is a columnist for The Progressive Populist and
a faculty adjunct at Cochise College. His most
recent book is, Politics, Religion, and Culture
in an Anxious Age.
Reading the corporate media, one gets the impression that the travails of the Eurozone constitute a morality play with a comforting theme. Germany has been a model of fiscal rectitude amidst a sea of profligate governments that are dragging it—and the whole European Union and the common currency-- down.
However comforting this theme may be, it is wrong on several levels. For starters, the countries in Europe that are still doing relatively well—including Germany, Sweden, Denmark—have far more developed welfare states than those of such “profligate” nations as Spain and Portugal. In addition, on a more basic level, the fiscal crisis faced by southern European nations owes more to the German model, the worldwide faith in financial “liberalization,” and the single currency.
European integration proceeded out of the most unquestionable of motives. After half a century of war and the decimation of the continent, European leaders and publics sought an end to violence. What better means of reducing violence than tying nations together economically. Europeans, starting with France and West Germany, fashioned common trade agreements on iron and steel and soon went on from there to create both wider free trade zones as well as a set of common policies to govern health, safety, and civil liberties. These early trade agreements, however, did not include or require a common currency.
From the start, many European social democrats worried that more inclusive European integration would bring together nations with vastly different economic productivity levels. Preserving floating currencies would, however, give nations that experienced shocks or the loss of jobs through balance of trade problems the escape hatch of currency devaluation. But just as importantly, the Maastricht agreement, one of the pillars of European Union, required richer nations to contribute to a stabilization fund to assist poorer nations in developing their infrastructure. Such a fund was viewed as an instrument of economic justice not only for the poorer states but also for a Western European working class that feared the loss of jobs to a low wage periphery.
European integration also took place on another track, one more dominated by financial elites than by working class or even manufacturing interests. Financial interests promoted the idea of a currency union as a means of taking currency risk out of trade within the EU as and thereby facilitating broader trade and development. Corporations would not need to worry about rapid fluctuations in the relative value of particular currencies. Another agenda was in play as well. Some banking elites hoped that a common currency would function much as the nineteenth century gold standard, making it impossible for debtors to inflate their way out of debt.
Germans were willing to go along, but with one proviso. Any agreement must include a central bank that would operate along historic German principles so that the new common currency would continue to carry an excellent credit rating. The European Central Bank (ECB) would have to be independent and would be guided by one mandate—price stability. As Center for Economic Policy Research co-director Mark Weisbrodt puts it, “The right-wing nature of the monetary union had been institutionalized from the beginning. The rules limiting public debt to 60 percent of GDP and annual budget deficits to 3 percent of GDP – while violated in practice, are unnecessarily restrictive in times of recession and high unemployment. The European Central Bank’s mandate to care only about inflation, and not at all about employment, is another ugly indicator.”
In the prevalent morality play, German’s fiscal rectitude plays a starring role, yet the German economic model is at the core of the periphery’s economic crisis. Economists at an early November conference on the “Crisis in the Eurozone” at the University of Texas pointed out that Germany in the last decade has forged a new social compact and model of development. The basic postulate is that price stability fosters economic growth. Price stability in turn had two pegs, government austerity and a social compact between management and labor under which wages were kept flat even as productivity rose dramatically. Labor’s one benefit was a commitment to maintain relatively high levels of employment even during down times. German corporations in effect accepted some redundancies in order to buy labor peace.
The strategy worked, at least for a time, but only because of one other major factor, financial speculation. Under the new Eurozone rules, each nation retained the right to regulate its own banks even as capital could flow more freely than goods and services. Banks and governments in effect forged a common bond in the aggressive quest to pursue new sources of profit. Since prices were stable in Germany and interest rates low, its banks could take cheaply raised capital and invest it elsewhere. Elsewhere included toxic US mortgage backed securities as well as housing in Spain and commercial real estate in Ireland, among other targets. The rating agencies, including most prominently Standard and Poor's, which recently downgraded the debt of several peripheral EU nations, blessed the credit worthiness of these toxic instruments, thereby adding fuel to the fire.
The press often suggests that European banks were affected by the Wall Street 2008 collapse, but from the very start they were key players in the run up to that collapse. And since European banks were even more highly leveraged than their US counterparts, their role was very large.
The evolution of this system in effect created real estate bubbles even as it was gradually decimating the productive capacity of the periphery economies. In a recent Foreign Affairs commentary, Mark Blyth and Matthias Matthijs commented: “German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone's Mediterranean countries. Frankfurt did quite well for itself. … in 2008, Germany was one of the two biggest net creditors within the eurozone (after France). Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain's negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe's periphery needs long-term loans more than ever, but Germany's enthusiasm for extending credit seems to have collapsed.”
Once the bubble burst, governments had to take on immense responsibilities to the unemployed as well as to their banks. Spain and Ireland had been models of fiscal rectitude before the crisis. That crisis and the factors that led up to it were the cause rather than the consequence of exploding budgets.
Some conference participants pointed out the literally self-contradictory nature of the current mainstream agenda. Every European nation is now being asked to cut wages and welfare benefits in order to become more competitive and run balance of trade surpluses. But every nation in a free trade area cannot run a surplus. Someone must buy the goods. Or perhaps Europe can become like Lake Wobegon, where everyone’s children are above average. Even S and P, though without acknowledging its role in this crisis, has belatedly recognized, that: “[T]he financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”
The European crisis, as several conference economists pointed out, could be contained relatively easily. Greek economist Yanis Varoufakis has developed one of the most detailed and widely discussed proposals. The ECB—acting on its own authority-- could buy bonds of distressed governments and refinance the loans at lower and sustainable rates of interest. With the exception of Greece, these nations could all pull debts and deficits down to manageable levels if reasonable interest costs were restored. A sensible recovery program would also include recapitalization along with central regulation of national banks. And finally, slow growth and the ECB’s relentless pursuit of price stability have been immense problems. Both ecological and economic concerns could be addressed through a European wide infrastructure fund.
The recent ECB decision to loan money to European banks accepting their risky sovereign debt as collateral is a small step in the right direction. It may buy time and prevent credit freezes. Nonetheless, it is inadequate. Loans are limited to three years maturities. As such there may be little effect on the long end of the yield curve. More fundamentally, nothing has been done to encourage growth and spending by the wealthier nations.
Unfortunately, as James Galbraith has pointed out, even more than the US case, Europe is dominated by a Calvinist mindset that equates wealth with virtue and debt with moral sloth. Germans complain about the irresponsibility of Southern Europeans, forgetting both that their banks encouraged it and that without such lending, German industry would have enjoyed smaller markets. A German working class, after years of being squeezed itself, can too easily accept such scapegoating.
These self-reinforcing trends could be reversed, but only through action on several fronts. In the healthier European states, a renewed social democracy might extend more fiscal benefits, support for wage growth, and more aggressive pursuit of shorter hours as a reward for increasing labor productivity. Such steps would benefit not only manufacturing workers but also the growing service sector as well. Demonstrations across Europe might show debtors are real people rather than crude moralistic stereotypes. A European infrastructure fund could lend more to the periphery, thereby improving long- term development prospects for the entire community.
Taking lessons from Occupy Wall Street, movements and leaders in Europe could do more to show the ways in which private investment banks have harmed both debtor nations and German taxpayers. Finally, one can even dare hope that industrial leaders in Germany might come to realize and publicly argue that austerity hardly helps them either. Stranger things have happened. Contemporary capitalism has more stresses, strains, and inconsistencies than either its defenders or even some of its Left critics recognize.
Whatever happens, we in the US have a vital albeit hard- to- measure stake in these events. An EU collapse will hurt our banks, many of which have huge credit default swaps (in effect insurance policies against sovereign debt defaults), Too many of our elite and many citizens will also continue to draw and even reinforce the wrong conclusions.