• The Debt Crisis in Europe – Urgency for a Viable European Solution

  • By Elena Papadopoulou | 10 Jun 13
  • Since the outbreak of the financial crisis in 2008 and its transmission to the financial systems of the European economies, the Left argued that the global economy was faced with a structural crisis of capitalist reproduction. In this context, it viewed rising indebtedness as a facet of the crisis, expressed in the concrete conditions of the EU architecture.

    The financial crisis, the origins of which can be traced in the neoliberal financial market transformation of the last decades was passed on to the fiscal balances of the countries of the EU – and more specifically those of the Eurozone  for two main reasons:

    1. The socialization of the losses incurred by the European banking systems. Although the collapse of Lehman Brothers in September 2008 and the bankruptcy of Iceland accentuated the banking crisis in many European countries, troubles with the European banks had already started in 2007, as many of them were holding toxic assets of US banks in their portfolios. European governments anchored their banking sectors by channeling huge amounts of money as a bailout transferring the cost to the taxpayers[1].

    2.  The deep recession instigated by the financial crisis. The transmission of a financial crisis to public finances is largely due to the operation of automatic stabilizers set in motion during an economic slowdown. As income and aggregate demand decrease, public revenues fall due to the decrease of the tax basis and the increase of the part of public spending that covers welfare state provisions for more and more European who become eligible for some kind of social benefit.

    The management of the crisis by the EU and the European elites through heavy austerity policies further not only couldn’t stop its negative dynamics but amplified the problem by creating a vicious circle of recession-debt-austerity-recession (particularly evident in the case of Greece) and instigating a sovereign debt crisis, initially erupting in the countries of the European periphery and soon evolving into a problem that threatened to destabilize the whole of Eurozone.

    As can be seen in Table 1.2 [on the right at “Documentation] coming from the latest report of Eurostat “Key figures on Europe - 2012”, the increase of general government debt was characteristic of all EU-27 countries from 2009-2011. Until 2011, only 5 out of the 17 member-states of the Eurozone satisfied the Maastricht criteria on debt and deficits, with the “robust” economies of Germany, France and Italy ranking among the highest on the list.

    EU leaders refused to assess the situation this way. The “profligacy of the Greek state” was claimed to be the main cause of the European debt crisis. Backed-up by theoretical arguments from the school of public choice, an unprecedented offensive was launched against the public sector as a whole, as well as against organized labour, indicating them as protectors of “vested interests” that have conserved an economy that “lived above its means”. According to this narrative, Greece was an exceptional case of “insider” interests, which systematically inhibited modernization and structural reforms and ultimately dragged down the EU in the vortex of the debt crisis.

    In this sense, the debt crisis could be tackled neither as a common European problem, nor in a final way. The set-up of the EFSF (ESM) could not sufficiently deal with the needs of the sovereigns, the ECB was never allowed to act as a lender of last resort, and the policies of excessive austerity are more self-undermining than able to stabilize the European economy, even in the short-run. In this context, it is clear that the inability to deal with the debt problem does not only accentuate instability in the Eurozone and undermine the possibility of the European economies, especially those of the South, to counter recession. It is also used, as Dragasakis (2012) mentions, “to enforce dependency and pressure society”.

    The case of Greece is once more characteristic. In 2010, when the country had to enter the bailout mechanism, its debt was approximately 120% of GDP, while it rose to 165% in 2011. At that point, SYRIZA was claiming that such an amount of debt neither could nor should be repaid because:

    • It represented a no-longer existing capital, either in terms of money, or in terms of productive capacity,
    • It was capital that was largely consumed, spent in equipment not producing value added, or transformed to profits that were not productively invested in the country but fled abroad.
    • Its servicing would need very high primary surpluses, which are unfeasible within the conditions of such a deep recession.
    • Even if the some surplus is created, if it is exclusively used to service debt, it will absorb the resourced for financing growth.

    In this sense, it proposed that a large part of the debt should be written off, after a transparent audit, that the role of the ECB should change in order to be able to lend directly to nations in the same way as it does for private banks, that growth should be instigated at the European level through the reinforcement of the EU budget and focused on international solidarity, employment, social and sustainable development.

    The response of the EU was not even close to encompassing all these important and interrelated dimensions of the debt crisis. However, reducing the bulk of debt was inevitable, as a possible default of Greece was looking more and more menacing. When the discussions about a haircut on the nominal value of Greek bonds started in July 2011, the Left pointed out certain important aspects: that the haircut should be selective, so as not to hit pension funds and small bond-holders and that it should be combined with a viable program for growth. Neither of these things occurred.

    The Private Sector Involvement program (PSI), which was carried out after months of negotiations with financial institutions in February 2012, was finally only able to write down a small amount of Greek debt, as a new loan and a new austerity program, that undermined the sustainability part of the plan (it was supposed to bring the debt back down to 120% by 2020) accompanied it. By the end of 2012, Greek GDP was brought down by 25%, unemployment rose close to 24% and debt skyrocketed to 175% highlighting the new impasse.

    The failure of the Greek adjustment program and the debt settlement through the PSI was revealed in the consecutive meetings of the Eurogroup after the summer. The new attempt to a solution took its final form in the Summit of the 27th of November and included a set of measures, like the lowering of interest rates and the extension of bond maturities after a process of debt buy-back in lower nominal prices by the Greek government, that was completed in mid-December. This is supposed to bring debt down to 124% by 2020 and 110% by 2022.

    The analyses of most economic and political analysts on the outcome converged to the view that decisions consisted another temporary remedy which can guarantee neither debt sustainability nor the end of recession in Greece, or in the Eurozone for that matter. The fact that this new program was paired with yet another heavy and unjust austerity package reveals the unwillingness for any revision of the approach to the problem, which will keep the Greek economy in deep recession and the sustainability of its debt futile. That will most probably lead to a fresh round of discussions for a haircut on the Official Sector debt holders as it seems that the conflict between the IMF and the German government prevented it from taking place yet.

    The debt must stop being a lever for European political and economic elites to push forwards their agenda of deepening the neoliberal project in the EU, while at the same time they constitutionalise austerity through the Fiscal Compact and the Six Pack. Hence, it is necessary for the Left to put once again forward its proposals for a just and viable solution to the debt crisis and not push the problem to the indefinite future. 

    This solution should include:

    • The cancellation of a big part of public debt, not only for Greece, but for other European countries trapped in a vicious circle of austerity and loan dependency, and especially of the part that will be found odious or illegitimate after a rigorous and transparent audit.

    • The renegotiation of the rest of it in a way that associates their repayment with the growth potential of the respective economies. This can include the introduction of a growth clause that will imply a European Recovery Program.

    • Τhe immediate realization of a European Debt Summit along the lines of the one that took place in London in 1953, which relieved Germany of around 60% of its debt in order to discuss on all the above issues and agree upon a common understanding of the European character of the debt crisis.   

    However, even if these issues were settled, the elaboration of a common and complete solution should also take into account the inequalities and asymmetries produced by the current construction of the EU and the Eurozone, as well as the urgency to move towards another type of European economic and social organization based on solidarity rather than national antagonisms and putting social and environmentally sustainable development at its core. In this framework it should be realized that the social problem does not finish with debt settlement, if the policies that generate it are not replaced. Austerity has to be abandoned as the blind orientation towards export-led growth and increasing competitiveness is destroying European societies and alienates them from the ideas of a European project based on cooperation and coexistence making them more and more nationalistic and xenophobic.

    In this historical conjuncture, it is the duty of the Left to light the road for an alternative European productive model, the radical transformation of European states, the profound change of the financial model of the economy and a new process of distribution and redistribution of income and wealth and transform its main institutions (allowing for example the ECB to act as a lender of last resort for European states, or the increase of the EU budget). Taking advantage of the experiences of active solidarity that have been developing in Greece and elsewhere, building on the proposals put forward by European movements and enhancing the dialogue among all Left actors (parties, trade-unions, activists, progressive intellectuals and researchers and so on) we can envision what Erik Olin Wright would call, the real utopias of our time.    

    January 2013

    Elena Papadopoulou
    is an economist, researcher at the Nicos Poulantzas Institute and the Department of Economics of the University of Athens. 


    [1] However, this was not the case of Greece, were the banking crisis was largely caused due to the fiscal crisis. Although public debt was one of the most important structural problems of the Greek economy, its viability was not questioned until confidence of the creditors of the Greek economy regarding its ability to cope with its debt obligations was shaken and the financial markets started speculating on Greek bonds.