Eurozone Crisis: Beggar Thyself and Thy Neighbour

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Larry Elliott’s article about the current Eurozone crisis in yesterday’s Guardian contained a reference to some interesting research to come out of the School of Oriental and African Studies (SOAS) in London. The paper, titled Eurozone Crisis: Beggar Thyself and Thy Neighbour contains some thoughtful insights into the underlying structural causes of the current predicament. It argues that the EU has created a core and periphery relationship with export-led Germany running current account surpluses, and the periphery countries suffering from persistent deficits, high consumer borrowing and/or investment bubbles characterised by property speculation, leaving them open to a sovereign debt crisis. Greek is the most obvious manifestation of this, but it applies to Spain and Ireland.


Here are some of the most interesting passages which highlight the two central arguments about the longer-term structural factors and the short-term impact of the current crisis:

‘Monetary union has removed or limited the freedom to set monetary and fiscal policy, thus forcing the pressures of economic adjustment onto the labour market. Guided by EU policy, eurozone countries have entered a ‘race to the bottom’ encouraging flexibility, wage restraint, and part-time work. Labour has lost out to capital across the eurozone. The race has been won by Germany squeezing its workers hard in the aftermath of reunification. The eurozone has become an area of entrenched current account surpluses for Germany, financed by current account deficits for peripheral countries. Monetary union is a ‘beggar-thy-neighbour’ policy for Germany, on condition that it beggars its own workers first.’

Given these constraints:

‘national competitiveness within the eurozone has depended on the conditions of work and the performance of labour markets, and in this regard EU policy has been unambiguous. The European Employment Strategy has encouraged greater flexibility of employment as well as more part-time and temporary work…There has been considerable pressure on pay and conditions, a race to the bottom across the eurozone.’

Furthermore

‘The crisis of 2007-9 compounded the predicament of peripheral countries because of the monetary and financial structures of the eurozone. The crisis resulted in extreme shortage of liquidity for European banks. The ECB intervened, lending freely and making it possible for banks to start dealing with their weak position. But ECB reaction was very different in 2009 when states faced growing borrowing needs due to the crisis. The eurozone left each state to fend for itself in the financial markets…Confronted with a public debt crisis, peripheral countries have been forced by the eurozone to impose harsh austerity. Yet, until early 2010, they have received no bridging loans to ease the pressure. This is grossly damaging, and offers no assurances of future growth. In effect, peripheral countries have been forced to accept IMF conditionality, but without an IMF loan.’

Moreover, the report does not shy away from stating what it believes to be the true nature of the European Union monetary and political arrangements:

‘It is apparent that the institutions of the eurozone are more than plain technical arrangements to support the euro as domestic common currency as well as world money. Rather, they have had profound social and political implications. They have protected the interests of financial capital by lowering inflation, fostering liberalisation, and ensuring rescue operations in times of crisis. They have also worsened the position of labour compared to capital. Not least, they have facilitated the domination of the eurozone by Germany at the expense of peripheral countries.’

What is most valuable about the report is that it offers 3 strategies to get out of this current crisis. The ruling-class option ‘Austerity, or imposing the costs on workers in peripheral countries’ and two alternatives. The first is ‘Reform of the eurozone: Aiming for a ‘good euro’ but the second and most radical proposal is entitled ‘Exit from the eurozone: Radical social and economic change’. The latter, says the report, necessitates the ability ‘to mobilise broader social forces capable of taking economic measures that would shift the balance of power in favour of labour’ and involves:

‘devaluation accompanied by cessation of payments and restructuring of debt. To prevent collapse of the financial system there would have to be widespread nationalisation of banking, creating a system of public banks. Controls would also have to be imposed on the capital account to prevent outflows of capital. To protect output and employment, finally, it would then be necessary to expand public ownership over key areas of the economy, including public utilities, transport and energy.’

These are best read properly and in full, and can be found in chapter 7 of the paper. In short, this paper is a radical critique of the workings of the EU economy and should stimulate a vital debate amongst the Left about what the European project means, what it should mean and what the best strategies are for achieving a Europe where labour dominates capital rather than the other way around. In other words, a workers’ Europe as a step towards international Socialism.