From Socialist Voice, June 2010

Blame the EU


Perhaps for the first time in its history, the viability of the EU project is being seriously questioned throughout Europe. The sovereign debt crisis in Greece, and the wider political crisis now engulfing the euro zone, are principally due to two related reasons. The first is the distorted nature of the monetary union itself; the second is the compounding effect of the economic turmoil that has been felt throughout the European Union since 2008.
     Monetary union has undermined the freedom of member-states to set their own monetary and fiscal policy. This in turn results in pressures for economic adjustment being placed firmly on the labour market. Monetary union has imposed fiscal rigidity, removed monetary independence, and forced associated corrections through restructuring of the labour market. This is now the only way in which states can ensure external competitiveness. It is one of the reasons why the Irish political and employer class has so easily cast aside “social partnership.”
     Guided by EU policy, member-states have effectually participated in a race to the bottom, encouraging flexibility, wage restraint, and part-time work. In this race the most convincing winner so far has been Germany. In the aftermath of its annexing of the German Democratic Republic and the opening of new markets in the east, German capital put sustained pressure on the pay and conditions of its work force, forcing nominal labour costs to move at an almost identical rate to productivity.
     Yet the German economy has performed poorly, with low growth, weak productivity gains, and high unemployment. Crucially, however, it has been able to keep down inflation as well as the cost of labour. Notably, smaller countries in the European Union, such as Ireland and Greece, did generally better in economic performance, but labour costs and inflation rose faster. Because Germany was able to secure competitiveness within the euro zone, it inevitably generated persistent current-account surpluses against the periphery. The surpluses were then turned into foreign direct investment and bank lending to the euro zone.
     The financial crisis of 2007–09 brought on by the failure of the American mortgage bubble resulted in extreme shortage of liquidity for European banks. Banks also had to deal with the excesses of the preceding bubble. The European Central Bank intervened, generously lending and making it possible for banks to begin dealing with their weak position and to repair balance sheets by reducing lending.
     However, this intensified the recession and the credit shortage. By 2009 bank lending was in retreat in the euro zone, and banks were not acquiring long-term securities.
     But during 2007–08 the banks of the core euro-zone countries, such as Germany, had continued to lend to countries such as Italy, Spain, Ireland, Greece, and Portugal. Gross cross-border claims from the core to the periphery reached €1½ trillion in 2008, representing almost three times the capital of core banks. By 2009, however, public revenue had collapsed as the recession deepened, while public expenditure had risen to rescue finance and maintain demand. All the member-states went to the financial markets, seeking extra funds, because of this crisis.
     In the financial markets of 2009, however, banks were reluctant to lend, and consequently the rising supply of state paper put upward pressure on yields. Speculative financial institutions found an environment favourable to their activities. In the past, similar pressures in financial markets would have led to speculative attacks on currencies and collapsing exchange rates for the heavy borrowers. But this was impossible within the euro zone. Speculative pressures therefore appeared as falling prices of sovereign debt.
     Speculators concentrated on Greek public debt on account of its large deficit but also because of the small size of the market in Greek public bonds. But the broader significance of the Greek crisis was not a result of the inherent importance of the country: instead Greece represented the potential start of speculative attacks on other smaller, peripheral members of the European Union and perhaps even on countries beyond. Notably, the euro zone left each state to fend for itself in the financial markets. The European Central Bank watched as interest rates rose, financial institutions speculated against state debt, and state bankruptcy raised its head.
     Confronted with a public debt crisis, peripheral countries were forced by the euro zone to impose harsh austerity. A bail-out of the Greek economy has now been provided by the European Union, after much indecision. The essential point, however, is that the ultimate strategy of the European Commission—the front for European monopoly capital—is now the introduction of austerity packages accompanied by further liberalisation. It seeks to achieve stabilisation through recession, imposing huge costs on European working people. It offers little prospect of sustained growth in the future.
     In response, it is vital that in Ireland, as elsewhere, a progressive patriotic alliance be constructed to protect and enhance Irish democracy and national sovereignty. At the very minimum, this alliance should have as its goal greater fiscal freedom by member-states and a relaxation of existing constraints, a substantially enlarged European budget, fiscal transfers from rich to poor, protection for employment, support for wages, and cross-European investment in sustainable industries. Of course even this demand by itself is likely to put significant pressure on the European elites.
     Further to this, leaving the euro zone must be placed squarely on the agenda. Until now this argument has been difficult to carry, for various political reasons. However, even among certain established commentators the idea is not as extreme as perhaps once thought. At the core of this exit strategy would be removal from the euro, currency devaluation, and restructuring of debt. A component of this would be the creation of a National State Bank and National Development Agency, which would extend controls over capital flows, utilities, transport, energy, and telecommunications. It would also endeavour to adopt a national programme of sustainable and equitable investment, a programme that the CPI has endeavoured to outline in its pamphlet An Economy for the Common Good. Ensuring continued access to international trade, technology and investment would be an essential plank of this policy.
     Of course there are many powerful forces working against the construction of such a progressive campaign. However, it must always be remembered that the great appear great to us only because we are on our knees. Let us arise!
[NC]

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