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The Eurozone Fiasco

Costas Panayotakis Dec 19

In the narrative of the economic and political elites that have long shaped it, the European project has put an end to the series of bloody wars that afflicted the continent up through the first half of the 20th century. In reality, of course, the process of European unification reflected and reinforced, from its beginnings, new kinds of divisions that continue to shape Europe’s social and economic landscape. In the early postwar period the gradual formation of the European Community helped to bring together the various European countries on the capitalist side of the Cold War divide, while in more recent decades the deepening economic integration of the continent, most dramatically exemplified by the adoption of a common currency by 17 of the European Union’s member states, has increased economic and class inequality by restructuring European societies along neoliberal lines. In addition to eroding the gains that the postwar “golden age” of capitalism brought to European working classes, this neoliberal model is now in grave crisis, as the contradictions underlying the eurozone project have begun to unravel.

While mainstream U.S. media often attribute the crisis to the overspending of European countries, the reality is that the philosophy structuring European institutions has long prioritized the pursuit of low deficits, debt and inflation even at the expense of chronically high unemployment. In this respect, the European Union has been in line with the neoliberal paradigm that has prevailed in most parts of the world since the postwar model of development came to an end in the 1970s. While the deficit and debt targets were often violated by most countries in the eurozone (and not just by Greece and the countries on the European periphery), the main thrust of the European project has been to move away from the immediate postwar model, which was predicated on Keynesian social-democratic policies that sought full employment and the growth of social services and welfare states designed to give capitalism a human face.

While the postwar model of “welfare Keynesianism” was predicated on an international economic structure known as the Bretton Woods system, which protected the autonomy of economic policy-making on the national level, the deepening economic integration within Europe has pushed a model of economic development less dependent on the growth of domestic demand and more dependent on international competitiveness. Thus, while rising wages and productivity, as well as a growing welfare state, helped support economic growth in the postwar model, in the neoliberal era rising wages and a large welfare state are viewed as drags on economic growth that damage national competitiveness and reduce exports.

As has been the case in other parts of the world, this shift from the postwar Keynesian model to today’s neoliberal model has been devastating for ordinary workers and citizens, even as it helped European capital to recover from the crisis of the postwar model in the 1970s. The process of economic unification up to and including the formation and crisis of the eurozone has, moreover, encapsulated the problems with neoliberal globalization more generally. 

While neoliberals never tire of presenting free trade as universally beneficial, scholars who have studied the history of national economic development often point out that none of today’s economic powerhouses developed by adopting an open-market policy in their early stages of development. Indeed, it is the technologically and economically most advanced countries that are usually the most ardent supporters of free trade, since they (and especially the capitalist groups within them) benefit the most from such policies. This dynamic has certainly been present within the eurozone and contributed to the regional divisions that overdetermine the present crisis. 

The adoption of a common currency was especially beneficial to German industrial capital, since the economically less powerful countries on the European periphery could no longer protect their competitiveness by periodic devaluations or by industrial strategies that sought to challenge their subordinate position within the European division of labor. Unsurprisingly, the adoption of a common currency did not just increase the penetration of Southern markets by German industrial products but also decimated the industrial capacity of economically less strong countries. 

This regional imbalance was further aggravated by Germany’s tendency to bolster the competitiveness of its products even further by squeezing the wages of its workers. Those who present Germany as the model that the black sheep on the European periphery have to emulate usually neglect to mention that because of this “competitiveness” policy Germany has in recent years experienced rapidly rising poverty rates even among citizens who are employed. 

In another sense, of course, Germany is a model of the contradictions that result from the neoliberal shift from a developmental model based on domestic demand to one based on exports. There is something paradoxical about the intense pressure on countries on the European periphery to emulate Germany by adopting an export-oriented development strategy that supposedly requires a brutal assault on wages, collective bargaining and labor rights. Those who advocate this strategy seem to forget that not everybody can emulate Germany’s trade surpluses for the simple reason that for some countries to achieve such surpluses some other countries have to incur corresponding deficits. 

The other contradiction of global neoliberalism operative within the eurozone relates to the inherent instability of liberalized financial markets. Financial liberalization may benefit the financial sector, which has been as influential in shaping the European project as it has been in shaping economic policy in other parts of the world, but it has again and again wrought terrible havoc on the lives of billions of people, whenever asset bubbles burst and in the ensuing climate of panic businesses close down, jobs are lost and people’s lives are ruined. 

The formation of the eurozone a decade ago inaugurated a short-lived period of easy credit. This easy credit was made available by banks in more affluent European countries, such as Germany and France, to the citizens and governments of less affluent countries on the periphery. From the point of view of countries on the receiving end of these loans, easy credit fueled a period of prosperity that, as we know from the experience of other countries, such as the United States, might not have been possible at a time of growing economic inequality. The creditors, by contrast, underestimated the risks inherent in doing business within a eurozone that was not economically and technologically homogeneous. 

As has often happened in the last few decades around the world, an external shock is often enough to turn unrealistic euphoria into extreme pessimism, giving rise in the process to debt crises that reverberate across the global economy. Thus it was that the financial crisis triggered three years ago by the subprime loans fiasco has over time come to threaten the very survival of the eurozone. 

When the European debt crisis first surfaced in Greece, the first response of the mainstream media in the United States and Europe alike was to attribute it to the “profligacy” of Greeks and the defective political culture that allegedly fueled it. In addition to misrepresenting the manifestation of a broader systemic problem as a “national” one, this interpretation is giving rise to new divisions within Europe, as the citizens of the so-called PIGS (Portugal, Ireland/Italy, Greece and Spain) have in effect been racialized and treated as the convenient scapegoats for a crisis flowing from the structural imbalances inherent in the neoliberal architecture of the eurozone project. 

This racialization provides ideological cover for the brutal assault on the living conditions, pension and labor rights not just of Greeks but of working people across the European periphery. Being at the forefront of the crisis, Greece exemplifies the inability of these policies to address the debt problem. By leading to the collapse of internal demand, the closing of thousands of small businesses, skyrocketing unemployment and the further weakening of a banking sector at the brink of bankruptcy, austerity policies that seek to reduce deficits by cutting spending fail because they simultaneously lead to a collapse of tax revenues. 

In this context, workers and citizens across Europe are proving more perceptive than their political and economic leaders. Social and class conflict across Europe is escalating as political and economic elites insist on a self-defeating strategy that has not contained the crisis to the periphery but has led it to spread, deepen and knock at the door of the largest eurozone countries, including Spain, Italy and, increasingly, France and Germany. 

At the same time, however, the risk of losing the benefits coming from the eurozone has forced European political elites to take some incremental steps to address the crisis. Being too little and too late, these measures have not prevented the crisis from deepening. And as the crisis grows, so do the fractures within the European capitalist elites. One of the central issues under debate has been whether the European Central Bank should play a greater role in supporting countries in trouble by lending to them directly and functioning, like most central banks, including the U.S. Federal Reserve, as a lender of last resort. 

The ECB has up to this point tried to stabilize the borrowing costs of countries in trouble by buying these countries’ bonds in the open market, but it is not allowed to lend to countries directly. This proscription, which contrasts with private banks’ easy access to low-interest loans from the ECB, is one example of tailoring the eurozone project around the needs of European financial capital. Germany is opposed to the ECB adopting a less restrictive policy stance, but as the crisis spreads to the core of the eurozone, it finds itself increasingly isolated. Germany has also been opposed adopting Eurobonds, which could ease the market pressure on the most vulnerable countries, preferring to postpone any such talk until even more draconian fiscal restrictions on eurozone countries make austerity permanent. 

Meanwhile, Germany and other countries of the European core have profited from the crisis, since, until recently, the investors who fled the bond markets of the countries on the European periphery turned to safer alternatives, such as German and Dutch bonds. 

This development has reduced the core countries’ interest rates, saving them tens of billions of euros. In addition, the interest rates such core countries earn on the loans that formed part of the rescue packages extended to countries like Greece, Ireland and Portugal exceed the interest rates they themselves have to pay, thus further adding to the benefits the “rescuers” reap from the rescue operation. In a typical ideological maneuver, the true beneficiary of the rescue operation appears as a benefactor, while the citizens in the periphery who are losing everything to keep servicing their countries’ debt appear as leeches supposedly living off the largesse of German and Northern European taxpayers. 

Needless to say, this maneuver leaves the other great beneficiaries of the rescue operation — the French, German and European banks holding European sovereign debt — out of the picture, thus making large parts of the rescue packages available for the continued support of zombie banks. To add insult to injury, a banker is now Greece’s new prime minister, inaugurating a new trend of unelected technocrats favored by European capital presiding over the bleeding of their countries. Thus, the evolving eurozone crisis brings to the surface the long-standing contradiction between capitalism and democracy. As European elites’ inept attempt to defend the former threatens to sink the eurozone, it falls on ordinary European citizens and workers to defend the latter by taking to the streets and escalating their resistance against a European capitalist class that has long abandoned the pretense of presiding over a social model that lends capitalism a human face. 

Costas Panayotakis is a professor of sociology at New York City College of Technology/CUNY. He is the author of Remaking Scarcity: From Capitalist Inefficiency to Economic Democracy.