Beneath the Euro-Crisis

Last week, the organisation for economic co-operation and development declared that the biggest threat to the global economy was the euro-crisis.  Understanding the euro crisis is essential to everyone but unfortunately, clear, elucidating analysis of the euro-crisis is hard to come by.  Reports on the crisis, from business desks, commonly  bandy about the usual pearls of received wisdom: profligate spending and weakness in the euro structure, but these narratives rarely hold up to sustained analysis.  To really understand the origins of the crisis we’ll have to put all of the pieces, players and elements of the crisis into their dynamic context.

Origins of the Crisis

The received narrative tells us that this is a crisis  in the Euro currency where the strong European countries (Germany) are tied to weak economies (Greece, Spain, Ireland, Portugal and Italy) and that there are structural flaws to this relationship.  We’ll come back to that later.

We often hear that  European countries were living beyond their means in recent years, and the level of debt has placed a strain on countries that have been spending more than their income. The idea that the crisis was caused by ‘irresponsible over spending’ by ‘out of control governments’ holds no water.  In the year before the global economic crisis burst, 2007, the Spanish government’s debts were only 36% of its gross domestic product (GDP), while the German government’s were 65%.  Furthermore, up until the eve of the crisis, Spain ran a balanced budget and was even in the process of paying its debt off.  Something neither Germany, the UK, nor the US could even conceive of.  Yet somehow Spain is now highly in debt with the vultures flying around it while Germany trades easy.  Spain is the best example of something being dreadfully wrong with the ‘overspending’ narrative, but there are other examples too.  Ireland’s (like Iceland’s) economic collapse in the global crisis was worsened by deep problems in their banking system, not pre-existing budget deficits.  In the five years before 2008 Ireland ran budget surpluses and its debt to GDP ratio was even lower than Spain’s.   It is true that Greece had budget problems before the global crisis,  but these local economic problems cannot be seen as sole causes of their respective countries crises, or the crises would have occurred before 2008.  They are,  rather, structural flaws, latent triggers, that can exacerbate an economic crisis that has deeper causes.   An obvious point not made often enough is that when the global economic crisis slashed national economies, tax revenues dropped significantly  so that governments immediately faced a debt crisis where there wasn’t one before.  Structural flaws and latent triggers can exacerbate this sudden debt crisis locally and set smaller economies like Greece and Spain into a worsening downward spiral.


Clearly then it is not possible to understand the origins of the Euro crisis without delving into the murky wold of international finance and debt that initiated the global crash in 2008; here again we are helped by looking at Spain as an example.  Spain, like the US, fuelled economic growth on the back of a property bubble; property prices tripled in between 1996 and 2007.  When the bubble burst, bad debt surfaced and the economy went into nosedive.  Commentators blamed Spain’s banks, property developers and ordinary home-buyers  who collectively borrowed and fuelled the property bubble.  But this is just another example of grasping for a quick easy ‘cause’ without placing these events into context.  Blaming home-buyers for the Spanish crisis is like blaming the street cleaners of las vegas for the excesses of the gambling system.  The key to understanding the crisis in Europe is to remember that the economic growth up to the year 2007, before the crash, was based on these debt fuelled bubbles in Spain, the US, UK, Ireland and yes, Greece.  That can’t be overstated: the growth was based on debt.  Without the toxic debt we wouldn’t have had the same growth.  In other words, stagnation and recession would have arrived much earlier.  If economic growth itself was built into a flawed structure, to find the real causes of the current crisis we have to start looking for structural systemic flaws in the global economy itself.  The age old cycles of boom and bust in capitalist economics have taken on a new potential for global crisis contagion as the modern deregulated economy has become an intrinsically fragile network.  Any weak point in the process of capital flow, debt repayment or dropping demand quickly spreads virally through the global economic network just as it did in 2008 and threatens to continue doing.


Once a global spark sets off national latent triggers like a series of explosions, market traders begin to shy away from the worst crisis stricken economies  (Greece, Spain, Italy, Ireland and Portugal) and it gets much more expensive or even impossible for them to borrow money to navigate through their sudden debt crises.   While Germany pays under 2% interest on government bonds, investors shot the price of Greek bonds close to 30% in early 2012.  Governments can be, for all intents and purposes, held entirely hostage to the dictates of the market.


Response to the Crisis


Mostly conservative governments in Europe (though centre-left governments fell in line too) mapped out an austerity strategy in response to the sudden debt crisis that utilises the ‘over-spending’ narrative to push through a Europe-wide programme of cuts to social spending, labour rights and wages.  This strategy was not academically or economically but politically led.  Why was austerity the default response to the sudden debt crisis?  As seen, government spending was clearly not the origin of the crisis; the narrative could just have easily been labelled ‘under-funding’ as ‘over-spending’ with an emphasis on taxing the wealthier layers of the economy to redress the balance.  The UK’s economy, where a conservative government is pushing through austerity cuts, has dipped back into recession and even Germany is feeling the pinch from its own exported austerity.   Why are European conservatives  willing to gamble heavily on a risky route through the euro crisis, clinging on to an austerity strategy that may cause huge economic havoc, a strategy Nobel-winning economist Paul Kruger has called Europe’s economic suicide?


The answer may be given away by a not often mentioned measurement term, the unit labour costs.  During the boom years, wages in southern Europe (Greece, Italy and Spain) rose along with the GDP.  Unions in those countries ensured that most working class wages kept up with growth and inflation.  In Germany and the UK, however, wages stagnated and so in real terms, declined.  This infograph from the BBC charts the growing wage discrepancy.  It’s important to contextualise this idea of ‘strong countries’ and ‘weak’ countries as, in many ways, they exist only in relation to each other.  The relative Unit Labour Costs between Spain and Germany is what makes Spain ‘uncompetitive’.  This fuels Spain’s high unemployment which means a devastated tax income for the government leading to its inability to borrow money to pay its debts, and thus it finds itself at the mercy of the strong economy.  The unequal wage relation between the two economies is the very cause of the unequal power relation.  Although dissenting perspectives are emerging, there is a political assumption that the crisis countries will never be able to pull out of recession unless they slash their wages considerably to ‘regain competitiveness’.  Greece was forced to put through three austerity packages in 2011 that cut public sector wages by 40%, cut public sector jobs, lowered the minimum wage and increased the pension age.  A hospital, struggling with the cuts, this week told a mother she could not have her new-born baby until she paid and soup kitchens in Greece are reported to be feeding over 250,000.  And still Greece is being made to ready a new austerity package.  Spain is putting through a severe austerity package, including a labour reform law that will suppress wages and make it much easier to un-employ workers in a country where youth unemployment is already over 50%.  But why are stronger economies also pushing through wage suppressing austerity?  In the UK, in addition to ongoing public sector pay freezes (cuts in real terms) the government is considering ‘regional pay’ which pushes down wages in less affluent areas of the UK.  Germany too, until just this week as part of Europe’s changing tide, kept wages suppressed.  Since austerity was a cross European programme it cannot have been intended to alleviate relative unit labour costs between countries, but rather it can only have been intended to address unit labour costs across the board.  This is another very important point: there was no European wide strategy to alleviate relative unit labour cost problems; there was a European wide austerity campaign that suppressed unit labour costs everywhere.  The financial crisis gave conservative leaders a chance to devise a new narrative to deal with wages.  If over-spending is a simplistic myth and reputable economists view risky austerity as a suicidal route, austerity’s main purpose appears to be to regain the initiative on Unit Labour Costs away from the unions and rewrite the balance of wealth in the crisis struck economy.  In more plain terms: old fashioned class war.  The austerity campaign has used the crisis to cut the wages and social programmes  of Europe’s working class, safeguarding the financial interests of the wealthier layers in an uncertain economy.

A new phase.  

The French presidential election of the Socialist Party candidate Francois Hollande who advocates emphasising growth rather than austerity may mark a turning point in the Euro crisis.  The remarkable, and ongoing,  anti-austerity election in Greece in which the previously minor leftwing party, Syriza, vaulted into a powerful position in second place, the sudden rise of the German Pirate Party and developments across Europe show a growing reaction against austerity.   Hollande may be able to change the narrative in Europe to a Keynesian growth drive that tightropes a line in between debt and default for economic stimulation.  This may buy Europe time, but so long as we continue to lack a clear analytical approach to the economic origins of the crisis we will not see an end to it.   Commentators that blame the inflexibility of the Euro  as it is currently structured claim that, for countries like Spain, this is a currency crisis, not a debt crisis.  While there is much benefit for mapping out possible futures in and out of the euro for countries like Greece and Spain, this represents another over-simplistic desire to find a single quick cause for a dynamic, interlinked crisis.  The future of the euro certainly looks uncertain, but fundamental economic weaknesses still exist right across the board in ‘weak economies’ and strong, in Europe and the US.  Up to this point, in our political narratives, there has been an absolute failure to look at each element as part of a system and, subsequently, a widespread failure to understand systemic failure.  Truly digging down into the roots of the crisis may earth up answers a bit too uncomfortable for the leaders of the global economy.   The workers, farmers and unemployed:  the real engine of the global economy, need these answers more than ever.  To stop us staggering from spiralling crisis to spiralling crisis we need to study the crises, understand why our ‘leaders’ aren’t really interested in a global economy that works and begin building towards a totally different global system.



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