Catastrophe Now: The Euro Runs its Course

ΠΗΓΗ: Social Europe Journal

by John  Weeks

In August 1982 the government of Mexico announced it could not service its debts.  Thus began an unnecessary, creditor-enforced depression that would sweep Latin American, and usher in the “Lost Decade” with appalling human suffering.  Thirty years later we replay this grim history in Western Europe.  The sorry fate of the European Union demonstrates the power of neo-liberalism.  Begun by social and Christian democrats to end centuries of European civil wars and bring prosperity to a conflict-ravaged continent, the European Union can now be found in the vanguard of imposing neo-liberal austerity.

In May 2010 the government of Greece faced a debt service problem.  In the context of the euro zone as a whole, the Greek difficulties were minor, equivalent to a US state government unable to balance its budget.  The obvious solution was for the European Central Bank to buy part or all of the Greek debt, ending the problem in a stroke.  With the purely financial difficulty eliminated, political discussions could have begun to correct the underlying cause of the short term problem.  The corrections would have included major changes in Greek taxation and expenditure policy, which could have been phased over several years.  The phasing would have allowed for economic growth to make the adjustments relatively easy.

In place of this rational approach, the non-elected officials in the European Commission and the European Central Bank, zealously encouraged by the German Chancellor, imposed a deficit reduction program on the government of Greece that makes the 1980s Washington Consensus appear benign in retrospect.  When the elected government of Greece proved unequal to the task of implementing economic madness, the lords and ladies of the euro zone took the austerity to its logical conclusion:  if an elected Greek government would not do the dirty work, impose a un-elected one.  It is rather bad luck for the Commission and the Chancellor that the Greek constitution requires an election be held this year (in April unless this bothersome democratic requirement can be avoided).

Against all rationality, the overlords/ladies of the euro zone managed to achieve what would seem a difficult to impossible task, convert the debt service problem of a country with less than eleven million people (smaller than ten American states) into an imminent catastrophe for a continent.  As the chart shows, in May 2010 when the Greek problem could have been easily solved, the growth rates of France, Germany and the four so-called PIGS (Portugal, Italy, Greece and Spain) were all positive.  In a new version of economic “convergence”, they are now all negative, save France (a robust +0.2%).  Even the mighty “power house” of German fell into decline in the final quarter of 2011.

GDP growth rates: Neo-liberal Convergence in the Euro Zone, 2010-2011

Sources: Eurostat and Eurostat News Release October 2011.

Few outside of Europe (and not all within) understand the profoundly undemocratic nature of the European Union that created the current disaster.  In retrospect it is clear that the long-term effect of the Maastricht Treaty and its infamous “criteria” were to remove economic policy from democratic oversight.  The design of the European Central Bank completed the task.  The anti-democratic removal is not an accident of the law of unintended consequences.  It is the conscious fulfilment of the central political principle of neo-liberalism, that economic policy is the preserve of experts, and should not be subject to the “populism” of democratic politics.  It is an irony that the European Union is frequently assailed by right wing politicians in the United States as a haven of socialism.  The reality is that the European Union represents exactly the end of democratic oversight that the Tea Party Republicans crave.

As disaster gathers on the European continent (a disaster that UK government economic policy eagerly works to emulate), one can imagine two paths of avoidance.  The essential problem of the euro zone is the extreme internal trade imbalances, Germany with a huge surplus mirrored by the deficits of the other countries.  The obviously rational approach would be for a German fiscal expansion coordinated with temporary export subsidies and import restrictions in the deficit countries.  The European Central Bank would provide transitory coverage of trade deficits.  The trade subsidies and restrictions would be combined with longer term policies for what might be termed “competition convergence”.  The probability of this sensible policy approach occurring is zero.

At the time of the Latin American debt crisis of the 1980s, many commentators (I among them) argued that if two or more of the countries joined together in a debt renegotiation pact, the onerously debilitating Washington Consensus policies could have been avoided.  Similarly, today in Europe a pact among the governments of Greece, Ireland, Italy, Portugal and Spain to coordinate a simultaneous withdrawal from the euro zone would offer a viable alternative to the imposed austerity programs.  Together the output of these five countries is almost forty percent larger than Germany’s.  The probability of this radical but feasible alternative may be as high as one in a million.

This leaves the two most likely outcomes:  euro zone depression with no defectors, or euro zone depression with a chaotic defection process.  My guess is depression with defectors, Greece being the first.

How far we have fallen!  The vision of a cooperative Europe, that began in 1950 with the Iron and Steel Community, is now realized as a collection of weak and strong countries caught in a spiral of beggar-thy-neighbor trade and austerity policies, in which the 99% are the losers (even in Germany).  The authoritarian governance of the EU has reached its fullest expression in the debt disasters of the 21^st Century, bringing on a continental depression.  The ideology that justified this consciously-created and unnecessary depression was and is pure neo-liberal economics.

Of all the bitter ironies of European unity gone viral, one stands out from all the others:  a political project designed consciously to ensure that no country would again dominate the continent changed into the mechanism to achieve that domination.