Six years after the beginning of the euro crisis, none of the problems it exposed have been resolved; in fact they have been both amplified and multiplied by events. In the first of a series of three articles, Josh Holroyd looks at the looming economic and political crises set to strike the EU this year.
In 2015, Europe was once again plunged into crisis. Now, six years after the beginning of the “Euro Crisis”, none of the problems it exposed have been resolved; in fact they have been both amplified and multiplied by events.
Having seemingly averted a possible ‘Grexit’ in July, the euro is still standing. However, despite an enormous programme of ‘quantitative easing’ (effectively printing money) by the European Central Bank (ECB), the 19-member euro zone is locked in a state of paralysis, with economic stagnation and even deflation on the order of the day. In this highly unstable equilibrium, the developing migrant crisis has exploded into a bitter dispute which has called into question the fate of the borderless Schengen zone.
In addition, the fallout from the Volkswagen emissions scandal, the looming Italian banking crisis, political instability in Portugal, and the continuing agony of the Greek people, are preparing a maelstrom of concurrent crises, which together could bring about the collapse of the euro.
Following David Cameron’s announcement that the UK will hold a referendum on its membership of the European Union by the end of 2017, and even as early as the summer of 2016, the pro-European and Eurosceptic wings of the British ruling class have begun to mobilise behind the official In and Out campaigns respectively. Already, British workers are being lectured on the importance of “British sovereignty” and “European solidarity”. But one thing that has been notably absent from the emerging debate over EU membership is any real perspective on the nature of the EU and, crucially, where it is going.
In this series of three articles, we look at the looming economic and political crises set to strike the EU this year, the ongoing migrant crisis, and the question of European integration on a capitalist basis.
Despite all the talk about “recovery”, the euro zone is a picture of stagnation. Data from the purchasing managers’ index (PMI) survey suggests that its GDP will have grown by 1.5% in 2015, but the palpable relief of analysts has been tempered by the fact that over the same period the European Central Bank (ECB) had pumped €1.1 trillion into European banks. Chris Williamson, chief economist at Markit (the body which carried out the PMI survey), was reported by the Financial Times as saying, “there is a concern that policy is proving somewhat ineffectual”.
Meanwhile, euro inflation stood at 0.2% in December, half as much as predicted and only a tenth of the ECB’s 2% target. This is despite a huge programme of quantitative easing and cutting interest rates, even into negative territory. The question arises: where is all this money going? Certainly not into the real economy; investment is still unacceptably low and banks on the receiving end of the ECB’s quantitative easing are simply not lending to small and medium businesses, while they continue to wrangle with “bad loans” totalling as much as €1 trillion.
The underlying situation is that of a complete and utter impasse. In short, the banks and large corporations are sitting on billions of euros, preferring to speculate on stock and currency markets rather than invest in production because there is no profit to be made from it. “Excess capacity” (over-production, in Marxist terms) persists in almost all markets as workers, the vast majority of the population, cannot buy back all the goods they produce.
It is this fundamental contradiction which drives all others to crisis point. The incredible extension of credit and bad debts accumulated by banks in the last period were an attempt to overcome this obstacle, as were the crippling state debts which threaten to bankrupt entire nations (and have already done so). Now capitalism, especially European capitalism, has nowhere to go and can only mask the problem by printing money, paving the way for an even deeper crisis. In such a volatile situation, all other crises can strike at the very heart of the European project.
Storm clouds on the horizon
As with the rest of the world economy, 2016 threatens further crises and convulsions for the EU. German industry, the backbone of the euro zone and the EU, is already experiencing a downturn as exports fell in the last quarter. Meanwhile, following the scandal over Volkswagen cars’ diesel emissions in September, US and UK sales of VW cars were down 25% and 20% respectively in November. The potential effects of this on the German ‘brand’ and exports are hard to quantify but impossible to dismiss.
Internationally, the decline in Chinese growth shows no signs of stopping and Brazil is now in a fully-fledged recession. Both of these factors will further dampen German exports. Both Germany and the EU as a whole are export economies; a continuing reduction in demand for European exports, or even another world slump, would hit the entire region and wipe out any so-called recovery.
Meanwhile, the ongoing saga of the sovereign debt crisis could begin its third and perhaps decisive episode in the not-too-distant future. The Greek state has now received three bailout packages from the Troika (the ECB, the IMF and the European Commission) amounting to €252 billion (of which over 80% went to private creditors, according to a study by the LSE) in return for wave upon wave of swingeing cuts and privatisations. Despite these “savings”, Greek public debt is now over €316 billion, almost twice the size of its GDP. Greece will never be able to pay back this enormous and growing sum. On the political stage, with every privatisation, cut to pensions etc. the Syriza coalition government gets weaker as MPs resign from the ruling parties. It is only a matter of time before there is another showdown over Greece’s status in the euro, and this time a Grexit is by no means ruled out.
The debt crisis is not limited to Greece, a relatively small and unimportant economy. Italy has a national debt of over €2 trillion, roughly 132% of its GDP. In addition, according to the IMF, the “bad loans” held by Italian banks amounted to €300 billion in 2014, almost as much as the whole of Greece’s public debts. Already, in November four small Italian banks had to be “rescued”.
In contrast to previous bank rescues, this deal took the form of a “bail-in”, as required under new EU rules intended to prevent a repeat of the 2010 crisis. The result of this was that shareholders and junior bondholders had to incur losses while senior bondholders were protected, leading to the public suicide of a pensioner who had lost €110,000 of his savings in the ‘rescue’ deal. The social and political ramifications of this are easy to comprehend: just look to Greece where in 2012 a pensioner shot himself outside the parliament building in Athens. Of course, Italy is not Greece - it is the euro zone’s third largest economy. For now, extremely low borrowing costs are staving off the inevitable reckoning, but if Italy should go the way of Greece the euro will not survive.
Portugal is also set to put the euro to the test after finishing 2015 with a debt burden of roughly 127% of its GDP, a constitutional crisis, and a minority Socialist Party government, despite the best efforts of its president to prevent “anti-European forces” from taking power. The new government under António Costa is proposing to challenge the strict fiscal discipline imposed on the country by EU in order to fund a Keynesian plan for state investment in education and health, but already cracks are beginning to show. As the Telegraph points out, Costa’s programme would be “entirely incompatible with the EU’s Fiscal Compact”, which requires all members states to reduce their debt-to-GDP ratio to 60% over the next 20 years. Indeed, Portugal’s president, Aníbal Cavaco Silva, who blocked the formation of a left-wing government in October on the grounds that it would likely breach EU rules, has demanded guarantees from the new government on this very point. A new constitutional crisis is entirely possible.
At some point a showdown with the EU is almost inevitable. Already, the new administration has carried out a bailout of the bankrupt Banco Internacional do Funchal SA and a controversial bail-in of foreign senior bondholders in order to fill a €1.4 billion capital shortfall in the newly restructured Banco Novo, prompting cries of “discrimination” from foreign creditors. In the case of the former, €3 billion of Portuguese taxpayers’ money were thrown into the breach in a move which required the support of the right-wing ‘Social Democratic’ Party to pass through Parliament. On the other hand, the government’s decision to target wealthy foreign creditors in the latter case has predictably caused outrage amongst investors, who are now calling for action from Europe. It is unclear how the ECB will intervene, but intervene it must and it is difficult to see how the situation can be resolved without a formidable legal and political clash.
In the current situation, any one of these events could blossom into a crisis comparable to, or even greater than, that of 2010. If several crises should hit at the same time, the effects on the euro and on the European project as a whole would be devastating, even fatal. But assuming the euro survives, what solution is being put forward by the strategists of capital?
Assault on the working class
In a survey of 33 economic analysts performed by the Financial Times at the end of last year, concerns over high levels of youth unemployment and low productivity were common. The two most popular measures to combat this were firstly, the boosting of public expenditure (on infrastructure in particular) and secondly, “labour market reform”, with a focus on improving “flexibility”. The implications of this are that European states will accumulate even more debt whilst assisting employers in further eroding workers’ terms and conditions.
The European working class can and should therefore expect not only a continuation but even an intensification of austerity as the crisis drags on. References to greater public infrastructure projects reminiscent of the New Deal of the 1930s are in no way intended to improve living standards – rather they are a reflection of the inability of the market and private “wealth creators” to develop the productive forces.
Instead of alleviating the conditions of European workers, these measures will simply transfer the cost of propping up the economy onto their shoulders in the form of precarious employment, poor working conditions and low pay. When state spending fails to boost the economy to any meaningful degree, the predictable refrain of “fiscal responsibility”, i.e. cuts, will once again be heard.
The end result of this is that all European countries can look forward to Greek conditions in the future, especially in the so-called “Club Med” economies. Today, Greece is ostensibly the model of a flexible labour market. Labour rights have effectively been suspended, with important changes to the legal status of collective bargaining, collective redundancies and the right to strike introduced as part of the EU Memorandum in July. Meanwhile, Greeks have been forced to “live within their means” as public spending has been cut by more than 30%. Added to this is the recent wave of privatisations in which important national assets, such as Athens’ Piraeus port, have been sold off to foreign, particularly German and Chinese, corporations. However, rather than seeing an improvement, the Greek economy has collapsed: its GDP fell by 22% between 2010 and 2014 and is expected to have fallen again in 2015, whilst unemployment stands at almost 25%.
As has been seen in Greece, where governments have sought to challenge austerity, the response of their European partners has been simply, “Pay your debts.” Yanis Varoufakis related in an interview for the New Statesman how his meticulously prepared (Keynesian) proposals were met with blank indifference by his counterparts from the Commission. Behind the Commission also stood a host of member states who were demanding that no quarter be given, not least those states also facing high levels of public debt. The reason for this is as political as it is economic: austerity is non-negotiable, and any resistance to it must be crushed in order to send out a clear warning to any other recalcitrant debtors. These are mafia tactics, pure and simple, totally in keeping with today’s mafia capitalism.
Also on the horizon is the “Transatlantic Trade and Investment Partnership” (TTIP) agreement currently being negotiated by the EU and the USA. These negotiations have been conducted entirely in secret, but a number of potential clauses were leaked last year. The overall purpose of the agreement is to improve market access for European goods and services in the USA and vice versa. Concretely, this will mean a bonfire of consumer protection and environmental legislation in order to open up markets for ‘free competition’. Perhaps even more disturbingly, the agreement may also give investors the opportunity to take legal action against states which prejudice their interests, effectively giving corporations the ability to challenge the policy of elected governments in an international court.
In effect, the NHS could be declared unlawful by an unaccountable court at the behest of big business and with the full backing of the European Commission. Should this agreement go through, and it most likely will, the further liquidation of what’s left of the European welfare state is firmly on the order of the day.
For a Socialist Europe!
The continued survival of the EU in this period of crisis will necessarily entail the continuation of the attacks on working people seen over the last five years. This is not a question of ideology as reformists such as Varoufakis claim, nor is it the result of individual errors – the outrages being inflicted on the people of Europe flow directly from the crisis of European capitalism. As long as the crisis persists, and there is every reason to believe it will, ordinary workers and young people will be made to bear the brunt.
What is required therefore is not a ‘Social EU’ or some other vestigial reform of EU institutions, but rather a class alternative which strikes directly at the source of the crisis – the capitalist system. Billions of euros are being hoarded by banks and corporations throughout Europe and the world, not out of malice but because of the profit motive, an integral part of the capitalist market.
Any government which seeks to challenge austerity must be prepared to break with this infernal cycle and take back these wasted resources if it hopes to achieve anything. The EU - its treaties, laws and institutions, not to mention the ruling classes who created it - stands irreconcilably opposed to this programme. The task for the workers of Europe, therefore, is not to reform the EU, but to overthrow it and replace it with a voluntary federation of socialist states.