The Euro-zone is undergoing a crucial test. A number of member states are unable to get out of the debt trap on their own. The major reason for the record deficits has to do with the superiority of the German economy, which right from the start has been the major exporter both of goods and of capital. Now German policy is trying to bring the countries under even stricter neoliberal control with the help of a rigid austerity policy. The current article contrasts this strategy – “We are exporting our culture of stability to Europe” (Minister of Finance Schäuble) – to the contours of “another Europe”, without which the deterioration of the currency union cannot be stemmed.

German government policy and the armies of neoliberal propaganda want to make the world believe that the crisis of the Euro has its roots in the misconduct of individual members. Some countries of Southern Europe, in particular, are said to have worked badly and consumed too much at the costs of the disciplined ones, such as of Germany in particular, which, as Chancellor Merkel said at the World Economic Forum in Davos, was simply “the best”. Yet it is exactly the opposite which makes sense: Germany as the export champion could expand at the cost of others and has in this way thoroughly undermined the Euro. That the German export champion could develop in such a way has structural reasons which have to be overcome if there is to be a reinforcing of the Euro.

Real reasons for the crisis

These structural reasons are the following:

Right from the start the constructional defect of the Euro-zone consisted in harnessing countries of completely different economic structure to one currency regime without even for a moment considering a common economic structural policy. Thus the superior German production structure could effortlessly expand on the markets of the inferior countries while at the same time defending its domestic market against attempts at import on the part of the weaker national economies. Through a fierce neoliberal strategy German companies were allowed to develop even more “competitiveness”. Thus there emerged a block of countries grouped around Germany with trade and capital balance surpluses, while on the other hand there was a block of weak ones which played the role of importer of goods and capital. Unless this polarisation of the Euro-states is corrected, there can be no stabilisation of the Euro and the Euro-zone.

The origin of the crisis does not lie in the indebtedness of the Euro-states, which itself should be seen as a consequence of the neoliberal capitalist strategy and its failure. The neoliberal dogma of reducing state revenues and state influence has led to a decrease of public expenses and services and to a deregulation of the markets. The redistribution from bottom to top, and in favour of incomes from assets, caused domestic demand to shrink and lag behind. Ever greater shares of the greatly swollen money assets flowed into the financial sector which thus detached itself more and more from the real economy and sought its fortune in financial deals, that is, in finding ever new debtors. These debtors were and are the countries of the European Union, which are structurally invested in such deficits. When the crisis exploded, the states were altogether too weak to launch economic stimulus programmes and safety nets without getting into ever more debt. Their classification by the rating agencies as weak and more or less incapable of meeting their obligations means they have to pay more for loans and that the interest and repayment burden for their old debts is steadily growing. The public debt, which several states cannot overcome on their own, is a symptom of the general crisis of neoliberal financial-market capitalism.

The predominance of the German economy

The predominance of the German economy is also reflected in the manufacturing sector’s high share of the entire value added. This is the sector on which the German dominance in exports is based. “Germany’s export dynamics is carried by only a few branches, most of all by the car-producing, the chemical and the mechanical engineering industries” (Becker, 13). In Germany the share of manufacturing is twice as high as in Italy, two and a half times higher than in France and four times higher than in Spain. The advantages in these sectors for Germany have been there from the beginning and have, since the introduction of the Euro, been steadily increasing.

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This Table illustrates the extreme polarisation of the Euro-countries with regard to their intra-EU, as well as their overall international, competitiveness. Out of the 17 Euro-countries only six – namely the Netherlands, Germany, Belgium Ireland, Slovakia and Finland – have a positive trade balance with the world as a whole (with regard to the intra-EU-trade, Finland shows a negative balance, while there is a small active balance for Slovenia). The remaining 11 all have an unfavourable balance of trade, which is particularly high for the problem countries of Portugal, Greece and Spain.

That the fourth in the PIGS pack, Ireland, is showing a surplus can be explained by its attractiveness as a low-tax country for transnational companies, which use Ireland as a production site for their foreign market. These circumstances are responsible for the peculiarity of the Irish problem, which does not have its origins in the fatal double deficit of the trade balance and the public budget. The reason why Ireland is stuck in a severe deficit crisis is that the state committed financial suicide when it tried to save the ailing banks. In 2010 the public budget deficit resulting from efforts at rescuing the banks amounted to one third of the GNP. The Irish disaster was entirely a consequence of the neoliberal financial-market crisis and the shifting of the bank’s debts on to the state.

The six winning countries with regard to intra-EU-trade are grouped around the major power of Germany. The oppressive predominance of Germany in exports can be seen from the data on world trade. The German surplus in world trade (from January to November 2010) is more than three times that of the Netherlands.

At the same time, the development of France is interesting, because it also became a victim of Germany’s aggressive export strategy. In 2003 the French trade balance turned unfavourable and has remained so (Becker, 15). The French government’s persistent criticism of Germany’s economic policy, which is said to keep its own market too small while feeding on the buying power of people in other countries, has this concrete background: In autumn 2010 President Sarkozy endorsed Chancellor Merkel’s line saying that it was not the Germans who had to change their policy but all the others which had to adopt the German model. Sarkozy was brought back down to the neoliberal earth, which perhaps also had to do with French banks inside the Euro-zone being, after the Germans, the second biggest creditors of the PIGS-states. In any case, the block’s leader, Germany, has been able to re-stabilise its dominance through this “German-French axis”.

Polarisation of winners and losers among the states

The structural differences were already there when the common currency was introduced, that is, there have been construction errors from the very beginning. The hope expressed in propaganda that the common currency would lead to an integrated economic policy and to an approximation of living and working conditions was a deceptive manoeuvre similar to that of the “flourishing landscapes” which Chancellor Kohl painted at the time of German reunification under the insignia of the common D-Mark. In fact, the rigorous neoliberal course in Germany led to a deterioration of living conditions while at the same time it further privileged German companies in international, and most of all, in intra-EU competition.

Germany’s wage ratio

The wage ratio, that is, the share of incomes and wages of the whole economy, is steadily decreasing in the context of global neoliberal capitalism (see illustration A). Most of all, it is decreasing in Germany, whose 2009 free fall in this regard was second only to that of the USA. But also in England, France and the Euro-zone countries, wage ratios are decreasing. However, in the Euro-zone the differences between the individual countries are considerable and in all categories Germany holds the top position as regards wage cuts.

Between 2000 and 2009, there was a decrease of 4.5% in the development of real wages and salaries in Germany, while there were increases in all other competing countries, partly enormous ones: in Finland real wages rose by 22%, in France by 15.2% and in Spain by 7.5%. The unit labour costs – meaning the relations of the wage costs and the costs of the finished product – reflect the development of the companies’ competitive capacity. Smaller wage cost increases mean a more competitive company. While between 2000 and 2009 the wage costs increased by an average of 19.4% in the Euro-zone, they rose by only 5.9% in Germany. In Greece the increase amounted to 37.1%, in Spain to 29.9%, in Ireland to 26.5%, in Portugal to 26.2%. The differences are even more conspicuous when one looks at the unit labour costs in the manufacturing industries only – the main area of Germany’s exports. In this sector, the unit labour costs in Germany decreased by 6.4% between 2000 and 2008, while in the countries of the Euro-zone they rose everywhere, in Spain even by 26.3%. This means that since 2000, in the respective Euro-markets, Germany has gained an advantage of labour unit costs of 32.7% over Spain. The comparative figure for Portugal is 15.5%, for Greece 15.3% while for France the increase of the advantage of labour unit costs for German companies still amounts to 12.6%. When one realises that when the Euro was introduced Germany already had a superior productive structure, it becomes clear that the rapid polarisation in the Euro-zone has elevated German companies to a position of absolute predominance.

The other side of the coin of this predominance of German export industries, which is first and foremost a consequence of the pressure on wages, is the steady decrease of domestic demand in relation to production capacities. To the capitalist this is a signal that more must be produced for export and / or that the greater part of profits must be invested in the financial markets.

A taxation system tailored to companies and the wealthy

The left Table shows that in all the Euro-countries corporate taxes have been cut back, the sharp drop occurring immediately after the introduction of the Euro. Germany took the longest jump to the bottom. In 1990, it had the highest tax rate with 50%, while in 2009 its tax rate was the lowest, even lower than in Ireland. The immense drop after 2000 is particularly striking: since then two-thirds of all taxes have been abolished, while since 2000 taxes remained stable in France and were only slightly reduced in Portugal and Spain. The German state filled the pockets of its entrepreneurs, thus doping them for international competition. Even if the so-called implicit tax rates are taken into account, privileging of incomes from capital is still the effect. “Implicit” here means that, in the burden on capital income, through profit and income taxes as well as land and property taxes, has been taken into account. In 2009, this implicit tax rate for incomes from capital amounted to 23.1% in Germany. In comparison, the taxes paid from wages and salaries amounted to 39.2%. In France the taxes on incomes from capital amount to 38.3%, while there is a tax on wages of 41.4%. The figures for Spain are: 32.8% taxes on capital, 30.5% on wages and salaries. For the Euro-zone altogether the taxes on capital incomes are 27.2%, those on wages and salaries 24.4%. Thus the German state proves to be a friend to capital and capitalists to a degree far above the European average.

This trend is also reflected in the development of the property tax. While in the Euro-zone the property taxes amount to an average of 2% of the GNP, the figure is 0.8% for Germany (see the “Taxes on property” chart below). This is only undercut by Austria. All other states raise more from their wealthy people. The list is topped by France with a share of the GNP of 3.3%. Neoliberal policies as they are being practiced in their pure form in Germany are directed against the German people as well as against the majority of people in the other Euro-countries. In Germany people work harder and are paid less. In other countries the economy is pushed to the margin, while the states are forced to run up ever more debts. Germany’s current structures, which, according to Chancellor Merkel’s dictum, should be emulated by all the others, are not the best but are actually the basic problem of both the Euro and the EU.

Interest spread favours the banks and the surplus countries

Interest spread or interest margin means the difference between active and passive interest, i.e. the interest the banks themselves have to pay for money, as compared to the interest their debtors have to pay for bank loans. The increasing public debt is big business for the banks. Since May 7, 2009 they have been getting money from the ECB for 1% interest. In Germany, ten-year government bonds yield a return of 3% annually. The country has a debt of 2 trillion Euro. If the federal government wants to decrease this debt by issuing state loans it would have to raise a sum of 60 billion Euros per year for interest alone. The banks – or other financiers – borrow the money from the ECB at 1%, that is, for 20 million Euros, and make a profit of 40 million Euros a year from German state bonds alone.

But this is only a part of the big business opportunity that state bankruptcy affords, because for problem countries the spreads are much wider, which means that they have to pay far higher interest for their long-term loans, namely 7 to 12%. Let’s take the current debts of Greece which amount to 130% of the GNP (and will next year amount to 150%). By now Greece can sell long-term state loans only by granting an interest rate of more than 10%. Applied to our example, this means that each year Greece has to muster up at least 13% of its GNP alone for paying the interest. No country in the world could recover under such conditions, not to speak of a slowly growing one such as Greece, the GNP of which shrank by 4.3% last year. Similar scenarios are looming for Portugal, Ireland, Spain and probably also for Italy. With every demotion by the rating agencies, the interest for bonds is soaring. This makes the interplay between rating agencies and financial investors so attractive for the “financial markets”, but so disastrous for the debtors. The different spreads for the countries graded as stable and the other, weaker ones widen the gulf between the economies of the Euro-countries. While the surplus countries can finance themselves from a 3% interest, the deficit countries have to muster up three or four times the amount. The disadvantages which had already been there at the outset are increasing from one period to the next.

The dissolution of the Euro-zone would be disastrous

From nationalist demagogues to worried economists the solution suggested to the crisis of the Euro is the demand: back to the Deutsche Mark (DM), out of the currency union with the notorious debtors in the Euro-zone! If successful, such DM nationalism would be devastating for Germany. The return to the DM would lead to a “shock effect in the wake of its deflation of up to 40%” (Memo Special, 5). The competitive advantages for the German export champion on the international markets would vanish overnight. To outbalance this, the pressure on wages and salaries in Germany would only increase further. Both the export as well as the domestic markets would shrink in the wake of a DM deflation, economic development would be hampered and the situation of both working and unemployed people would become even more precarious.

Likewise, also for the deficit countries there is no solution to their problems in a return to their national currencies. In relation to a Euro-block at the core (consisting of a DM Germany and other surplus countries), these currencies would be rapidly devalued, namely to the same extent that the DM or the Euro would be re-valued upwards. The debt burden of the countries concerned would rise, because it would have to be paid in Euros, which would increase the value of the Euro by up to 40% as compared to the national currencies. The PIGS would be less able to act and to pay than ever before. Also, their devalued currency would not help the exports of their products, since their export-low is a consequence of their productive structure and not of the exchange relations between the currencies. Currently they are not able to produce goods in the required amounts which would also be able to compete on international markets. A process of recovery would have to be introduced by establishing productive, sustainable and socially sensible economic structures which the countries left to their debts can afford even less now than they could in the past. These arguments apply to all the models which exclude the Euro-debtor states, and thus also to both the idea presented by former BID (Association of German Industrialists) President Henkel, of dividing Europe into a Euro-North and Euro-South-zone, and the idea of uniting the countries excluded from the Euro in a new European currency system and tying them via fixed exchanged rates to the core currency. The result of a gap between the currencies – a gap that would be expected and indeed wanted – would necessarily lead to a revaluation of the one side and a devaluation of the other.

Without a haircut nothing will work

Apart from leading EU politicians and the European bank oversight agencies, the whole world admits that there has to be a haircut, a partial abstention on the part of the creditors from debt repayments by the bankrupt states. Even the spokesmen for bonds funds, for example, SPD politicians, support this demand. With a state deficit of up to 130% of GNP, the more indebted states remain incapable of paying, since they cannot annually muster 10% and more of GNP for servicing the debts alone. It is better to arrange a partial waiver, with the creditors receiving the rest of their claims with a guarantee. The conflict is about how short the cut should be, the form it is to take and, most of all, who is to pay for it.

The different methods of the cut are: the partial devaluation of the creditor’s claims, a partial relief of the interest payable, the prolongation of the terms of loans. With regard to the debt conversion rate, Peer Steinbrück, minister of the grand coalition for the financial crisis, indicated ca. 30% (Süddeutsche Zeitung, March 11, 2011). Yet in many cases this would be too low. If the Greek public debt is to be reduced to 90% of the GNP, as is demanded by the head of the biggest bond investor’s in the world, a debt conversion rate, i.e. waived claims from creditors, of 40% or more would be required.

Will the creditors be part of the game? The major creditors of the indebted states are banks, investment funds and insurance companies. From 10-year bonds, for example for Greece, their yield is more than 12%. They can sell the government bonds for 80% and less, but get interest for 100% of the papers. The actual interest amounts to about 15%. In only two years they will have reaped a profit amounting to 30% of the debt conversion quota.

Despite this, thus Steinbrück, the investors are not to pay for the debtors’ waiver. For banks which get into trouble as a consequence of the haircut, further public safety nets will, according to Steinbrück, have to be set up (Süddeutsche Zeitung, March 11, 2011). IFO (Institute for Economic Research)-President Sinn and his combatants from seven European countries in the European Economic Advisory Group even go one step further. They demand in the event of a haircut that the old debts be converted into bonds, to be guaranteed by the Union (Sinn). Instead of a real co-liability of banks and other big speculators the state would once again bear exclusive liability. This time the community of countries would unabashedly take over the loan default, while investors would be able to go scot-free with their speculative profits.

Even the authors of the Working Group on Alternative Economic Policy advocate “special regulations”, when “an investor’s existence is threatened” by debt conversion (Sonder-Memo, 14). This means that investors might speculate with and risk the existence of states, without themselves being put in existential danger if the bled-dry debtor cannot pay any more. This is equivalent to an invitation to the speculators not to change their behaviour in any way.

Tackling the causes of the crisis

All the measures to rescue the afflicted Euro-countries and the common currency discussed and decided on so far might afford some relief for now, but they do not tackle the causes of the crisis itself. Among these the following are the most important:

• the redistribution of incomes from bottom to top which wears away mass incomes and limits the markets;
• the impoverishment of the public sector, which shows itself in a sinking public-expenditure quota and insufficient state finances and the consequent public indebtedness despite shrinking public services; 
• the dictate of the so-called financial markets, i.e. the banks, investment funds and insurance companies; this financial capital has detached itself from the real economy and speculates, without any effective control, on the highest possible profits;
• the imbalances in the current accounts of national economies tear the Euro-countries ever further apart, which makes it impossible to keep up a permanent currency union;
• in the national economies investments are made according to the criterion of the highest profit, which means a trend towards financial investments and a turn away from social and ecological criteria; under these conditions, a qualified improvement of economic structures is not possible. 

If all these are the essential causes of the Euro crisis, it is necessary to change course in these areas and introduce a new European policy.

1) We need a new tax and wage system which reverses the development of recent decades in the distribution of incomes and assets. In Germany, the DAX companies were able to increase their profits by 57% last year, while real wages fell back behind the level of 2005 (junge Welt, February 12, 2011). The result is that enormous amounts of money pile up with companies and the wealthy who continue to invest less and less of their money in the real economy, because mass income, and thus also demand, is stagnating or receding. What is required is higher taxation on profits and on the highest incomes, and tax relief for the lower incomes, while at the same time wages and salaries need to be increased.

2) The state needs more public revenue, and society needs a higher public-investment quota which is able to pay for more and better public services. In Germany, the highest 10% of the population disposes of money assets of nearly 10 trillion Euros, while the state has run up debts of two trillion. Putting a tax of 1% on the highest 10% of incomes would yield about 100 million Euros per year. A financial turnover tax of 0.05% would yield a further 27 million Euros. There is plenty of money in Germany and the other Euro-countries, but it is flowing into the wrong pockets.

3) The whole banking system must be restructured from scratch. The banks themselves are allowed to scoop out any amount of money and invest it according to profit-maximising criteria, while controls are extremely deficient. The banks thus endanger economic and social development. The bigger they are, the more they can, in their speculative deals, count on being rescued by the state (“too big to fail”). This rotten system must be broken. We need banks to handle money transfers, to guarantee savings and to provide loans for the real economy. To facilitate this and to avoid speculation, the entire banking system must be put under social and democratic control.

4) Removing the trade imbalances between the different countries requires increasing domestic demand in the surplus countries, i.e. a drastic increase of mass incomes. In the deficit countries an improvement of the entire economic structure is needed, so that exports can develop and so that they are better braced for imports. Indeed, we require an integrated economic policy in the Euro-zone, but one oriented towards the development of all the national economies and not taking the example of the “best” and continuing the practice of publicly servicing the accumulated debts.

5) All of Europe needs a new and alternative economic policy which leads to the development of sustainable and ecologically sound structures and to the social organisation of economy and society. An economic and financial sector which is only interested in reaping the highest profits can by definition not bring this about. It is not only that it has completely different priorities; sustainability and social meaningfulness are disturbing elements for it. Europe can and will only have a future if and in as far as the political power relations are changed. The currently dominant parties of neoliberal capitalism must be pushed back by the forces struggling for “another Europe”.

So far there are not many signs to show that this could happen. In the metropolises of the Euro-zone where the major profiteers of the Euro rule, the attitude among the “subalterns” is characterised by lack of understanding, resignation and passivity. Here is where the least resistance has developed against the attempt of the neoliberal elites to use the crisis as a chance for fine-tuning the neoliberal regime all over Europe. The situation in the countries of the periphery seems slightly different, because there the austerity policy is massively and obviously directed against the life opportunities of the broad masses. Nationwide strikes in Greece, Spain and Portugal show the readiness to fight. Without the development of forces at the centre, and without a better Europe-wide coordination of these forces, the struggles on the periphery will have limited effect.

Sources

Becker, Joachim: EU: von der Wirtschafts- zur Integrationskrise. In Z – Nr. 85, März 2011, 10 – 30 [The EU: From the Economic Crisis to a Crisis of Integration. – In: Z 85, March 2011]

ISW-Wirtschaftsinfo 44. Fred Schmid / Conrad Schuhler: Bilanz 2010 – Ausblick 2011. Fakten und Argumente zur wirtschaftlichen Lage in Deutschland und der Euro-Zone. München, April 2011 [Balance Sheet 2010 – Outlook 2011. Facts and Arguments on the Economic Situation in Germany and in the Euro-Zone, Munich, April 2011]

Sinn et al.: EEAG Bericht über die europäische Wirtschaft. Berlin, 1.3.2011 [EEAG (European Economic Advisory Group)-Report on the European Economy]

Sonder-Memo = Arbeitsgruppe Alternative Wirtschaftspolitik: Sondermemorandum Euro in der Krise: Ein Sieben-Punkte-Programm zur Wirtschafts- und Währungsunion”. Bremen, Februar 2011 [Working Group on Alternative Economic Policy: SonderMemorandum on “The Euro in the Crisis: A Programme of Seven Points on the Economic and the Currency Union”]