In August 1982 the government of Mexico announced it could not service its debts. Thus began an unnecessary, creditor-enforced depression that would sweep Latin American, and usher in the “Lost Decade” with appalling human suffering. Thirty years later we replay this grim history in Western Europe. The sorry fate of the European Union demonstrates the power of neo-liberalism. Begun by social and Christian democrats to end centuries of European civil wars and bring prosperity to a conflict-ravaged continent, the European Union can now be found in the vanguard of imposing neo-liberal austerity.
In May 2010 the government of Greece faced a debt service problem. In the context of the euro zone as a whole, the Greek difficulties were minor, equivalent to a US state government unable to balance its budget. The obvious solution was for the European Central Bank to buy part or all of the Greek debt, ending the problem in a stroke. With the purely financial difficulty eliminated, political discussions could have begun to correct the underlying cause of the short term problem. The corrections would have included major changes in Greek taxation and expenditure policy, which could have been phased over several years. The phasing would have allowed for economic growth to make the adjustments relatively easy.
In place of this rational approach, the non-elected officials in the European Commission and the European Central Bank, zealously encouraged by the German Chancellor, imposed a deficit reduction program on the government of Greece that makes the 1980s Washington Consensus appear benign in retrospect. When the elected government of Greece proved unequal to the task of implementing economic madness, the lords and ladies of the euro zone took the austerity to its logical conclusion: if an elected Greek government would not do the dirty work, impose a un-elected one. It is rather bad luck for the Commission and the Chancellor that the Greek constitution requires an election be held this year (in April unless this bothersome democratic requirement can be avoided).
Against all rationality, the overlords/ladies of the euro zone managed to achieve what would seem a difficult to impossible task, convert the debt service problem of a country with less than eleven million people (smaller than ten American states) into an imminent catastrophe for a continent. As the chart shows, in May 2010 when the Greek problem could have been easily solved, the growth rates of France, Germany and the four so-called PIGS (Portugal, Italy, Greece and Spain) were all positive. In a new version of economic “convergence”, they are now all negative, save France (a robust +0.2%). Even the mighty “power house” of German fell into decline in the final quarter of 2011.
GDP growth rates: Neo-liberal Convergence in the Euro Zone, 2010-2011
Sources: Eurostat and Eurostat News Release October 2011.
Few outside of Europe (and not all within) understand the profoundly undemocratic nature of the European Union that created the current disaster. In retrospect it is clear that the long-term effect of the Maastricht Treaty and its infamous “criteria” were to remove economic policy from democratic oversight. The design of the European Central Bank completed the task. The anti-democratic removal is not an accident of the law of unintended consequences. It is the conscious fulfilment of the central political principle of neo-liberalism, that economic policy is the preserve of experts, and should not be subject to the “populism” of democratic politics. It is an irony that the European Union is frequently assailed by right wing politicians in the United States as a haven of socialism. The reality is that the European Union represents exactly the end of democratic oversight that the Tea Party Republicans crave.
As disaster gathers on the European continent (a disaster that UK government economic policy eagerly works to emulate), one can imagine two paths of avoidance. The essential problem of the euro zone is the extreme internal trade imbalances, Germany with a huge surplus mirrored by the deficits of the other countries. The obviously rational approach would be for a German fiscal expansion coordinated with temporary export subsidies and import restrictions in the deficit countries. The European Central Bank would provide transitory coverage of trade deficits. The trade subsidies and restrictions would be combined with longer term policies for what might be termed “competition convergence”. The probability of this sensible policy approach occurring is zero.
At the time of the Latin American debt crisis of the 1980s, many commentators (I among them) argued that if two or more of the countries joined together in a debt renegotiation pact, the onerously debilitating Washington Consensus policies could have been avoided. Similarly, today in Europe a pact among the governments of Greece, Ireland, Italy, Portugal and Spain to coordinate a simultaneous withdrawal from the euro zone would offer a viable alternative to the imposed austerity programs. Together the output of these five countries is almost forty percent larger than Germany’s. The probability of this radical but feasible alternative may be as high as one in a million.
This leaves the two most likely outcomes: euro zone depression with no defectors, or euro zone depression with a chaotic defection process. My guess is depression with defectors, Greece being the first.
How far we have fallen! The vision of a cooperative Europe, that began in 1950 with the Iron and Steel Community, is now realized as a collection of weak and strong countries caught in a spiral of beggar-thy-neighbor trade and austerity policies, in which the 99% are the losers (even in Germany). The authoritarian governance of the EU has reached its fullest expression in the debt disasters of the 21st Century, bringing on a continental depression. The ideology that justified this consciously-created and unnecessary depression was and is pure neo-liberal economics.
Of all the bitter ironies of European unity gone viral, one stands out from all the others: a political project designed consciously to ensure that no country would again dominate the continent changed into the mechanism to achieve that domination.
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This attempt to portray the Eurozone crisis as the flailings of 'neo-liberalism' is really funny. Is it a spoof? Congratulations! At least this progressive website now seems to be ready to say that the EU project is in important respects 'authoritarian'. Progress indeed.
Macbeth sums it up nicely:
http://charlescrawford.biz/blog/-social-europe-or…
I have my own personal and political biases that make me sympathetic to this analysis. That may not make me objective.
This comment by John Weeks is a fair assessment of the human costs of current global economic policy as experienced by a multitiude of people. My own analytical bias is to think about the quality of mercy and the old Roman notion of "clementia". There seems to be a role for building virtuous policy that includes a notion of mercy. One of the things that Greece rerquires is a merciful solution much like what Weeks' recommends should have happened in the first place.
My major problem with neo-liberal solutions is that they are typically short-sighted, narrow and selfish, too often seeking to punish. That is no remedy for any sort of long term solution thatb builds solidarity and provides apath forward for the many. Furthermore, global solutions that further impoverish and weaken peoples can only be a recipe for disaster in a world that has to decide between economic principles that enrich a very few and principles that allow for a sustainable and ecologically sensible set of economic relations in the future that benefit the majority.
Lifeboat analogies have always popular but I never thought I would live to see the day when the only lifeboats remaining were superyachts. That seems to be the course that neo-liberal thinking has put us on.
It's not enough (I think) to rummage around in different abstract virtues and try to imagine a world built on just a few of them, such as Solidarity, Mercy or even Clementia (in the EU case Dementia seems more realistic).
Greece has had huge quantities of Solidarity in the form of billions of Euros of funds provided by wealthier member states. But that money has not been invested well.
Plus it is not that 'policies lead to impoverishment'. Rather impoverishment is the natural state of things. We need policies which lead to wealth.
I recommend the parable of Prodigal Son: http://charlescrawford.biz/blog/crawf-elsewhere-e…
The parable makes sense as an example of 'mercy' only if the wasteful son is sincerely penitent AND believed by the generous father. The problem for the EU is that Greece's capacity to deliver penitent and credible policies is generally thought to be low, which is why eg the Germans want to steer Greece's affairs for a while to get them back on track. That is deeply humiliating for the Greeks, but maybe it's their best chance?
Personally whilst I was enchanted at the first few sentences.The more I read on the more irked I became.People just cant resist having a pop at the European Union and Germany and its Chancellor in particular.Why annoys me…is that people often talk about the egg,and avoid talking about the chicken that laid it.I didn't go to the London School of Economics but for me the origins of this crisis and woes lay in banking fraud in New York City.If you pay to mis-rate bonds,sell them (hugely)on the Capital markets and bring European countries to their knees.Combine that with the same rating agencies who mis-rated the bonds now dropping the ratings on Euro debt and you have the current recipe for disaster.The European Union has been left holding the baby!For me the article should look towards Manhatten and those criminal bankers that sit there,than try to point the finger at Berlin!
On one level this is all true. But at the start of the crisis in 2008 it was widely seen as essentially a US/UK problem. Ireland and Spain were noted, since they had had similar property bubbles but there was a widespread view in continental Europe that the eurozone was largely a by-stander in the crisis. A series of extraordinary pieces of mismanagement by EU and ECB officials and European leaders have bungled the EU response so that it is now at the centre of the crisis. But even further back than that, the formation of EMU in the form it took was disastrously misconceived, an accident waiting to happen. If a doctor prescribed a solution as bad as EMU, he or she would be struck off. Those officials and politicians who promoted EMU should be disbarred from having influence over economic policy, their failure of judgement was as bad as the rating agencies.
As a hobby economist of 20+ year this is a depression that would have happened sooner or later agrivated by Bankers & rating agencies greed & fraud; people are making money out of this! Meanwhile others starve. Gov't mismanagement is rife; we have the perfect storm.
It is unfortunate that John Weeks chose to exclude Argentina, a nation whose democratically elected leadership made a different choice. Recognizing that the austerity programs required to satisfy bank and IMF loans would prevent national growth and recovery in the longer run, as well as further impoverishing the nation in the short run, Argentina simply declined to service that debt. Despite dire predictions of disaster, Argentina recovered well, placing the monies others wished to see spent on debt instead in education and infrastructural development as well as jobs programs. This is a model we would do well to include in such analyses.
A very clearly argued piece of analysis, which could only have been improved upon by discussing the case of Argentina (as someone has already commented) and by including the insights provided by modern monetary theory – particularly the lack of wisdom shown by Greece and others in giving up their sovereign currencies in the first place. As for Charles Crawford, he so spectacularly fails to engage with any part of the analysis or to disguise his Cameronian/Osbornian pre-conceptions, fallacies and misunderstandings, that it is his comments which appear the spoof. The descent into biblical story as spurious analogy is particularly farcical. Impoverishment may indeed be 'the natural state of things' in a pre-economic development feudal or barter system, but Greece was not impoverished and now it is becoming so. Unnecessarily. Still, it takes all sorts.
This article makes an extraordinary claim:
"The authoritarian governance of the EU has reached its fullest expression in the debt disasters of the 21st Century, bringing on a continental depression. The ideology that justified this consciously-created and unnecessary depression was and is pure neo-liberal economics."
What is 'neo-liberal' about authoritarian EU policies being used to bail out banks which have lent unwisely to sovereign governments that have shown themselves unable to live within their means? Insofar as anyone has 'Cameronian/Osbornian pre-conceptions' (sic) it appears to be you, who questions the wisdom of Greece joining the Euro in the first place: I'm sure that D Cameron and G Osborne would be 200% with you on that one.
The point surely is that this Eurozone crisis cuts across all usual categories of political analysis (as the confused piece above itself shows), and to slap a 'neo-liberal' label on it trivialises the argument.
As for Argentina, is that really the model which Social Europeans here favour, namely running up huge debts because of stupid domestic policies then repudiating them? That's a parasitic policy, relying on others to trust your incompetence and fecklessness then take the hit when you fail to fulfil your promises. Sure, sometimes lenders need to accept that they have made unwise loans which will not get them all their money back. But is that really what's happening here? If they did make those loans it's because they trusted the state – is that the test of neo-liberal economics?
As that famous neo-liberal Jin Liqun, chairman of China Investment Corporation (CIC), put it in October:
"Europe is not really short of money. Europe needs to give a clear picture to the Europeans themselves and to the rest of the world that their problems could be worked out. The root cause of the trouble is the over-burdened welfare system, built up since the Second World War in Europe – the sloth-inducing, indolence-inducing labour laws".
Anyone care to disagree?
I would care to disagree. The only country amongst the so called GIPSIs with a significant deficit pre-GFC was Greece. Ireland and Spain ran budget surpluses. These governments were rendered insolvent by a combination of global recession, collapsing asset markets, and the fall out of the GFC. The GFC was caused by a private sector debt bubble centred in the US. This bubble was the result of policies pursued over a 30 year period – most notably financial deregulation taken to an extreme and growing income and wealth inequality. The European governments with the highest welfare spending relative to GDP prior to the GFC included Germany and France – not Greece and Portugal. You are right that the euro-zone was a mistake. It has taken away the power of these sovereign governments to use their powers of seignorage to respond in an appropriate manner to a private sector debt crisis and subsequent collapse in demand. It is meaningless to say countries are 'living beyond their means' when they have spare productive resources but lack the effective demand to employ those resources, and when there is no current risk of demand-pull inflation. They are living beyond their stock of euros, and they do not have the power to print euros – though the ECB does, and has done so grudgingly and indirectly in a belated attempt to prop the foolish system up. The economy of Argetina was successful after its default, and it could not have been as successful without a default and abandonment of dollarisation. Yes – Argentina from 2003 is very much an example to Greece. The first duty of the Greek government is to its citizens, and not to European bureaucrats and German politicians. Osborne is right that Britain is better off outside the Euro – he is dead wrong in pursuing an unnecessary austerity package which prolongs the slump in the UK. He is in a country with its own currency. His folly is in behaving as though this is not the case.