The EU’s problems stem from a destructive attempt by its leaders to save out-of-date institutions.By Bruno Waterfield
Amid the uncertainty created by Europe’s sovereign-debt crisis, there is
one thing we can be absolutely sure of: the Greeks won’t be getting to vote on
the European Union’s ‘fiscal discipline’, the austerity medicine that is being
rammed down their necks - and nor will anyone else. For the first time in the
history of the EU, even governments that stand in the way of EU diktats have
been toppled.
When the Greek government briefly floated the idea of standing against the
EU orthodoxy, a coalition of Germany, France, the International Monetary Fund
(IMF), the European Commission and the European Central Bank (ECB) threatened
to plunge Greece into chaos. The result was that George Papandreou, the Greek
prime minister, was summoned to Cannes last week to be told to step aside in
favour of an unelected ‘national unity’ government.
The Greek leader had resisted strong behind-the-scenes EU pressure to
suspend normal parliamentary democracy in favour of a unity government since
June. But after his announcement that the Greek people would vote on the latest
bailout plan, the campaign became open and explicit. Even after Papandreou
abandoned his plan to hold a referendum, senior French, German and European
officials demanded that he step down to allow for a ‘technical’ administration.
With a clear threat of economic force, José Manuel Barroso, the European
Commission president, warned last Friday that unless the government was deposed
by Monday, Greece would not be able get its next €8billion payment from the EU
and the IMF, leading to national default and bankruptcy within a month. ‘What
we expect to happen is to have a government of national unity’, he said. ‘What
is the other option? Default and have real difficulties to pay wages to the
public servants, to the schools, to the hospitals, which will lead to paralysis
of the country. I am sure that the majority of the Greek people do not want
this kind of chaos.’
Papandreou had to be overthrown for the mere suggestion that his government
would allow voters, (especially in Greece, was the implication) to unpick
decisions taken to uphold the common good of Eurozone financial stability. The
EU’s demosphobia is based on experience. The question of referenda and
referendum rejections has dogged the EU since the early 1990s, as its
structures have become increasingly important to European governments. The
Maastricht Treaty, which gave the European Union its name and created the euro,
was only narrowly approved by a referendum in France known as the ‘Petit Oui’.
The Danes voted No. In Britain, John Major’s Conservative government almost
tore itself apart over the question of a British vote - a debate that is still
haunting a new Tory-led coalition today.
In 2005, the EU was rocked when the Dutch and the French voted to reject
the European Constitution, leading to a pact to make Europe a referendum-free
zone (1). Only Ireland, due to a constitutional quirk, was allowed to vote on
2007’s Lisbon Treaty, the successor to the failed constitution. When that
referendum was lost in 2008, the Irish people were told in no uncertain terms
to think again by EU leaders. Ireland finally voted ‘Yes’ in October 2009 after
being warned that if they rejected the treaty for a second time, the country
would be destroyed by Europe’s deepening economic crisis. Just over a year later,
the EU forced Ireland into a punitive EU-IMF austerity programme designed to
help the central-bankers in Frankfurt rather than the people of Ireland, an
irony that was not lost on millions of Irish voters (2).
It is worth taking a step back to look at how EU statecraft and
institutions have come to give the current crisis its dynamic and severity. For
the first time since the 1930s, a looming collapse of financial institutions
holds out the real possibility of an economic crash alongside the reintroduction
of force, or external compulsion, into European affairs as a political measure
to ensure stability.
Uncharted waters and the compulsion of nations
The latest phase of the Eurozone crisis has taken European countries into
uncharted and dangerous waters, where the EU openly talks of overthrowing or
overriding elected governments and where compulsion has returned to relations
between European states. The current crisis, manageable two years ago, has been
made worse by the EU, whose institutions and decisions have generated and
exacerbated tendencies that are now leading to a serious economic event.
The EU crisis is constitutional in origin. EU and Eurozone institutions are
deliberately divorced from democratic pressures, including economic interests
such as energy generators, manufacturing industry and research and development.
As explained elsewhere (3), the EU has evolved as a mechanism for ordering
politics in Europe, and relations between European countries, by insulating
them from public accountability.
This development means that the entire European political order -
established over the past two decades as a condition of German reunification,
by the EU’s Treaty of Maastricht and by subsequent treaties - rests on a
structure that is unable to deal with the practical exigencies of a real
crisis.
The ECB and national central banks have come to the fore as the dominant
economic-policy organs both nationally and at the EU level as governments have
divested themselves of responsibility and accountability for more and areas of
the economy. This has pushed state policy closer and closer to the banking and
financial sectors, binding states to destructive creditor interests, shaping
and limiting policy decisions to an increasingly narrow menu of options.
From a banking to a sovereign crisis
One important economic crisis tool, default, has been expressly ruled out
because central banks have a directly material and existential interest in
refusing to write down debts.
In 2009, capital worth €4.6 trillion, or 39 per cent of the EU27’s GDP, was
tied up in loans and guarantees to the European banking system. If the Eurozone
fails to manage the crisis (sadly, experience and all the evidence points that
way), then the event could lead to a violent correction. European economies
would then be disrupted by the shock of an unmanaged destruction of levels of
non-productive activity that represent a major share of the economy.
Economists in finance ministries, especially Germany and the IMF, have
warned that refusing to countenance orderly ‘haircuts’ or write-downs has
fuelled a spiralling risk and debt burden on states, especially the Eurozone’s
already highly indebted PIIGS – Portugal, Ireland, Italy, Greece and Spain. In
October, the ECB tried to block an EU-IMF report (mainly drafted in
Washington), which found that the current anti-default policy would add (at
least) an extra €250 billion to the Greek debt burden. Finally, after the
report was leaked, last week’s Eurozone summit agreement proposed a 50 per cent
write-down of Greek debt held by banks in order to try and bring Greece’s debt
down to 120 per cent of GDP by 2020. But this plan, to take Greece out of the
fire to put it back in the frying pan, is probably unrealistic; it relies on
two per cent growth annually when Greece’s GDP is currently shrinking at
5.9 per cent per year. Furthermore, at the time of writing, the details of how
the haircut can take place on a voluntary basis, subsidised to the tune of €30
billion, have not been agreed with European banks.
The failure to grasp the nettle of default springs from the original ‘too
big to fail’ banking policy of 2008. Default is not a soft option but does,
potentially, lead to the managed destruction of capital rather than an
unmanaged crash or shock. A managed default, whether it is imposed or negotiated
on private investors, can clear the way for investment in the productive
economy rather than expending energy or resources on shoring up banks or
bailing out contaminated sovereign bonds.
The inability to take hard decisions has had a huge cost. The first bailout
for Greece in May 2010 was just over €100 billion. The price of a second
bailout, agreed last week, is an additional €139 billion. In July, the European
Financial Stability Facility (EFSF) increased its AAA credit-rated assets and
guarantees to €440 billion. By October, the consensus was that the Eurozone
needed €2 trillion to fire-fight debt contagion.
An agreement on 27 October to ‘leverage’ the EFSF to increase its firepower
by using it to insure Italian and Spanish bonds has been widely derided as a
sign of that the Eurozone is estranged from economic reality. None other than
Jens Weidmann, the president of Germany’s Bundesbank and a member of the ECB,
warned that the EFSF was too dependent on the kind of high-risk banking deals
that had caused the economic crisis in the first place. ‘It is tied to higher
risks of losses and to increased sharing of risks’, he said. ‘The way they are
constructed, the leveraging instruments are not too different from those which
were partly responsible for creating the crisis, because they concealed risks.’
Reality-proof EU and the German bubble
By 2015, 90 per cent of global growth will be outside the Europe. But the
evolution of the EU has pushed its response to a changing economic reality into
a narrow and destructive direction as it has become trapped within the
institutions and policies that fuelled the crisis.
A postwar sovereign-bonds system, with its origin in the Bretton Wood and
IMF arrangements, has been destabilised by the rise of emerging economies such
as China, low European growth rates and a government-debt spike caused by
Europe’s over-exposure to toxic banking assets in 2008. Instead of confronting
economic challenges, especially low or stagnant growth, European elites have
hidden in a comfort zone of cheap credit.
Germany, Europe’s economic ‘powerhouse’, has become too reliant on the
Eurozone as a sales area, with an economy overly dependent on a credit and
asset bubble that sucked in and laid waste to Spain and Ireland while
compounding the troubles of Greece and Portugal. German and other European
banks took the cash surpluses earned from selling to the PIIGS and offered it
back to those countries as cheap credit. The creation of the Eurozone monetary
bloc, with the ECB fixated on keeping interest rates low, made it cheap for the
weaker economies such as Greece to get credit and to issue sovereign debt at
almost the same interest rate as German bonds. This helped create the credit
bubble in Europe’s peripheral countries. Enthusiastically supported by
financial markets, the gigantic carousel seemed to be working for over a
decade. Until, that is, the shock of the financial crisis exposed it as a
bubble.
Such is the destruction wrought by a single-currency zone rigged to benefit
northern European economies, that Greece is now importing olive oil from
Germany. Recession in Greece, compounded by EU-IMF austerity programmes, has
led to even greater competitive imbalances between the Greek and German
economies. This distorted relationship meant that in September Greek consumers
bought €1.5million of olive oil from German suppliers, with the extra painful
twist that much of the olive oil was originally from Greece (4).
Over 60 per cent of German exports are to EU countries and Germany’s
impressive trade surplus has been at the expense of Italy, Spain and Greece.
According to one estimate by Swiss bank UBS, a Eurozone collapse would see
German production contract by 20 to 25 per cent. For over a decade, Germany,
along with other European countries, has hidden behind a credit bubble to avoid
restructuring its economy. Germany, and other economies such as the
Netherlands, depressed wages domestically but had a captive credit-fuelled
market in the Eurozone periphery of southern Europe – Portugal, Italy, Greece and
Spain. At the same time, the euro was rigged by the ECB to maintain exchange
rates much lower than deutsche mark levels giving Germany, and others,
artificial benefits in the global economy.
Germany is not, despite its reputation, a productive powerhouse. Any state,
like Germany, that has switched off nuclear-power stations at the cost of a
fifth of its electricity output - forcing it to become more dependent on
expensive gas imports during a slowdown - without being brought to its senses
by the captains of industry, is in a bad way. France, meanwhile, has become
highly dependent on cheap sovereign debt to maintain its prestige economic
status. Its AAA rating has become its primary national interest, and its banks
are deeply mired in the southern European asset bubbles.
Built on a credit bubble and insulated from democratic or economic
interests – beyond those of the central banks and the financial sector - the
EU’s institutions have given rise to a tendency to take manageable economic
problems and to turn them into events that threaten the global economy.
A forced fiscal union?
As the Eurozone fails to get a grip on the crisis, the use of external
compulsion on countries to act against their own national interests has been
reintroduced into European politics as the EU evolves into the means by which
powerful countries dominate weaker ones.
Many, including the British government, have urged that the current crisis
should lead to a ‘fiscal union’ in the Eurozone as a necessary counter-crisis
measure. This is wrong. The Eurozone, and the EU, is emerging as a compulsion
union to make previously sovereign states bow to austerity programmes and to
adopt fiscal disciplines drafted in Brussels, Berlin and Paris. The object of
the imposed programmes is to uphold the economically irrational policies
detailed earlier.
The EU has evolved as a bureaucratic and secretive way of doing politics
and is now developing mechanisms that are openly about imposing an order on
Europeans, whatever it takes. Conclaves of officials are now disposing of the
fate of nations like Greece behind closed doors. Secret diplomacy and overt
power-play is back. This is a dangerous development. Brinkmanship, as Germany
jockeys to enforce ‘fiscal discipline’ on southern Europe, has polarised
relations between EU member states and powers as never before in the history of
the Union.
Europe as Germany
Angela Merkel’s stern speech to Germany’s parliament, the Bundestag, on 26
October was less an exercise in democratic accountability than an assertion of
raw power: a German Chancellor laying down the law to the rest of Europe,
including France. ‘The world is watching Germany and Europe to see if we are
ready and able to take responsibility. If the euro fails, Europe fails’, she
said, eliding German interests with the wider EU. ‘None of us can foresee what
the consequences would be if we were to fail.’
Her words were directed at France just hours before a Eurozone summit.
Nicolas Sarkozy, the French president, has been desperate to involve the ECB,
with its unlimited firepower, to shore up the euro and to help banks exposed to
Greek, Italian and Spanish debt, saving France’s AAA rating in the process. The
idea of ECB involvement is anathema to Germany, where politicians led by Merkel
raise the spectre of the 1930s stagflation that led to the economic collapse,
ushering in Nazi rule and the Second World War. ‘No one should take it for
granted that there will be peace and affluence in Europe in the next half
century’, warned Merkel. In an exercise in power unseen for a generation in
Europe, Merkel’s speech (backed by a Bundestag vote) meant President Sarkozy
was given no option other than to agree or to face down a chancellor embodying
the German people and peace in Europe.
When state institutions confront conditions of life that are completely
different from the circumstances in which those institutions were formed, the
situation can become destructive, particularly when these bodies insist on
pursuing a narrow and out-of-touch policy. This process is even more dangerous
when, as now, it becomes bound up with the struggle of global powers for their
existence.
Competing for the EU – not outside it
Germany and France are two global powers that can only resolve their
interests beyond their national borders. The Eurozone territories are the key
sphere of economic and political influence for both countries.
Eurozone tensions are far more than any spurious return to the national
status quo before the euro’s creation, because of the involvement of Germany
and France who are both global powers. As nations that both need to project
their power in Europe, the struggle for control of the EU assumes a fundamental
importance. Britain has so far stood on the sidelines but there are signs it is
getting involved, making the dynamics even more unstable.
The 1992 EU Treaty of Maastricht, that created the euro, was also the
treaty of German reunification. Britain and France were both keen to bind or
neuter Germany in the euro arrangements. By shackling Germany to France and the
rest of Europe, by fostering a German statecraft completely dependent on the
EU, UK prime minister Margaret Thatcher and French president Francois
Mitterrand may have created a monster on a par with the Treaty of Versailles.
The particular character of the German state means it has become more bound
than any other to EU statecraft and institutions. For Germany to pull away now
from the EU would be of foundational significance, a much greater change than
reunification. France, hitched to Germany since the Saarland/Ruhr coal and
steel union arrangements of the early 1950s, is less entangled with the EU for
reasons of the postwar settlement and its independent foreign policy. But
following a decade of the Eurozone bubble and 20 years of EU integration,
France has come to rely on the European status quo to maintain its rather
gilded existence and the AAA credit-rating of a top-rank world power.
A German or British breakaway?
Some have predicted that Germany’s national interests will push it to ditch
France and to form a breakaway currency with less stressed AAA countries such
as Finland, the Netherlands or Denmark. This argument fails to take into
account Germany’s need as a global power to project itself throughout the
European territories. Moreover, a breakaway would be tantamount to an act of
aggression. There would be immediate repercussions and counter-measures by
France, which straddles northern and southern Europe, to mitigate against the
losses. The EU’s single market for exports would cease to exist, damaging
Germany and plunging Europe into chaos.
Rivalries between France and Germany over who controls the Eurozone/EU are
becoming an important feature of the crisis. Broadly speaking, France wants to
turn the EU into a Eurozone vehicle, with some strong protectionist tendencies,
using the ECB to defend its currency, the euro. Germany needs to keep the
current EU treaty order both because it is hardwired into the German
constitution and because it relies on the single market for its economy. In
many ways, the EU is modelled on Germany’s constitutional ‘basic law’ order
that seeks to insulate the state from voters. Germany throws its weight around
by upholding and shaping an EU institutional order that is intrinsic to its
statecraft, a model now internationalised throughout Europe.
Thus Germany is the strongest supporter of sweeping EU powers to impose
fiscal discipline, preserving the euro as a rigged currency in its interest.
France is much more reluctant to go down this route because its economy is more
dominated by a high level of state debt. Britain, completely outside the
contest, could end up being hit by protectionist or arbitrage problems for 50
per cent of its exports as the single market crumbles under these strains.
There is already evidence of this process, beginning with a British EU court
case against the ECB over location policy and a battle with France and Germany
over a financial transaction tax.
The annexation of Ireland
The tendency towards compulsion as a counter-crisis measure was hidden with
the initial Greek bailout in May 2010, a package that was requested by Athens.
Ireland was the first country to be pushed into an EU-IMF bailout that it did
not want in order to make life easier for the Eurozone. The pressure included
top-level anonymous EU briefings, mainly from Germany, on the weakness of Irish
finances and the need for extra austerity. The tactics deliberately drove up
the cost for Ireland of servicing its debt.
Morgan Kelly, professor of economics at University College Dublin, has
given a superb account of how the EU used anti-democratic force, via the
increased power of central bankers, to override Irish sovereignty (5). As he
noted, the IMF, no soft touch, warned Ireland that its default-free bailout was
less about helping the Irish than disciplining Spain.
‘The ECB walked away with everything it wanted. The IMF were scathing of
the Irish performance, with one staffer describing the eagerness of some Irish
negotiators to side with the ECB as displaying strong elements of Stockholm
syndrome’, wrote Professor Kelly. ‘The sole purpose of the Irish bailout was to
frighten the Spanish into line with a vivid demonstration that EU rescues are
not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a
choice between being strung up like Ireland – an object of international
ridicule, paying exorbitant rates on bailout funds, its government ministers
answerable to a Hungarian university lecturer – or mending their ways, the
Spanish have understandably chosen the latter.’ In early 2011, Portugal was
also forced to accept an EU-IMF bailout in order to set an example to Spain.
Destabilising Italy’s elected government
The tendency to bludgeon governments into line has peaked with the
overthrow of the Greek government but there other dangerous developments unfolding.
On 23 October, after Silvio Berlusconi was given an unprecedented dressing
down by the EU - represented by an openly contemptuous Merkel and Sarkozy - the
Italian prime minister was instructed, publicly, to carry out highly
controversial pension and judicial reforms combined with additional cuts while
the French and German leaders sniggered at his inability to do so.
Unlike Greece, Ireland or Portugal – all already run by the EU and IMF -
Italy is a large member state, where the Union’s founding Treaty of Rome was
signed. It has the EU’s fourth-largest population and is the third-largest
Eurozone economy. As with past interventions, Merkel and Sarkozy’s contempt
pushed up the interest rate that Italy has to pay to borrow to punitive and
dangerous levels – the highest since the euro was created. It gave extra
impetus to moves and plots to get rid of Berlusconi, a buffoon but an elected
leader. ‘Nobody in the union can appoint themselves administrators and speak in
the name of elected governments and the peoples of Europe’, said Berlusconi,
more hopefully than realistically on 24 October.
Not yet satisfied with Italian promises to implement a political programme
written by EU officials, Olli Rehn wrote an imperious letter demanding answers
on a detailed set of questions on progress in implementing emergency Italian
austerity measures passed in September. ‘Grand Viceroy Rehn’, quipped the Financial
Times, as even the favoured newspaper of Europe’s oligarchs blanched at a
demand for ‘additional measures’ including ‘further expenditure constraint’ and
a ‘thorough spending review’.
By 8 November, with the cost of servicing Italian debt reaching levels
reached in the recent past by Greece, Ireland and Portugal before they entered
EU-IMF programmes, Berlusconi - under intense pressure – agreed to step down as
power shifted to his finance minister, Giulio Tremonti, who is in favour of a
new Greek-style ‘technical’ government of experts. The combined strength of
markets, let off the leash by Merkel and Sarkozy, and sneering EU diktats had
finally overthrown Berlusconi, a man who had survived multiple sex scandals and
corruption trials, whom even the combined weight of the Italian opposition and
judiciary had been unable to dislodge.
Were the eurosceptics right?
Recent developments in the Eurozone have given a new lease of life to
British eurosceptics who are now able to claim that ‘we told you so’ over the
shaky and irrational foundations of the single currency. But many sceptics
conveniently forget that they supported binding a unified Germany into the EU
and its euro. They are also quiet on the rise of the ‘independent’ central
bankers, such as Britain’s Mervyn King, who have played such a leading role in
the crisis.
Right-wing eurosceptics do not contest the dominance of the financial
sector and have been silent over enshrining monetarist diktats in both British
politics and the international order. Most have few answers about how Britain
or Europe can overcome the slide down the world’s economic league, which is the
real driver of this crisis. Their belief that Britain is safe solely because it
can devalue sterling is both depressing and defeatist. Devaluation is a
necessary but insufficient economic tool, as events have shown.
The UK government has embraced the EU/Eurozone idea that more ‘fiscal
discipline’ is the answer by underwriting irrational institutions with
compulsion. The idea that the Eurozone failed because it is not enough of a
single currency and did not enforce its rules is one of the most monstrous European
establishment myths for some time. Many eurosceptics also buy into the
growing misanthropic prejudice that swarthy Greeks and Italians cannot be
trusted with money and need to submit to the command of thrifty and productive
German or Dutch officials.
A new European order
A month ago, the Dutch, almost certainly with German approval, suggested a
system of ‘guardianship’ for fiscal offenders, such as Greece, allowing problem
countries to be taken into the tender care of the EU-ECB. Those subject peoples
who refused the EU’s ministrations would then be expelled. Greece was openly
threatened with this scenario after it announced its ungrateful plan to hold a
referendum.
In a series of important articles, EUobserver’s Leigh Phillips
has documented how the crisis has seen national governments remodelled along EU
lines to remove them further from voters, whether opposed to austerity or
paying for bailouts, in order to uphold a new European order of experts. ‘This
has not happened by putsch or coup d’état, at least not one
involving any guns or tanks. There are no colonels or partisans who have
captured the garrisons and seized the telephone exchange’, he wrote this
summer. ‘Yet a junta has installed itself nonetheless, a junta of “experts”,
technocrats, those educated in the knowledge of What Needs To Be Done.’
Dealing with economic reality requires real political leadership. It means
making demands both of elites and the public for European and national economic
restructuring to lift productivity. This is denied by EU states preoccupied
with maintaining routines and detached institutions. The EU is becoming more
and more explicitly a tool of domination. Because it is unable to get to grips
with the new economic and political realities, it is defying them with the full
force of statecraft.
For an alleged peace project, the EU is looking like a much uglier
construction. European affairs are once again governed by secret summit
diplomacy and power-play in which the explicit assertion of an order based on
inequality between nations is backed up by compulsion.
‘We are not children’
Speaking in the snow outside Dublin’s General Post Office in November 2010,
Fintan O’Toole, the Irish thinker and commentator, addressed a crowd of over
50,000 people demonstrating against the EU-IMF austerity package that had just
been imposed on Ireland. During his speech, O’Toole made an important point.
People, he argued, were prepared to make sacrifices and, after all, they
made them every day in order to provide for their families, children and to
build communities. While they were ready to work to repair the Irish economy,
people were not ready to be sacrificed on the altar of undemocratic
institutions, he said. ‘We can emerge from this crisis with a renewed sense of
solidarity and justice and with a vigorous democracy in which power has
returned to the people’, said O’Toole. ‘We are here today to say that we are
not economic units whose only function is to behave ourselves… We are not
children who must take our medicine or be sent to bed without our supper… We
are citizens. And we want our republic back.’ (7)
The expulsion of the public from EU decision-making and institutions has
made the economic situation far worse than it needed to be. Irrational EU and
Eurozone institutions have stopped trying to persuade and have started using
force to impose destructive policies. Without the cut and thrust of democratic
politics or a contest between opposing economic interests there are no
alternatives to the series of unravelling bureaucratic fixes that are pushing
Europe to the brink of disaster.
Supporting calls, whether in Greece, Britain or anywhere else, for
referendums on bailouts, austerity programmes or euro membership plays an
important role in beginning the political process that can stop the cycle of
destructiveness that the EU has become. The EU and euro are threatening to drag
down the world economy, consuming nations and peoples to uphold institutions
that have failed. Democracy might be disruptive to the world of euro summits
and central bankers, but it is Europe’s only chance.
Bruno Waterfield is Brussels
correspondent for the Daily Telegraph and author of E-Who? Politics Behind Closed
Doors, published by the
Manifesto Club.
(1) No Means No!: E-Who? Politics behind closed doors, by Bruno Waterfield
and ‘No’ to the politics of the fait accompli, by Christopher Bickerton
(Manifesto Club 2008) available here
(3) Ibid No means No
(4) Greece should shake
off the euro straitjacket, New Economics
Foundation, James Meadway
(5) Ireland’s future
depends on breaking free from bailout, Morgan Kelly, Irish Times
(7) Speech from the Rally
in Dublin, Fintan O’Toole
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