Over the past, there has been a proliferation of analyses, reports, commentaries on the Eurozone sovereign debt crisis, its causes, the economic and political situations in Greece, Italy, Spain, Portugal, on the handling by European leaders, on the structural and other issues of the European Monetary Union (EMU).
Some commentators focus on Greece and its high sovereign debt levels. Some, usually at the more sophisticated end of the spectrum, provide an analytical approach to identify the causes of the Greek debt: 1. the low interest rates available to the Greek government, as a result of EMU, which led to an increase in government borrowing 2. the increase in Greek imports (from Germany and the European north) which led to a current account deficit, translated into debt accumulation and, of course, 3. corruption. Others analysts of course, at the less sophisticated end of the spectrum, indulge in the bashing of the “profligate” Greeks, who did not respect the Maastricht rules, “spend more than their means allow them” (colloquialism for borrowing), work 5 hours a week and have taken the term “tax evasion” to a whole different level. Of course, the Maastricht rules were first broken by none other than France and Germany back in 2005 and the shift towards spending-by-borrowing (rather than by reducing your savings) is a universal one, but these are different issues.
Other analysts look at the Eurozone as a whole and point to its well-known deficiencies and often startle at its problems: For example, that the Eurozone has a currency but not a government (really? Wasn’t this in the Maastricht Treaty of 1992?), or that the European Central Bank (ECB) only focuses on low inflation rather than high employment and growth (again, really? Wasn’t the ECB modelled after Deutchebank, inheriting its anti-inflationary obsession?) Others stress the centrifugal powers within Europe, which will lead to the break-up of the Eurozone, as Brussels interferes more and more in nation-states’ politics,economics and societies. Although an increasing transfer of powers from the national to the European level is taking place with questionable methods (see rule by bankers in Italy and Greece), the break-up of the Eurozone seems to echo less the reality and more Conservative British wishful thinking.
What is often downplayed, is a more political reading of the Eurozone debt crisis. The Eurozone debt crisis debate has been framed in terms of “more or less growth”, or “Europe versus national economies”. However, the developments in the Eurozone over the past two years are more political than ever.So, let’s clarify a few things:
First, to go back a year, the Greek austerity measures, all-too-easily accepted by the Greek political elite, are well-known for their neoliberal character among development economists. Similar IMF-backed Structural Adjustment Policies, as the ones being implemented in Greece at the moment, have taken place in developing countries since the 1980s and failed to create growth and employment. It should not come as a surprise to the Greek media and political elite that increasing taxes and reducing deficits threw the Greek economy into depression, more so as the Greek government could not devaluate its currency. This is another well-known fact among economists, and even the World Bank allowed for more social spending in the programmes it proposed to developing after the end of the 1990s.
Second, economic growth can be stimulated in a variety of ways. One of those is to reduce deficits and debt, reduce the role of the state, privatize, open the economy to trade and foreign direct investment, and facilitate the private sector domestically. Another way to stimulate growth is by increasing investment made by the public sector. In theory, were the IMF a different institution, it could very well bail-out Greece not on the condition that the role of the state in the economy is reduced through tax increases and public spending reduction, but provided the government invested in the economy, and, for example rebuilt its industrial base.
Third, fiscal stability is a fine and noble goal. The whole idea is that a government’s revenues must more or less match its expenses, because if it borrows excessively, it mortgages the country’s future, as these debts have to be repaid. However, among other things, one of the reasons why a government may borrow in the first place is to stimulate the economy by public spending in the case of a recession. Put differently, the government could (and should) borrow to implement an expansionary policy when the private sector is not confident enough to invest, as is the case presently in Europe and the US.
It is in this light that last week’s “fiscal compact” should be read. The rule (government deficits not to exceed 3%) exists since the Treaty of Maastricht (1992). However, the idea back then was all about making European economies converge ahead of the adoption of the common currency. This time, the rule will be stricter and harder and presumably incorporated in constitutions or legal texts of similar legal force. While this will essentially render counter-cyclical economic policy at the national level illegal, the European Union has yet to provide an equivalent mechanism at the European level. The Brits may have stayed out of Europe’s deal to protect the interests of their City, but in effect they retained the one of the most powerful government policy tools.
There are many who like to present austerity and fiscal stability as simple economic rules, in the far-far-away land of technocratic, depoliticized issues. This is not about economics. This is about good, old traditional left-right politics. And up to now, the Right is winning.
Greece and the IMF 