I heard, former Bank of England MPC member, David Blanchflower, describe the policy of cutting budgets, being pursued by the Tories and other governments, as economically illiterate. It’s a good description.
A few weeks ago, I wrote that the obvious, and probably likely, solution to the Greek, and Club Med economies, debt crisis was that the ECB should simply monetise the debt; print money that was used to buy up the debt. A week later, that was almost exactly what happened. A massive, 750 billion euro, stabilisation fund was set up to guarantee the sovereign debt of Eurozone economies, and the ECB began to buy up Greek debt. The Euro rose sharply, and, around the world, Stock Markets soared. A week later (when I first wrote this) the Euro has fallen to an eighteen month low, and is almost back to its original value against the dollar. Stock Markets have crashed by as much as 5% in a single day. Why?
The reason is simple. When I spoke about monetising the debt, I also pointed out that such a process would only be tolerated by the rich Eurozone economies, who, ultimately, will have to pay for it via a lower Euro, higher interest rates and inflation, and/or higher tax payments, if it was part of an overall package in which there was greater control over the budgets of individual states. Germany, in particular, especially during elections, was reluctant to cough up any money to bail out Greece. According to a report in El Pais, Sarkozy threatened to take France out of the Euro unless the Germans did. I pointed out that you can’t have a single market, for long, without a single currency, without a single state acting as the Executive Committee of the ruling class, ensuring a level playing field for all Capital within its borders. That means common fiscal policy, common benefits, pensions etc, or at least in large part.
Behind the scenes, the proto-European state has been bringing some of these things about. The Maastricht Treaty set down fiscal rules that had to be met before countries could join the Euro. But, as Greece has shown it was a sham, and the FT has given data showing that, in fact, France and Germany breached the Treaty far more than has Greece! Throughout the EU, there are now reciprocal arrangements in relation to Pensions and Benefits, so that if you are in receipt of a Benefit in one country, you continue to receive it in another. But, it is precisely the fact that these measures have had to be introduced by the back-door that demonstrates the contradiction at the heart of the EU. To work it has to centralise, it has to establish a strong and controlling central state apparatus, but the continuing national interests of sections of Capital – particularly small Capital – and of political elites, stands in the way of bringing that about. As Marxists have always argued, Capital probably cannot create a United States of Europe, only workers can do that.
In the US, the original Constitution saw it as a Republic – not a democracy – in which the real power continued to be vested with the people of each state. The role of the central, Federal State was to be extremely limited. However, it did not take long before the needs of US industrial Capital blew that Constitution away. It needed a strong central state, and when several, non-industrial, states baulked, it was prepared to wage a Civil War against them, to bring it about. In Europe, several centuries of national identity, a couple of centuries of existence as nation states, and the legacy of Nationalist ideology that goes with that, particularly in Britain, where it is combined with a strong dose of racism, which was developed to justify its Colonial Empire, in a way that was not so true for France, or Spain, now also stands in the way. Those ideas, in the heads of peoples, now stand as a democratic impediment to Big Capital’s, historically progressive, EU project. So, it has simply ignored democratic principles and proceeded by bureaucratic means.
The representatives of Capital are now speaking openly about what has to be done. But, at a time of economic crisis, and after a period during which Euro-scepticism has grown in various countries, partly because of the bureaucratic manoeuvrings within the EU, and its democratic deficit, it is the least likely time that an open debate about establishing a Federal European state will succeed. In that most federal of European states, Germany, which has most to gain from a united federal Europe, Der Speigel, which is the equivalent of the Daily Mail, has been responding in typical populist terms, by whipping up Euro scepticism over the Greek bail out, and raising demands about the return of the Deutschmark.
In its absence, the price that Greece is being asked to pay, for the bail out, is swingeing cuts in its Public Spending. As Daniel (Danny The Red[now Green]) Cohn-Bendit said in a speech in the European Parliament, cuts way beyond anything even rich countries like France have ever been able to achieve. For Greece, still in recession, and suffering deflation, the consequences are inevitable. Not only severe social unrest, but also a collapsing of its economy into deep recession, that, of itself, is likely to increase its deficit, just as Thatcher’s recessions of the 1980’s did in Britain, as tax revenues fell, and Benefits payments soared. But, its not just Greece that has been placed in that position. The markets have turned their attention to the other PIGS. Portugal saw the interest payments for its sovereign debt rise sharply, and has introduced its own austerity programme. Spain, still in recession, and with unemployment at Depression levels of over 20% (and staggering youth unemployment over 40%!) has introduced its own programme of economic suicide. Ireland has already gone down the same road. Now, with a Tory Government in Britain, threatening to also begin to immediately swing the axe, Europe stands on the verge of a self-inflicted severe recession, because if the PIG economies, and Britain, are laid low, then for the rest of Europe, whose economies are bound to them, the consequences, when they are themselves still in a stage of fragile recovery, will be severe. That is why the Euro has been collapsing, that is why EU Stock markets have been tumbling, and why the consequences of a severe EU recession for the global economy, has sent world stock markets into crash mode once again. It appears that EU Governments, and those like the Tories in Britain, have got themselves into a kind of machismo mindset, of outdoing each other in the cuts they propose to make as a means of “reassuring the markets”, without actually noticing that their very actions of proposing such cuts, and sending their economies into recession is precisely what is sending the markets into a panic!!!
The comparison with other economies is clear. China’s Command economy responded to the Financial Crash in 2008, and subsequent recession, almost immediately. It stepped up Public Spending, and resorted to measures such as handing out vouchers to citizens so that they could just go out and buy consumer goods. Even during the global recession, China grew at nearly 8%. Its now growing at over 12%. In the US, the massive stimulus programme has continued, and the US rapidly came out of recession, and is now in a V shaped recovery. Brazil is growing at 5% a year, and is set to overtake Britain, and it too has been increasing its Public Spending, particularly on Social projects, which put money into the hands of the poorest who are most likely to spend it. Yet, there are still those like Jean Claude Trichet, at the ECB, or like the Tories, who insist that, irrespective of the consequences, deep cuts are absolutely vital. It is economic illiteracy.
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