Europe: Struggling to save the eurozone

Governments have no mechanism for dealing with the crisis

BEFORE THE GLOBAL crisis that began in 2007, the eurozone leaders, particularly the leaders of the Franco-German alliance that dominate the project, trumpeted the success of the euro. The common currency, together with the European Union-wide single market, undoubtedly helped to increase intra-EU trade. However, there was no acceleration of the growth rate of the eurozone, which was no better than the overall EU growth rate. Inflation was low, but this was mainly due to international factors – global over-capacity and intense competition among low-cost producers – rather than the policy of the European Central Bank (ECB).

The common, multi-national currency did not facilitate increased political and institutional integration between the national states sharing the euro. Even with banking, there was increased integration of investment banking (including London-based banks outside the eurozone), but there was no comparable integration of high-street, retail banking. There was no harmonisation of legal systems and financial regulatory structures. Claims that a common currency would lead to greater ‘convergence’ and steps towards a political confederation were not borne out.

The ECB set a common interest rate and regulated the money supply. It pumped credit into the European economy during the credit crunch which gripped the world economy in 2008, resorting to quantitative easing, like the US Federal Reserve and the Bank of England. However, national governments within the eurozone continued to issue their own bonds to finance their budget deficits. This complication (in contrast to the US with its vast fund of federal Treasury bonds) limited the development of the euro as an international reserve currency.

The weaker eurozone economies with trade deficits, like Greece and Portugal, may have been adversely affected by the strengthening of the euro against the US dollar and other major currencies (making it hard for them to increase their exports). This trend reflected the strength of the major eurozone economies with big trade surpluses, like Germany and Netherlands. Instead of the convergence envisaged by the 1992 Maastricht treaty, there was a widening of the gap between surplus and deficit countries within the eurozone.

The weaker, ‘peripheral’ countries took advantage of low eurozone interest rates. Governments and banks could borrow money from the ECB (using government bonds as security) almost as cheaply as the stronger countries with budget and trade surpluses. Cheap euro credit fuelled property booms (especially in Ireland, Greece and Spain), bank-lending bubbles (particularly in Ireland), and public-spending booms (notably in Greece and Portugal). As a result, the ECB holds billions of euros worth of dodgy government bonds. At the same time, foreign banks have outstanding loans of $1.7 trillion to banks in Greece, Ireland, Portugal and Spain. There are also $756 billion of derivatives linked to these loans. This exposure to potential bad loans does not include the bond holdings or loans of domestic banks within these four countries.

This situation arises from the contradiction in the Maastricht project. The treaty established a monetary union without a political union. No doubt some EU leaders believed that a common currency would prepare the way for piecemeal progress towards political integration. But despite a limited surrender of economic sovereignty, both the EU and the eurozone remained associations of nation states which refused to surrender their fundamental sovereign powers. Thus the euro was launched in 1999 without a eurozone finance authority that could impose fiscal policy on the countries sharing the euro or in any way curb the credit-driven property bubbles that developed.

The EU’s muddled response

THE EUROZONE WAS inevitably hit by the global financial and economic crisis that started with the US subprime crisis in 2007. The downturn exposed the extent of the sovereign debt crisis facing the eurozone, with a potentially explosive situation for the banks that had financed the spending spree. The emergence of the sovereign debt issue in 2010 was a factor in stalling the very feeble ‘recovery’ in the world economy.

It was clear from the start that eurozone governments had no mechanism for dealing with the crisis. Maastricht ruled out bailouts. EU leaders were in complete disarray, fearing a nationalistic electoral backlash against bailing out ‘profligate’ foreigners. EU leaders held a series of inconclusive meetings in the early part of 2010, while financial markets were in turmoil. They promised that the EU would support Greece, Ireland and Portugal and not allow defaults, but were slow in coming up with concrete measures. The suggestion by German chancellor, Angela Merkel, that bondholders should be forced to take a “haircut” (that is, accept losses on the bonds they held) caused a furore among finance capitalists, and EU leaders were forced to announce that there were no immediate proposals for such write-downs (which would have amounted to a partial default).

In an admission of weakness, eurozone leaders were forced to rely on the IMF as a kind of surrogate treasury to sponsor a bailout. Through a hastily improvised European Financial Stability Fund (EFSF), on 9 May 2010 they came up with an aid package of €750 billion (€500bn from the eurozone countries and €250bn from the IMF). The EFSF will issue bonds to finance the loans. This rescue is hardly a model of collective action. To avoid accusations that it is effectively organising bailouts, it has been structured as a package of bilateral loans, with each contributor (including the loan recipients) being liable for their share of the fund (proportionate to GDP)! The EFSF has provided massive loans to Ireland and Greece, and more recently Portugal, on the basis of savage austerity measures.

The EFSF will be supplemented from 2013 by a new body, the European Financial Stabilisation Mechanism (EFSM). This body will be able to provide emergency funding to any EU state on the basis of loans guaranteed by all 27 EU members. However, so far it is authorised to raise only €60 billion (compared with the €440bn for the EFSF), which is likely to be a drop in the bucket as further financial crises unfold. At the same time, the European Commission (EC) is pushing proposals to strengthen its surveillance of the fiscal performance and economic policies of member states.

Strained relations

IN AN OUTBURST last year, Merkel even demanded that countries that break EU budget discipline should be liable to expulsion from the eurozone. (EurActiv, 18 March 2010) Yet during the global economic downturn in 2008-09, all the major EU powers, including Germany, broke the stability pact guidelines on budget deficits and national debt. In reality, the EU has no power to enforce economic policy without unanimous agreement of all 27 members, which is unachievable in practice. Unilateral action by Germany to employ some kind of sanctions against ‘delinquent’ countries, however, would threaten the very existence of the eurozone.

The Eurogroup, economics and finance ministers of the 17 eurozone countries, meets monthly, but they are informal meetings. There is no decision-making body responsible for steering the eurozone’s economic policy. Once again, it highlights the contradiction between a common currency and the lack of an economic power. This is particularly true given the increased interdependence of financial markets, when problems in one state rapidly spill over into the others. Last year, José Manuel Barroso, EC president, stated: “Let’s be clear, you can’t have a monetary union without having an economic union. Member states should have the courage to say whether they want an economic union or not. And if they don’t, it’s better to forget monetary union all together”. (EurActiv, 12 May 2010)

Some capitalist leaders are still dreaming of the further integration of the EU into a confederal structure. For instance, Felipe Gonzáles, former right-wing Socialist prime minister of Spain, argues that the only way for the EU to emerge from the financial crisis is to “move forward decisively on the path towards ‘federalisation’ of economic and fiscal policies”. He even advocates the federalisation of foreign and security policy. (New York Times, 7 January 2011)

But this is utopian. Even in a period of economic upswing, the EU leaders were unable to centralise EU institutions with real power, even in the economic sphere, let alone foreign policy and military forces. Enlargement to 27 members has made further integration even more problematic. The kind of changes envisaged by Barroso, for instance, would require treaty changes which, in turn, would require referenda in a number of states.

Strengthening nationalism

GIVEN THE STRENGTHENING of nationalist feeling throughout Europe, together with the appearance of xenophobic trends (for instance, the so-called True Finns, Danish People’s Party and Sweden Democrats, and renewed support for the Front National in France and Northern League in Italy), who believes that pro-Europe leaders could secure majorities for the further surrender of national sovereignty to a more integrated, federal Europe?

The obstacles in the way of federal schemes reflect more than passing political difficulties. Despite the tremendous growth of the world market, with the interdependence of trade and finance, the capitalist system is still anchored in the national-territorial state. While capitalists operate far beyond their national borders, the wealth and power of each capitalist class is rooted within its frontiers, based on its property and defended by its state apparatus.

Moreover, capitalism has for centuries fostered national consciousness to legitimise and reinforce its rule, and that national consciousness cannot simply be brushed aside because sections of capitalist leaders now favour pooling some of the power with European partners. On the contrary, the organic crisis of capitalism, with deepening social tensions, is strengthening reactionary nationalist and xenophobic forces which make it even more difficult for capitalist leaders to strengthen the EU’s embryonic federal features.

With the tremendous growth of the advanced capitalist economies in the post-war period, the productive forces of Europe objectively required greater integration, especially if west European capitalism was going to hold its own against US imperialism. Sections of European capitalism recognised this and, beginning with the European Coal and Steel Community and the Common Market, developed the EU and the euro. But they could only use capitalist methods and, while they could reach over the national frontiers, they could never dissolve them.

From the beginning, we rejected the idea (accepted by some on the Marxist left) that the EU would step by step lead to a federal European state, or even a looser confederation. We did not accept that sections of the national capitalists could develop into a unified, transnational euro-capitalist class. We predicted that, while it could go forward during periods of economic upswing, the EU would face growing internal tensions in times of crisis. We also rejected the idea that the euro, launched in 1999, would become a permanent currency union, embracing more and more European states. We predicted that, in the event of deep economic crisis, the eurozone would inevitably be thrown into crisis – and at some point break up into two or more currency areas or disintegrate entirely.

No capitalist solution

THE PRESENT CRISIS confirms our prognosis. Far from cushioning the eurozone countries from the global crisis, the common currency has exacerbated the situation. The eurozone system allowed the weaker economies, like Greece, Ireland and Portugal, to run up huge current account deficits and unsustainable levels of debt. The more powerful states are forced to intervene to try prevent defaults, which would throw the whole eurozone into an even deeper crisis and threaten the survival of the bond-holding banks throughout Europe. Whether key economic powers manage to save the euro this time remains to be seen. But the euro can only survive on the basis of transferring a huge share of the existing debts from the private banks to public authorities, like the EU and IMF (ultimately piling the cost of the bailout onto the working people of Europe).

A ‘solution’ to the current euro crisis will weigh like a crippling burden on the European economy, sapping the reserves available for another round of bailouts. If it survives this round, it is unlikely to survive the next time. One or more of the weaker economies may break with the euro – or be pushed out – at least being able to take advantage of a devaluation of a new national currency to stimulate growth through exports. Alternatively, Germany, together with its main trading partners (Netherlands, Denmark, Belgium, Luxembourg), might initiate a rupture, abandoning the euro to form a new Deutschmark bloc.

We do not oppose the EU or the euro from a narrow, nationalist standpoint. The unification of the whole of Europe would be an enormous step forward. But this cannot be achieved on a capitalist basis. The existing EU institutions, like the EC, the ECB and so on, are clearly agencies of the capitalist ruling class, incapable of surmounting capitalist limitations. The European parliament has very limited oversight over the EC and no control at all over the national states that, through the Council of Ministers, take all the key decisions.

We stand for the unification of Europe on a socialist basis. This would take the form of a voluntary socialist confederation of states, based on a planned economy and workers’ democracy. Economic growth would provide the basis for real ‘convergence’ through levelling up living standards, in contrast to the current neo-liberal ‘race to the bottom’. The integration of finance and trade into a common plan would allow the development of a durable common currency. The ‘social Europe’ falsely promised by EU leaders in the past could be achieved, with the generous provision of public education, health and welfare services. Instead of being locked into a crisis-ridden ‘fortress Europe’, the workers of the continent would reach out to collaborate with the workers of the world.

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May 2011