the impact of the global capitalist crisis on the eurozone_page proofs

000 Berberoglu book.indb 3

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The Global Capitalist Crisis and its aftermath

The Causes and Consequences of the Great recessionof 2008–2009

Edited byBerch Berberoglu

University of Nevada, Reno, USA


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© berch berberoglu 2014

all rights reserved. no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher.

berch berberoglu has asserted his right under the Copyright, designs and patents act, 1988, to be identified as the editor of this work.

published byashgate publishing limited ashgate publishing CompanyWey Court east 110 Cherry streetunion road suite 3-1farnham burlington, VT 05401-3818surrey, Gu9 7pT usaengland

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British Library Cataloguing in Publication Dataa catalogue record for this book is available from the british library

The Library of Congress has cataloged the printed edition as follows:berberoglu, berch.The global capitalist crisis and its aftermath : the causes and consequences of the Great

recession of 2008–2009 / by berch berberoglu.pages cm. -- (Globalization, crises, and change)

Includes bibliographical references and index.isbn 978-1-4724-1727-5 (hardback) 1. Global financial Crisis, 2008-2009. 2.

economic policy. i. Title.hb37172008 .b46 2014 330.9’0511--dc23

2014016419

isbn 9781472417275 (hbk)

printed in the united Kingdom by henry ling limited, at the dorset press, dorchester, dT1 1hd

44


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1 Chapter 6 12 2

3 The impact of the Global Capitalist 34 4

5 Crisis on the eurozone 56 67 David L. Elliott 78 89 9

10 … the euro zone is now essentially an economic prison, with Germany as the 1011 jailer and the common currency as the bars. no matter what happens they face 1112 a future of stagnation—as aging societies with expensive welfare states whose 1213 young people will sit idle for years, unable to find work, build capital or start 1314 families. (douthat 2013) 1415 1516 1617 a hundred years ago, coal miners would take caged canaries into mines because 17 18 canaries were more sensitive to the effects of carbon monoxide (CO) than humans, 18 19 and when a canary showed distress or died, the miners would leave the mine. 19 20 if the miners had been scientists possessing the instrumentation to measure the 20 21 Co, there would have been no need for the canaries. in 2008, the tiny nation of 21 22 Iceland suffered a financial crash that should have served as the canary for the 22 23 capitalist system; one economic scientist had used his own instruments and saw 23 24 it coming and raised the alarm. but his advice was shelved and probably never 24 25 even read by those with authority. The Icelandic crash accompanied financial 25 26 crisis in the united states and was followed in rapid succession by heightened 26 27 crisis in the european union, especially the eurozone countries that adopted the 27 28 euro as official currency. Outside Europe and the United States, the impact was 28 29 more transient though appearing in almost every other country, giving China the 29

30 opportunity to invest in building its own infrastructure (harvey, 2011). 3031 recurring crises have characterized capitalism throughout its history. each 3132 succeeding crisis to a greater or lesser extent saw the enhanced concentration of 32 33 capital in the hands of the capitalists vis-à-vis the working classes and peasantry, 33 34 and a reconfiguration of sectors within the ruling capitalist class. The Great 34 35 Depression of the 1930s was an extended crisis that started on Wall Street in 1929 35 36 but spread across the capitalist world over the next decade while its recovery 36 37 coincided with the second World War and the war’s end and recovery. This chapter 37 38 explores the continuing European crisis and explains why it differs from that of 38 39 the united states (at least as of this moment) and what its impact has been upon 39 40 the working and middle classes of europe. analyzing why the crisis occurred, 40 41 how and why the european manifestation was unique, and what the prospects 41 42 are for the future of the eurozone are the main goals of this chapter. The chapter 42 43 argues that the leading economic policies of each capitalist state impact the rate 43 44 and nature of its crisis recovery with the important exception of nations within 44


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140 The Global Capitalist Crisis and Its Aftermath

1 the eurozone. in the eurozone, the policy leadership resides in the largest national 12 economy, Germany, and this is realized by actions of the european Central 23 bank (eCb). The concentrated economic power across the eurozone means that 34 monetary policy exercised by the ECB is often in conflict with the fiscal policies of 45 the more seriously crisis-impacted nations: Portugal, Italy, Ireland, Greece, Spain, 56 and Cyprus. 67 The recovery from the Great depression, followed by a lengthy period 78 of robust capital growth, was occasioned at least in part by economic policies 89 advocated by John maynard Keynes who published The General Theory 9

10 of Employment, Interest and Money (Keynes, 1936), a work that suggested 1011 “Keynesian” counter-cyclical pressures—monetary and fiscal—that helped to 1112 stabilize the growing capitalist economy for several generations. beyond Keynes, 1213 traditional economists have generally failed to provide an explanation for the 1314 repeated crises that, though smaller, continue to confront the capitalist system. 1415 While many, such as schumpeter (1939), have traced the economic indicators and 1516 identified a number of apparently concurrent cycles of boom and bust, persuasive 1617 systemic theoretical explanation is lacking. Schumpeter was willing to let crises 1718 continue in the process that he called “creative destruction”—a process that is 1819 superficially apparent today as the ruling class has concentrated and reconfigured 1920 ownership of the means of production. however, economists following delusional 2021 ideologies that include creative destruction, invisible hands, or free and efficient 2122 markets are self-precluded from analytical thinking and they usually reduce each 2223 recurring crisis to isolated idiographic episodes, each with its own largely unique 2324 explanation. 2425 2526 2627 The Recurring Crises of the Capitalist System 2728 2829 Critics of the capitalist system, however, since the time of Marx, have identified 2930 an elegantly simple explanation that provides for critique of the contradictions 3031 of capitalism as a system and for its recurring crises. The foundation for this 3132 explanation is the labor theory of value: all economic value is produced by human 3233 labor power. This is not to say that there are no other manifestations of value. 3334 The defining contradiction of capitalism is the purchase (by capitalists) of the 3435 labor power of the worker and collectively paying workers less in wages than the 3536 total value of the goods and products that they produce. The profit realized allows 3637 the capitalist class to accumulate capital for its own purposes at the expense of 3738 the working class. What does a capitalist do with the accumulated profits? If it is 3839 spent on conspicuous consumption, this removes it as a key factor in the capitalist 3940 system. In capitalism the accumulated profits are reinvested in additional wage 4041 labor and the materials of production to produce yet more goods and products. 4142 The contradiction here is that, sooner or later, more goods that are produced by 4243 the working class are placed for sale than the working class as a whole has the 4344 wages to purchase. There are temporary solutions that may appear “creative”: 44


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The Impact of the Global Capitalist Crisis on the Eurozone 141

1 bankruptcy of some merchants or industrialists, extension of credit to workers, 1 2 globalized commerce and production, etc.; however, eventually the system enters 2 3 a crisis of overproduction (or under consumption) that often results in cut-backs in 3 4 production, rise in unemployment, and it may take months or years for the system 4

5 to recover. Japan is only now recovering from its crisis of the 1990s. 56 While this analysis is based on a more simple system of the nineteenth century, 67 in essence, it remains valid today. of course, today’s world is more complicated. 7 8 in addition to the economic spheres of production and consumption that were 8 9 most salient during most of the nineteenth century, the spheres of distribution and 9

10 exchange have in many respects become the key elements of globalization in the 1011 twenty-first century. A century or more ago, Lenin identified the emergence of 11 12 finance capital as the defining element of imperialism and published his famous 12 13 treatise, Imperialism, the Highest Stage of Capitalism in 1917. he argued that no 13 14 longer were goods, alone, exported for sale abroad; capital was exported to support 14 15 capitalist production in the periphery (lenin, 1975). The accumulation process 15 16 was thus extended to other parts of the world and the crisis of overproduction was 16 17 forestalled as some profits made at home were invested for production and sale 17

18 abroad, rather than for the home market. 1819 This development signaled theemergence of imperialismand today’s heightened 1920 importance of the spheres of distribution and exchange vis-à-vis production and 20 21 consumption. Computers and electronic communications in the internet age 21 22 have contributed significantly to neoliberal capital accumulation as goods and 22 23 products may now be produced, marketed, and distributed to consumers across the 23 24 world much more quickly and with fewer workers involved in the process. This 24 25 contributes to capital accumulation at the expense of the workers employed in the 25 26 distributive industries. But of greater interest here is financialization, a moment 26 27 in the sphere of exchange. Finance capital has provided credit for workers, 27 28 consumers, and students. It has also provided leverage for firms to buy out others 28 29 for expansion through monopoly, as well as for research and development. No 29 30 longer is direct extraction of surplus value in the process of production the sole, or 30 31 necessarily the main, means of capital accumulation. Now, extraction of surplus 31 32 value from the working class via interest on debts, especially consumer credit, 32 33 car loans, and home mortgages, has appeared. This contributed to the dot-com, 33 34 real estate, and other speculative economic bubbles that disproportionately impact 34 35 working individuals negatively, as opposed to corporations, even corporations that 35 36 invest at high risk, sometimes unknowingly. Corporations, however, have access 36

37 to derivatives that offer insurance against major investment losses. 3738 While world production and commerce have changed markedly in the past 3839 century, finance capital still plays a key role within the capitalist system. But today, 39 40 the cause of the crisis may be traced directly back to the role that finance and 40 41 growing debt have played in the accumulation process of neoliberal globalization. 41 42 it is here that we turn our attention to analyze the current crisis, particularly in 42 43 Europe. A key factor that makes the European crisis experience unique was the 43 44 evolution of the european Community (eu) and the single currency, the euro. The 44


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1 euro is used in the eurozone, comprised of many (not all) eu member states. The 12 eu has emerged as a politically weak, policy-setting body for sovereign states 23 as members of the Community alongside the eurozone’s relatively strong, semi- 34 independent central bank, the eCb. 45 by the 1980s and 1990s, Keynesian policies had fallen from use in favor of 56 neoliberal policies—deregulation, financialization, and other economic practices 67 of the ruling class—largely due to the efforts of followers of economist milton 78 friedman and politicians ronald reagan and margaret Thatcher. Whereas 89 Keynesianism was designed to stabilize the capitalist system as a whole, neoliberal 9

10 ideology is more firmly rooted in classical economic thought dating back to Adam 1011 smith and is designed effectively to enrich the individual capitalists and the class, 1112 itself, vis-à-vis the system as a whole, and especially the system that includes 1213 the working class. indeed, the last three decades have seen the massive shift in 1314 the ownership of social wealth toward a smaller number of wealthy families and 1415 individuals owning an increasingly larger proportion of society’s wealth. and this 1516 time period also saw the increased accumulation of concentrated wealth for most 1617 capitalist countries (Germany excepted) that measured in terms of nation-based 1718 accounting data now looks more like the extremes of global inequality, as seen in 1819 the nineteenth century (piketty and Zucman, 2013). 1920 The current crisis, first manifested in 2007–08, is second in severity only to the 2021 Great depression. it, too, has spread beyond the north atlantic rim largely through 2122 financialization, with varying degrees of intensity, landing early-on in Europe 2223 where it continues with its own recurring episodes that seem to repeatedly throw 2324 the political and economic institutions of the european union and the eurozone 2425 into turmoil (lapavitsas, 2012). by spring 2013, capitalists in the us and europe 2526 had largely recovered and enhanced their profitability when financial crisis in 2627 Cyprus erupted, throwing the eurozone into turmoil far beyond what one might 2728 have expected given Cyprus’s heretofore modest role within the capitalist system 2829 of europe. The european manifestation of the crisis thus appears to continue with 2930 little sign of systemic recovery. 3031 The epicenter of the crisis was the United States; its financialization had bled 3132 into the economies of most of Europe. The key financial activities in the United 3233 States that precipitated the crisis were debt-centered and included: 3334 3435 • fraudulent and other questionable acts related to securities 3536 • home loans to persons with insufficient resources that caused a real estate 3637 bubble along with improper or illegal foreclosures that helped burst 3738 the bubble 3839 • massive mismanagement of debt and consolidation of risky toxic assets 3940 • inept or fraudulent assessments of debt risk, etc. 4041 4142 many of the tainted debt packages were marketed internationally such that 4243 financial institutions abroad were placed at high risk when they purchased toxic 4344 US financial products, or engaged in similar activities of their own. But the US is 44


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1 not the only country that suffers from fraud and mismanagement; we see similar 1 2 practices across the capitalist world, and this contributed to the crisis of the entire 23 system. 34 45 56 Iceland, 2008: Prelude to the Eurozone Crisis 67 78 for most of its more than one millennium of human habitation, iceland has 8 9

depended upon the sea for its economic base, indeed even well into the twenty-first 9 10 century. for most of this time, iceland was associated with the nordic countries— 1011 often ruled (sometimes nominally) by norway or denmark—though its annual 11 12 parliament, the Althing, first met in the tenth century. In the twentieth century, 12 13 iceland was occupied by the nazis, but after the second World War, once freed 13 14 from German occupation, iceland began to emerge as a modern democratic country, 14 15 notwithstanding disputes with its neighbors as it extended its claims for fishing 15 16 rights out to 320 kilometers, and with the international Whaling Commission over 16

17 whale hunting (macheda, 2012). 1718 By the last decade of the twentieth century, class conflict had emerged as 1819 iceland developed a robust trade union sector that challenged management and 19 20 had a record of work stoppages that rivaled other capitalist economies. however, 20 21 as iceland’s three major banks adapted to the neoliberal, deregulated international 21 22 system of financialization, profitability rose thus advantaging shareholders and 22 23 depositors. Iceland emerged as an international financier, purchasing toxic US 23 24 assets with funds earning high interest rates deposited by europeans and by 24 25 icelandic union pension funds. after the crash, british and dutch bank depositors, 25 26 through their respective states, kept intense pressure on iceland until the bank 26 27 deposits were finally honored, though the Icelandic labor movement increasingly 27 28 collaborated with capital and quickly lost its progressive nature (macheda 2012). 28 29 Macheda identifies the five characteristics of financialization in Iceland: 1) 29 30 Deregulated financial sector; 2) Increased profits outside the productive sector; 30 31 3) Shareholder profit-making became more salient; 4) Household credit driven 31 32 increasingly by consumption; and 5) finance capital penetrated workers’ own 32 33 social and economic reproduction. These characteristics and others reappeared 33

34 across Europe in various configurations as the crisis spread. 3435 Meanwhile, as the US economy stumbled in late 2007 and the first half of 3536 2008, Congress and the Federal Reserve began to execute a series of extraordinary 36 37 measures to save the capitalist system. This action was the key difference between 37 38 the US and the EU response to the crisis: the US used Keynesian fiscal tools while 38 39 the eu/eCb largely restricted themselves to monetary tools. for the us, this 39 40 included authorizing hundreds of billions of dollars in currency swap lines with 40 41 britain, sweden, norway, Canada, switzerland, Japan, australia, and the european 41 42 Central Bank. More importantly, the US Treasury made available in excess of 42 43 $800 billion to subsidize financial and manufacturing companies. Iceland, with 43 44 far fewer resources and clout in the world, and with overexposure to the toxic 44

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1 12 23 34 45 56 67 78 89 9

10 1011 1112 1213 1314 1415 1516 1617 1718 1819 1920 2021 2122 2223 2324 2425 2526 2627 2728 2829 2930 3031 3132 3233 3334 3435 3536 3637 3738 3839 3940 Figure 6.1 Iceland: A = Unemployment rate and 4041 B = Consumer price index, 2000–2012 4142 Source: Federal Reserve Bank of St Louis. Created 26 July 2013, https://research.stlouisfed. 4243 org/fred2/. 4344 44


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1 financial products from the US, saw its three major banks collapse in October 1 2 2008, and in November it received IMF approval for a $2 billion loan. This should 2 3 have come as no surprise to the bankers: Joseph Stiglitz was the economist who 3 4 authored a working paper for the Central bank of iceland in 2001 cautioning them 4 5 about the financial risks of crisis for small economies, specifically Iceland’s, in the 5

6 midst of growing global financial instability (Stiglitz 2001). 67 iceland’s center-right government fell after the october 2008 crash but it 78 was the workers that paid the price. pension funds were reduced in value and 8 9

used to prop up the nationalized (later re-privatized) banking system. each 9 10 Icelander effectively was expected to pay $8000 to restore the economy. By 2010, 1011 unemployment had shot up to over 10 percent (see figure 6.1). and during this 11 12 time, since 2008, trade unions have continued their collaborationist relationship 12 13 with the bankers and other capitalists responsible for iceland’s economic crisis, 13 14 paid for by the workers. By 2013, the crisis had resulted in significant hardship for 14 15 the working and middle classes with the state still deep in debt (see figure 6.1a 1516 and 6.1b). 1617 1718 1819 European Union and the Eurozone 1920 2021 What made the crisis experience of the eurozone countries unique? In the 21 22 year 2000, european union countries seemed to be strong economically—but 22 23 belgium, italy, and Greece had debts greater than their Gdps. by 2005, on the 23 24 cusp of the crisis, belgium’s debt had fallen somewhat, but portugal, france, 24 25 Germany, and Austria had each accumulated debt that exceeded 60 percent of their 25 26 GDPs, the maximum mandated by the 1992 Treaty of Maastricht and subsequent 26 27 amendments (european Commission 2010). by 2011, portugal and ireland were 27 28 added to Greece and italy as having debt over 100 percent of Gdp, and france, 28 29 britain, and Germany had each seen their debt rise above 75 percent of the Gdp. 29 30 spain’s debt level remained below 50 percent in the years leading to the crisis (less 30 31 than Germany’s) but rose to the 60s in 2010–11 and then jumped to 84 percent 31 32 in 2012. ireland’s debt was likewise less than 50 percent before the crisis but 32 33 then rose sharply to 117 percent in 2012. The corpus of this debt was the result 33 34 of financial speculation and manipulations including rampant extension of credit 34 35 to those who could not repay the inflated prices of the goods (especially housing) 35 36 when the bubbles burst. high government debt, above the 60 percent of Gdp cap 36 37 as established by the maastricht Treaty, was a sign of concern but government 37 38 debt, alone, did not define the most troubled economies, especially prior to the 38

39 crisis (see figure 6.2a and 6.2b). 3940 It might seem at first important to identify those countries that suffered most 4041 (portugal, ireland, italy, Greece, spain, and Cyprus) and name the factors that 41 42 led these countries to their present situations, noting the negative implications for 42 43 workers and consumers. however, the eurozone is an inclusive system in itself 43 44 within the EU, with its own central bank playing a key role that must be examined. 44

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1 12 23 34 45 56 67 78 89 9

10 1011 1112 1213 1314 1415 1516 1617 1718 1819 1920 2021 2122 2223 2324 2425 2526 2627 2728 2829 2930 3031 3132 3233 3334 3435 3536 3637 3738 3839 3940 4041 Figure 6.2 Select European and Icelandic government debt as 4142 a percent of GDP, 2001–12 4243 Source: Eurostat. Last Update: 26.06.13. Extracted: 24.07.13, http://epp.eurostat.ec.europa. 4344 eu/portal/page/portal/eurostat/home/. 44


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1 A nation’s central bank (for example, the Bank of England or the US Federal 1 2 reserve bank [the fed]) traditionally sets the monetary policy related primarily 2 3 to inflation and interest rates. The capitalist ideological environment of the late 3 4 twentieth and early twenty-first centuries advocated using interest rates as a tool 4 5 for keeping inflation low. All states may exercise fiscal policy (taxes and spending) 5 6 and that is part of the Keynesian tool box for regulating the overall economy. 6 7 however, the rightist, neoliberal ideology rooted in milton friedman’s monetarist 7 8 perspective was the one that held sway with the eCb. in addition, the eCb wanted 8 9 the euro to replace the dollar to become a new global currency—irrespective of 9

10 the implications for individual nations that were members of the eurozone, as 1011 a system. The eurozone, as a whole, thus lacked the authority to exercise fiscal 11 12 policy as this was the responsibility of each state. The result is that important 12 13 fiscal resources—such as in the United States, the $840 billion in fiscal tools that 13 14 had been used as of June 2012—were not directly available to the eCb, even if it 14 15 had wanted them. The european union, however, did agree to a 200 billion euro 15

16 stimulus plan in late 2008. 1617 Fiscal policy relating to taxes and state expenditures has rarely been used 1718 explicitly to regulate the economy by most countries in the neoliberal period; 18 19 capitalists have been loath to employ the counter-cyclical pressures advocated by 19 20 Keynes for those purposes. Taxes and expenditures have generally been employed 20 21 to reinforce the ideological goals of nations’ ruling parties, including making 21 22 the rich, richer. In the United States, for example, Democratic administrations 22 23 of obama and Clinton have tended to spend more than republicans for social 23 24 purposes, but even so, the overall shift in ownership of wealth has been toward 24 25 the rich—the capitalist class. The biggest exception, the Obama administration’s 25 26 use of national debt to bail out corporations in 2008 and later, has been excoriated 26 27 by the right-wing Tea party ideological advocates of balanced budgets. in today’s 27 28 neoliberal world, ruling parties have generally only resorted to Keynesian tactics 28 29 when confronted with imminent collapse, and not always then. in many cases, when 29 30 the state can no longer increase its debt, increase the money supply, and chooses 30 31 not to default, it turns to the international monetary fund (imf) that follows a 31 32 neoliberal path often including severe austerity measures that disproportionately 32 33 impact the workers. The IMF essentially dictates the fiscal measures a nation must 3334 take to receive the bailout funding. 3435 3536 3637 The Central Role of Germany in the Eurozone Crisis 3738 3839 in europe, britain and especially Germany have been most strident in opposing 39 40 fiscal policy for counter-cyclical purposes. Britain and Germany have also been 40 41 most successful in oppressing their working classes (lapavitsas, 2012), with 41 42 Germany extracting sufficient surplus value to minimize economic crisis—other 42 43 than the cost of ongoing economic stagnation. The German situation was fairly 43 44 unique as the federal republic struggled to incorporate many workers from the 44

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1 12 23 34 45 56 67 78 89 9

10 1011 1112 1213 1314 1415 1516 1617 1718 1819 1920 Figure 6.3 European unemployment rate, selected countries, 2003–13 2021 Source: Eurostat. Last update: 30.06.14. Extracted: 30.06.14, http://appsso.eurostat.ec. 2122 europa.eu/nui/show.do?dataset=une_rt_a&lang=en. 2223 23

24 former east Germany into the labor market. many of these workers lacked the 2425 experience needed for the high-tech capitalist economy of the west and various 2526 means were attempted to integrate them into the work force. While bureaucratic 2627 solutions with respect to employment search, etc., may have helped in some regard, 2728 in the final analysis, it appears that reductions in the benefits for the unemployed 2829 and introduction of more low-wage job helped to raise the employment rate (bonin, 2930 2012) (see Figure 6.3), and certainly the profit rate of corporations now with access 3031 to more low-wage labor. how long this will remain effective is questionable but 3132 the “success” of this hard line would seem to have emboldened the German state 3233 to force other nations to apply austere measures to their workers and consumers to 3334 resolve the crises brought by the neoliberal capitalist system. 3435 moreover, as the largest economy in the eurozone, Germany was able to 3536 play a heavy-handed role within the eu, as well with its own workforce. in the 3637 early years of transitioning to the euro, 1999–2002, Germany’s current accounts 3738 balance vis-à-vis portugal, italy, Greece, and spain went steadily down from 2003 3839 until 2008, meaning that Germany exported increasingly more than it imported 3940 with respect to these countries. in addition, Germany’s overall current accounts 4041 balance as a percentage of its Gdp went from a slight negative in 1999–2000 up 4142 to 6–7 percent in 2007–10. Clearly something was happening here, and rosenthal 42 43 4344 44

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1 12 23 34 45 56 67 78 89 9

10 1011 1112 1213 1314 1415 1516 1617 1718 1819 19

20 Figure 6.4 Eurozone current account, 2004–12 20

21 Source: OECD. Current account balance of payments 2012. http://stats.oecd.org/. 2122 2223 argues that currency speculation and manipulation was in Germany’s favor as the 23 24 individual currencies were finding their value with respect to the euro before the 24

25 euro actually became a fact (rosenthal 2012) (see figure 6.4). 2526 Germany began to experience the effects of the crisis in 2007–08, especially 2627 with respect to its tainted us investments. The Christian democrat dominated 27 28 government (with social democrats) did not move rapidly when the scope of the 28 29 problem became obvious, and refused to carry out the Keynesian counter-cyclical 29 30 policies advocated by the social democrats. The Christian democrats did all 30 31 they could to avoid any apparent nationalization (unlike the us approach that 31 32 took partial ownership of some companies) and focused primarily on lowering 32 33 taxes to stimulate the economy. Even though France in 2008 recommended 33 34 a common eurozone bailout fund, Germany opposed it. france and Germany 34 35 have the two largest economies in the eurozone. When they are in agreement, 35 36 their view generally guides eurozone policy. but when they disagree, eurozone 36 37 policy and eurozone action effectively reverts to the positions of the eCb and 37 38 the imf, which are largely monetarist. by 2009, in German internal politics, the 38 39 governing coalition fell and the election brought back the Christian democrats 39 40 with the social democrats suffering heavy losses (Zohlnhöfer, 2011b), an election 40 41 that seemed to provide evidence of public support for angela merkel’s hardline, 4142 rightist approach. 4243 4344 44


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1 The Eurozone’s Troubled Periphery 12 23 elsewhere in europe, the crisis that already hit iceland and the us had not 34 manifested itself fully, if at all. The ultimately hardest hit countries--portugal, 45 Italy, Ireland, Greece, Spain, and finally Cyprus—were occupied with national and 56 intra-european issues. in portugal, increased fuel prices caused demonstrations by 67 fishermen. Ireland was more preoccupied with remaining political issues related to 78 northern ireland vis-à-vis the republic. italian electoral politics drifted to the right 89 with berlusconi once again the prime minister, and the right taking on the mayor’s 9

10 office in Rome. Greece was feeling the impact of pervasive fraud in the pension 1011 system and, unlike the more compliant icelanders, Greek workers protested 1112 repeatedly against plans to reduce benefits and add years to the retirement dates 1213 of some workers, primarily women (who could retire at earlier ages than men). of 1314 greater significance, by the end of 2008, Spain had the highest unemployment rate 1415 in the eu and was moving to pay for the repatriation of immigrant workers whose 1516 unemployment rate was 17 percent. 1617 The most troubled eurozone members of the european union, however, 1718 faced a more complex situation; since monetary policy was centralized and not 1819 necessarily designed for the good of any specific country most member nations 1920 had little control over their monetary environment. moreover, the way the euro 2021 was established and each country’s currency linked to it favored the largest and 2122 strongest economy, Germany. One result was that German exports of machinery, 2223 expensive automobiles, etc. could sell at high prices since during this period there 2324 was little competition abroad; however, portugal and spain were in competition 2425 with low-wage areas such as China, and their exports suffered. In fact, in the years 2526 leading up to the crisis, even the value of internal eurozone trade increasingly 2627 favored Germany over the countries in the mediterranean region—Greece, italy, 2728 spain, and portugal. in addition to the european Central bank that sets monetary 2829 policy for the 17 member nations out of 27 members of the eu, there are other 2930 institutions including a parliament and a european Commission of national leaders. 3031 since technically the eu is an international organization built upon a patchwork 3132 of treaties, it has no internal police powers to hold states to their treaty agreements 3233 and obligations. However, the European Commission does exercise some power 3334 over the ECB and exercises influence within the 27 members of the Union. The 3435 chair of the european Commission rotates annually among the membership of the 3536 union, not a source of strength. 3637 sarkozy of france had tried and failed to orchestrate a change in eu rules to 3738 appoint a permanent european Commission chairperson (presumably himself), but 3839 instead the new member of the eu, the Czech republic, took on the rotating chair 3940 responsibilities. This caused both personal and structural fissures in the EU and 4041 decreased its already weak political influence. As a consequence, monetary policy 4142 executed through the ECB remained the primary means by which the EU and 4243 the eurozone addressed the growing crisis. The political weakness of the eu was 4344 further illustrated by european Commission Chairman Topolanek of the Czech 44


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1 republic openly and publicly criticizing obama’s bailout of us corporations 1 2 and banks, much to the consternation of many EU nations. Exercising national 2 3 fiscal measures (raising taxes and cutting expenditures) was politically risky 3 4 without significant external pressure and without leadership from the European 4 5 Commission. The external pressure was primarily the threat of IMF demands if a 5 6 loan were offered, as european union treaties alone were not generally effective 6 7 in implementing the drastic measures seen by many as needed to save the system. 7

8 european parliamentary elections were held in early June of 2009 with 89 a low turnout (43 percent), but significant indications of dissatisfaction with 9

10 contemporary political and economic issues. a small number of ultra-right 1011 candidates were elected that generally signaled a shift to the center-right across 1112 europe. 1213 in 2009, the impact of the eCb ideology was felt by the eurozone’s second 1314 largest economy, France: 1415 1516 … the head of the european Central bank, Jean-Claude Trichet, warned european 1617 governments against accumulating more debt. ‘There is a moment where 1718 you cannot spend more and accumulate more debts. We are at that moment,’ 1819 mr Trichet said during an interview on french radio europe 1. 1920 2021 further stimulus spending would present a serious problem for future generations 2122 to deal with he said, adding that the current packages were ‘completely 2223 extraordinary’ and also ‘sufficient’ to deal with the downturn. (Willis, 2009) 2324 2425 At the time, France’s budget deficit (tax receipts minus spending) was expected to 25 26 exceed 7 percent and her overall debt remained well over the Maastricht Treaty’s 26 27 limit of 60 percent of the GDP. The strong arm of the ECB thus reflected the 27 28 ideology of externally-designed monetary policy that placed pressure on a nation’s 28 29 own fiscal policy, an act that was followed three years later by President Sarkozy’s 29 30 loss to socialist françois hollande in a bid for re-election. but the french 30

31 government was not the only eurozone state on the line in 2009. 3132 by the end of 2009, after a year of strikes, demonstrations, and other violent 3233 protests, Greece began to face ECB pressure as deputy finance minister Philippos 33 34 sachinidis announced that debt had reached 300 billion euros, 113 percent of 34 35 the Gdp (bbC news, 2009). This was just the beginning of a continuing public 35 36 debacle that pitted rival ideologies against one another (right vs. populist) as well as 36 37 geopolitics (in eurozone terms: core vs. periphery or north vs. south). Greece was 37 38 still basking in the glory of the debt-funded, over-budget 2004 XXViii olympiad 38 39 games (Harvey, 2011) and civil servants were provided with enviable benefits. 39 40 but as the eurozone would soon learn from a 2010 eurostat report (european 40 41 Commission, 2010), Greek national accounts suffered from both methodological 41 42 and governance issues that called into question the quality of reports that Greece 42 43 had issued (with known inconsistencies) in its attempt to respond to the growing 43 44 crisis. as Greece slid toward default at the end of 2009, the eu and imf pledged 44


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1 a three-year, 110 billion euro bail-out package in exchange for Greece’s austerity 12 agreement that would raise taxes and cut the income of public sector workers and 23 retirees. 34 Greece was not alone in facing the looming crisis in 2009; spain began the 45 year with the bursting of a housing bubble. for decades spain’s warm weather 56 and cheap prices had attracted northern europeans for vacation and as long-time 67 residents, thus driving up real estate prices during the boom years that ended 78 in 2008. unemployment rose, and prices that had risen during the boom years 89 dropped precipitously until by April they had become deflationary. As Paul 9

10 Krugman remarked in his blog at the end of the year, spain 1011 1112 needs to become more competitive—but it can’t have a devaluation, because it’s 1213 a euro country. so the only alternative is wage cuts, which are desperately hard 1314 to achieve (and create big problems for debtors). 1415 1516 Contrary to what everyone seemed to be saying even a few weeks ago, being a 1617 member of the eurozone doesn’t immunize countries against crisis. in spain’s 1718 case (and italy’s, and ireland’s, and Greece’s) the euro may well be making 1819 things worse. (Krugman, 2009) 1920 2021 At the end of 2009, Ireland was similarly afflicted: still recovering from the decades 2122 of rebellion in northern ireland, the housing bubble that had been encouraged by 2223 banks prior to 2007 had burst sending housing prices in a freefall (26 percent drop 2324 since 2007) and unemployment rose to over 12 percent. by 2010, most european 2425 Union members were in technical violation of the Maastricht treaty that expected 2526 nations to maintain public debt below 60 percent of the Gdp (see figure 6.2a and 2627 6.2b). 2728 in Greece the crisis was most acute. not only did Greece have the highest 2829 debt as a percentage of its Gdp, but the Greeks continued to struggle against the 2930 austerity measures prescribed by Germany and the eCb. Greek workers and civil 3031 servants protested vigorously and the first bailout of 2009 had not fixed the debt 3132 problem. The continued pressure on the Greek government by eCb to enhance 3233 fiscal austerity measures met by mass mobilizations against these measures winter 3334 and spring (psimitis, 2011) continued through 2010 as did the eu/imf loan 3435 promises. 3536 as of 2010, ireland (to be followed by portugal, spain, and italy) had embarked 3637 on a similar path toward default as Greece. and two long years after the crisis 3738 erupted, the eurozone and the imf (minimally under the circumstances) propped 3839 up their economies: 3940 4041 • to the tune of 85 billion euros for ireland; 4142 • a permanent eurozone bailout fund of 500 billion euros was created; 4243 • 78 billion euros went to portugal; 4344 44


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1 • the eCb purchased spanish and italian bonds; 12 • italian debt rating was cut; 23 34 and the crisis was spreading to britain, belgium, and france. meanwhile, austerity 4 5 spread across the hard-pressed eurozone members with heightened alarms 5

6 sounding for the entire eurozone experiment. 67 During the next year, 2011, Greece continued to flirt with default, and deal with 78 repeated rounds of austerity and protests as eurozone leaders added an additional 8 9

109 billion euros of support—in light of the 90 billion euros owed to Germany and 9 10 france, alone. in october, eurozone leaders offered a 50 percent debt write-off, 1011 conditional upon yet another round of austerity measures which prime minister 11 12 Papendreau offered up as a referendum for the public. Next month after intense 12 13 criticism of the referendum plan, papendreau resigned. by the end of 2011, Greece 13 14 had been granted another 8 billion euros in loans, and banks agreed to another 14 15 21 percent loss on loans to Greece. but the banks had little say in swallowing 15 16 the losses on the Greek bonds. Cyprus would emerge a year and a half later with 16 17 its own crisis rooted, in part, on the severe impact of the Greek bailout upon its 17 18 own banks that had invested heavily in presumably safe Greek bonds. ironically, 18 19 in a report issued in spring 2013, the imf admitted to the ineffectiveness of 19 20 some austerity measures it had extracted from Greece (Executive Board of the 20

21 international monetary fund, 2013). 2122 The following year, 2012, started in January with the downgrading of both 2223 French debt and the eurozone bailout fund, itself. The next month, Greece executed 23 24 severe austerity measures that resulted in an additional 130 billion euro bailout, 24 25 but the measures once again sparked violent protests. Greek electoral politics went 25 26 into a tailspin with the conservative new democracy party winning the election in 26 27 June, but it took until year’s end to renegotiate loans and facilitate the next bailout. 27 28 meanwhile, the eurozone economy as a whole began to shrink and eurozone 28 29 unemployment grew to a record of 10.7 percent across the board for January, with 29 30 19 million people out of work. spain was hardest hit with an unemployment rate 30

31 of 23 percent (see figure 6.3). 3132 The same year, 2012, saw the most recent eurozone country, Cyprus, approach 3233 the eCb for assistance. The losses Cypriot banks realized on the loans to Greece 33 34 enormous: they amounted to about 22 percent of the nation’s GDPin 2011 (Higgens, 34 35 2013). And only four to five years after joining the eurozone in 2008, national 35 36 politics were on the rocks and the russians (whose money of questionable origins 36 37 was deposited in the Cyprus banks, and lost) refused to bail the Cypriots out. in 37 38 march 2013, the latest of the heavy-handed eCb actions brought the Cypriots to 38

39 their knees as well. 3940 by the end of 2013, the worst crisis episodes were past and europe settled 4041 into a new stasis of German hegemony in the eurozone and what may prove to be 41 42 high and prolonged levels of unemployment in the european union, especially 42 43 the eurozone (see figure 6.5, euro area ea17 and eu28 unemployment rates as 4344 published by eurostat in January 2014). 44


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1 12 23 34 45 56 67 78 89 9

10 1011 1112 1213 1314 1415 1516 1617 Figure 6.5 Euro area EA17 and EU28 unemployment rates, 2000–2014 1718 Source: Eurostat Newsrelease: Euroindicators, 17/2014–31 January 2014. Eurostat news 1819 releases on the internet: http://ec.europa.eu/eurostat. 1920 2021 2122 The Future: Stalemate? 2223 23

24 both the working/middle classes and the ruling capitalist class are plagued with 2425 national and other divisions that have, on the one hand, prevented the workers 2526 of europe from effectively uniting to confront capital. on the other hand, the 2627 divisions prevented the ruling class from more effectively exploiting the workers, 2728 peasants, and middle classes across the world as they continue to compete with 2829 one another within the framework of imperialism inherited from the nineteenth 2930 century. at the same time, eu leading perspectives were characterized by the 3031 use of national units of analysis or points of view rather than, for example, the 3132 eurozone as a transnational system. Thus the european Community including the 3233 eurozone is trapped in a stalemate: a web of nationalist, neoliberal, monetarist 3334 economic policy spun by Germany, the imf, the eCb, and supported by britain 3435 and other non-euro members of the eu versus the fragmented workers and middle 3536 classes. 3637 if the workers and middle classes continue to fail to see their shared interest 3738 to unite across national lines, and if the capitalists retain their unholy marriage 3839 between centralized euro-monetarism and decentralized political nationalism, this 3940 crisis is likely to continue indefinitely. Japan has stagnated for nearly two decades 4041 of monetarism and only recently, under Prime Minister Shinzo Abe’s pro-fiscal 4142 approach, is Japan beginning to see its way out of its late twentieth-century crisis. 4243 Will Japan’s experiences over the next few years serve for Europe as a roadmap 43 44 44


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1 out of the stalemate the eurozone is in? and till then, what will happen to portugal, 1 2 ireland, italy, Greece, spain, and Cyprus? according to eurostat (2014) as this 2 3 book went to press, their unemployment rates in december 2013 ranged from 12.1 3 4 percent in ireland to 25.8 percent in spain, with the latest rate for Greece 27.8 4 5 percent in october 2013. by contrast, iceland’s unemployment rate had fallen to 56 5.2 percent and the us rate to 6.7 percent at the end of 2013. 67 78 89 Conclusion 9

10 1011 The focus of this chapter was an analysis of the divisions that have stalemated 11 12 european capitalist development; the european ruling class is unable to effect a 12 13 full and viable capitalist auto-recovery with the people of europe unable to unite 13 14 and take advantage of the contradictions of today’s capitalism to finally end its 14

15 reign once and for all. 1516 The historic eurozone experiment in financialization—European Central Bank 1617 monetary policy concentrated within the EU but decentralized tax and spending 17 18 fiscal policy in nations across the EU—has worked poorly for both the ruling 18 19 classes and the working classes. It has essentially subjected each nation’s fiscal 19 20 policy to international law through treaty obligations and placed the eCb beyond 20

21 the bounds of national law and leadership. 2122 The eurozone experience stands in striking contrast to the immediate EU 2223 response to the crisis in the ukraine that began to unfold as this book went to press. 23 24 While the eCb and imf forced severely debilitating monetary measures upon 24 25 Greece (especially) and portugal, Cyprus, spain, italy, and ireland leading to the 25 26 fall of many governments, the EU offered $15 billion in aid to the Ukraine, much 26 27 of it designed to support the rebel government and to soften the harsh terms they 27 28 expected the IMF to impose. Once again, we saw the hegemonic posture in the 28 29 euro crisis by the German-french powers that undermined the southern european 29 30 periphery, but this time it appears as anti-russian and directly from the european 30 31 Commission, itself. The balance of fiscal-monetary measures was reversed for the 31 32 ukraine to better serve the immediate political and ultimate economic goals of the 32 33 eu to maintain a power imbalance within the eu with an eye toward ukraine’s 33

34 eventual joining the eu. 3435 This is the outcome of an ideology of weak, laissez-faire political control over 3536 a rigid, centralized financial structure. European civilization is deep-rooted and 36 37 the accompanying national/ethnic antagonisms and prejudices go back centuries; 37 38 but, it would be a mistake to read too much into these beliefs. The failure of the 38 39 eurozone experiment is nothing if it is not the ultimate failure of an economic 39 40 ideology rooted in the enlightenment but now moribund, and slipping relentlessly 40 41 toward the next cataclysm that may eventually lead to the final collapse of global 4142 capitalism. 4243 4344 44


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