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D. Sotiropoulos - Eurozone Debt Crisis

D. Sotiropoulos - Eurozone Debt Crisis

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Published by: elenakimou on Mar 11, 2011
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03/11/2011

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Eurozone Debt crisis and Austerity Policies
1. Introduction
In order to deal with the economic problems and the surging debt in theeurozone we need to understand what has happened so far. Consideringthe relevant debate, I believe that this is not an easy field to cross.Hence, let me briefly touch upon this query.
2. The nature of the European symbiosis
First, I will try to put forward a brief explanation which of course is quitefar from being a thorough analysis.What have we seen so far in the eurozone?
On the one hand 
, we have seen economies that experienced high growthrates, higher accumulation and profitability. In this fashion, theysucceeded in catching up with the more developed and competitiveeconomies of the European ‘center.’ This is the case of the so-calledcountries of the European ‘periphery,’ namely: Greece, Spain, Ireland,and possibly Portugal (the latter is a special case). In this group, domesticdemand was further boosted (1) by the credit expansion in anenvironment of historical low interest rates and also (2) by theuninterrupted inflow of foreign savings (a great deal of them comingfrom the surpluses of the ‘center’). This caused lasting surpluses in thefinancial accounts. The concomitant deficits in the current accounts,
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along with the mere deterioration of competitiveness despite theimprovements of the productivity of labor, mirror exactly this increase of the domestic demand and the inflow of foreign investments.In this group, those economies that managed to avoid the surging of their private debt saw their public debt reaching unsustainable levels in thewake of the recent financial meltdown. Greece is the most characteristicexample. On the other hand, the economies that followed a prudent routein their public finances, saw their private debt go skyrocketing. I amreferring here to Spain, Ireland and Portugal. These countries will seesome of the biggest increases in the public indebtedness with theimplication that the latter will no longer be low by 2015.
On the other hand 
, regarding the economies of the European ‘center,’ theold deutschmark bloc (Germany, France, Austria, Netherlands, Belgiumand Luxemburg) tended to experience modest growth and domesticdemand. The mechanism of euro actually squeezed the working people.These countries retained or even improved their competitiveness despitethe poor productivity development mainly through the income channel.In this bloc, the economies which controlled their private and public debt,experienced really poor growth rates (Germany). Those which saw their private debt soaring had better growth results (Netherlands) but evenbigger capital outflows and financial account deficits.This asymmetric development within the Eurozone produced persistentcurrent account imbalances creating at the same time a massive financialinterconnectedness. The already leveraged balance sheets of the bankingsystem in the ‘center’ got stuffed up with ‘peripheral’ debt. Modesteconomic development in the ‘center’ translated these ‘competitive’giants into capital exporters as well, which was sometimes poorlyinvested. After the crisis these economies found their banking systemsquite vulnerable.
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What we have identified so far are the negative results of an aggressiveneoliberal form of European symbiosis. It is quite obvious that themechanism of euro did carry the day to the benefit of capital; yet withmajor contradictions.So, we have to keep in mind the following major results: debt surging(sovereign and private), imbalances, financial inter-indebtedness and afragile banking system.
3. The debt trap in the European context
If you ponder over the data and the projections with regard to sovereigndebt, you will find out that most of the European economies are
now
pretty much on the same footing.This is the other key lesson of the capitalist development of the last 15years. The state has become the last resort guarantor of the risk incurredby the financial system. This means that even countries with solid publicfinances had to socialize the financial exposures turning them into publicdebt. From another point of view, private debt is a kind of 
ghost 
publicdebt always ready to move from private portfolios to public balancesheets. In this sense, it is involuntarily supported by the taxes of theworking classes. Contemporary capitalism transforms workers into
ghost underwriters
(to paraphrase the title of Polansky’s recent movie) of ahighly liberalized financial system.Without doubt, the fiscal problems of Greece and Ireland are exceptional(the future of Portugal and Spain is uncertain as well).
Yet the mainproblem for Europe is not debt per se but the fact that financial marketshave become so fully integrated and leveraged that they can be noisolated or unilateral solutions without too much cost and misery for theworking people
. Every competitive national strategy has outrightimplications for the others.
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