The Eurozone Crisis - An Opportunity For the Left?

Robin Hahnel is Professor of Economics at Portland State University. His most recent book is Economic Justice and Democracy and he is co-author with Michael Albert of The Political Economy of Participatory Economics. He spoke to NLP's Alex Doherty on the continuing crisis in the Eurozone. 

ΠΗΓΗ: New Left Project

The election of Francois Hollande and the strong showing of the left in the recent elections in Greece has led to hope that a shift away from austerity policies may become politically possible. What is your view?

Austerity policies are not only terribly unfair, they aggravate the problem they are supposed to solve by shrinking economies which only makes it harder to pay off debts. Left, progressive, and competent macroeconomists have been pointing this out to no avail for over three years. Financial markets are now clearly of the same opinion. Lenders are now raising risk premiums for all countries whose economies are being shrunk by austerity policies irrespective of whether or not their governments are “behaving,” i.e. fulfilling all austerity obligations to the letter no matter how onerous, or “misbehaving” i.e. failing to enforce every last austerity measure negotiated. Unfortunately, those in charge of the European Commission and the European Central Bank have paid no attention to those speaking out against austerity, and instead have insisted on repeated the same mistake Herbert Hoover made eighty years ago.

As the human, social, and economic toll from austerity has increased, as the futility of the measures has become more apparent, and most importantly, as anti-austerity forces have become better organized, opposition has gradually increased. Like any popular movement, the strength of the anti-austerity movement ebbs and flows, and is sometimes stronger in one place than another. But the trajectory is clear: The movement opposing austerity is in ascendancy throughout Europe, and it is becoming ever harder for those imposing austerity to “stay the course.” We have now entered the phase where some among Europe’s ruling elite are changing their rhetoric. Whether this leads to a real shift away from austerity policies remains to be seen.

The opposition to austerity takes different forms. Some punish politicians and parties associated with austerity at the polls switching their votes to formerly fringe parties who voice opposition to austerity in their electoral campaigns. Others march in the streets and go on strike in attempts to force those who govern to change course. And some react by calling for “system change” and beginning to build the new world they believe is not only possible, but increasingly necessary.  As more and more young people become openly hostile to the “ancien regime” ruling elites become increasingly frightened and waver between concessions and repression. The recent elections in Greece and France are the latest political setback for pro-austerity forces. It will take more electoral defeats, more mass mobilizations and strikes, and an ever growing threat of radical system change to bring about a shift from austerity to pro-growth policies. Victory for the anti-austerity movement is not just around the corner.

The election of Hollande has led to comparisons with the election of the far more radical Mitterand government in 1981 which quickly abandoned its leftist program in the wake of pressure from international finance. What lessons does this have for us today?

The euro zone could easily survive economically without Greece. France, on the other hand, is the second largest economy in the euro zone and a major player in EU politics. However, I think the election of Hollande in France is much less significant than the rise of left parties in the Greek election. Every center right or center left political party that has presided over forced austerity in the EU during the past three years has been voted out of office. Nicolas Sarkozy is the latest center right victim to fall to popular anger against austerity. Had the French Socialist Party been in power when the crisis hit instead of Sarkozy, I suspect it’s leader would have imposed austerity – as “regrettable but necessary” – just as Papandreou did in Greece and Zapatero did in Spain. In which case, instead of Sarkozy being shown the door by French voters it would have been the French Socialist Party that would be on its way out instead right now.

The question is what lessons Mr. Hollande has learned from the fate of his fellow socialists, Mr. Papanedreou and Mr. Zapatero? What lessons has he learned about what austerity does, and does not accomplish? For that matter, what lessons has he learned from the government of Francois Mitterand the early 1980s? I seriously doubt he has learned the lessons I think he should have. Anti-austerity rhetoric is cheap from an opposition candidate. Is there any reason to believe Mr. Hollande will walk the walk now that he is in charge after he talked the easy talk during the campaign?

As you say, the left government led by Mitterand in 1981 was far more radical than the one Mr. Hollande will lead today. Yet international financial interests that were much less powerful then than they are today quickly forced Mr. Mitterand to abandon the progressive, expansionary fiscal policies he had campaigned on. In Economic Justice and Democracy (Routledge, 2005) I had this to say about Mitterand economic policy during the recession of 1981:

The government launched strong expansionary fiscal and monetary policies to provide plenty of demand for goods and services so the private sector would produce up to the economy's full potential and employ the entire labor force. There is nothing to find fault with here. Everyone deserves an opportunity to perform socially useful work and be fairly compensated for doing so. However, there is only so much any progressive government can do about this as long as most employment opportunities are still with private employers. Mitterrand deserves praise for doing the most effective thing any government in an economy that is still capitalist can do in this regard: ignore the inevitable warnings and threats from business and financial circles and their mainstream economist lackeys preaching fiscal “responsibility” and monetary restraint, and unleash strong expansionary fiscal and monetary policy…. However, there are ultimately only three options: (1) Don't stimulate the domestic economy in the first place because you are not willing to stand the inevitable heat in your kitchen. (2) Stimulate, but back off as soon as new international investment boycotts your economy, domestic wealth takes flight, and financial markets drive interest rates on government debt through the ceiling. Or (3) stimulate, but be prepared to face the heat international capital markets will bring with strong measures restricting imports and capital flight, by substituting government investment for declines in international and private investment, and by telling creditors you will default unless they agree to rollovers and concessions. Option three is the economic equivalent in the neoliberal era of not only playing hardball with international creditors, but going to financial war if need be. As daunting as option three is, it is important to remember that the Mitterrand government in France proved that option two does not work. (pp. 121-122)

As a friendly interpreter, the American socialist Michael Harrington, concluded: “Within less than two years the Socialists were engaged in administering a regime of ‘rigor,’ otherwise known as capitalist austerity.” I would not change a word I wrote seven years ago, and can only hope Mr. Hollande does not make the mistake of thinking that moderation and timidity in response to threats from international capital are likely to win him approval from long-suffering voters, much less a positive place in history. Unfortunately, I think Mr. Hollande and his party are likely choices to make this mistake, and put up even less of a fight than Mitterand before him.

But only history will tell. The futility of austerity, and obvious political fate of all political parties who administer it, may grow more backbone where there is little to begin with. In any case, there is no reason to pre-judge the new French government since what anti-austerity forces must do in any case is the same: RAISE MORE HELL! As new political cracks appear, even in Germany, who knows which politicians will surprise us, or what may soon become possible.

How do you interpret the intransigence of the German government in its insistence on maintaining current fiscal policies?

What can one say about German politicians and the German public? The smart move is to get ahead of financial crises, rather than to react too slowly and too cautiously. Since Merkel has made this mistake repeatedly, she has forced German taxpayers to put much more at risk in bailout funds than necessary. How much of this has been over cautiousness, or penny-wise, pound-foolish ideology on her part, and how much has been driven by popular sentiment among German voters averse to “enabling” what is portrayed in the German media as lazy workers and irresponsible governments in the PIGS -- and Greece in particular -- is difficult to know.

There are some hard nose self-interests that have clearly played a big role. Since German banks are on the hook for many loans to PIGS governments and private businesses they expect their government – and make no bones about it, Merkel’s center-right government is beholden first and foremost to German banks -- to protect their interests. That means squeezing every penny out of their creditors, but not pushing them quite to the point where they default. Merkel has tried to do exactly this in negotiations over austerity conditions – squeezing every last penny – while begrudgingly providing bailouts at the last minute to avoid defaults that would rock the German banking industry. But this is always a dangerous game and Germany may now have pushed Greece, and perhaps others, too far.

With the global recession still with us, with Europe clearly slipping back into the much feared “double-dip” recession, why has Germany steadfastly refused to provide the EU with a much needed fiscal stimulus? Unlike the PIGS, the German government can borrow right now to finance a deficit at rock bottom interest rates in private capital markets. What is stopping them from using this cheap money to create much needed fiscal stimulus? A popular answer is Germany’s fear of inflation dating back to the days of the Weimer Republic in the aftermath of WWI. I think a more likely answer lies in the fact that Germany has successfully “exported” its unemployment onto the PIGS. Because the PIGS use the same currency Germany uses none of them can devalue to eliminate the large trade deficits they are running with Germany. This gives Germany large trade surpluses which has kept unemployment rates in Germany low throughout the Great Recession. Unlike the US where the electorate seems willing to tolerate high rates of unemployment, this has not traditionally been the case in Germany. Any German government that presides over high unemployment has traditionally been given a quick heave-ho. But German unemployment rates have not been high because of its large trade surpluses with other countries in the euro zone. Hence, little domestic political pressure for fiscal stimulus in Germany, despite the fact that this would do more to pull the EU out of its economic doldrums than anything else. However, the double-dip in the EU is looking more and more severe, and unemployment rates in Germany are beginning to rise. So like much else, this too may soon be changing.

The withdrawal of Greece from the eurozone is described in near apocalyptic terms by advocates of the economic status quo. What do you think the repercussions might be for both Greece and for the eurozone in general if Greece were to make an exit?

Greece has reached a political impasse in which the center right and center left political parties that have dominated Greek politics for the past forty years both had their share of the vote cut by more than half, and formerly fringe parties are clearly in the ascendancy. Moreover, the Greek economy is in a death spiral and is quickly becoming dysfunctional. Nothing short of a strong left government determined to (1) default on debt that is un-payable, (2) restore social spending, and (3) engage in public investment when private investment flees has any chance of turning things around. However, that may soon be possible.

Unless rules are suspended it now appears there must be a new election as early as June. Three things need to happen for a constitutional government of left political parties to emerge. (1) SYRIZA (16.78%) and the party of the Democratic Left (6.11%) need to increase their percentage of the vote at the expense of Pasok who fell to third place with 13.18%. That can easily happen since (a) Pasok administered unpopular austerity and still supports austerity as “necessary;” Pasok support is “soft” and based largely on patronage it can no longer deliver; (c) many voted for Pasok in the past only because they believed left parties had no realistic chance of governing. Now that SYRIZA has surpassed Pasok it is a vote for Pasok that is “wasted.” (2) Those who voted for smaller left parties -- like the Greens (2.9%) -- who failed to get the minimal 3% for any seats in Parliament need to top the 3% threshold or give their votes to one of the left parties sure to win representation. I don’t see why that should prove overly difficult in a new election. But the most difficult problem is (3) left parties must overcome historic divisions in order to form a coalition government with a viable program.

However, history may soon hand Greek leftists a lucky gift. It is possible that the major issue dividing left parties may soon become a moot point. The Communist party was against joining the euro zone in the first place, and is adamant about leaving. On the opposite extreme, the party of the Democratic Left broke from SYRIZA in 2010 largely because Democratic Left leaders insisted on a firm commitment to stay in the euro zone. SYRIZA only favors staying in the euro zone -- provided the EU reverses its pro-austerity policies. Not only is that not going to happen, a second default is virtually inevitable, which may well trigger a sequence of events including a massive bank run that will force Greece out of the euro zone even before a left government can come to power. If so, not only will the principle bone of contention on the left become a moot point, a left government would enjoy the advantage of a devaluation that would provide a huge boost to employment as Greek exports become cheaper and imports become more expensive. In such a clear “crisis” a left government could also become a government of national salvation which Greek patriots rally around.

If this happens Greece may prove to be Europe’s salvation not its ruin. Those who argue that economic and political chaos in Greece are destroying the EU are talking about a neoliberal EU that is on an unsustainable path to self-destruction. It will take quite a jolt to move the EU off its disastrous austerity path onto a path of equitable growth. If Greece provides a jolt, and shows the way to a better path, those who dream of a peaceful, egalitarian, and prosperous Europe may well have Greece to thank years from now.

Warning: “Possible” is not the same as “probable,” much less “a sure thing!” And even a jolt from Greece may not prove sufficient to turn the rest of Europe around. It may well take more jolts from other PIGS as well.