The European Crisis

First published in Oxford Left Review Issue 10 (June 2013)

In order to think realistically and creatively about matters of socialist strategy – how to resist austerity, how to defeat austerity and even more than this how to set about winning power in order to bring about fundamental change toward a more democratic, humane, equal and sustainable society – we need to be clear about the economic and political context in which we are seeking to operate. In the following I shall put forward some broad-brush observations in relation to the origins, development and trajectory of the current crisis of capitalism focusing in particular on Europe before drawing out tentatively, and giving brief consideration to, a series of possible ‘exit routes’ – two which might be imposed by capital and one which might be implemented by anti-capitalist forces.

Some General Points about the Crisis

It must be emphasised that the current global capitalist crisis is, precisely, a crisis of capitalism. That is, it is a systemic crisis. It is not simply a debt crisis. It is not about ‘profligate government spending’ as the neoliberal right have sought to present it – very successfully so, incidentally, given the way in which this narrative frames much of the debate in the political and media mainstream. It’s not even really about ‘greedy bankers’ or a ‘failure of regulation’ as the dominant narrative on the centre-left tends to suggest. The first of these two (complementary) elements of the centre-left story moralises the crisis in a crudely simplistic way and the second presents it merely as a failing of administrative/ managerial competence. Deeper, underlying structural and systemic determinants – the economic pressures driving risk-taking, profit-maximising behaviour (i.e. the driving logic of capitalism) and militating against the imposition of regulatory constraints on those behaviours (and thus on maximised rapid financial returns) – are ignored and entirely excluded from the picture. It must be insisted, against all this, that the crisis is rooted in the dysfunctional logic of capitalism and that, indeed, this is an extremely serious crisis from which it is very hard to see how capitalism has any immediate prospect of recovery. It is likely to drag on for years.

Just as for capitalist growth and expansion, capitalist crisis unfolds in processes of combined and uneven development. The close international integration of national economies means that a crisis emerging within one of them can be transmitted widely very rapidly. However, while this entails generalisation of the crisis internationally in some respects (and indeed the crisis takes on some specifically and irreducibly international/global features) the effects of the crisis are not evenly distributed and its intensity varies from state to state and from region to region. This unevenness is shaped by national (and in Europe to a certain extent by regional) specificities and ‘path dependencies’ – the relative weight and health of particular economic sectors, the particular configuration of political-economic institutions and the particular constraints and capacities that arise from them, and the specific policy responses to the crisis chosen by governments for example.

One important feature of this international unevenness is that the crisis tends to become concentrated at any given time in one or two particular locations. It is not just, then, that the uneven development of the crisis is expressed in differing levels of intensity from place to place, but that the crisis becomes focused and condensed within a particular economy or economies. Developments in those particular locations take on a general significance – the unfolding of the crisis in these places manifests a sort of concentrated expression of the international crisis in general. Certainly the development of the crisis internationally can turn very rapidly on developments in these locations. These sites in which the crisis is concentrated and condensed need not include the location in which the crisis first emerges – indeed the geographical epicentre(s) of the crisis can shift. In the current crisis the epicentre of global economic instability has moved from the US to Europe. It began as a crisis in the US mortgage market and has been transformed into a European sovereign debt crisis and a crisis of the institutions of the EU and Eurozone. Furthermore, this European crisis, which condenses the global crisis, has a particular focal point of its own – Greece. It is in Greece, then, that the global crisis is manifested in its most concentrated form and it is for this reason that whatever happens in Greece over the next few months – economically but also politically – is likely to have hugely significant international ramifications.

Dimensions of the Crisis in Europe

We’ve been told regularly over the past few months that the European crisis has ‘turned the corner’. Each time the proclamation has been proven wrong by subsequent events, only for the proclamation to be repeated a few weeks later which, in turn, proves to be mistaken – and so on. Recent economic figures show the seriousness of the situation. Eurozone GDP contracted for three consecutive quarters in 2012, following 0% growth in the first quarter of that year. The fourth quarter saw growth fall by 0.6%, following a drop of 0.1% in the previous quarter. Clearly things are not improving. The last quarter of 2012 also saw some of the worst GDP figures for major states in the EU: Italy minus 0.9%, France minus 0.3%, and even Germany saw its GDP decline by 0.6%. ‘Peripheral’ southern European economies such as Spain, Portugal, Cyprus and particularly Greece are, of course, suffering the worst effects of this crisis. In Spain, for example, unemployment currently stands at about 26% – youth unemployment at 52%. In Greece, which has seen a cumulative reduction in GDP by about 20% over the past four years and which is expected to have contracted by 25% by the end of 2014, the unemployment rate stands at about 27% – with youth unemployment at 61.7%. About a third of Greece’s population (that’s about 3.9 million people) are now thought to live in poverty.

The fact is that Europe is in a deep, intractable crisis and nobody really knows how it can be overcome. As we’ve seen, the crisis in Europe (the most acute, focal point of which is Greece) condenses the global crisis and so stagnation in Europe both manifests in sharp form, and also itself drives and reproduces, the great world recession.

How did we get here?

The current crisis represents the breaking down of a series of temporary solutions to a major crisis of capitalism that emerged in the 1970s. In effect, the international economy has gone full circle and returned, after a few decades of (largely debt-fuelled) growth based on various temporary fixes, to the relative stagnation in which it languished around forty years ago. In order to understand the crisis today, then, we need to examine the development of the global economy over the past few decades.

Robert Brenner1 has argued that the advanced capitalist economies entered a crisis of profitability at the end of the 1960s. Indeed, according to Brenner, these economies have suffered from relatively low rates of profit ever since. One major reason behind the crisis of profits that emerged in the late 1960s was that firms encountered increasing constraints on opportunities for profitable investment as the post-war boom petered out. The effects of this can be seen in the marked slow-down in rates of growth from the 1970s onwards compared to previous decades (the average rate of annual GDP growth in Western Europe from 1950-73 was 4.79%, while from 1973-03 it averaged 2.19%).

Capitalism responded to this crisis in several ways. It sought to ‘go global’ in order to seek out cheaper pools of labour and to open up new investment opportunities abroad. Under Thatcher and Reagan especially, it launched an assault on trade unions and pushed up unemployment in order to weaken organised labour and drive down wage costs at home. Finance was also, increasingly, deregulated in order to soak up excess capital looking for profitable outlets. Some of the initial solutions, however, soon created further problems for capital. Repression of wages, of course, drove down workers’ spending power and thus reduced the rate of effective demand. Capital’s solution to this problem was to extend the credit system and to ramp up debt-fuelled consumer spending. This strategy intertwined with wider moves to deregulate finance and with the rapid acceleration of ‘financialisation’. Credit-fuelled consumption, together with asset price inflation drove growth for a while. However, this solution, in turn, eventually became the source of serious problems for capitalism because it ‘ultimately led to working-class over-indebtedness relative to income that in turn led to a crisis of confidence in the quality of debt instruments’.2 The crisis that emerged in the US ‘sub-prime’ market brought into full view the extent to which major financial institutions had become perilously overextended and, indeed, the extent to which growth had been reliant on ballooning of debt.

What we saw, then, from the 1970s onwards was a series of temporary fixes to a deeper structural problem in which each fix raised further problems that had, in turn, to be temporarily solved with further fixes. Indeed Capitalism, as David Harvey points out,3 never really resolves its crisis tendencies – they are merely shifted around, postponed and held off. Capitalism finds a way of overcoming one crisis only to discover, sooner or later, that the terms of this solution, in turn, throw up new problems which develop into a new crisis.

It is worth noting that ‘financialisation’ represented a response to very real pressures on profitable accumulation – it was a way of soaking up excess capital given the weakness of profitability in the productive sector. The deregulation of the financial markets and the concomitant extension of credit and debt did not simply represent, as social democratic and Keynesian theorists tend to suggest, an ideologically driven, bad policy choice on the part of neoliberals. A solution to the problems we face then, cannot be as simple, as some sort of return to the post-war ‘Keynesian consensus’ in which financial regulation is tightened up and the financial markets put back in the box from which they escaped after the 1970s. The real structural pressures to which ‘financialisation’ was a response are still there and remain unsolved.

The Eurozone Dimension

The crisis in the Eurozone intersects with this deeper, wider crisis of capitalism more generally. The Eurozone crisis, however, has a number of specific features and emerged in a relatively distinct historical process closely bound up with particular effects emerging from the institutional architecture of the Euro. European Monetary Union (EMU) flowed logically from closer and closer economic integration among European economies and from the institutional/legal structures (such as the Single European Market) which reflected and accelerated this process. One of the key factors driving economic integration in Europe – from the mid-1980s especially, after a period of so-called ‘Eurosclerosis’ in the 1970s – was the intensifying global competition which set in after the petering out of the post-war boom as outlined above. Monetary Union, as the most advanced and ambitious form of economic integration in Europe, functioned as a joint strategy among European elites for defending and improving the global competitiveness of the region in the context of a general and sustained crisis of profitability. EMU was rooted in world crisis from the start then – it has always been, in a sense, an expression of this underlying crisis of profits. As the most recent in a series of successive fixes to this underlying global crisis (financialisation) broke down, however, EMU itself became a key source and driver of the global recession we are now experiencing.

The key weakness of EMU from the start was the ‘one size fits all’ approach embodied in its ‘discipline and convergence criteria’ for membership and perpetuated in its ‘stability and growth pact’. This yoked together economies as diverse as Germany, Greece, Finland, Ireland, the Netherlands and Cyprus in a deeply inflexible system. One of the key problems was that some of these economies are strong exporters and others are not. Inevitably major trade imbalances between national economies within the Eurozone emerged. Germany in particular ran huge trade surpluses (driven in part by sustained wage repression) while countries like Spain and Greece ran corresponding deficits. Further, the surplus from exporter economies (particularly Germany) was increasingly recycled into the property market in Spain, driving the speculative property boom there, and also into financing Greek borrowing to cover its trade deficit. For countries like Greece, then, a vicious cycle of debt emerged in which – unable to deploy the traditional instruments for rectifying trade imbalances (devaluation, allowing inflation to rise) because of the constraints imposed by EMU membership – it had to borrow more and more to cover its growing trade deficit and the more it borrowed to finance imports the larger this deficit grew.

It is worth making plain that for a several years this dysfunctional arrangement suited countries like Germany very well – after all it bound stronger and weaker economies together in an intra-European core and periphery relationship which helped to underpin export driven growth in Germany in particular. It was only after the eruption of the Euro crisis that, suddenly, Greek ‘profligacy’ was discovered and loudly denounced by German politicians and EU elites.

The ‘credit crunch’ of 2008 eventually brought these structural imbalances to the surface. As the effects of the sub-prime crisis in the US rippled outwards and deepened into global financial crisis the money loaned to southern Europe by northern banks suddenly looked very vulnerable. The crisis in Greece was finally precipitated in 2009-10 when, on coming to power, the new Papandreou government announced that the country’s debts had reached 300bn Euros and, shortly afterwards, announced that its 2009 budget deficit was four times the limit imposed by EU rules. The emergence of an acute sovereign debt crisis in Greece heightened fears about heavy indebtedness elsewhere in the Eurozone – particularly in Spain, Ireland and Portugal. The EU’s and IMF’s response was to insist on severe austerity measures in return for emergency loans and bailouts to stricken economies. It soon became clear that EMU (and perhaps even the EU itself) was in no small danger of disintegration and possible collapse.

Of course, the current crisis in Europe is not confined merely to members of the Eurozone – the current situation in the UK, for example, cannot be attributed directly to effects arising within the structures of EMU. Nevertheless the various sovereign debt crises that have emerged within the Eurozone are key drivers of the crisis in the EU more widely which is, in turn (since the economy of the EU as a whole is the largest in the world), at the core of the continuing global turbulence.

Austerity in Europe

Austerity has been implemented unevenly across Europe – but it is the favoured response of European political and economic elites to the crisis. It is quite clear, however, that as a strategy for economic recovery austerity is failing miserably and is, in fact, making the economic situation much worse. As Meadway explains, there is a simple mechanism at work here:

Cuts in government spending shrink demand in the economy. As demand shrinks, firms sell less. Firms that sell less cut wages and make redundancies. Demand falls still further, and a vicious circle of decline is established. Cutting spending to reduce a deficit leads to bigger deficits as unemployment rises and taxes fall. Austerity is self-defeating.4

The self-defeating logic of austerity is, of course, most plain to see in Greece where it has been implemented in its most vicious forms and where the economy contracted severely.

Why, given its clear failure, do states remain committed to austerity? The basic intention behind the austerity drive is to ensure that the costs of the crisis are shifted away from capital as much as possible and born, instead, by ordinary people. In the Eurozone this has, in addition, a key international dimension in that it is the loans of over-extended northern banks that ‘the troika’ is, in particular, seeking to protect and it is the ordinary population of the southern states who are being forced to pay the price. The determination to stick to austerity despite its dire effects reflects the determination of European elites to defend the banks come what may.

Nevertheless the fact remains that, plainly, austerity is not succeeding as a means of overcoming the crisis. This must be just as clear, now, to the political elites driving austerity as it is to those being forced to endure the suffering it inflicts. The determination to stick with this approach does not at all imply that European elites have any confidence any longer that it will work. Indeed, the current situation seems to be characterised by a certain ideological bewilderment on the part of those elites. They do not know how to end the crisis. They continue with austerity only because they have no idea what else they can do – they can see no other acceptable alternative. The strategy, such as it is now, is simply to keep going in the desperate hope that something turns up.

The Future

How might the crisis in Europe unfold over the next few years and what ‘exit routes’ might emerge? Of course no firm predictions can be made but it is possible to discern three distinct possible paths. The first of these – which is also, in my view, the most likely – is that the crisis simply drags on for several years. That is, Europe remains mired in a condition of relative stagnation as political leaders attempt to ‘muddle through’ the crisis in the hope that generalised austerity can squeeze wages and the ‘burden’ on capital presented by public spending enough to restore profitability to the point at which ‘normal’ rates of capitalist growth can return. Nevertheless it is quite hard to see how profitability can recover without massive destruction of overaccumulated capital – the underlying basis of the current crisis. In other words, capitalism probably needs a major slump in order purge itself of the dead weight which currently weighs it down – but, of course, the political and social costs of a severe depression would be so high that most governments are unlikely to let this happen. All of this raises the interesting prospect of the possible political ‘normalisation’ of capitalist crisis and stagnation.

A second path of development – something that has been mooted among EU elites – is some form of managed breaking up of the Eurozone as it is currently constituted and its radical reconstruction. This would involve the ejection of southern European economies from the Euro and the formation of a smaller and more tightly integrated Eurozone made up of core northern European economies. Full fiscal and banking union among these core economies would occur – responsibility for the banking system and for taxation and public spending would be taken away from constituent states and given to supranational institutions. This might be a way of abolishing the structural problems and imbalances within the Eurozone and ensuring that they do not re-emerge. This process might be accompanied by the break-up of the EU as it currently exists, too, or perhaps the emergence of a ‘twin-track’ EU in which the tightly integrated Eurozone states co-exist with a more loosely integrated ‘outer Europe’.

However, this would be a difficult path for the Eurozone to take for several reasons. First, it would put northern banks’ loans at great risk and the process of disentanglement as southern European economies left the Euro would be a pretty perilous process for all concerned. Secondly there are considerable political obstacles in the way of fiscal and banking union among core EU states – not least that many citizens in the states involved are likely to be hostile to the idea. A third problem is that this root and branch reconstruction of the Eurozone would take several years to organise – therefore, it could not provide a quick route out of the Eurozone crisis. The final problem is that this process of reconstruction would not necessarily provide any means of addressing the underlying crisis of profitability.

There is a third path, however. This is probably the least likely of all to happen – but it is the one that socialists must fight for. The point of departure for this route would be the breaking of austerity by mass resistance and the implementation of a series of reforms which would alter the balance of class power in favour of the working class and other popular forces and which would set in motion a process of transition beyond capitalism. What happens in Greece over the next few months is key to this process. We have seen that it is in Greece that the crisis of capitalism is condensed in its most acute form. This makes Greece the weak link in the contemporary imperialist chain – and a socialist breakthrough at this point would send shockwaves through the entire system. In the general election of June 2012 Syriza – the coalition of the radical left in Greece – narrowly missed (by 2.8% of the vote) becoming the largest party in the Greek parliament. A situation which would have been unthinkable a few years ago – a radical anti-capitalist party in Europe on the verge of winning power (in a country where the present governing coalition might fall apart at any minute) – has become a reality. If Syriza can take power and bring austerity to a halt in Greece it would provide an inspiring example to people elsewhere in Europe and help to deepen and radicalise anti-austerity struggles across the continent.

Of course, a party seeking to utilise the capitalist state apparatus to implement a radical left-wing programme of reforms would face many great difficulties and dilemmas. Here we start to encroach on one of the oldest controversies in socialist thought – the classic reform/revolution debate. It seems unlikely to me that there is any strictly reformist road to socialism, but it is also my view that there is no reason why revolutionary transformation should not emerge organically and dialectically from a programme of transitional reforms. In any case it is hard to see how a process of socialist transformation in countries with established parliamentary democratic institutions could entirely bypass these structures. One of the interesting things about the unfolding crisis in Greece is the way in which it maps closely onto the classical Marxist conception of a pre-revolutionary situation in all but one key respect. We can observe a certain level of decomposition of certain state apparatuses in Greece (demoralisation of the police for example and its increasing penetration by, and collusion with, far right forces), the collapse of the political centre and the increasing polarisation of social forces for example. However, there is little sign as yet of any proliferation of workers’ councils/soviets and nothing corresponding to the emergence of a ‘dual power situation’. The resistance of ordinary Greek people is finding political expression in the rise of a party committed to forming a united government of the left within (and against) capitalism. One of the most urgent tasks for the international radical left today is to return to, and rethink, the idea of the ‘workers’ government’, because it is in this direction that Syriza – at the vanguard of socialist struggle today – is heading.

1 Brenner, Robert (2005) The Economics of Global Turbulence (London, Verso)

2 Harvey, David (2010) The Enigma of Capital: And the Crises of Capitalism (London, Profile Books), p. 117

3 Ibid. p. 117

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