Europe in the Crisis - On the Road to Breakup?

Europe in the Crisis - On the Road to Breakup?
By Joachim Bischoff , Richard Detje | 22 Oct 09 | Posted under: Contemporary Capitalism
In the current economic crisis, the character of the European Union as a “project of the elites” is clearly revealed. Now it comes back to haunt us that “… at the turning points of the unification process European policy has never before been as unabashedly elitist and bureaucratic” (1) as it is when enforcing neoliberal constitutionalism. From the start, the constitutional process was not based on a policy furthering social and political integration. Rather, massive democratic deficits are codified and the militarisation of foreign policy spurred on. And now, in times of crisis, the lack of perspective, which has been inherent in neoliberal politics of deregulation, of expansion of the market and the privatisation of central pillars of the European social model, becomes abvious. The European project is sinking in the mire of a deep crisis of legitimacy.
Crisis policy in Europe
For the first time since the world economic crisis of the 1930s, the total wealth produced in the world (global GDP) has decreased. It is the synchronicity of recessions both in the highly developed capitalist countries and in the “development” and “threshold countries”, which marks this crisis of the century as the first global crisis in the much talked about “Age of Globalisation”.
The EU-states are not situated at the margins of the crisis process, but constitute one of its centres. Although this process started in the USA with the outbreak of the real-estate crisis and its sequel in the crisis of the Wall Street-Dollar regime, the recession has by now gripped the EU much more strongly than the USA. While for the USA a 3 % decline in GDP is expected for 2009, figures of four 4 and 5 % are predicted for the Euro zone.
As a consequence of the crisis, the social landscape is undergoing a fundamental change. Within less than two years, unemployment will rise by 50 to 80 % in most countries; in a number of states – among them such model states of a flexible labour-market regime as Denmark and the Netherlands – it will more than double within a short period of time. In the EU every fifth person under 25 years of age was unemployed by the end of the first quarter of 2009 – with every fourth in Italy, Greece, Hungary, the Baltic Republics and Sweden and every third even in Spain.
Hopes for a moderate economic recovery starting next year will do little to brighten up the perspective. Even if such a recovery takes place at all – that is, if a long-term development of depression and stagnation can be avoided against all odds – the relief on the labour markets will not be quick to come, because economic growth is developing below the productivity rate. This means that in the crisis phase Europe is undergoing at present, a new basis of mass unemployment will be built. Increased pressure on wages will be one consequence. In addition, as the experience of the last decade has shown, there will be an acceleration of the vicious circle of growing mass unemployment, increasing precariety of labour conditions and the dismantling of those parts of the old European social model which have not been cut and privatised so far.
A glimpse at the map of Europe allows us to distinguish between different dimensions of the crisis.
Especially in Ireland, Great Britain and Spain the burst of the real-estate speculation bubble has led to enormous destruction of capital. While in Spain, due to the previously enormously expanded and now massively failing construction industry, this has been leading to an unparalleled explosion of unemployment, it has led to a quasi-collapse of the private banking system in the Anglo-Saxon countries, which could only be counteracted by extensive partial nationalisations.
In Hungary, but also in the two Baltic republics of Estonia and Latvia, the economic crisis has long since developed into a political crisis or crisis of the state. While the Latvian government was forced by broad protests and manifestations to resign from office – like the government of Iceland –, it was necessary in Hungary to tackle the tedious task of finding a new government formula, a desperate search which took many months and which revealed the instability of the political system. And as far as the Czech government is concerned, it had difficulty even getting through the presidency of the Council of the European Union in an orderly fashion. In short, in spring 2009, a “failed states” scenario threatened Central Eastern Europe.
Among the Scandinavian countries Norway occupies an exceptional position due to its oil income, while Denmark and Sweden – as well as Finland – are being hit by the full force of the recession. However, the still strong weight of the welfare state in these countries is, with its “built-in stabilisers” (which keep demand on a high level via benefits from social security contributions), still limiting economic decline – albeit not to the extent this was possible in the 1980s. The crisis reveals that even the Scandinavian model has not come through unscathed.
Germany is standing at the centre of the crisis both because of and also despite its leading economic role. “Because of”, due to its export industry faltering with the decline of world trade. “Despite”, due to the fact that even in the crisis Germany is pursuing a “beggar my neighbour”-policy vis-à-vis the other European states by skimming their demand and exporting unemployment.
Explanatory note: A negative figure signifies an increase in price competitiveness. Source: German Federal Bank
Political answers to the economic and social crisis in Europe do not usually amount to more than crisis rhetoric. While in the beginning there was often talk that financial markets needed to be strictly regulated und guided by the requirements of the real economy, even the moderate decisions made at the London EU-Summit of March 19 - 20, 2009 are more and more being vitiated. Instead the old competitive strategy (the so-called Lisbon Strategy which aimed at making Europe the world’s leading economic power) is again being sworn, to and, largely from the German side, but also from the ranks of the European Central Bank, “a clear commitment to the stability pact” is being demanded.
Despite pressure from the USA, the economically leading countries of Europe have refused to adopt national anti-crisis-programmes – with some EU member-states such as Italy not even adopting a single measure and instead pursuing a pro-cyclical course. While China, with an economic stimulus package amounting to 7.1% of its GDP, is already on the path towards growth (with a new focus on the growth of the domestic market) and the USA is reckoning on having stopped the downswing with an economic recovery package of 2% of its GDP, the packages adopted in Europe amount to just about 1% on average.
From a political point-of-view, it is interesting to see that for the first time and in order to legitimise their current anti-crisis-policy, the demand-stimulating effects of the social welfare state have been acknowledged by the European governments – in order to be able to show to the US administration a stimulus package of 200 billion Euros (2009) which amounts to 3 % (2). In autumn, however, the political wind seems again to be turning against the “built-in stabilisers” of welfare state policies.
An additional stimulus package which had been adopted by all 27 member states and the Commission was rejected mainly due to the pressure exerted by the German Federal government, only to be replaced by a fig leaf: 9.3 Euros (= 0.07 % of the overall EU-GDP) will be spent on investments in broadband and energy networks – yet not as an additional expenditure, but taken from the current EU-budget. Within such a context, it goes without saying that the demands of the left for an increase of the EU-budget, the permission for raising of credit and for some specifically EU tax sources will not be met.
The crisis fund for bankrupt states was increased from 25 to 50 billion Euros (Hungary, Lithuania, Rumania), which is not only completely insufficient (3), but is also based on a wrong approach. What is required is crisis-prevention measures such as – admittedly restricted – budget backing in time instead of last-minute-relief. This relief follows the logic which also underpins IMF policy (which increased loans to the countries mentioned above): The precondition for receiving funds are massive cuts in public expenditure (decrease of wages and salaries, reduction of jobs in the public sector) which in turn creates a deflationary effect. And equally ridiculous is the increase of the funds of the European Investment Bank by 15 billion Euros, which amounts to not more than 0.09% of the GDP of the EU-27.
On the road to schism
The reality of the crisis points to Europe as a continent drifting towards disintegration and schism.
The gulf is deepening between the North and the South of the continent, which on the one hand results from the dominant position of German capital as compared to the states of “Mediterranean capitalism”, and, on the other, is caused by the different degrees of public debt in the individual countries and their creditworthiness.
For the first time since the introduction of the Euro, bonds from Greece, Ireland, Spain, Italy and Portugal are burdened with extra charges for the risk they represent. Even France must pay more for its state bonds than Germany. If one of the member states faces massive problems with its balance of payments this would be just one more step towards damaging the entire monetary union.
For the first time the common currency could be in danger. “Even cool-headed people think of the possibility that a Euro member such as Greece will become bankrupt”, well-renowned US-economist Barry Eichengreen says. From the insolvency of one member-state it is only a short step to its leaving the Euro-structure and to the collapse of the monetary union.
At the European Central Bank these fears are swept under the carpet. In this case not only enormous economic costs would have to be tackled because public debt money is borrowed in Euros and would rise in value (due to the devaluation of the national currency), leaving the Euro-zone would be followed by dropping out of the European Union altogether. This would represent a huge political problem which no country could put up with. Nevertheless: the extra charges for state bonds due to the risks they hold show that the markets rate the economic potentials of the member states differently. Symptoms of this are the “spreads”. In their competitive capacities, the member-states are moving apart. This makes it more difficult for the ECB to carry through a standardised fiscal policy for economic spaces drifting in different directions. Even the managing director of the IMF, Strauss-Kahn, is demanding “more cooperation with regard to their economic policy” between the European states. Otherwise “the stability of the monetary zone might be in danger”.
The EU-Treaty contains a no-bailout-clause, which means that the other countries do not have to pay for the debts of an insolvent member of the Euro group. A proposal of the EU-Commission for solving the problem of extra charges due to risk involved the issuing of joint Euro-bonds, but was rejected by the German government. The reason given shows the deep and ongoing anchoring in competitive and corporate thinking: A deterioration of conditions for German state bonds will not be tolerated – in such a case interest would fall for the Euro problem states, but rise for Germany, resulting extra billions in costs for the federal budget. The way out of the crisis pursued by the German government is a deeply national one: the productivity of German capital is to be used to embark on a new round of market conquests as soon as a new boom sets in. Europe is to provide the monetary framework for this. That this strategy has already failed in the face of the current crisis is simply suppressed and forgotten.
The other fault line in Europe runs between West and East. If the money, credit and capital traffic in the new member-states and their neighbouring periphery is controlled by banks located in Western Europe, and major sectors of the real economy are nothing more than extended workbenches, we cannot speak of integration based on independent potentials. And worse than that, if due to their liquidity preferences banks are reversing their credit-granting policies in Central and Eastern Europe, and if companies are adjusting their standard portfolios to stabilise their headquarters, disintegration on a grand scale is taking place (4). These processes are under the way – and the political drama consists in the fact that they are counteracted only by emergency measures, while long-term structural and political alternatives are necessary for both the real economy and the financial markets.
“A poor political leadership”
The dominant policy in EU-Europe is a crisis-policy that preserves the structures and institutions (5). This Europe is a cause of serious concern as to whether the global economy will find a lasting way out of the crisis in the near future. US Nobel-prize laureate for economics, Paul Krugman, is “concerned about Europe. I am also concerned about the world as a whole – there are no safe harbours from the global economic tempest. But the situation in Europe worries me even more than the one in the USA.” (6)
Krugman’s worry has two sources. After all that has been said so far, it is impossible not to agree with his first consideration: “A poor political leadership is part of the story. (…) To find something comparable to the tirades of hatred issued by the German Minister of Finance, you have to listen to the Republicans.” Krugman’s allusion is to Steinbrück’s criticism of a – as the German Minister of Finance calls it – “crude Keynesianism”, by which the German federal government tries to justify its refusal of any further programmes of public expenditure. To Krugman it is clear that the centre of the political crisis in Europe is currently Berlin.
The second source of his worry is also immediately comprehensible: “the economic and monetary integration of Europe has been far too much ahead of the development of political institutions. Europe does not possess any institutions on its continent which would allow it to cope with a crisis which has seized the entire continent.” And, indeed: Europe has a common currency and the institution of the European Central Bank (ECB). The capitalist crisis of the century has made it clear, however, that alone neither suffices to keep up European integration, much less to develop it any further. Without the instrument of a joint economic and fiscal policy (i.e. one that is coordinated at least between the members of the Euro group), both the Euro and the EU are facing an unprecedented danger of disintegration. Their mere existence is at stake.
Yet the picture sketched by Krugman of an economic development outpacing the political one only tells half the story. It is, in fact, political institutions of Europe which have implemented and guaranteed the absolute priority of economic interests. In the beginning of the 1990s, Jacques Delors, then President of the EU Commission, could still be dreaming of European integration working according to the principle of “Russian nesting dolls: each measure of economic integration also contains a process of social integration. Yet this was not even true for the development of the Single EU Market and is even less true for the monetary union. The asymmetry between economic and social integration is the fundamental principle of European policy to date.
The failure of the Lisbon Strategy
At the end of the 1990s, the governments of the EU agreed on a comprehensive policy of modernisation which was to turn Europe into the globe’s leading “knowledge-based” society and region, the so-called Lisbon Strategy. In a mid-term assessment, a commission of high-ranking experts presided over by former Dutch Prime Minister Wim Kok stated that the major goals of the strategy – including those dealing with competitive policy – could not be met. Despite this, its continuation was recommended. In a position paper on the socio-political agenda, the Commission stated,
A social Europe in the global economy: Jobs and new opportunities for all” – this is the motto of the second phase of the socio-political agenda which covers the time-span up to2010. As the Commission states in its statement on the half-term-assessment of the Lisbon Strategy, the vision endorsed in the constitution which unites us all is that the Union “works in favour of a sustainable development in Europe on the basis of balanced economic growth and of price stability, a highly competitive social market economy oriented towards full employment and social progress as well as a high standard in protection of the environment and improvement of environmental quality. (Comm (2005) 30).
As we can see now in the current crisis, in its central components this strategy was poorly conceived.
The Lisbon Strategy should have increased the competitiveness of Europe. What was carried out under the label of modernisation of that model, however, is nothing more than a re-structuring of the European social model for the purpose of higher competitiveness and further privatisation of public enterprises, especially those providing municipal infrastructure.
Accordingly, the focus of social struggles in the EU-member states is the struggle against the liberalisation of the service sectors, among others the financial services but also the areas of transportation, health and the re-structuring of the old-age pension systems along the lines of the three-pillar-model of the World Bank: public pension systems which are gradually being reduced to the levels of a mere minimum provision, pensions paid into the companies’ pension funds and private pension funds. In this policy area the misguided development is most significant. It is threefold: a prolongation of working life (including the reduction of early retirement provision), the disconnection of old-age pension levels from the development of social wealth (and of income from employment, i.e. decreased levels of old-age pensions); the promotion of private old-age pension systems. All in all, this policy has considerably contributed to the dominance of the financial markets and their simultaneous deregulation.
In the face of the crisis, the Lisbon Strategy has definitely proved a failure. Nevertheless, there is not the faintest sign of a self-critical evaluation of the wrong decisions taken. The consequence: Currently the European Commission is working on a follow-up concept in which the fundamental mistakes of the old strategy are maintained. In this respect also, we can see the in ability of the elites in control of Europe’s political and economic lives to learn from mistakes.
A change of politics is necessary
The drama of the EU is that there is no political majority effectively to counteract the crisis. And the EU does not possess adequate instruments of economic and fiscal policies. In this deepest crisis since the 1930s, it is simply ridiculous to start a lawsuit because of a breach of the EU Stability Pact: against Ireland, Spain, Greece, Portugal and France, followed by Germany but also Austria whose banks are strongly engaged in Eastern Europe businesses. And yet this continues to correspond to the conception of the political majority class, since it is from considerations like this that the financial markets judge the creditworthiness of individual states.
The political left and the trade unions must carry out a thorough change of the political course in Europe. A re-proportioning of the financial sector, a coherent policy for stabilising the real economy and a renewal of the European social model – all three of these tasks represent a huge challenge.
A change of direction towards strengthening the domestic market requires a change of traditional power relations between capital and labour. With the Lisbon Strategy, the European Union has abandoned the path of Rhenish social welfare-state capitalism in favour of Anglo-Saxon shareholder- and property-based capitalism. By means of deregulation and privatisation, a development was strengthened, which favours the dominance of property incomes not based on work. The financial crisis and the downward spiral of the economy have made the bankruptcy of this European strategy more than obvious.
European renewal cannot end with a reconstruction of the financial sector. What is needed is the extension of democracy, starting at the company level and including the distribution and control of financial markets. Capitalist society must be subjected to comprehensive democratic control.
The pillars on which a European future must rest are, among others:
- Measures such as the social control and re-dimensioning of financial markets and the prevention of mass lay-offs. The first of these points is a precondition for political control over the economy, the second one a condition for preventing the recession from developing into a deep depression. To achieve this, a European stimulus package amounting to at least 2% of EU-GDP is required.
- A U-turn in distribution policy. To this end, both effective taxes on incomes from capital and property and the prevention of dumping with regard to company taxes (which is continuously kindled by Germany in particular) are indispensable steps. For increasing mass incomes, a coordinated wage policy throughout Europe is necessary; in all member-states minimum wages, a basic insurance based on people’s requirements as well as minimum pensions must be provided, all of which guarantee the minimum socio-cultural existence level as well as standard of living.
- The appropriate provision of public finances facilitates public investments, a sufficient set of public services and the reconstruction of a public and non-commercial sector. A strong public sector would give an impulse favouring a mixed economy with palpable economic democracy. This includes the renewal of the European social model as a safeguard against precariousness, poverty and social division.
- To exclude a repetition of the neoliberal rollback, a democratic constitution must be implemented in companies to provide guaranteed rights of participation and co-determination. Here also, the enforcement of a European economic democracy is a guiding idea.