Europe: Eurozone time-bomb

Mired in recession, the eurozone is haunted by the spectre of stagnation

Mired in recession, the eurozone is haunted by the spectre of stagnation. Quantitative easing will not provide a magic solution. The election of a Syriza government on an anti-austerity programme has raised the possibility of a showdown with the leaders of German capitalism and their allies. An explosion is being prepared, however long the fuse. LYNN WALSH writes.

Neither the EU nor the eurozone can claim to be great successes. After the ‘great recession’ of 2007-09 and the subsequent bailout of insolvent banks, the EU leaders congratulated themselves on riding out the crisis. But last year, the eurozone faced the spectre of prolonged stagnation, with near-zero growth. The recession was no longer confined to the weaker, southern economies (Greece, Portugal, Spain, etc) but gripped the core countries (France, Italy and even Germany). Germany, in particular, was hit by the slowdown in growth in China, which curbed Germany’s manufacturing exports. The common currency did not insulate the eurozone economies from sluggish, uneven growth, with high unemployment, especially among young people.

A major factor in the slowdown of the world economy has been the slowdown in China, where growth has been between 7-8% per annum, compared to growth of 9-10% during 2008-11. Growth in the US and Britain, ranging from 2.2-2.4% in the US and 1.7-2.6% in Britain, have been partial exceptions. In both countries, however, there is concealed unemployment and wages have trailed way behind growth. The income and wealth of the top 1% has soared.

The recent fall in petrol prices – 40-50% from the previous peak – has been a major factor in recent developments. Germany, Japan and other economies have been given a significant boost by the decline in fuel prices, which has boosted consumer spending on non-fuel goods and services. The other side to this, however, is the impact on some major oil producers, like Iraq, Venezuela, Russia, etc, where the declining value of oil and gas exports will have a major impact on their finances. This will lead to increased political instability within a number of major oil producers, and sharpened geopolitical tensions in a number of regions.

The ECB and QE

In July 2012, when the eurozone economies were hovering on the verge of recession, Mario Draghi, head of the European Central Bank (ECB), promised that he would do “whatever it takes” to support the eurozone. His implied promise to inject liquidity into the economy, on the lines of quantitative easing (QE) in the US, Japan and Britain, reassured financial markets that he would step in to avert a new downturn. However, the German government under Angela Merkel still resisted QE, the purchase by the ECB of eurozone government bonds. Draghi prevaricated, even though the eurozone economy stagnated during 2014 (0.8% growth).

Then, at the beginning of this year, Draghi announced a massive programme of QE to begin in March. Why the change? One factor was the ruling of an important EU court that it would be legal for the ECB to buy government bonds in the secondary market (ie not directly from those governments). Moreover, at the turn of the year, the abrupt decline in the rate of price inflation raised the spectre of outright deflation.

Deflation would have the effect of raising the real, inflation-adjusted price of debt, an additional drag on the economy. Deflation also squeezes the profits of big business and leads to a decline in investment, which would be likely to raise unemployment. Under these conditions, the German government reluctantly acquiesced to the ECB’s QE programme. The plan is for the ECB to purchase €60 billion a month of government bonds and other debt as a means of pumping additional liquidity into the banks. Altogether, Draghi plans to spend €1.1 trillion (£820bn).

Hailed by some as a bold step, others criticised the QE package as ‘too little, too late’. At the Davos economic forum, Lawrence Summers, a former US Treasury secretary, cautioned that “it is a mistake to suppose that QE is a panacea in Europe, or that it will be sufficient”. At the same time, Mark Carney, governor of the Bank of England, said that monetary policy alone could not “eliminate the risk of prolonged stagnation”.

Carney argues that the success of the eurozone depends on common tax and spending policies – and is calling on the eurozone countries to allow cross-border transfers of tax revenue. However, Germany, Netherlands, Finland and other eurozone members have intransigently rejected the idea of a ‘transfer union’ under which resources would be shifted from the richer to the poorer eurozone countries. Carney’s proposals are ‘logical’ but immediately come up against the conflicting national interests of the states that make up the eurozone. Eurozone leaders criticise Carney – and the UK government – as ‘bystanders’ who have no right to advocate extravagant spending policies for the key eurozone economies.

Scepticism about the effectiveness of QE, however, is amply justified. In the US, Japan and Britain, which have implemented QE on a massive scale, most of the funds created by central banks were channelled through the commercial banks to wealthy speculators. The funds were used for investment in ‘emerging markets’, in luxury property development, the purchase of company shares and pure speculation. Little or none of it found its way into social housing, education, renewal of the infrastructure, or manufacturing investment. It will be the same story in the eurozone. It is Keynesianism for bankers and speculators.


Under the eurozone’s austerity regime, mainly dictated by the leaders of German capitalism, “the euro’s recession-ridden crisis countries [instead of increasing public spending – LW] have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty and scant hope”. Thus writes Joschka Fischer, the former German Green foreign minister. The savage austerity measures imposed on Greece have pushed the country into a deep slump. There has been a 28% decline in GDP, with domestic consumption falling around 40%. Unemployment is 26%, youth unemployment a devastating 57%. Many areas of society are breaking down.

The national debt has reached a staggering 175% of GDP, which is completely unsustainable. Over half of the money borrowed by Greece, supposedly to resolve the crisis, has been spent on the servicing of debt. Out of a total of €254.4 billion in loans from the troika – the ECB, IMF and European Commission – and its own financing (taxes, etc), only €27 billion has been spent on ‘state operating needs’. All the rest was spent on the repayment of loans, interest, and the recapitalisation of Greek banks.

The Greek government, through savage spending cuts and increased taxes, has achieved a primary budget surplus (balance excluding debt servicing) of 1.5% of GDP – but under the troika’s plans Greece would be expected to achieve a primary surplus of 4.5% of GDP by 2016. This could only be achieved through more cuts and tax increases – a massively increased burden on the Greek working class and ever-wider sections of the middle class.

Germany and Grexit

In 2012, Merkel and her political allies in the eurozone considered easing Greece out, as a way of stabilising the eurozone. They decided against such a course, however, and instead imposed a bailout on Greece on extremely onerous conditions. Their calculation was that if Greece left and reverted to the drachma, with a devaluation to boost its exports, others like Portugal, Spain, etc, might well follow. Reverting to their own national currencies, they would resort to competitive devaluations and beggar-thy-neighbour trade measures. This would threaten the breakup of the eurozone, possibly with the survival of a rump Germany-Netherlands-Belgium bloc.

A savage austerity package was the price the Greek people were forced to pay. For continued membership of the eurozone, the troika, which sponsored the package, exploited the craven capitulation of the Greek government, the New Democracy-Pasok coalition. They also took advantage of the fact that a majority of people in Greece favour staying in the eurozone, as the euro was associated with the growth, modernisation, etc, of Greek society.

A similar situation applies today. Germany would prefer to keep Greece in, and avoid the prospect of a eurozone fragmentation. The major difference from 2012, however, is that the Greek people have suffered the consequences of unprecedented austerity.

A breakup of the eurozone under current conditions would, if anything, have even more catastrophic repercussions than in 2012. The idea that recent banking reforms will allow European banks to sail through another deep crisis is a fantasy. A eurozone meltdown would provoke convulsions in the world money system. A foretaste of this is the severing of the peg between the Swiss franc (CHF) and the euro. The Swiss authorities do not want the CHF pulled down by the declining euro, which would seriously undermine their banking business. The value of the euro has plummeted because of the introduction of QE, which inevitably undermines the exchange value of the euro. One immediate consequence: Poles who purchased their homes with CHF loans from Swiss banks now face ruinous repayments as the value of the CHF rises against the euro. The Danish authorities may also be forced to break the peg between the krone and the euro.

The logic of the current situation, regardless of the immediate intentions of political leaders on both sides, is that it could lead to a breakup. Greece’s debts are objectively unrepayable. As a result of austerity-induced slump, debt is actually rising as a proportion of GDP. Many capitalist commentators argue that a large section of Greece’s debt will inevitably have to be written off and it would be better to act in a timely manner. For instance, Reza Maghardan, an ex-IMF official, argues for the writing-off of half of Greece’s debts.

At a certain point, the Greek capitalists may decide that a major default on their debts would be more viable than perpetual, austerity-induced stagnation. But, on a capitalist basis, Grexit and default would impose a terrible burden of ‘recovery’ on the Greek working class, as in Argentina in 2000-03. For the working class, recovery requires ownership and control of the banks and major sections of the economy, and a democratic plan of production and trade.

Many eurozone leaders are terrified at the prospect of social upheaval in Greece: in reality they face the spectre of revolution. An explosion in Greece would detonate similar explosions in Spain, Italy, France, etc. Merkel, however, and her finance minister, Wolfgang Schäuble, continue to take a rigid, hard line on Greece’s ‘obligations’. They continually denounce Greece’s ‘irresponsible borrowing’ and ‘fiscal profligacy’. Yet irresponsible borrowing relied on irresponsible lending, with German banks in the forefront. The extravagant public spending, moreover, was promoted by corrupt governments and public servants. Wealthy Greeks paid little or no taxes and looted the finance sector and the state. The debts were not run up by the Greek working class.

At the same time, German capitalism gained from its position in the eurozone. Participation by the weaker economies, like Greece, kept the value of the euro down on foreign exchanges. This gave Germany a price advantage in export markets. Without the eurozone, a German national currency would have been much stronger, making it more difficult for Germany to export its manufactures to the rest of the world. Year after year, Germany ran a current account surplus (boosted by exports at the expense of domestic demand). This made it difficult for weaker economies like Greece to export goods to the German market, while Germany enjoyed plenty of opportunities to export its goods to southern European markets.

Germany has been a key force in the development of the eurozone. But Merkel sees the eurozone as a fiscal police power, which limits budget deficits and national debt. The German government has blocked the ECB from acting as a bank of last resort for eurozone governments. Germany has only acquiesced to the ECB’s QE programme under threat of a generalised eurozone slump. In the last few years, Merkel and her allies have pushed for a more coordinated, institutionalised leadership for the eurozone – but only to strengthen its policing role. The result of the drastic restrictions on public spending has been a period of stagnation, with German capitalism itself falling into recession during 2014. The differences in GDP growth and living standards between the richer and poorer members of the eurozone have sharply increased in recent years.

Merkel and her cohorts have consistently rejected the idea of a fiscal union on the lines of federal states such as Canada, the United States, etc. In federal states, there is a certain redistribution of revenues, partially mitigating regional differences and cushioning the weaker states during recession. Germany has always denounced such proposals as a ‘transfer union’, involving hand-outs from ‘frugal’ Germany to ‘profligate’ countries in the south.

Provisional proposals

Following tense negotiations, the leaders of the Syriza government came to a provisional agreement (20 February) with the ‘institutions’, formerly known as the troika. This will release another tranche of loans that will avert a default at the end of February, when some current loans expire.

Alexis Tsipras, Syriza leader and prime minister, and Yanis Varoufakis, finance minister, claimed they had achieved “an important negotiating victory”. In reality, the Syriza leaders have performed a somersault. Some cosmetic changes were agreed: the hated troika has become the ‘institutions’, the ‘memoranda’ – the austerity package – is no longer mentioned. However, the substance remains. Tsipras-Varoufakis entered the talks saying they would not accept the continuation of the existing austerity package in any form. They demanded a new agreement that would lift the catastrophic austerity measures imposed on the Greek working class.

In the event, they accepted the existing package, winning at best some possible ‘wiggle room’ over the primary budget surplus (before debt repayments). At present, this is supposed to be 3% of GDP in 2015 and 4.5% in 2016. Varoufakis argues that the primary surplus should be 1.5% of GDP. This would mean that debt repayment would be at a much slower rate than currently demanded, implying another ‘haircut’ (debt write-down) for Greece’s creditors. There is no indication that the German leaders are prepared to accept such a write-down.

On the contrary, Schäuble has repeatedly demanded that Greece sticks to its original agreement. Like other neo-liberal leaders he fails to see that Greece’s debts are objectively unrepayable. Schäuble and company are determined to inflict a heavy, demoralising defeat on the Syriza leaders as a deterrent to Podemos and other anti-austerity forces in Europe. They appear heedless of the social consequences of perpetual austerity that, sooner or later, will provoke explosive political upheavals on an unprecedented scale.

Varoufakis claims there is “constructive ambiguity” in how severe the austerity package should be. The Greek leaders will be submitting an amended version that will place the emphasis on clamping down on tax evasion, smuggling and corruption. But it is subject to approval by the institutions, and Schäuble has made it clear they want to see ‘details’ – figures for savings – not vague policy pledges. Moreover, the austerity programme will continue to be monitored by the institutions.

The Brussels talks have confirmed that Germany, the dominant European power, dictates eurozone policy. Germany is backed up by Netherlands and Finland, which together form a Germany-led bloc. But Schäuble is also supported by neo-liberal governments in Portugal, Spain and Ireland who have themselves carried out savage austerity programmes – and fear a political backlash if concessions are now made to Greece.

Syriza leaders have so far failed to challenge German neo-liberal policies. This cannot be achieved through negotiations within the framework of official EU/eurozone, ECB, IMF institutions. Breaking with austerity and restoring the living standards of the Greek people requires the mass mobilisation of the working class and an alternative socialist programme for taking control of the economy. It would require a programme for a socialist Europe.

A temporary fix

As we go to press (24 February) BBC News reports that eurozone finance ministers have approved reform proposals submitted by Greece as a condition for extending the bailout until June. Among other things, the Tsipras government proposes to combat tax evasion and corruption. It commits not to roll back already introduced privatisations, but review privatisations not yet implemented. It will introduce collective bargaining, but stop short of raising the minimum wage immediately. It will tackle Greece’s ‘humanitarian crisis’ with housing guarantees and free medical care for the uninsured unemployed, but with no overall public spending increase. It will reform public-sector wages to avoid further wage cuts, without increasing the overall wage bill, and reform the administration of pensions, without cutting payments. It will reduce the number of ministries from 16 to ten, cutting special advisers and fringe benefits for officials.

These formulas reflect a fudge on crucial issues. The institutions have pulled back from a head-on collision with the Syriza government. Syriza has been allowed to put its stamp on the revamped bail-out programme. But the eurozone leaders are clearly preparing for a fight. The European Commission and the ECB both stated that the Greek proposals were a “valid starting point”. They had “averted an immediate crisis”, said EU commissioner Pierre Moscovici. But “it does not mean we approve those reforms”: they are the basis for further discussion.

The sharpest criticism came from Christine Lagarde, head of the IMF. The Syriza proposals lacked “clear assurances” in key areas, she said: “In quite a few areas… including perhaps the most important ones, the [Greek government’s] letter is not conveying clear assurances that the government intends to undertake the reforms envisaged”. Draghi said there would be a need to assess whether measures rejected by Greece were “replaced with measures of equal or better quality”. In other words, cuts have to be replaced by cuts or even deeper cuts.

This is a standoff that will not last indefinitely. In June, or perhaps even earlier, all the same issues will come up again – while workers in Greece, as well as Spain, Portugal, Ireland and elsewhere will be even more impatient to overthrow austerity and improve their conditions of life. The institutions will turn the screws on Greece. The Syriza leaders may argue that they have gained time. But this will only be useful if they urgently mobilise mass forces for a showdown with the capitalist powers which dominate Europe.

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February 2015