European Union: “Why can’t Greece be more disciplined?”

European Union hawks demand further austerity

Per-Åke Westerlund, Rättvisepartiet Socialisterna (CWI Sweden)

Finance ministers of the European Union (EU) who met on 15-16 February threatened a financial straight-jacket including more tax cuts and “tougher cuts” for Greece. Within a month, by 16 March, Greece has been told to show results from its “measures to bring order to the country’s lousy economy”. Anders Borg, Sweden’s finance minister and a leading hawk against other EU states, summarised: “Why can’t Greece be more disciplined?”

“It is clear that Estonia, Latvia and Hungary and a large number of other countries have been able to pull themselves together and take political responsibility to secure a clean-up of public finances, so I find it hard to see why Greece cannot show the same discipline and the same order as we demand from other member states”, Borg said, representing the close to market-fundamentalist Swedish right-wing government.

The role of the European Union as a defender and instrument of capitalism has been very clear during this crisis. The EU bullied Latvia into horrible cuts in health care and wages. Other East European states have been treated similarly, while the Irish were warned in strong terms not to vote no in the second Lisbon Treaty referendum. Iceland is now facing what all applicant members states have faced – demands for cuts in the public sector and ‘liberalisation’ of the economy, only this time without any promises of improvement later.

The heavy pressure from the EU functions like a bat for any government to swing against trade unions and other opposition to austerity policies. ‘Without the EU, we are on our own’, governments will say, ‘we have no choice but to take their medicine’. Alongside such arguments, governments will blame Wall Street and flirt with nationalism (‘we have to save our country’). The Greek Prime Minister Papandreou has said “Greece is being used as a laboratory animal in a test of strength between the eurozone and financial markets”. The challenge for socialists and workers is to present both a strategy for the struggle against the EU and austerity, and an alternative socialist programme.

Worst EU crisis

The Greek deficit and debt is potentially the worst crisis ever for the EU and the eurozone. The ‘bond market’ – read: global financial speculators – has increased the interest rates gap between Greek and German bonds above 4 percentage points. Since Greece joined the eurozone ten years ago, the average spread has been 0.35 percentage points. This tenfold increase of the difference in interest rates between Greece and Germany means a sharp increase in borrowing costs for Athens. It is also a sign of speculation against Greece’s increased need to borrow. The “volatility has created opportunities to make money”, Financial Times commented. EU politicians fear that other EU member states will follow Greece, since Portugal, Ireland and the much bigger economy of Spain are not far behind Greece, yet at the same time this provides openings for speculation by finance capital. The interest on Portuguese bonds in early February reached a record gap with German bonds of close to 3 percentage points. Increased borrowing costs could also affect other EU countries.

The EU response has been hesitant. A year ago, the German finance minister stated the EU would save Greece. This time, even a possible state default was discussed, even if the EU will not let that happen.

The plan of the social democratic government of Greece to reduce the state deficit from 12.7 to 8.7 percent of GDP this year and down to three percent by 2012 was approved by the European Commission in Brussels. The European Central Bank, the ECB, however, which is based in Frankfurt and guardian over the single currency and eurozone ‘fiscal discipline’, “urges Greece’s Socialist government to make bigger budget cuts, increase Value Added Tax for consumers and impose higher taxes on luxury goods and energy”, in a document leaked to the German daily paper, Handelsblatt (quoted from euobserver.com).

An informal summit of EU heads of government last Thursday, 11 February, indicated the EU would give some form of guarantee for Greece, “determined and co-ordinated action if needed to safeguard financial stability in the euro area as a whole”. No specifics about such an action were discussed.

The following finance minister meeting, 15-16 February, agreed to postpone demands for more cuts until 16 March, when officials from the EU, ECB and International Monetary Fund (IMF) will go over the book keeping in Athens. This will be the “strongest surveillance measures ever on a member state”.

What kind of bail-out?

When the EU and euro rules were established at Maastricht in 1992, it was the German government that pushed for tough fiscal rules. State deficits should be limited to 3 percent of GDP and debts to 60 percent. In addition, the EU agreed to a ‘no bailout’ clause and rules to punish governments breaking the rules. However since 1992, the rules have been broken many times, including by German governments. This year, all 16 eurozone governments have fiscal deficits over 3 percent of GDP.

The EU politicians and particularly the Germans, fear the costs of a rescue operation for Greece. Opinion polls in Germany show over 60 percent against credits for Greece and a majority open to Greece being expelled from the eurozone.

This wing of the eurozone politicians fear that any rescue operation might spread beyond Greece, but this is not the only scenario in the current crisis. A default can also spread beyond Greece. When Lehman Brothers – whose debt was bigger than Greece’s - collapsed in September 2008, the US government attempted to set an example by not saving it. Instead, however, the crisis went into free fall and engulfed the rest of the banks and the giant insurer, AIG. In the 1930s, sovereign defaults – by nations – set off a chain reaction with others following suit. In Europe in 1992, a currency crisis led to devaluations in a number of countries.

A default by Greece would also heavily hit banks all over Europe in a situation where Europe is among the weakest links of the present economic ‘recovery’. The European Central Bank has made clear it will keep cash available for banks at one percent interest for the time being.

EU governments obviously want to avoid social upheavals in Greece that could be followed by movements in other countries. They would therefore prefer a more protracted process of attacks, to wait and see what the reaction of workers will be.

There is also another political price for EU leaders if any member state was to default. The “union” part of the EU project would be exposed as a failure. At the same time this would show that the euro is no way to economic prosperity, on the contrary.

That is why the EU’s bottom line for now will be to offer Greece some kind of bilateral loan, guarantee or similar. Maybe this will take place through some new agency or by expanding the fund already existing for candidate eurozone states such as Hungary. So far, EU and the eurozone have abstained from giving any details, despite requests for this from the Greek finance minister George Papaconstantinou in order to calm the “markets”.

Deepened crisis

Any package from the EU will be as a last resort. Greece has 20 billions euros of loans to settle in April-May and another 30 billions later in the year. Until then, the EU’s strategy is to push for harsher austerity measures. “There is a clear case for additional measures”, said the EU’s new commissioner for economic affairs, Olli Rehn. German officials have made similar calls. But more cuts will deepen the crisis. And all capitalist solutions will be paid for by working class families. The effect of the austerity in Latvia is the worst crisis in Europe, maybe in the world.

Unemployment is now officially 23.9 percent, consumption has dropped by a third, half of the hospitals have closed. Even capitalist commentators recognise this. “An attempt to cut a fiscal deficit by 10 per cent of GDP, via cuts in spending, would require an actual reduction of 15 percent of GDP, once one allows for falling fiscal revenue”, wrote Martin Wolf, chief economic columnist in Financial Times. He also makes the point, the crisis is not caused by an over-spending public sector – just look at Spain and Ireland, who have similar state budget deficits. Instead, it was the big expansion of the private sector – property, banks and low-paid service jobs – which has been the common feature of all the worst hit countries in the years before the crisis. This was fuelled by the EU’s low interest rates, which in turn increased demand from Spain, Greece etc for imports from other EU countries. As an alternative crisis policy, Wolf advocates temporary fiscal support for Greece and increased demand in surplus countries, particularly Germany, in exchange for lower wages and budget cuts.

Politicians in other EU states try to portray the current crisis in Greece and southern Europe as something exceptional caused by the mistakes of national governments. But the crisis not only homemade, far from it. Capitalist globalisation of the last 20 years in particular, and the integration of the EU, has made the crisis more international than even in the 1930s. Even in the midst of this crisis, the notorious CDS (credit default swaps) derivatives are at work in Greece. An editorial in Financial Times commented, “The purchase of protection against a Greek default by investment banks and other investors has wired the country more tightly into the wider financial system. As these are lightly regulated ‘over-the-counter’ derivatives, the counterparties’ identities and the scale of their exposures are difficult to know, raising the risk of contagion should a default happen.” It has also been exposed how the investment bank Goldman Sachs assisted previous Greek governments through currency swaps to hide the real state of their finances.

In many previous downturns governments have been able to devalue their currency and thereby revive the economy through increased exports. This time, there are few signs of new markets. Governments with trade and currency account surpluses, such as China and Germany, are neither willing nor able to drastically increase consumption. They fear new downturns and hope for new increases in exports. This is an indicator that global imbalances as well as regional imbalances within the EU are likely to continue.

The eurozone states will do everything to keep the single currency at this stage. With new serious downturns and class struggles, however, the strain in holding together will become too great. The alternative, deeper integration and a common finance policy, is strongly resisted by most EU governments. Governments will play the national card, blaming the EU for the crisis, while wealthier governments may want to get rid of weaker members states. Socialists will show how a more ‘national’ capitalism offers no way out from austerity, privatisation and rising unemployment. The alternative to the capitalist EU is a democratic socialist Europe. International solidarity with workers struggles’ in Greece, Latvia and other countries as well as joint struggle across borders are necessary in the fight against the EU’s capitalist policies.

The Economist magazine says the economic crisis is back in full swing, “To some, the rescue of Greece marks a new wave of the global financial crisis”. Capitalism escaped from the worst crisis scenario only through the most expensive rescue operation ever mounted. Iceland, Dubai and now Greece shows the system’s vulnerability. Workers and youth will now fight back against governments forcing them to pay for the crisis. These struggles, even if they do not take place immediately, will be the source for new socialist forces.