The economic, and democratic, crisis in Europe raises questions. Why were policies that were bound to fail adopted and applied with exceptional ferocity in Ireland, Spain, Portugal and Greece? Are those responsible for pursuing these policies mad, doubling the dose every time their medicine predictably fails to work? How is it that in a democratic system, the people forced to accept cuts and austerity simply replace one failed government with another just as dedicated to the same shock treatment? Is there any alternative?
The answer to the first two questions is clear, once we forget the propaganda about the “public interest”, Europe’s “shared values” and being “all in this together”. The policies are rational and on the whole are achieving their objective. But that objective is not to end the economic and financial crisis but to reap its rich rewards. The crisis means that hundreds of thousands of civil service jobs can be cut (in Greece, nine out of ten civil servants will not be replaced on retirement), salaries and paid leave reduced, tranches of the economy sold off for the benefit of private interests, labour laws questioned, indirect taxes (the most regressive) increased, the cost of public services raised, reimbursement of health care charges reduced. The crisis is heaven-sent for neoliberals, who would have had to fight long and hard for any of these measures, and now get them all. Why should they want to see the end of a tunnel that is a fast track to paradise?
The Irish Business and Employers Confederation (IBEC)’s directors went to Brussels on 15 June to ask the European Commission to pressure Dublin to dismantle some of Ireland’s labour legislation, fast. After the meeting, Brendan McGinty, IBEC director of Industrial Relations and Human Resources, warned: “Ireland needs to show the world it is serious about economic reform and getting labour costs back into line. Foreign observers clearly see that our wage rules are a barrier to job creation, growth and recovery. Major reform is a key part of the programme agreed with the EU and the IMF. Now is not the time for government to shirk from the hard decisions.”
The decisions will not be hard for everyone, following a course that is already familiar: “Pay rates for new workers in unregulated sectors have fallen by about 25% in recent years. This shows the labour market is responding to an economic and unemployment crisis” (1). The lever of sovereign debt enables the European Union and International Monetary Fund to impose the Irish employers’ dream order on Dublin.
The same view seems to apply elsewhere. On 11 June, an Economist editorial observed that “Reform-minded Greeks see the crisis as an opportunity to set their country right. They quietly praise foreigners for turning the screws on their politicians” (2). The same issue analysed the EU and IMF austerity plan for Portugal: “Business leaders are adamant that there should be no deviation from the IMF/EU plan. Pedro Ferraz da Costa, who heads a business think-tank, says no Portuguese party in the past 30 years would have put forward so radical a reform programme. He adds that Portugal cannot afford to miss this opportunity” (3). Long live the crisis.
Catering only to rentiers
Portuguese democracy is just 30 years old. Its young leaders were showered with carnations by crowds grateful for the end of a long dictatorship and colonial wars in Africa, the promise of agrarian reform, literacy programmes and power for factory workers. Now, with reductions in the minimum wage and unemployment benefit, neoliberal reforms in pensions, health and education, and privatisation, they have had a great leap backwards. The new prime minister, Pedro Passos Coelho, has promised to go even further than the EU and the IMF require. He wants to “surprise” investors.
US economist Paul Krugman explains: “Consciously or not, policy makers are catering almost exclusively to the interests of rentiers – those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” Krugman says creditor interests naturally prevail because “this is the class that makes big campaign contributions, it’s the class that has personal access to policy makers, many of whom go to work for these people when they exit government through the revolving door” (4). During the EU discussion on funding Greek recovery, Austrian finance minister Maria Fekter initially suggested: “You can’t leave the profits with the banks and make the taxpayers shoulder the losses” (5). This was short-lived. Europe hesitated for 48 hours, then the interests of rentiers prevailed, as usual.
To understand the “complex” mechanisms underlying the sovereign debt crisis, you need to know about constant innovations in financial engineering: futures, CDs (credit default swaps) etc. This level of sophistication reserves analysis for select experts who generally profit from their knowledge. They pocket the proceeds while the economically illiterate pay, as a tribute they owe to fate, or to an aspect of the modern world that is beyond them.
Let’s try the simple political explanation instead. Long ago, European kings borrowed from the Doge of Venice or Florentine merchants or Genoese bankers. They were under no obligation to repay these loans and sometimes neglected to do so, a neat way of settling public debt. Many years later, the young Soviet regime announced that it would not be held accountable for money the tsars had borrowed and squandered, so generations of French savers suddenly found they had worthless Russian loans in their attics.
But there were more subtle ways of getting out of debt. In the UK, debt declined from 216% of gross domestic product in 1945 to 138% in 1955, and in the US it fell from 116% of GDP to 66%. Without any austerity plan. Of course, the surge in post-war economic development automatically reduced the proportion of debt in national wealth. But that was not all. States repaid a nominal sum at the time, reduced each year by the level of inflation. If a loan subscribed at 5% annual interest is repaid in currency that is depreciating at the rate of 10% a year, the real interest rate becomes negative to the benefit of the debtor. Between 1945 and 1980, the real interest rate in most western countries was negative almost every year. As a result, as The Economist remarked: “Savers deposited money in banks, which lent to governments at interest rates below the level of inflation” (6). Debt was cut without much trouble. In the US, negative real interest rates were worth the equivalent of 6.3% of GDP per year to the Treasury, from 1945 to 1955 (7).
Why did savers allow themselves to be cheated? They had no choice. Capital controls and the nationalisation of the banks meant that they had to lend to the state, and that is how it got its funds. Wealthy individuals did not have the option to invest on spec in Brazilian stock index-linked to changes in the price of soybeans over the next three years. There was a flight of capital, suitcases of gold ingots leaving France for Switzerland the day before devaluation or an election in which the left might win. However, this was illegal.
Up to the 1980s, index-linked wage rises (sliding scales) protected most workers against the consequences of inflation, and controls on free movement of capital had forced investors to put up with negative real interest rates. After the Reagan/Thatcher years, the opposite applied.
The system has no pity
Sliding wage scales disappeared almost everywhere: in France, the economist Alain Cotta called this major decision, in 1982, “[Jacques] Delors’ gift [to employers]” (8). Between 1981 and 2007, inflation was destroyed and real interest rates were almost always positive. Profiting from the liberalisation of capital movements, “savers” (this does not mean old age pensioners with a post office account in Lisbon or carpenters in Salonika) make states compete for funds and, as François Mitterrand said, “make money in their sleep”. Moving from sliding wage scales and negative real interest rates to a reduction in the purchasing power of labour and a meteoric increase in returns on capital completely upsets the social balance.
Apparently this is not enough. The troika (European Commission, ECB and IMF) has decided to improve the mechanisms designed to favour capital at the expense of labour, by adding coercion, blackmail and ultimatum. States bled by their over-generous efforts to rescue the banks, and begging for loans to balance their monthly accounts, are told to choose between a market-led clean-up and bankruptcy. A swathe of Europe, where the dictatorships of António de Oliveira Salazar, Francisco Franco and the Greek colonels ended, has been reduced to the rank of a protectorate run by Brussels, Frankfurt and Washington, the main aim being to defend the financial sector.
These states still have their own governments, but only to ensure that orders are carried out and to endure abuse from the people who know the system will never take pity on them, however poor they are. According to Le Figaro, “Most Greeks see the international supervision of the budget as a new form of dictatorship, like the old days when the colonels were in charge, between 1967 and 1974” (9). The European ideal will not gain from being associated with a bailiff who seizes islands, beaches, national companies and public services and sells them to private investors. Since 1919 and the Treaty of Versailles, everyone knows that such public humiliation can unleash destructive nationalism – and all the more so as provocations increase. The next ECB governor, Mario Draghi, who – like his predecessor – will issue strict orders in Athens, was vice chairman and managing director of Goldman Sachs when the bank was helping the conservative government in Greece to cook the books (10). The IMF, which also takes a view on the French constitution, has asked Paris to insert a “rule to balance public finances”; Nicolas Sarkozy is already working on it.
France has let it be known that it would like the Greek political parties to follow the example of their Portuguese counterparts, “join forces, and form an alliance”; and the prime minister, François Fillon, and European Commission president, José Barroso, have tried to persuade the Greek conservative leader, Antonis Samaras, to take this course. ECB head Jean-Claude Trichet considers that “the European authorities could have the right to veto some national economic policy decisions” (11).
Honduras has established an enterprise zone, in which national sovereignty does not apply. Europe is currently establishing a debate zone for all the economic and social issues no longer discussed by the political parties because these areas have gone beyond their control. Inter-party competition now concentrates on social matters: the burqa, the legalisation of cannabis, radar on motorways, the angry gestures or foul language of a reckless politician or intoxicated artist. This confirms a trend already noticeable 20 years ago: real political power is shifting to areas where democracy carries no weight, until the day when indignation finally boils over. Which is where we are.
But indignation is powerless without some understanding of the mechanisms that caused it. We know the alternatives – reject the monetarist, deflationist policies that deepen the crisis, cancel part of the debt if not all of it, take over the banks, get finance under control, reverse globalisation and recover the hundreds of billions of euros the state has lost by tax cuts that favour the wealthy (?70bn in France in the past ten years, more than $1 trillion in the US, especially for the top 1% of income earners). And knowledge of these alternatives has been shared by people who know at least as much about economics as Trichet, but do not serve the same interests.
This is not a technical and financial debate but a political and social battle. Of course, the economic liberals will claim that what progressives demand is impossible. But what have they achieved, apart from creating a situation that is unbearable? Perhaps it is time to remember how Jean-Paul Sartre summed up Paul Nizan’s advice to people who bottle up their aggression: “Do not be ashamed to ask for the moon: we need it” (12).