July 2014        

The economic philosophy behind the euro

In 1979 Margaret Thatcher was the first European prime minister to introduce the neo-liberal agenda. She was soon followed by Ronald Reagan in the United States, and the European Union formally adopted the neo-liberal ideology in the Maastricht Treaty in 1992.
      The agenda emphasised the free-market monetarist policies espoused by right-wing think-tanks such as the Libertas in Ireland, the Cato Institute in America, the Adam Smith Institute in Britain, and the Copenhagen Institute in Denmark. These are all funded by millionaires to promote the interests of rich people. The Republican Party in the United States and the Tea Party (where the Taoiseach attended a fund-raising function during his visit for St Patrick’s Day) also support these policies.
      Milton Friedman implemented these policies in Chile when the dictator Pinochet was in power, arguing that inflation is always linked with excessive monetary policies. To offset this he advocated cutting public expenditure and privatising public utilities.
      These policies became known as the Washington Consensus in 1990, from the multilateral agencies based in Washington. Robert Gwynne, cited by Peadar Kirby in his book Introduction to Latin America (2003), described these objectives as follows:
. . . trade liberalisation and easier foreign direct investment . . . Reduce direct government intervention in the economy through privatisation, introducing fiscal discipline, balanced budgets, and tax reform . . . Increase the significance of the market in the allocation of resources and make the private sector the main instrument of economic growth through deregulation, secure property rights and financial liberalisation.
      The agenda advocates free trade, and the euro is an extension of free trade. But free trade, or the euro, gives access for transnationals from the larger states to the markets of the smaller states. For example, Lidl and Aldi are grabbing a growing share of the Irish grocery market, and they are doing the same throughout the euro area.
      The underlying assumption of this economic ideology (an assertion that is more like a mantra than reality) is that the public sector is inefficient and the private sector (the market sector) is more efficient. It is argued by the proponents of these policies that the state sector should be reduced. Yet the state-controlled French railway system SNCF is far more efficient than the privatised British railway system.
      With the reduction in the role of the state, more of the economy would be controlled by monopoly capital. Nowadays most branches of the economy are controlled by a small number of firms (oligopolies), which make excess profits for their rich shareholders by charging high prices. These firms do not compete on price, because it would reduce their profits and consumers would be the winner: they use advertising and other non-price competition to gain a larger share of the market. They act, to all intents and purposes, as monopolies.
      This ideology was written into the Maastricht Treaty in the form of the “fiscal rules”:
      1. The excessive government deficit (excess of government spending over revenue) should not exceed 3 per cent of gross domestic product (GDP).
      2. Government debt should not exceed 60 per cent of GDP.
      These rules were reinforced by a change in the German constitution that made it compulsory to balance the state budget. Germany got the other countries that use the euro to adopt the Fiscal Stability Treaty. Under these new rules
      (1) the deficit has to be reduced to 0.5 per cent of structural GDP (i.e., the budget must be balanced);
      (2) if the ratio of debt to GDP exceeds 60 per cent it must be reduced to 60 per cent over twenty years.
      These rules were set up to protect the interests of investors who buy government bonds. These people are shareholders in banks that hold bonds—very wealthy people and hedge funds that manage the funds of wealthy people. The last thing the neo-liberals want is for a government in the euro zone to default.
      Mario Draghi, president of the European Central Bank, formerly worked as an economist for Goldman Sachs. This is a bank that looks after the interests of wealthy people. Draghi is independent of national governments but is not independent of the ideology of his former employer.
      Over time, these rules will reduce taxes and the role of government. The rich pay less tax so they will be better off, while the less well off, who use government services, will be worse off. This will cause a transfer from the poor to the rich.

The fiscal deficits, 2009–15

Following the worldwide recession that occurred in 2008, caused by the failure of an American bank, Lehman Brothers, all twelve countries that we are analysing had a fiscal deficit in 2009.
      The roots of the collapse of this bank go back to 1985, when Margaret Thatcher deregulated the banking system. The chancellor of the exchequer (minister for finance), Nigel Lawson, who introduced deregulation (the “big bang”), put forward the view that this was the cause of the crash in 2008.
      The EU followed suit and deregulated the banks as part of the Single European Act in 1987, and the United States deregulated in early 2000s. The American deregulation was to lead to a massive expansion of mortgage credit, which was used to finance speculative house-buying and “sub-prime” (more risky) lending. This ended in a housing bubble that collapsed and caused the great recession. A similar bubble happened in Ireland and Spain.
      We divide the countries into three groups, but this time the debtor-countries are taken first.

Fiscal deficits, 2009 and 2015 (forecast)

In a recession such as the one that began in 2008, output falls; then spending, incomes and employment fall. As a consequence, unemployment increases, so government spending on the unemployed increases, and tax revenue decreases. This increases the fiscal deficit.
      Before the Maastricht Treaty (1992), European governments would increase their spending and cut taxes. The tax cuts would increase take-home pay, and this would increase consumer spending, so leading to increased output (growth) and lower unemployment. This would counteract some of the effects of the deficit; but it would lead to an increase in the deficit.
      The neo-liberals at the heart of the IMF, the EU Commission, the European Central Bank and Germany are horrified by this, as it might put the funds of lenders (rich people) in danger. Mario Draghi, in an interview with the Wall Street Journal (24 February 2012), “warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete.” The social contract means full-time jobs, which he wants to be replaced with part-time, temporary and contract jobs. This is the agenda of Merkel and of ISME and IBEC.
      In table 1 the deficits of the debtor-countries are shown.

Table 1: Debtor-countries

Fiscal deficit as percentage of GDP, 2009Forecast fiscal deficit as percentage of GDP, 2015Change as percentage of GDP
Average population weights, 20129%#3.8%–5.2%
*The EU Commission has given Spain an extension to 2016 to meet its deficit target.
†Programme (1) Includes interest (about €2.7 billion) on the €64 billion bank debt foisted on Ireland by the Troika.
      The EU Commission forced these governments to reduce their deficit towards 3 per cent of GDP (output) by 2015, causing austerity. Ireland, Portugal and Greece were put into “bail-out” schemes, and the Troika (ECB, EU Commission and IMF) took over their budgets and cut the deficit year by year to reach 3 per cent. The other countries operated under country-specific recommendations made by the EU Commission.
      The achievement of the 3 per cent ratio took precedence over any services provided by governments. This forced them to increase taxes. Expenditure on health, education and social welfare was cut. This reduced spending in the economies, reduced growth, and increased unemployment.
      In Ireland’s case, tax increases and cuts in expenditure of $31 billion were taken out of the economy in budget cuts between July 2008 and 2014. The cuts in expenditure hit low and middle-income earners most, and the increases in taxes were regressive, again hitting those on low and middle incomes. The rich got away unscathed.
      Each of the countries had a massive increase in unemployment and a substantial fall in their standard of living. All this was to keep the “markets”—the seriously rich people—happy.

Table 2: France

Deficit as percentage of GDP, 2009Forecast deficit as percentage of GDP, 2015Change as percentage of GDP
*Revised according to information from EU Commission, March 2014.
      France will have reduced its deficit by 4½ per cent of GDP by 2015. It will have to reduce government spending or increase taxes. Its deficit will have fallen nearly as much as the debtor-countries: 4.5 per cent, compared with 5.2 per cent between 2009 and 2015. This has a major effect (reduction) on growth and on unemployment (increase) over the period.


Half the creditor-countries—the Netherlands, Belgium, and Austria—had a deficit of more than 3 per cent in 2009; the rest were at or below 3 per cent. (Germany was at 3.1 per cent.) Yet the governments in most of these countries introduced “austerity” under the neo-liberal agenda of the EU Commission. The average drop in the deficit would be 2.6 per cent of GDP if the forecasts are correct. These governments, especially Germany, either cut spending or increased taxes when there was no need to do so; and Germany went so far as to amend its constitution to make it compulsory that it balance the state budget.

Table 3: Creditor-countries

Deficit as percentage of GDP, 2009Forecast deficit as percentage of GDP, 2015Change
Average population weights, 20123.6%1%–2.6%
      The debtor-countries suffered twice as much austerity as the creditor-countries, because 5.2 per cent on average is being taken out of their economies, compared with 2.6 per cent in the creditor-countries. So Draghi intended that his medicine was mainly for the peripheral (debtor) countries; but it also affected the core (creditor) countries, because they had right-wing governments.

Growth in the euro area

The twelve countries of the euro area had two periods of recession between 2008 and 2013. The first was caused by the collapse of Lehman Brothers in 2008, when output in these countries fell by 4.4 per cent (Eurostat calculation).
      A second recession occurred in 2012 with a fall of 0.7 per cent and in 2013 with a fall of 0.4 per cent. This was caused by the policy of reducing the deficit to 3 per cent of GDP adopted by the Troika in the programme countries and by the country-specific recommendations coming from the EU Commission. The Commission showed at this point that the only thing that was important was adherence to the Maastricht rules. Growth in GDP and employment are no longer a priority. Now 2 per cent inflation is at the top of the agenda.
      These policies caused a double-dip recession in the euro countries in 2012 and 2013. Altogether, GDP in the area fell by 1.9 per cent between 2008 and 3013.

Growth, debtor-countries

The debtor-countries experienced a fall in output in most of the years between 2008 and 2013. Italy had a drop in output in four of the six years. Spain’s and Portugal’s experiences were similar.
      Greece experienced a fall in each of the years, and Ireland experienced a fall in three years. Between 2008 and 2013 output fell by 8.6 per cent in Italy, 3.7 per cent in Spain, 23.2 per cent in Greece, 7.2 per cent in Portugal, and 9.2 per cent in Ireland.
      The decrease of 23.4 per cent in Greece between 2008 and 2013 was the highest in living memory in western Europe. The average fall in this period for the debtor-countries, 8 per cent, was more than four times the average fall for the twelve countries of the euro area (1.9 per cent), as calculated by Eurostat. In the same period the economies of the creditor-countries grew by 2.7 per cent.
      Each of these countries, except Ireland, suffered a double-dip recession in 2012 and 2013. (See note with table.)

Table 4: Annual change in output (GDP), debtor-countries

Average population weights, 20120.6%–4.4%0.4%–0.4%–5.5%–1.7%–8.0%
Falls in GDP are highlighted.
*Growth in Ireland is measured in terms of gross domestic product (GDP), which includes the profits of transnational corporations. The size of GDP goes up and down as profits are moved into and through Ireland for tax purposes. This makes the GDP figures unreliable as a measure of Ireland’s output.


The French economy experienced only two years of falls in GDP and grew by 1.6 per cent over the period 2008–13. France’s experience was more like that of the creditor-countries, but there was slow growth in the years in which it had growth.

Table 5: Annual change in output (GDP), France



The creditor-countries only experienced on average a fall in GDP in one year,:2009. Germany and Austria had a fall only in 2009. Belgium and Luxembourg had a fall in two years: 2009 and 2012. The Netherlands and Finland had a fall in three years: 2009, 2012, and 2013.
      In the debtor-countries GDP fell in more years than in the creditor-countries. Germany’s GDP grew by 4.1 per cent between 2009 and 2012 on the back of massive trade surpluses. This growth was greater than all the other countries in the euro area. These surpluses and exports give rise to increased output and lower unemployment in Germany; but they cause lower growth and higher unemployment in the countries that import from Germany.

Growth in output (percentage of GDP), creditor-countries

Table 6: Annual change in output (GDP), creditor-countries
Average population weights, 20121.0%–4.8%3.3%2.8%0.3%0.2%2.7%
Average growth for debtor-countries0.6%–4.4%0.4%–0.4%–5.5%–1.7%–8.0%

Unemployment rate, debtor-countries

In table 7 the unemployment rates of the debtor-countries are shown. The average unemployment rate increased from 7.2 per cent to 18.9 per cent between 2007 and 2013.
      While in 2007 all the countries were close to the average, by 2013 there were massive variations between the countries. Spain and Greece have more than a quarter of their work force unemployed. Italy’s and Portugal’s rates doubled, to 12.2 per cent and 17.4 per cent, respectively. Ireland’s rate trebled, despite the fact that about 100,000 people have emigrated since the crisis, and the Government has more than six schemes, including Job Bridge, for getting people off the dole and so reducing unemployment figures artificially.
      But the real sufferers in this crisis are young people, as a consequence of the policies adopted by the Troika in Ireland, Portugal and Greece and those adopted by the EU Commission in Italy and Spain. In 2012 nearly half of all young people in the EU (45 per cent) were unemployed. Of these, Spain and Greece had over 50 per cent, Italy and Portugal had over 35 per cent, and Ireland had nearly 30 per cent.

Table 7: Unemployment rate, debtor-countries

2007      2013      Youth unemployment rate,
fourth quarter 2012*
Average rate population weights, 20127.2%18.9%44.9%
*Source: Eurostat.


Unemployment in France rose from 8.4 per cent in 2007 to 11 per cent in 2013, but youth unemployment in 2012 rose to 26.4 per cent in 2012. This increase in youth unemployment is a damning indictment of EU policies.

Table 8: unemployment rate, France

2007          2013          Youth unemployment rate,
fourth quarter 2012


Average unemployment in the creditor-countries actually fell over the period. Average youth unemployment was 10 per cent; in Germany it was 7.9 per cent, and only Belgium, at 22 per cent, exceeded 20 per cent.

Table 9: Unemployment rate, creditor-countries

Unemployment rate, 2007Unemployment rate, 2013Youth un­employ­ment rate, fourth quarter 2012
Average rate population weights, 20127.5%6.0%10.0%

Table 10: Average rates of unemployment (using 2012 weights)

Creditor-countries7.5%    6.0%    10.0%    
Euro-area average weights (Eurostat)7.6%12.3%27.2%

Summary of unemployment data

Unemployment rates were around 7½ per cent in the twelve countries of the euro zone in 2007, but there was a massive divergence by 2012 and 2013. The average total unemployment rate in the debtor-countries was three times the rate in the creditor-countries in 2013, while youth unemployment in the debtor-countries was more than four times the rate in the creditor-countries. This is a scandal.


This article shows that ordinary people in the peripheral countries had to endure massive hardship in recent years. In Ireland there were cuts to government services, such as education, health, and social welfare, and increased taxes, such as the universal social charge, property tax, and water tax. Workers’ wages were cut throughout the periphery.
      Output fell and unemployment rose dramatically, especially for young people. At this point the EU Commission is offering a “youth guarantee” of training, whereas it was responsible for destroying millions of jobs in Europe since 2007.
      The crisis in 2008 was a crisis of financial capital, which occurred because of the deregulation of banks in Britain in 1985, followed by the deregulation of banks in Europe under the Single European Act and then in the United States in the early 2000s. Deregulation meant that retail banks became casino banks, and this led to the crash.
      The EU was partly responsible for the crisis in 2008. It imposed “austerity” after 2008, and ordinary people have had to bear the burden of its mistakes.
      And the crisis is not over in Ireland, as the Government still has to reduce the deficit by approximately €4 billion between 2016 and 2018. So austerity will continue until then.

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