Eurozone Debt crisis and Austerity Policies

1. Introduction In order to deal with the economic problems and the surging debt in the eurozone we need to understand what has happened so far. Considering the 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 quite far 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 growth rates, higher accumulation and profitability. In this fashion, they succeeded in catching up with the more developed and competitive economies of the European ‘center.’ This is the case of the so-called countries of the European ‘periphery,’ namely: Greece, Spain, Ireland, and possibly Portugal (the latter is a special case). In this group, domestic demand was further boosted (1) by the credit expansion in an environment of historical low interest rates and also (2) by the uninterrupted inflow of foreign savings (a great deal of them coming from the surpluses of the ‘center’). This caused lasting surpluses in the financial accounts. The concomitant deficits in the current accounts,

along with the mere deterioration of competitiveness despite the improvements 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 the wake of the recent financial meltdown. Greece is the most characteristic example. On the other hand, the economies that followed a prudent route in their public finances, saw their private debt go skyrocketing. I am referring here to Spain, Ireland and Portugal. These countries will see some of the biggest increases in the public indebtedness with the implication that the latter will no longer be low by 2015. On the other hand, regarding the economies of the European ‘center,’ the old deutschmark bloc (Germany, France, Austria, Netherlands, Belgium and Luxemburg) tended to experience modest growth and domestic demand. The mechanism of euro actually squeezed the working people. These countries retained or even improved their competitiveness despite the 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 even bigger capital outflows and financial account deficits. This asymmetric development within the Eurozone produced persistent current account imbalances creating at the same time a massive financial interconnectedness. The already leveraged balance sheets of the banking system in the ‘center’ got stuffed up with ‘peripheral’ debt. Modest economic development in the ‘center’ translated these ‘competitive’ giants into capital exporters as well, which was sometimes poorly invested. After the crisis these economies found their banking systems quite vulnerable.


What we have identified so far are the negative results of an aggressive neoliberal form of European symbiosis. It is quite obvious that the mechanism of euro did carry the day to the benefit of capital; yet with major contradictions. So, we have to keep in mind the following major results: debt surging (sovereign and private), imbalances, financial inter-indebtedness and a fragile banking system.

3. The debt trap in the European context If you ponder over the data and the projections with regard to sovereign debt, 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 15 years. The state has become the last resort guarantor of the risk incurred by the financial system. This means that even countries with solid public finances had to socialize the financial exposures turning them into public debt. From another point of view, private debt is a kind of ghost public debt always ready to move from private portfolios to public balance sheets. In this sense, it is involuntarily supported by the taxes of the working classes. Contemporary capitalism transforms workers into ghost underwriters (to paraphrase the title of Polansky’s recent movie) of a highly 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 main problem for Europe is not debt per se but the fact that financial markets have become so fully integrated and leveraged that they can be no isolated or unilateral solutions without too much cost and misery for the working people. Every competitive national strategy has outright implications for the others.

The present situation is characterized by a combination of a weak banking system and distressed sovereign borrowers. This tension is hard to be solved as long as the European banking system, especially in the ‘central’ economies, remains in the present fragile position and the European governments adhere to conservative neoliberal agendas. At the same time, this predicament is responsible for the delay of the reckoning day for the sovereigns imposing even harder pressures on the working people.

4. The parameters of the problem Ten years ago, the reference to the European states as social, as opposed to other parts of the capitalist world, was regarded to be rather trivial. Nowadays, this sounds like a bad joke. Eurozone economies along with the developed capitalist economies worldwide are getting into high levels of indebtedness. One does not need to have a PhD in economic science in order to see the bluff of the system. Regarding the historical experience, it is not difficult to understand that the goal of the large fiscal adjustment is extremely hard to be achieved, especially in the midst of a severe economic recession with a fragile financial sector. Nevertheless, even in the most optimistic scenario, adjustments of this type require time (typically at least five years) with the debt-to-GDP unsustainably increasing during this adjustment process. So let’s get serious. The anti-social political measures against pubic goods and benefits are not implemented in order to deal with the debt overhang. Capitalist classes simply use contemporary crisis as means to set about implementing the neoliberal agenda of conservative reforms and

privatizations. Fiscal austerity is the shadow future of the working people in the developed capitalism.

5. A possible way out What might a possible way out look like in the contemporary correlation of powers? Let us recall Polanyi’s major insight. In a historical context bearing similarities to the contemporary one, he argued that neoliberalism, when in crisis, needs a kind of ‘conservative interventionism’ in order to reproduce itself. I believe that Polanyi’s insight still holds its strength. In our era, the capitalist states do not seem helpless any more. They profoundly intervene to restore the dynamics of the markets and finance building up mechanisms and institutions to further squeeze social incomes and public benefits. The resulting situation seems to be that of a free economy under a strong government, as Polanyi might have put it. The key target of contemporary capitalist strategies is the subordination of the stability of employment and incomes to the well functioning of the financial markets. An unstable social regime seems to be the fruit of this process. At the same time, this ‘authoritative’ kind of intervention designates the very simple fact that there are many different solutions to the debt overhang. Yet, I believe that a radical left should set political targets that point beyond the neoliberal character of eurozone opening up the space for militant policies to the benefit of workers. Our counter attack must concentrate on the heart of the problem. In my point of view, ECB is a good nodal point to begin with: not only should the ECB proceed to the necessary haircuts, but also it should start printing money and collecting debt in an attempt to relieve the European

economies from the debt burden and to finance public benefits. What we should demand is nothing particularly new: if the ECB intervenes to the benefit of the financial system, why might not do the same for the European people as well, which is the ultimate underwriter of its structure? The radical left should return to the social movements and suggest a political agenda that impugns neoliberal architecture and avoids the trap of looking for competitive solutions against other countries.


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