Europe’s Crisis: An Explanation and an Internationalist Alternative

Neoliberalism led to a significant increase in the profitability of capital via a dramatic decline in workers’ bargaining power and share of income. However, this has meant a decline in workers’ purchasing power, which has limited their potential to consume. Demand deficiency and financial deregulation reduced investment despite capital’s growing profitability. Debt-led consumption, enabled by financial deregulation and housing bubbles, seemed to offer a short-term solution in the periphery of Europe, in particular Greece, Portugal, Spain, Ireland and Eastern Europe, and also in some core countries like Britain and Italy. Current account deficits and private or public debt (in the case of Greece) in periphery countries was matched in core countries like Germany by export-led growth and current account surpluses. For capital in the core, exports had to compensate for the decline in domestic demand caused by workers’ decreased purchasing power.

Contradictions within the EU

The periphery of Europe became important markets for firms in the core. The level of productivity of capital in the periphery didn’t converge with the level in the core because of lack of a sufficiently large European Union (EU) budget and of significant fiscal transfers targeting productive investments in the periphery. The EU’s Stability and Growth Pact, as well as EU competition regulations, limited the implementation of national industrial policies. 

Lacking investments to boost productivity and unable to increase competitiveness by devaluing their currency after they adopted the euro, the only option open to periphery countries has been to  lower wages and impose more precariousness on workers. But this did not save the countries of the periphery, since Germany was engaged in a much more aggressive policy of holding down wages and deregulating labour markets. In the 1990s and 2000s productivity increases outpaced the growth of real wages in all Western EU countries. In Germany, Italy, Spain, and Portugal real wages even declined in the 2000s.

The financial crisis in 2007-8 laid bare these divergences and the fragility within Europe. The crisis was tamed by bank bailouts and fiscal stimuli in 2008-9. This along with falling tax income increased public sector deficits. In 2009 the banks, which were bailed out by the European Central Bank (ECB) and EU governments, relabeled the crisis a “sovereign debt crisis. Banks have been asking for higher interest rates because of the default risk of the governments with high public debt. The ECB, which acted as a lender of last resort to private European banks, did not fulfil the same function in the case of the Eurozone governments until May 2010 when the markets speculated fiercely about a default in Greece; since then the ECB has been reluctantly buying government bonds in the secondary market.

Bailouts and austerity

Following speculations about Greece’s default and exit from the Eurozone, the Eurozone governments hesitated for months before implementing the first bailout package in May 2010 together with the IMF. This was followed by speculative attacks and bailout packages for Ireland and Portugal in 2010-11.

The bailout packages of the Eurozone governments were designed to protect European banks, mostly based in Germany and France, from losses on their holdings of government bonds in the event that the countries of the periphery had to restructure their debts. However, these packages did not calm the markets, so in the summer of 2011 a decision was made to ramp up the European Financial Stability Facility (EFSF). Along with a new bailout package for Greece there was some restructuring of the Greek debt and banks had to accept that they would bear some of the costs.

The crisis has also spread to countries like Spain, which has a low level of public debt but high private debt, and Italy, which has high public debt but a low budget deficit. Even France is being questioned based on its commitment to guarantees via the EFSF, particularly if Italy needs a bailout. The financial markets were temporarily calmed down in 2012 when the ECB announced that it would do “whatever it takes” to save the euro. However, the ECB’s interventions will be limited to intervening in the bond markets to prevent hikes in the interest rates on government bonds of the peripheral countries; in exchange, the ECB will require that any country it “assists” adopt a harsh austerity programme.

The future of the Eurozone

The possibility of a break-up of the Eurozone is more seriously discussed among the speculators as well as on the Right and Left of the political spectrum. However, the consequences of this for countries in the periphery would be a currency war for competitive devaluations, no gains in competitiveness and serious hikes in inflation due to rising import costs that would have devastating effects on the incomes of the majority of the people. The value of countries’ debts in foreign currencies would also spike if not accompanied by a major debt restructuring. A deep 1930s style depression would be likely in the European core as well as in the periphery.

The ruling classes claim that Europe has a sovereign debt crisis due to a lack of fiscal discipline.  They ignore that the public debt would not have increased so much if it were not for the unprecedented bank rescue packages, the loss in tax revenues, and the increased social spending stemming from rising poverty and unemployment. Their solution to the crisis is austerity:  ever-deepening attacks on the working class and welfare states across Europe.

As a consequence, 2011 was marked by a weak recovery in many European countries and since 2012 the recession is back again. The southwestern periphery of Europe is in a deep recession. Most Eastern European countries’ GDP is still below 2008 levels despite a strong recovery in 2011. Britain, the champion of budget cuts in the core, is heading towards a triple-dip recession. Germany’s growth, pulled by China, has failed to lift all boats in Europe, and has also been rather weak since 2012. 

Working people are experiencing an incomes and jobs crisis along with the dismantling of the welfare state and more regressive taxes. People who did nothing to cause the crisis are now being made to pay for it. Unemployment increased sharply in 2009 and has remained high since then in all countries except Germany.  The increase has been particularly dramatic in Spain and Greece, where the unemployment rate has reached 25%. Long term and youth unemployment have worsened even more. Workers have been experiencing real wage losses since 2010 or 2011 in the periphery as well as in some core countries like Britain and Italy. Austerity and wage cuts may lead to more people being unable to pay their debts, creating problems for banks.

The policies of the ruling classes do not address the origins of the crisis. They ignore the structural divergences in productivity and imbalances within Europe and don’t address the causes of growing deficits. A political crisis of representation is emerging as fewer people vote in elections and more voters express their discontent by voting against austerity and for alternatives ranging from the radical left SYRIZA and the fascist Golden Dawn in Greece to other parties outside the establishment, like the Five Star Movement in Italy. 

Resistance and alternatives

Faced with a concerted ruling-class offensive, we need a European-wide mass movement of resistance. Four demands are key: 1) opposition to austerity policies and all cuts; 2) higher taxes on the income and wealth of the rich, corporations and financial transactions, as well as controls on the movement of capital; 3) bringing the banks into public ownership under democratic control; 4) auditing the debt and cancelling the parts which are illegitimate.

There is a growing consensus within the radical left across Europe around these issues. But we also need to build a bridge from an emergency programme that responds to the crisis to an internationalist Europe of the people as an alternative to the Europe that works in the interests of capital though the current institutions of the EU.

The radical left in Greece, Spain, Portugal and elsewhere across Europe is focussing on fighting austerity. It is opposing deep cuts in public services, wages and pensions and calling instead for banks, corporations and the rich to pay for the crisis which they created. If these movements succeed, they would push for renouncing the neoliberal treaties of the EU and cancelling illegitimate debts. This would encourage and spread resistance across Europe.

Withdrawal from the EU or exit from the Eurozone is not a precondition in our fight against austerity and for radical change. If one country in Europe rejected austerity plans and refused to pay the debt, this could lead to a massive domino effect of mobilization across Europe. Protectionist alternatives on a country-by-country basis, such as withdrawal from the EU or exit from the euro, do not have the same power to spread the resistance. They would also lead to currency devaluation. This would have disastrous consequences for ordinary people, especially in countries such as Greece, as the costs of imports and of domestic goods produced with imported inputs would soar while the purchasing power of wages and pensions would collapse. Moreover the exit of one country from the Eurozone would likely lead to the exit of others, which would start a currency war via a series of devaluations across countries.

The way to unite the power of people across Europe is to build on the common interests that we have across borders. The austerity packages in every country, driven by the interests of banks and corporations and coordinated through institutions such as the IMF and the ECB, are creating mass unemployment and driving down the living conditions of the working class. Even workers in rich countries like Germany have not been spared: at the turn of the 21st century, wages, unemployment benefits and pensions were attacked to make German companies more profitable.
Reversing austerity in Germany as well as in Greece is crucial to solve the crisis in Europe. The austerity policies to deal with debt are intended to bail out the banks. But these policies bring countries such as Greece, Ireland and Portugal to the edge of insolvency by means of a deepening recession. This has consequences for working-class people in Germany, France and Britain, who will again be pressured to bail out the banks that have driven these countries into an ever-increasing level of debt which cannot be repaid. The only way to end the vicious circle of austerity and bailouts is to cancel major parts of the debt and nationalize the banks under democratic control in both the richer and poorer countries of Europe.

The questions we must ask are not only “why should we pay for the crisis?” and “can we pay back the debt?” but also “why should we continue paying for the growing debt caused by the ever-deepening crisis?” Recognition of the need to cancel the debt is also important given the ecological limits to growth, which pose a constraint to the traditional Keynesian policies of paying down debt through capitalist economic growth.

An international mobilization against austerity must lead to a radical change in economic priorities in Europe, a challenge to the dictatorship of the EU, IMF and the banks, and a new and democratic way of organizing society. Fiscal, monetary, and industrial policy should aim at full employment, ecological sustainability and equality. Minimum wages, social benefits and public services across Europe should be financed by a European budget funded by increased progressive taxation of corporations, banks and the rich. Fiscal transfers within Europe are also consistent with the interests of the working people in the core countries: a low-wage periphery that attracts corporations is a threat to workers in the core as well. The ECB should be replaced by a Peoples’ Bank of Europe that would be responsible for the supply of funds needed for green investments and to meet the needs of people rather than demands for private financial profits. Monetary policy should reflect the priorities adopted by a Peoples’ Assembly of Europe, not those of the unelected European Council.

 Across Europe we have to not only reject the austerity programmes but also the logic of the capitalist system by proposing another way of distributing wealth and challenging the private ownership of finance and industry. It is within this framework that we should work towards the convergence of struggles across borders and collaborate with different anti-capitalist movements across Europe. The resources of the continent could be used to meet the needs of people and the planet, tackling poverty, inequality and climate change. But this cannot be done within the existing framework of the EU, which was set up to create a free market for capital and to maximise profits. Resistance against austerity is starting at a national level, but the scale of the crisis is such that radical solutions are required at the level of Europe. This calls for a movement of resistance and alternatives that unites workers and peoples across the continent.

Özlem Onaran has widely published on the crises, globalization, distribution, employment, and growth. She collaborates with Socialist Resistance, the British section of the Fourth International.