banks behaved in an extraordinarily foolish way by continuing to lend heavily to peripheral countries, even in 2009. But the crisis extended the deficits of peripheral countries, and core banks eventually realised they were in a pickle. They held a lot of peripheral public debt, while also facing funding problems as the euro fell against the dollar. By spring this year, European banks were on the brink of a major crisis.

The austerity measures are part of the plan to rescue the banks again. Governments throughout the eurozone have succumbed to an alliance of banks and large holders of public debt who are desperate to avoid the implications of their foolish lending. Expensive funds were made available to Greece and others with the ultimate aim of protecting core banks. The price was austerity across the region in a naked attempt to shift the costs of the crisis on to taxpayers and public sector workers. Meanwhile the eurozone is becoming ever more rigid, including tough penalties for persistent "delinquents" who exceed the 3% limit.

But austerity is unlikely to work, even on its own terms. Private investment remains depressed and consumption is weak; credit is scarce and expensive, and exports cannot be a solution as the world economy is slowing down. Austerity probably means stagnation, which makes the prospect of peripheral default even more likely. Financial markets are fully aware of this, and hence Irish, Portuguese and Greek borrowing rates were at record levels in September.

The eurozone has become a trap for peripheral countries. They are crushed by debt, unable to compete against the core, saddled with austerity and facing long-term stagnation. Defaulting and reconsidering membership of the euro are no longer unthinkable. But for this to work the political power of the alliance of bankers and lenders has to be broken. There must be social change in favour of the working people who protested this week and who are the source of future prosperity. Then economic policy might be designed to deliver growth and jobs.