July 2011        

Social democracy and the crisis

Part 1

Tom McDonnell’s discussion paper for TASC (“The Debt and Banking Crisis: Progressive Approaches for Europe and Ireland”) fails to offer a real analysis of the crises facing us.
     The reasons for this are simple. Firstly, the paper does not ask crucial and obvious questions, such as: What is the relationship between production, finance, and the government sector? What is the level of wealth in the economy, how is it distributed, and what does this tell us about the crisis? Why were huge sums of money invested in financial and other speculation in recent decades? Is there a systemic problem, or can the system be restored and improved through correct policies?
     What is the nature of sovereign debt, and what does this tell us about national economies and government budgets? What is the nature of the EU, and what is its relationship with Ireland? Is the EU the answer or part of the problem?
     Secondly, the paper is informed by social-democratic politics and so never considers class beyond a general commitment to a fairer form of capitalism; never asks whether capitalism needs to be transformed rather than softened; never questions the limits of liberal democracy or whether democracy should be extended beyond the political sphere to all areas of society and economy; never understands imperialism as the systematic organisation of the world by capitalism that serves specific class interests and so never understands the class nature of the organisations and structures that support it and implement its policies (EU, UN, WTO, IMF, World Bank, etc.).
     In short, this type of paper and the politics it informs are unable to offer more than a demand for a better, fairer capitalism. And it is this failure to understand that capitalism itself is the problem that undermines social democracy from the beginning.
     This is not to deny that capitalism can be forced to provide better conditions for working people. History bears witness that gains can be made through struggle, and post-war social democracy in parts of Europe certainly improved the lives of many. But, even with those gains, capitalism provided no solution for the working class: the wealth created through the productive activity of workers continued to be expropriated by capitalists; imperialism continued to visit poverty, social deprivation and war on millions of people around the world; real democratic control over their lives continued to be denied to people everywhere; and the potential for human development continued to be held back.
     Social democrats are, mostly, concerned about the well-being of ordinary citizens and want to see the lives of the poor and less well off, indeed of all citizens, improved; and they are, mostly, committed to a better, fairer distribution of resources. That is not the problem. The problem is that the failure to identify capitalism as the source of the social ills they wish to remedy, and to understand that capitalism is a class system that systematically advances the interests of one class at the expense of another, means that social democracy is doomed to reproduce this system of expropriation and exploitation.
     There is much in the discussion paper that echoes the positions of the socialist left. It argues that “taxpayers ought not to be obliged to honour any of the private debts of the failed banks,” and that “Ireland’s bank guarantee should be removed entirely and immediately replaced by a guarantee covering deposits only.” It goes on to insist that “fiscal consolidation . . . must be accompanied by a countervailing programme of strategic investment designed to create conditions for recovery.”
     Elsewhere it identifies some of the problems in the European Monetary Union that we are familiar with: “the impossibility of setting an interest rate appropriate for each of seventeen different heterogeneous economies,” “the separation of control over monetary and fiscal policy,” and “the absence of a guaranteed Lender of Last Resort controllable by member states.” These problems are essentially about the different interests of the member-states, their different economic cycles, and the democratic deficit in the EU and the euro zone.
     The paper recognises that “the transfer of debts from the private banking system to the general public is amongst the largest per capita social transfers in modern economic history and is deeply inequitable.” It points to the contribution to the crisis of “a failure of regulation and the reckless lending practices of the Irish and European banking system.” The Keynesian understanding that “extreme austerity” traps states in “a vicious cycle of low growth and high costs of borrowing” and makes it difficult for states to emerge from crisis is also noted. And it concludes by insisting that “full implementation of the fiscal adjustment necessary to achieve Maastricht compliance will substantially inhibit economic growth and employment creation in the medium term.”
     There is, the paper says, a “need for a mechanism to operate as a countervailing force to the programme of austerity being undertaken on the Euro zone periphery”; this mechanism must provide a “large-scale level of investment.”
     There is much here that we can partly or fully agree with; so what about solutions? Without much supporting argument, the paper consistently asserts that the solution can be found only within the EU and the euro zone. It would not be unfair to say that TASC sees saving the euro and EMU and correcting their shortcomings as the most important goal and the principal answer to the crisis.
     On the banking crisis the paper recommends that taxpayers should not be made to pay the private debts of the failed banks; Ireland’s bank guarantee should be replaced with a guarantee for deposits only; the non-systemic banks should be left to their own devices (i.e. allowed to fail); new state-owned banks should take over the deposits and physical infrastructure of the systemic banks; and these good banks would restore lending to the domestic economy and provide relief for troubled mortgage-holders. This would all be “contingent on the political acquiescence of our European partners as Ireland’s economic future is inextricably linked to that of Europe.”
     In response to the debt crisis, the paper proposes that Greece’s sovereign debt should be restructured; the euro zone should create a euro bond worth up to 60 per cent of each member-state’s GDP (60 per cent is the Maastricht target debt-to-GDP ratio), which would both reduce the difficulties of borrowing on the markets for some states and lower the costs of borrowing; the ECB should be given the new responsibility of providing guaranteed liquidity to member-states; this should be accompanied by “strict fiscal oversight and supervisory mechanisms” for the members-states’ economies (presumably overseen by the EU and ECB); and the ECB’s remit should be extended beyond price stability to include output, full employment, and financial stability.
     Finally, as a solution to what it calls the “crisis in the real economy,” the paper recommends “a new Marshall Plan for Europe,” funded and run by the euro-zone countries. This would be a “permanent centralised investment fund” for the euro zone. In the current crisis it would be used principally to support the peripheral countries; in the longer term it would be used counter-cyclically to maintain stability in the euro-zone economy.
■ The second part of this critique will appear in the next issue and will deal with the lack of class understanding within the TASC economic analysis. It is difficult to understand any discussion of economic policies that is neutral in relation to this central question.

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