We may be witnessing, before our eyes, the death spiral of the European Union. Greece’s bailout to the tune of $40 billion will grow to $108 billion by 2012 – and that’s just to stabilize the economy. Greece is just the tip of the iceberg: Portugal, Italy, Spain, and France, amongst others, are heavily in debt and likely to need their own bailouts soon (though at a far higher cost than Greece). If France goes, then the Eurozone collapses, with all the wreckage and detritus that is likely to bring out of the wood work.
Gonzalo Lira has an interesting piece on why this is so over at Naked Capitalism. Essentially, the Eurozone is one big currency peg; nations within the zone have given up the right to print their own currency and linked their monetary policies to that of the strongest Eurozone economies (Germany). Debt, however, isn’t collectivized in the E.U., and this means that governments are allowed to float their own debt while keeping their currency pegged to the value of the Euro.
A country with a floating currency rate that becomes overindebted will see the value of its currency fall in order to make up for the balance-of-payments deficit. Or, the country could typically do a host of things like inflate (devalue) the currency, deflate the economy via taxes, austerity measures, or even tax the wealthy, nationalize industries, etc. in order to correct the problem.
Unfortunately the countries in the Eurozone have given up the right to an independent monetary policy, and most are extremely constrained by market ideology with they will do through fiscal policies. They have still, however, issued sovereign debt. As their economies have suffered in the world recession, no one wants to buy their debt, the Euro remains strong and suddenly these countries cannot pay off Euro-denominated debt.
Much of this could be solved if the European Union collectivized national debts, but as this would move the E.U. closer to a real political union it is unlikely we will see this happen.
If we think back to the political economic history of the immediate period post-WWII, we see a similar problem with a different solution. Western Europe was running a balance-of-payments deficit with the United States and had turned to a policy of inflating the currency in order to pay for working class social demands. With an inflated currency European goods could not compete with those from the U.S., so many turned to tariff walls as a solution. The U.S. ruling class, fearful of being cut out of the European market again and the prospect Western Europe would drift towards socialism decided to:
1. Offer aid/bailouts of Western European economies under the guise of military aid.
2. Nudge the Europeans towards creation of the Common Market so as to liberalize intra-European trade.
3. Open the U.S. market up to goods, especially “distress goods” so that the Europeans could run a balance-of-payments surplus with the United States again and solve their liquidity problems.
Right now the country in the Eurozone which could play the role of the United States is Germany, but it seems very unlikely to do so. Germany seems committed to a policy of trade surplus. This means Germany – the largest market in Europe – has essentially closed itself off to increased exports from the rest of the Eurozone. In fact, its economy remains competitive vis-a-vis the rest of the E.U. because countries like Greece, Portugal, and Spain operate at currency rates linked to Germany’s economic strength. Doug Henwood notes that the German capitalists
are the current world champs of sadomonetarism. A few weeks ago, the Greek economist Yanis Varoufakis said on this show that a source in the European Central Bank told him that Germans were quite eager to put his country and the other weaklings on the periphery of Europe through the wringer, because they don’t want to fund a bailout. And since they export all their goodies like BMW’s to the elites of those countries, they don’t give a damn about the purchasing power of the masses—a Greek depression won’t harm German industry. The other day, the French finance minister, a far more respectable voice than radical economists interviewed on Behind the News, urged the Germans to loosen up. But so far the Germans will have none of it. They don’t want to set up some sort of intra-European version of the IMF to run bailouts; they think that such a body wouldn’t be as stringent in its demands for austerity as the existing IMF would be.
The U.S. plan to liberalize Europe markets worked because we accepted that U.S. industry would take a hit in order to promote consumption of European-produced goods and revive their economies. Germany seems unwilling to accept the same principle – and thus the countries in the Eurozone may be left with few options as they too teeter towards debt default.
Still, it is probable that part of the reason Germany is willing to demand severe austerity measures is due to the lack of a credible socialist or radical working class threat. As much as austerity works against fixing a capitalist economy, it works very well towards destroying the jobs, incomes, and political will of the working class to resist.