Beyond the Door Marked “Austerity”
Paul Mason, the economics editor of BBC2’s “Newsnight” and author of “Meltdown: the End of the Age of Greed” has an excellent article in the May 19th edition of the New Statesman. Like the Simon Johnson and Peter Boone article in the New York Times Economix blog on Ireland yesterday, its one of those really useful pieces that provide a very clear analysis of what is happening in the Eurozone at the moment and lays out the dangers and the prospects to come.
Here’s the conclusion, but it’s worth reading the whole thing.
Since 2008, the principal risk to the global economy has been a debt-deflation spiral, where the cost of meeting unpaid debts leads to low growth, falling prices, falling wages, the collapse of state finances and the need for governments to adopt policies which exacerbate the downturn. This is what happened in the early 1930s, and it is what the G20 leaders promised to avoid this time around.
Today, in Washington, London and Frankfurt, all that stands in the way of debt-deflation is the state: in the form of massive money-printing exercises through central banks; in the form of states underwriting the banking system; and in the form now of big states agreeing to stand behind small states.
The Greek bailout announced on 10 May does not make the risk disappear. It simply transfers the risk in southern Europe to the governments and taxpayers of northern Europe. The geostrategic implications of this shift are clear. Big states have bailed out little states and will demand reforms that change the lifestyle of people in these latter for ever. The eurozone is on the way to becoming a supranational, state-like entity.
Because every step in the EU project has been taken by elites, with the populations left to work out what was happening months and years later, we can trace very accurately where the risk has been transferred to. It has been transferred to the streets: streets such as the narrow warren around Exarchia Square, with its disgruntled students, angry workers and jaded riot police.
The eurozone has staved off crisis by ripping up its rules, defying its own ideology on the promise of a future consolidation into a fiscal superstate. Yet the path to that superstate cannot lie through electoral consent; it never has, not even in the good times.
So phase three of the global crisis poses the following danger: that the fiscal stimulus of the past 18 months produces bankruptcy at the level of nation states; that the markets demand austerity to prevent it, creating in the process debt-deflation and, with it, social unrest. This is particularly bad on the continent with the strongest labour movement, the highest ethnic tensions and the longest history of revolt.
Discussion
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Comment by: Pope Epopt
May 21st 2010 at 13:05
Thanks Donagh,
Both articles repay careful reading.
How real, I wonder, are Merkel’s moves against finance capital? It’s been enough to spook ‘the markets’, but then they are an inveterate crowd of bed-wetters, with a systematic interest in instability.
Assuming her plans are for real, including her calls for ‘an orderly default’ in the Euro-periphery, then there is a serious war going on between the Euro-core state elite and finance capital.
The only viable option for maintaining stability in the current crisis was something like Richard Douthwaite’s recent proposal. i.e. that the ECB start printing Euros like they were going out of fashion and giving them away on a per-capita basis to ameliorate social tension. Get your competitive devaluation in first! Of course the ECB is constitutionally bound to thwart such an action. For how long? It’s a time of tearing up old rules and quickly writing new ones within the EU.
That, combined with the being
, may yet mean Europe is the first site of the collapse of finance capital, with all the hope and trauma that implies.
Time will, in it’s ineffable way, tell. And sooner rather than later, is my guess.
Comment by: Aidan R
May 21st 2010 at 16:05
Interesting article but contains a lot of hyperbole. Not sure I agree with the conclusion.
It seems to me the logical step of sharing a currency (one does not have to be a monetarist nor a neo-liberal to see the benefits of this) is European wide coordination of both fiscal and labour market policy. I do not see this as bad in-itself whereas Paul Mason does (by my reading). In fact, I am not against a Federal Europe per se.
As it stands most eurozone economies are stuck in the middle of a U-trough - they cannot devalue and face a painful social process of ‘austerity’ and there is no central federal stimulus. So, the best strategy is either get out of the Eurozone or greater coordination via a federal EU (with the capacity to stimulate). Both seem improbable.
What EU policy makers are doing is the worst of both worlds - forcing austerity based on an unrealistic objective of reducing the defecit of peripheral countries to 3 percent by 2014 - without the corresonding federal stimulus. But this is not a problem with the euro as such but a problem of coordination - the absence of a corresponding authority to coordinate the real transnational economy.
From day one the Euro contained an implicit neo-liberal assumption: labour markets can adapt to a crisis through an automatic reduction in wage costs. When a crisis hit the option of a devaluation was gone - all actors, including trade unions signed up to this, perhaps thinking the era of boom-bust capital was over. Upon entry to the EMU it was always going to be government budgets and labour markets that take the hit in a crisis. In real terms - workers and those reliant on state services.
The EMU project always assumed that labour markets are like any other hypothetical market where prices respond to signals. The reality of course is that labour markets are not like the buying and selling of an ordinary ‘commodities’. They are institutions with organsied actors - trade unions - that will resist automatic reductions in labour costs. This is obvious to common sense but not to neo-classical economists. Hence the OECD and Economist newspaper blaming the rigid labour markets of Southern Europe for their inability to ‘adapt’ (i.e. if only trade unions didn’t exist everything would be fine).
The only alternative is climbing up either side of the U-trough: get out and manage the problem nationally or take the logical pan-Euro step. At the moment you have governments imposing austerity without growth and cannot borrow to do the latter because of the constraints of the Euro.
As an unapologetic internationalist my preference is for a pan-Euro coordination - despite its distant future. But, it has already begun in labour markets. IG Metal in Germany have been coordinating collective bargaining and agreed wage increases with their Nordic counterparts for a few years. European trade unions recognised the challenge of the EMU. Remember the Doorn Declaration?
http://www.eurofound.europa.eu/areas/industrialrelations/dictionary/definitions/doorngroup.htm
Comment by: Tomboktu
May 22nd 2010 at 13:05
If I am not mistaken, the presecription for the banks by Boone and Johnson on the NY Times blog was proposed by Prof Terrence McDonough (NUI Galway) at the TASC conference in October.
Comment by: William Wall
May 22nd 2010 at 15:05
‘Thing fall apart,’ as somebody once wrote, ‘the centre cannot hold.’ Entropy is the natural state. We’re heading there. the only surprise for us, because it’s always a surprise, is that it’s happening in our lifetimes, even though it always does.
Comment by: Donagh
May 23rd 2010 at 21:05
You’re right, Tombuktu and as it happens it was first proposed in an article we published in Feb 2009:
http://www.irishleftreview.org/2009/02/20/ireland-bankrupt/
Comment by: AL
Jun 2nd 2010 at 09:06
Just too much influenced by British Euro-skeptic thinking.
Al