Will the euro survive?
All bets are off, writes Michael Roberts. This article is based on his presentation to the CPGB’s Communist University in August
As I write, it would appear that there has been a limited recovery in euro zone economic growth. Italy and Spain have accelerating rates of real growth in terms of gross domestic product, albeit still very modest. The Italian economy expanded by 0.3% in the second quarter of 2015 - that takes the annual rate to 0.7%. And Italy’s jobless rate sank to 12% in July, according to preliminary data - the lowest since the same month in 2013. Overall, euro zone manufacturing activity is making a modest improvement.
But this recovery is six years since 2009. The euro zone has experienced a deep recession, followed by stagnation and a very weak recovery. The euro zone economy is now some 11% below where it would have been without the global financial crash and the ensuing great recession, and the gap is widening.
This proves that the euro crisis, as it has come to be called, was mainly a product of the slump in global capitalism in 2008-09 and the subsequent failure to recover much is the same. Profitability in most capitalist economies is still well below the peak of 2007 (the US is the only exception).
I have correlated the change in profitability for the ‘distressed’ euro zone economies since the end of the great recession with real GDP growth since then. The trend line is positively sloped. So, the bigger the increase in profitability of the capitalist sector of each euro zone economy, the greater the economic recovery.
Estonia and Ireland have seen the biggest recovery in profitability (through austerity and cutting wages and living standards for the population, along with massive emigration of the unemployed). As a result, they have had the best GDP recoveries - such as they are. Where the recovery in profitability has been weak or non-existent, then real GDP has contracted the most since 2009 (Greece).
But there are special features involved in the euro crisis. This is evident from the fact that the biggest losers among capitalist economies from the great recession and the ensuing weak recovery were the southern states of Europe: Greece, Portugal, Spain and Italy.
Capitalism is a combined, but uneven, process of development. It is combined in the sense of extending the division of labour and economies of scale and involving the law of value in all sectors, as in ‘globalisation’. But that expansion is uneven and unequal by its very mode, as the stronger seek to gain market share over the weaker.
The euro project aimed at integrating all European capitalist economies into one unit to compete with the US and Asia in world capitalism with a single market and a rival currency. But one policy on inflation, one short-term interest rate and one currency for all members is not enough to overcome the centrifugal forces of capitalist uneven development, especially when growth for all stops and there is a slump.
The professed aim from the beginning of the euro in 1999 was that the weaker economies would converge with the stronger in GDP per capita, fiscal and external imbalances. But the opposite has happened instead, as the International Monetary Fund explained recently, when it said:
During the years that followed the euro’s introduction, financial integration proceeded rapidly and markets and governments hailed it as a sign of success. The widespread belief was that it would benefit both south and north - capital was finally able to flow to where it would best be used and foster real convergence.
But in fact a lasting convergence in productivity did not materialise across the European Union. Instead, a competitiveness divide emerged. As the financial crisis gripped the euro area in 2010, these and other problems came to the fore ... In fact, there has been little absolute real convergence in the euro area. Those euro area countries that had low per capita incomes in 1999 did not have the highest per capita growth rate.\1
The imbalances widened and have not converged. Fig 1 shows who has gained or lost in GDP terms relative to the euro zone average since the euro began. It is northern Europe (and Ireland) that has gained, while southern Europe has fallen further behind.
At the same time as looking towards more integration, the European Central Bank, the EU Commission and the governments of the euro zone proclaimed that ‘austerity’ was the only way Europe could escape from the great recession. Cutting public spending would force convergence. Supporters of austerity like to cite the example of the Baltic states, such as Estonia, as showing that these policies could quickly restore profitability and growth. The government there adopted neoliberal policies forcefully. Estonian unemployment fell back from 20% in early 2010 to 10% and the economy grew at over 8% in 2011. But Estonia’s real GDP is still some 9% below its peak in 2007, having fallen over 17% from peak to trough.
There have been six years of austerity and very little progress has been achieved in restoring growth or even meeting the fiscal and public debt targets and, more important, in reducing the imbalances within the euro zone on labour costs or external trade to make the weaker more ‘competitive’.
The recession in the euro zone has made fiscal austerity programmes self-defeating. As the denominator for fiscal deficit or debt to GDP has shrunk, the ratios have risen, despite huge cuts in government spending and higher taxes. France, which promised to get below the 3% budget deficit to GDP target set by the euro zone leaders, is forecast to hit 3.7% in 2015, while Spain, which has been granted two separate delays in its timetable to hit the target, is projected to see its deficit rise from 5.9% of GDP in 2014 to 6.6% in 2015. Overall, the euro zone sovereign debt ratio will hit another all-time high of 95.9% of GDP this year.
Actually, the real aim of ‘austerity’ is not to ‘balance the government books’, but to achieve a sharp fall in real wages and cuts in corporate taxes, and thus raise the share of profit. The adjustedwageshare in national income -defined there as compensation per employee as percentage of GDP at factor cost per person employed - is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. Every capitalist economy had managed to reduce labour’s share of the new value created since 2009. Labour has been paying for this crisis everywhere.
Not surprisingly, it has been the workers of the Baltic states and the distressed euro zone states of Greece, Ireland, Cyprus, Spain and Portugal who have taken the biggest hit to wage share in GDP. In these countries, real wages have fallen, unemployment has rocketed and hundreds of thousands have left their homeland to look for work somewhere else. That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough in most countries to restore profitability to levels seen before the great recession and thus sustain sufficiently high new investment to get unemployment down and these economies onto a sustained path of growth.
In all these countries, governments are implementing an agenda of ‘labour market reform’, spending cuts and privatisations designed to hit labour’s share in the national output - there is more misery to come. Italy’s ‘Blairite’ leader, MatteoRenzi, is pledged to such neoliberal measures. France’s François Hollande has had a Damascene conversion to a neoliberal agenda and Slovenia’s ‘social democrat’ coalition is imposing similar measures.
One of the striking contributions to the fall in labour’s share of new value has been from emigration. It has become an important contribution to reducing costs for the capitalist sector in the larger economies like Spain. Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal and north Africa. Now that has been completely reversed.
In 2008, one year after the start of the crisis, Spain still recorded 310,000 more migrant arrivals than departures. That number fell to just 13,000 the following year, before turning negative in 2010. In 2012 there were more than 140,000 more departures than arrivals, and the pace of the exodus is picking up fast. According to the national statistics office, the foreign-born population now stands at 6.6 million, down from more than seven million just two years ago.
The Estonian labour force has been decimated, as thousands have left this tiny country to seek work elsewhere in Europe. Estonia also received over €3.4 billion in EU structural funds to finance infrastructure spending and employment. In this way, wage costs have been lowered and profits raised.
The poster child for ‘successful austerity’, Ireland, achieved an export-led recovery by getting rid of its ‘excess’ workforce in a similar way. Irish emigration is now back at levels not seen since the dark days of late 1980s.
Euro zone unemployment has now fallen to a three-and-a-half-year low. But it is still at 10.9%, with 25% in Greece and 22.2% in Spain. Indeed, there were rises in three countries in the latest data for this June: France, where it rose from 10.3% to 10.4%, Finland - where unemployment climbed from 8.7% to 9.7%, and Austria, where it rose from 5.7% to 5.8%.
The crisis in the euro zone has been blamed by some on the left on the rigidity of the single currency area and on the strident ‘austerity’ policies of the leader of the euro zone, Germany. But the euro crisis is only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the euro zone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses. Austerity means a loss of jobs and services and thus income. Keynesian policies mean a loss of real income through higher prices, a falling currency and eventually rising interest rates.
Take Iceland, a tiny country outside the EU, let alone the euro zone. The widely supported Keynesian policy of devaluation of the currency, a policy not available to the member-states of the euro zone, has still meant a 40% decline in average real incomes in dollar terms and nearly 20% in krona terms since 2007.
Under capitalism, what matters is not government spending as such, but restoring profitability in the productive sectors. In Iceland, the rate of profit plummeted from 2005 and eventually the island’s property boom burst, and along with it the banks collapsed in 2008-09. Devaluation of the currency started in 2008, but profitability in 2012 remains well under the peak level of 2004, although there has been a slow recovery in profitability from 2008 onwards. In Greece, profitability stayed up until the global crisis took hold and then it plummeted and only stopped falling last year. Profitability in ‘austerity’ Greece and ‘Keynesian’ Iceland is now about the same relative to 2005 levels. So you could say that either policy has been equally useless.
No escape for Greece
But the euro leaders have failed to solve the imbalances within the euro zone. Greece exemplifies this in the extreme. It cannot escape the debt deflation trap that it has descended into. Gross public and private debt relative to GDP has risen to record proportions and is still rising. Greek companies have the highest debt-to-equity ratio of modern economies at 235%, more than twice the euro zone corporate average. These debt ratios are rising because nominal GDP growth remains non-existent, while the cost of servicing debt continues to rise.
This is Greece’s third macro-economic adjustment programme in five years, after the first in 2010 and second in 2011. It looks just as likely to fail as the last two in restoring Greek ‘debt sustainability’, let alone economic growth, employment and living standards.
Under the new ‘bailout’ package agreed by the Syriza government under duress, the Greeks are being subject to further severe austerity in trying to run surpluses on the government account (before interest payments) rising to 3.5% of GDP. Both the IMF and the EU Commission reckon that the Greek government debt ratio - currently around 180% of GDP - will probably rise to over 200% before there is any sign of a fall and will anyway stay well above any level that is considered ‘sustainable’.
The only possible escape for Greece would be if euro zone economic growth were to accelerate and thus revive the Greek economy - a rising tide lifts all boats. But, despite the signs of recovery outlined at the start of this article, the signs of euro zone growth much above 1% a year are not good.
And anyway, the euro group and its credit institutions, as well as the IMF, want the debt ratio to fall and their previous loans paid back. The target for 2030 is a 60%-of-GDP limit for all euro zone members. But, even if Greek governments apply austerity right through to then, the public debt to GDP will still be above 100%.
Moreover, there is no way the Greeks can ‘return to the market’ to raise money to repay the IMF and the euro institutions. The market will charge at least 6%, according to the IMF, and that is impossible for the Greeks to pay. So this ‘bailout’ would have to be followed by another and another, as far as the Greek and German eyes can see.
What is the alternative then? Well, up to now Keynesian economists and many on the left have advocated that Greece needs to break with the euro and the German-led troika bailout packages. Greece should restore the drachma and then devalue to boost exports and inflate away the real value of debt. In short, Greece should ‘do an Argentina’ and default on its public debts. Two-thirds of the outstanding Greek government debt is held by the euro zone bailout mechanisms and the IMF. The other third is mainly held by the Greek banks.
Two things spring from this alternative policy. First, was the Argentina option of 2002 a success? The experience of Argentina was partly exceptional and eventually proved unsuccessful.\2 Second, if the euro crisis is a crisis of capitalism and not just a problem of the euro as ‘too strong’ a currency, then devaluation and debt default on its own would only be a temporary palliative for Greek capitalism - and no more palatable for working people than euro-defined austerity, as it would mean hyperinflation and a collapse of businesses laden with euro debt. The current renewal of Argentina’s crisis has confirmed that prognosis.\3
If there is no political upheaval that overthrows pro-austerity governments, then eventually enough capital value will be destroyed through bankruptcies, unemployment and an investment strike to raise profitability in surviving euro zone corporations and the ‘whole crap’ can start again - after huge human cost.
Even this may not be possible for Greek capitalism - which is not just on its knees, but is prostrate, with life-support mechanisms not working. Greece is not tiny like Estonia, but it is a relatively small capitalist economy, dependent on trade, mainly of processed minerals, pharmaceuticals and food, as well as services like tourism. Greek capitalism is still encumbered by inefficient oligarchic capital, so investment is not recovering.
The Germans do not want to cough up any more money, but they will probably agree to relax the terms of repayment of debt, perhaps by rolling over that debt perpetually - after all, the UK did not pay back all its World War II debts to America until 2002! But just relaxing the repayment burden does not restore Greek capitalism. Unless the euro zone leaders write off the loans to Greece and/or the region as a whole makes a dramatic economic recovery in the next year or so and this revival ‘trickles down’ to Greece, Greek capitalism will remain imprisoned.
The global slump dramatically increased the divergent forces within the euro, threatening to break it apart. The fragmentation of capital flows between the strong and weak euro zone states exploded. The capitalist sector of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead.
Those who wish to preserve the euro project like the EU Commission, the majority of EU politicians and most capitalist corporations, recognise that the only way to do so is to extend the process towards more integration. That means a ‘banking union’, so that all the banks in the euro zone are subject to control by the Euro institutions like the ECB and not national government regulators. That is underway and begins in earnest in January 2016.
Better still would be the establishment of a full ‘fiscal union’, so that taxes and spending are controlled by euro zone institutions and deficits in one Economic and Monetary Union state are automatically met by transfers from surplus states. That is the nature of a federated state like Canada, the US or Australia. These transfers reach 28% of US GDP, compared to the controlled and conditional transfers under EU budgets and bailouts of less than 10% of one state’s GDP.
But the euro zone does not have such a fiscal union and there is little prospect of one. Instead, after much kicking and screaming, the Germans and the EU agreed to set up some fiscal transfer funds - first the European Financial Stability Facility and then the European Stability Mechanism. But these do not deliver automatic fiscal union transfers; they are contingent on meeting fiscal targets in a troika (EU, IMF, ECB) programme, and national governments still set their own budgets. And there is growing opposition in Germany and northern Europe to shelling out cash for what they see as wayward countries who cannot get their public finances in order.
There are two ways a capitalist economy can get out of slump. The first is by raising the rate of exploitation of the workforce enough to drive up profits and renew investment. The second is to liquidate weak and unprofitable capital (ie, companies) or write off old machinery, equipment and plant from company books (ie, devalue the stock of capital). Of course, capitalists attempt to do both in order to restore profits and profitability after a slump.
This is taking a long time in the current crisis since the bottom of the great recession in mid-2009. Progress in devaluing and deleveraging the stock of capital and debt built up before even being delayed by easy monetary policy.
Can the people of Greece, Portugal, Spain, Italy, Cyprus, Slovenia and Ireland endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in Greece and will happen in Spain, Italy, Portugal and Slovenia?
The electorate is losing patience and is angry, as the 2014 Euro elections showed. The EU leaders and strategists of capital need economic growth to return quickly or further political explosions are likely. And yet, given the current level of profitability, that may take too long before, perhaps, the world economy drops into another slump. Then all bets are off on the survival of the euro.
Michael Roberts blogs at thenextrecession.wordpress.com and has a Facebook site at
2. See http://thenextrecession.wordpress.com/2012/05/10/eurozone-debtmonetary-union-and-argentina.