What Happens in Europe Doesn't Always Stay There

By John Buell

Reading the corporate media, one gets the impression that the travails of the Eurozone constitute a morality play with a comforting theme. Germany has been a model of fiscal rectitude amidst a sea of profligate governments that are dragging it down along with the whole European Union and the common currency. However comforting this theme may be, it is wrong.

For starters, the countries in Europe that are still doing relatively well — including Germany, Sweden, Denmark — have far more developed welfare states than those of such “profligate” nations as Spain and Portugal.

From the start, many European social democrats worried that European integration would bring together nations with vastly different economic productivity levels. Preserving floating currencies would, however, give nations that experienced disproportionate shocks the escape hatch of currency devaluation.

But just as importantly, the Maastricht agreement, one of the pillars of European Union, required richer nations to contribute to a stabilization fund to assist poorer nations in developing their infrastructure. Such a fund was viewed as an instrument of economic justice not only for the poorer states but also for a Western European working class that feared the loss of jobs to a low-wage periphery.

European integration also took place on another track, one more dominated by financial elites than by working class or even manufacturing interests.

Financial interests promoted the idea of a currency union as a means of taking currency risk out of trade within the EU as and thereby facilitating broader trade and development. Corporations would not need to worry about rapid fluctuations in the relative value of particular currencies. Another hidden agenda was in play as well. Some banking elites hoped that a common currency would function much as the 19th-century gold standard, making it impossible for debtors to inflate their way out of debt.

The initial appeal of the common currency was not limited to the banking community. Some of the weaker European states hoped that teaming up with economic power Germany would allow them to benefit from the latter’s stellar credit rating. Others hoped that they would become little Germanys.

The press often suggests that European banks were affected by the Wall Street 2008 collapse, but from the very start they were key players in the run up to that collapse. And since European banks were even more highly leveraged than their US counterparts, their role was very large.

In a recent Foreign Affairs commentary, Mark Blyth and Matthias Matthijs wrote: “German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone’s Mediterranean countries. Frankfurt did quite well for itself ... In 2008, Germany was one of the two biggest net creditors within the Eurozone (after France).

“Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain’s negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet.

“Now Europe’s periphery needs long-term loans more than ever, but Germany’s enthusiasm for extending credit seems to have collapsed.”

Once the bubble burst, governments had to take on immense responsibilities to the unemployed as well as to their banks. Spain and Ireland had been models of fiscal rectitude before the crisis. That crisis and the factors that led up to it were the cause rather than the consequence of exploding budgets. The European crisis, as several economists at a recent conference on the future of the Euro at the LBJ School in Austin pointed out, could be contained relatively easily. Greek economist Yanis Varoufakis has developed one of the most detailed and widely discussed proposals.

The ECB — acting on its own authority — could buy bonds of distressed governments and refinance the loans at a lower and sustainable rate of interest. With the exception of Greece, these nations could all pull debts and deficits down to manageable levels if reasonable interest costs were restored.

A sensible recovery program would also include recapitalization along with central regulation of banks and a European wide infrastructure bank to finance needed, green, enhancements of the transportation and energy sectors.

Under the current model of European economic integration, banks are free to invest everywhere but are regulated only at the national level. This has not only precipitated a race to the bottom in financial standards but also close ties between bankers and national political leaders.

Germans complain about the irresponsibility of Southern Europeans, forgetting both that their banks encouraged it and that without such lending, German industry would have enjoyed smaller markets. A German working class, after years of being squeezed itself, can too easily accept such scapegoating. German Chancellor only plays to these sentiments. As of this writing, it appears that Germany will extend further bailouts only on conditions that other EU governments, including its own, legally bind themselves to more austerity. And the ECB remains committed to the same course. Europe now is all anchor and no sails.

These self-reinforcing trends could be reversed, but only through action on several fronts. A renewed social democracy might extend more fiscal benefits, support for wage growth, and more aggressive pursuit of shorter hours as a reward for increasing labor productivity. Such steps would benefit not only manufacturing workers but also the growing service sector as well.

Demonstrations across Europe might show debtors are real people rather than crude moralistic stereotypes. And movements and leaders can do more to show the ways in which private investment banks have harmed both debtor nations and German taxpayers. Finally, one can even dare hope that industrial leaders in Germany might come to realize that austerity hardly helps them either.

Stranger things have happened.

Contemporary capitalism has more stresses, strains, and inconsistencies than either its defenders or even some of its Left critics recognize.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, January 1-15, 2012