Back to the Eurozone Crisis
by Paul Murphy
“The ESM is poisonous. If you touch it, you die.” Pier Carlo Padoan, former Italian Finance Minister
Late night ‘Eurogroup’ meetings, arguments over eurobonds, the return of the European Stability Mechanism… the first symptoms of a new eurozone crisis are clearly present. Just as the coronavirus attacks older people with underlying health conditions, it is having a devastating impact on a vulnerable world economy. Pre-pandemic, it was experiencing its slowest rate of recovery since World War II, reliant on historically low interest rates and ‘Quantitative Easing’. The contradictions and faultlines within capitalism exposed by the ‘Great Recession' are being laid bare once more. The emergence of a new eurozone crisis, with deep tensions and clashes between the different capitalist governments, is a graphic illustration of this process.
All of the talk of European solidarity was quickly forgotten when Covid-19 hit. The free movement of goods, supposedly a cornerstone of the entire European project, was unceremoniously abandoned. Italian appeals for urgent medical supplies from other European states went unheeded. The German government temporarily banned the export of Personal Protective Equipment (PPE) while the crisis raged. This was followed by the French government seizing all supplies of PPE, including those intended for export to other European countries. The Belgian and Spanish governments followed suit. Meanwhile, another foundational principle, the free movement of people, was also swiftly discarded as borders went up between Schengen countries.
The consequences of this approach were predictable - Italians justifiably angered at being abandoned to face the pandemic alone when they were the European state hit first. In the context of an already-strong skepticism about the European Union, 88% of Italians declared that Europe was failing to support Italy in the crisis, with only 4% believing it was doing enough. Two-thirds of Italians now see being in the European Union as a disadvantage, compared to 47% in November of 2018.
Economic consequences
The row about PPE and medical equipment quickly moved onto the economic terrain. The European economy is faced with its biggest contraction since World War II. The suggestions from some economists that this would be a ‘V’ shaped recession, with a sharp fall followed by a quick recovery, look increasingly unrealistic as unemployment rates have doubled and doubled again in the space of less than a month. Instead, a deep recession or depression looks increasingly likely, with a prolonged reduction in demand, and bankruptcy and bailouts for banks, airlines, hotel chains and other industries.
More rapidly than in 2008, Central Bankers and governments worldwide reached for ‘unconventional monetary policy’ and other measures outside of neo-liberal orthodoxy in order to mitigate the worst of the crisis. The US government, with more freedom of manoeuvre than other capitalist governments because of the dollar’s dominant position as ‘World Money’, disbursed so-called ‘helicopter money’ of $1,200 to every adult, as part of a $2 trillion recovery package. The European Commission suspended application of the ‘fiscal rules’, which restrict public expenditure, and relaxed the ‘State Aid’ rules, which prevent state support for industry.
The European Central Bank started the crisis with a disastrous press conference from its new President, Christine Lagarde, where she suggested that it was not the role of the ECB to “close the spread.” The ‘spread’ refers to the gap in bond yields (interest rates paid on government debt) between different countries in the European Union, with EU states such as Italy paying significantly higher interest rates on their government debt than Germany. The result was that the ‘spread’ widened further, and the ECB was forced to perform a swift u-turn. Six days later, it announced the ‘Pandemic Emergency Purchasing Programme’ (PEPP), the purpose of which is precisely to “close the spread”.
The PEPP involves the ECB buying up to €750 billion worth of European government bonds on the secondary market. In other words, they don’t buy them directly from states, because that would blatantly breach the ban on ‘monetary financing’ of member states. Instead, they will buy them from private investors, giving speculators a chance to profit in the crisis. This initiative caused the spread between German and Italian bond yields to narrow somewhat, but the gap remains over 2%.
Who will pay?
However, these unconventional measures will not allow governments and capitalist classes to avoid answering the question of who will pay the bill. Above all, this is a class question which will be fought out through struggle in the coming months and years, as the burden for the inevitable bailouts of big business is once more attempted to be placed on the shoulders of working class people. In addition, particularly within the European Union, it is also a question of dispute between the different capitalist classes. Posed bluntly, will the Italian economy have to shoulder the burden for the cost of its coronavirus crisis alone, or will it be shared with Germany and other northern European nations?
Even in an economy like Germany’s, the estimated cost of the crisis is forecast to increase the debt to GDP ratio from 60% to over 70%. In peripheral European economies, still suffering under unsustainable debt that was simply papered over at the end of the last crisis, this will mean a re-emergence of public debt crises. Italy’s debt to GDP ratio remains 135%, Spain’s is at 100%, while Greece’s is already at an eye-watering 180%. While Ireland’s debt to GDP ratio is at 64%, its debt to GNI* (which strips out the distorting effect of multinational corporations practising tax avoidance through Ireland) is at 100%, a more accurate reflection of the scale of the debt relative to the real economy. None of that is to mention the accumulation of private debt, which for Ireland is almost 400% of GNI*, an historic high. Like in the last crisis, some of this private debt could be converted into public debt in the event of large-scale bailouts.
Economists suggest that in Spain and Ireland, those public debt ratios could quickly increase from 100% to 120%, based on a 10% drop in GDP, and a 10% deficit caused by coronavirus related expenditure. That increase would be even more for countries with a debt to GDP ratio higher than 100%. Pedro Sanchez, the Prime Minister of Spain summed up the dilemma facing his government and those of other peripheral states, “in a crisis like this, the Spanish economy cannot take on more debt; it can’t.”
Coronabonds
In this context, the governments of the periphery have reached into the toolbox of proposals to fight the last crisis. They hastily scratched the euro out of ‘eurobonds’ and replaced it with corona. It is the same proposal however, and faces the same obstacles for the same reasons. The essence of coronabonds is that new debt would be issued at a European level, with joint responsibility for paying for it.
The Irish government joined the governments of Italy, France, Spain, Greece, Belgium, Portugal, and Slovenia in co-signing a letter to the President of the European Council calling for such an initiative to “ensure stable long term financing” for states affected by the pandemic. The French government dresses up its support as being one of ‘solidarity’ with countries like Italy. In reality, it reflects the real position of France, which instead of being an equal partner to Germany, increasingly has many features of a peripheral economy.
The old debates of the last crisis have been rehashed at long European Council and Eurogroup meetings, with the Dutch and German government leading opposition to any ‘mutualisation’ of debt. Those opposed to coronabonds counter with the suggestion that the European Stability Mechanism (ESM), established in 2012 as a source of conditional funding during the last Eurozone crisis, should be used. The Dutch and Austrian governments have insisted that while money released to directly address the health crisis could be without conditions, funding to tackle the economic crisis would have to come with strict conditionality, including so-called Country Specific Recommendations. In other words, a return to a level of supervision equivalent to that of the Troika after the last crisis - with austerity and privatisation policies dictated by the ESM.
Politically, this is extremely difficult for governments in the periphery to sell - as working class people have been burnt by the Troika experience of conditionality in the past. Pier Carlo Padoan, a former Italian Finance Minister remarked with fear, “the ESM is poisonous. If you touch it you die.”
A 14-hour Eurogroup meeting of Finance Ministers on 7 April ended without even agreement about a joint press statement, and with the cancelling of the planned press conference. A further meeting on the night of 9 April ended in defeat for the peripheral governments. There would be no agreement on coronabonds, and agreement on ESM funding without conditions only extending to 2% of a country’s GDP and to be spent on “direct and indirect healthcare, cure and prevention related costs due to the COVID 19 crisis.”
Even with a broad interpretation of “prevention related costs”, which the German and Dutch governments are unlikely to support, the limit of 2% of GDP means that any further funding will come with strict conditionality, i.e. an austerity programme and ‘supervision’ by the ESM. The only crumb of comfort for the peripheral governments in relation to coronabonds is that discussion on “innovative financial instruments” will continue - the same sort of language used to kick eurobonds into the long grass during the last crisis.
Deep fault-line within EU
The clash and deadlock between many of the peripheral European governments on the one hand, and the core states on the other, is not an accidental one. The Covid-19 crisis has brought to the fore the central contradictions of the European Union. German, Dutch and Austrian capital oppose the mutualisation of European debt, because they refuse to take responsibility for debts incurred by other European states.
Behind the yellow stars, the ‘Ode to Joy’ recitations and the rhetorical references to solidarity and internationalism, is a reality that is quite different. It is a project of the different capitalist classes across Europe to pool some elements of sovereignty in order to create an integrated market with free movement of capital, to more effectively exploit the working classes across Europe, to extract more resources from the neo-colonial world and to attempt to compete on the world stage with the US on one side, and China on the other. Despite the increasing integration of capital across Europe over the last decades, and the wishes of some of its more ambitious proponents, a European capitalist class has not been created, and the EU is far from a US type of federal state. The consequence is diverging national capitalist interests which come sharply to the fore at time of crisis.
The monetary union (common currency and common central bank) and free-trade zone of the EU has functioned to the benefit primarily of the German capitalist class, providing a massive market for exports, while removing the option of devaluation from weaker peripheral capitalist classes. While it was meant to mean upwards economic convergence for the peripheral states, in reality it led to an increasing divergence. German capitalism won the competitiveness race at the expense of both German workers and the weaker economies. This was temporarily papered over before the last crisis, with availability of cheap credit for companies and individuals at the periphery. This private debt was then converted into public debt with the bailouts and subsequent austerity.
This divergence has exacerbated the fault-line which monetary union without fiscal union (i.e. common taxation and public expenditure policies) always posed for the eurozone. This is because without common fiscal policies, where tax revenue can be redirected from the stronger to the weaker regions (as happens within a nation state), the trend will be for further divergence economically between different parts of the eurozone. With monetary policy being set to suit the interests of German and northern European capitalism, while they refuse to take any responsibility for the debt, the coronavirus is setting into motion once more the centrifugal forces which threatened to push Greece and other countries out of the eurozone previously.
What next?
These centrifugal pressures are not the only forces present. Clearly German capitalism has been the big winner from the process of capitalist integration of Europe and the development of the common currency. While it is loath to take responsibility for the debt of other states, its long-term interests would be damaged by the disintegration of the eurozone. The European Commission, which has a strategic project for a full fiscal and monetary union across Europe, pushed for eurobonds during the last crisis, although so far, current President Von der Leyen has not been enthusiastic.
In reaction to the last crisis, both the European Commission and the German government pushed further towards fiscal union to match monetary union, by adding teeth to the Maastricht criteria, with the addition of the ‘Fiscal Treaty’ as well as the six-pack and two-pack, granting more power to the European Commission and enshrining neo-liberal straitjackets in law.
These counterposed centrifugal and centripetal forces can co-exist for a period of time, and even reinforce each other. German capitalism will demand significant further moves towards full fiscal union in exchange for any serious consideration of mutualisation of debt. Those demands in turn will deepen the anti-EU sentiment in peripheral states. The outcome could include the exit of some peripheral states from the eurozone, and possibly the EU, while the core countries take a further step forward towards fiscal union.
It should be remembered that Greece was maintained in the eurozone only by the sell-out of Syriza, betraying the result of a referendum rejecting a bailout package full of austerity. Also, contrary to the expectations of former Syriza Finance Minister Varoufakis and others, there is no question that the other side of that negotiation was willing to pull the trigger and force Greece out of the euro in order to avoid the political contagion of left governments.
Political factors are present once more. This eurozone crisis comes in the slipstream of the last one. The political forces of the capitalist class enter this crisis much undermined compared to the last one. The situation of Ireland, where the combined vote of Fianna Fail and Fine Gael was almost 70% in 2007, while it has fallen to under 45% now, is not unique. It’s a similar story, with different national particularities, across most of what were derisively known as the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) as well as other European countries, including France. The capitalist class lack stable political instruments with social weight and support in society.
Workers who went through the last crisis and saw the bankers and bondholders be bailed out at their expense, will not be inclined to give them the benefit of the doubt. Social provision and public sector pay levels have still not recovered, yet working class people are burdened with more tax. Efforts to blame this crisis on lazy public sector workers, or lazy Italians, are also likely to fall on infertile soil.
Even the German government has a limited room for manoeuvre. Any move towards concessions on mutualisation on debt, presumably in exchange for increased control over peripheral states’ fiscal policies, would meet with strong opposition from the right-wing AfD. It would also clash with a large part of Merkel’s CDU’s support base, which has been fed a diet of xenophobic stories about lazy southern Europeans.
The ECB’s PEPP bond-buying programme should avoid an immediate lock-out of peripheral countries from bond markets, as happened to countries like Greece in the last crisis. However, while it avoids a liquidity problem for these states, it will not allow them to avoid a new crisis of unsustainable debt, as having access to funding is not the same as being able to repay it! This will come into focus as debt rises and economies contract. Combined with the new ESM conditionality, this will give an added edge to the coming programme of austerity, presumably repackaged as ‘corona solidarity’, in peripheral states.
The result will be explosive. Class struggles, as well as clashes between capitalist governments within Europe are on the horizon. Anti-EU sentiment will undoubtedly grow dramatically in peripheral states, creating openings for radical forces both of the populist right and the socialist left. The crisis also has implications for inter-imperialist relations, with the likely acceleration of the trend of partial de-globalisation, in particular with strengthened border controls and possibly the relocation of some essential production by states in an effort to avoid disruption of supply chains. China is already moving to strengthen its relative position on the world scale through this crisis.
New opportunities to build mass parties of the left which can fight for left governments with socialist policies will be posed. Syriza squandered the opportunity given to them during the last crisis, setting back the struggle for socialist change across Europe, and complicating the picture in Greece. The mistake of Podemos in taking responsibility for managing capitalism alongside PSOE in Spain, leaving the far-right Vox as the second largest opposition party in parliament, as well as the historic mistakes of the Italian left in participating in coalition government are unfortunately going to have an impact. They may mean that the right is better positioned in some countries to take advantage of the crisis, at least in its initial stages. Aspects of the pandemic response such as border closures and quarantines are ripe for exploitation by the far right, as Trump’s xenophobic comments demonstrate.
Given the impending climate catastrophe, the socialist left can’t afford to squander the coming crisis. Instead of leaving space for the right, the left must occupy the terrain of criticism and exposure of the reality of the EU, instead of participating in prettifying it. It should advocate a programme of socialist rupture with this neo-liberal EU and the rebuilding of a new, genuinely democratic socialist Europe, based on mutual aid, cooperation and solidarity.