Austerity Has Failed - Part 1

The policy of austerity, introduced by right-wing, populist Governments, across Europe, and being pushed by the Tea Party, and Republicans, in the US, has failed.

But, not only has it failed, it is threatening to send the economies of Europe and the US into a severe recession, that will not only cause considerable damage to Capital in those areas, and provoke widespread social unrest, but will permanently weaken Capital in those areas compared to Capital in China, and other parts of Asia.

The real basis of the crisis in Europe comes down to this. The EU established a single market, and single currency without establishing the other elements of a single economy that need to go with it. That is they failed to create a single, centralised state, and a single fiscal policy. That means that some countries suffer from the Monetary policies, adopted to meet the needs of the dominant regions of the economy, whilst others such as Germany benefit.

When interest rates were low, and the Euro fell in value, Germany was able to use that to further rebuild, and restructure, its industrial base, and to grow through exports. The peripheral areas of the EU, however, lacking the world beating industries of Germany, used low interest rates to borrow to finance consumption – often of German produced goods – and to finance, what they did seem to have going for them, a huge expansion in property construction to cater for the purchase of holiday homes by Northern Europeans.

When interest rates rose, and the Euro followed suit, Germany was able to weather the storm, it could issue its own Bonds, which attracted plenty of buyers, due to its sound economic position, and its world beating industries succeeded on the basis of providing quality not cheapness. The periphery, however, when it came to borrow on international Capital markets had no such luck. It faced rising interest rates, just at a time when a rising Euro exposed the lack of competitiveness of its economies, and potential to grow and finance its deficits.

In places like Spain, and Ireland, where the property bubble had been exceptional, the end of the bubble caused construction to collapse, throwing tens of thousands on to the dole, and exposing the fact that many of its Banks were built on the sand of massively inflated property prices.

The point is that, in a single economy, this should not happen. The quid pro quo of giving up control of your interest rates, and currency should be that you are able to borrow at the same rate as everyone else in the currency area. That can only happen, if Bonds are issued by a central Debt Management Office, and so Capital markets buy those Bonds at prices based on what they think the risk factors are for the whole area. In the case of Europe, given the size of Germany's economy, as a percentage of the whole, this means that they would price these Bonds mainly on the strength of the German economy. It means that the individual states, should then be able to borrow at this rate from some Central Authority, or that the funds raised by it, and from taxation, can be used to be dispersed to the various component states in accordance with their needs.

However, this was not done in the EU, for various reasons. Firstly, some countries like Britain were opposed to the idea of a centralised Federal State. Even getting through the Lisbon Treaty proved too problematic. In the US, a Civil War had to be fought before the rights of individual states were subordinated to the Federal State in the interests of industrial Capital.

In Europe, long established sovereign states cling to the past, and centuries of culture, nationalism, and self-interest stand in the way of creating a single state. The dialectical dynamic created by that is complex. On the one hand, the interests of Capital, particularly Big Capital, are best served by the establishment, as in the US, of a strong centralised State. The bourgeois parties, including the bourgeois Workers parties, who seek to look after the interests of that Capital, therefore, are pulled towards such a development. But, those parties are built around coalitions of views, some to the Left, some to the Right of a Centre ground, that itself moves to and fro. In short, these parties raison d'etre is to get elected.

As their politicians frequently retort when their failure to stand by any principle is raised, “its no use having principles if you can't implement them.” Consequently, these parties, at the same time as attempting to shape Public Opinion, through their activities, are themselves massively shaped by it. Perhaps, one of the greatest examples of that was the way in which European Socialist Parties collapsed in 1914 into become patriots, when they were confronted by millions of workers upon whom they relied, rallying to the flag of War.

But, the political parties are not the only shapers of Public Opinion. Of course, bourgeois ideology is implanted in workers minds from an early age via the schools and other Capitalist State education factories. But, bourgeois ideology, in general, does not demand that, at any one time, the masses should be overwhelmingly racist, or bigoted in other ways, nor that they should be vehemently nationalistic, or warmongering. On the contrary, there are periods when such sentiments are wholly contrary to the interests of Capital.

How these ephemeral shifts in attitudes occur is down more to the mass media, which can as we have seen whip up periodically moral panics, such as that over paedophiles, the danger of which for Capital, could be seen by the fact that this campaign led some of those who were likely to be whipped up, in fact, into violently attacking the homes of paediatricians!!! But, the dialectic is at play here too. In decades past, when newspapers had millions of readers, and when their profitability was secure, they could, perhaps afford to make radical shifts in their position, in the knowledge that if they upset some of their readers by doing so, they would win others, and that it would be only a matter of time before, lost readers returned. But, in an era where newspapers face fierce competition from TV, the Internet and so on, and when sales have been declining steadily, leaving most papers running at a loss or barely making a profit, they can be less flexible in their position. Like the politicians who have built an electoral coalition around a fairly tight range of views – and usually at its centre is the views of the majority of its core membership – the newspapers, having staked out their particular niche, in the market, are loathe to stray away from it, for fear of losing market share. In fact, this is once again the operation of the principles of Game Theory at work, which has come to dominate the marketing, and production decisions of most major corporations – avoidance of big gambles on something new. The sets of ideas established, if not over centuries, then at least over decades, then tend to have an inertia that is hard to break free from. If it is to happen, then it has to be done by some kind of consensus, the kind of consensus that does not usually come within a competitive environment, unless the interests of the dominant sections of Capital are challenged seriously.

This is the backdrop to the adoption of policies of austerity in Europe, and by the Tea Party, and Republicans in the US. It is also, perhaps, why in those societies where these kinds of limitations, or this kind of ideological consensus does not exist – in China, Brazil etc. - the problem did not arise, and large scale, expansionary policies were adopted as counter-cyclical measures to deal with the recession that followed the Financial Crisis.

Taking Britain, as the most obvious example, for most of the period, up to the election in 2010, the Tories were arguing that they would match Labour's spending proposals. Why, because the general consensus was that such policies had worked during the period after 2000, when a series of downturns had occurred, and because that consensus also saw the rebuilding of Public Services such as the NHS, as beneficial.

But, in 2010, the Tories needed to get elected, and opinion had shifted due to the deficit, and the crisis in Europe. The Tories, if they were to mobilise the coalition of electoral support they needed to get elected, had to shift their position to be more aligned with the concerns of their core membership, and support. That comes from the ranks of the small business class, sections of the middle classes, and backward sections of workers whose views are narrow, and restricted, and for whom the view of the world is indeed shaped by their fears, and their experiences of how they run the budgets of their businesses and homes. Even then the Tories could not mobilise a sufficient majority around such a set of ideas, whilst the Liberals even during the Coalition talks continued to believe that the deficit was being hyped up, and that any austerity measures would be counter-productive, if implemented before the recovery had properly taken hold after 2011.

Moreover, that set of ideas, around the need to balance budgets, in the same way that businesses and households are supposed to do – in fact, of course they don't because many households not only have mortgages that run for 25 plus years, but in fact, private debt is twice the level of Public Debt! - fitted with the kinds of ideas that the newspapers that this section of society read – the Daily Mail, Express, Sun, Star etc. - whereas papers such as the Financial Times, read by the real Capitalists, never went along with such an approach, warning, indeed, of the dangers of undermining the recovery. That was not to say that there was not an argument for dealing with the deficit, but doing so by means of a certain amount of managed inflation, of growth, and gradual reductions in planned expenditure.

Indeed, even arch doomster, Nouriel Roubini, who had warned of the dangers of the crash and subsequent downturn, brought about by unsustainable levels of credit, argued that, in times of crisis, everyone has to be Keynesians, and only when the crisis is over do you start to withdraw the stimulus. In fact, in 2008 at the height of the crisis, even old Thatcherites such as Samuel Brittan, writing in the Financial Times, was arguing in favour of such stimulus, and pointing out that in such conditions there was no conflict between Keynesian and Monetarist policies!

But, that set of views is in large part based on fear. The typical middle class or aspiring middle class person is frequently characterised by their overwhelming view that someone is getting something for nothing, that they are not getting, that somebody wants to take what they have away from them, and that it is necessary to hunker down. In fact, of course, its usually the other way around, that the Middle Classes, are more aware of what they are entitled to, more confident and able to obtain it, than those less fortunate. But, it is this kind of view that fosters all of those kinds of reactionary ideas, about Benefit Scroungers, Foreigners, and Governments wanting to spend their money, to be paid for by higher taxes on them. Unfortunately, in the latter instance the experience of the period since WWII has provided justification for that particular view. Big Capital has fulfilled its requirement for a healthier, more educated, and more socially content working-class through a huge expansion of the Welfare State, paid for by the increasing amounts of taxes levied on the Middle Class, and increasing layers of the working-class.

Like the fear of paedophiles, that fear within those sections of the masses was picked up on by the right-wing populist politicians who needed to get elected, and by the tabloid press who needed to sell papers. Having picked it up, the dialectic set to work, and the prejudices were reinforced in the minds of the masses. A new consensus was formed that the deficit was an existential threat, and only immediate, decisive action was sufficient. Anyone who slightly disagreed was to be labelled a “deficit denier”. But, having created this Monster, Frankenstein was trapped by it.

We know from the disclosures of David Laws to Sky News, that the issue of the deficit had been “hyped up”, we know that the Liberals themselves opposed the idea of austerity, but having tied themselves as human shields to the Tories, they too were trapped into a narrative that took on a life of its own.