How to solve the European debt dilemma without a focus on austerity

Roger Rees reports on a recent conference which explored resistance to austerity measures, examining alternative perceptions of the current European economic and social crisis, and possible solutions. 

A spectre is haunting Europe – the spectre of austerity. Across the continent governments think austerity is the answer to crisis. But cutting public expenditure to reduce national deficits and hoping that stimulates the private sector is a huge leap of faith. 

Cutting public sector jobs and slashing public budgets reduces demand (and hence growth) in the economy, including demand for private sector goods and services (see ‘Eurozone in Crisis’, an interview with James Meadway on 25 August 2011 on Reality Radio.

So austerity is making the crisis worse, not better by increasing UK unemployment, now at its highest level for 17 years. Wage reductions and smaller pensions are generating rising poverty for those at the bottom and middle. While at the top of the socio-economic ladder soaring wealth continues relatively unabated. 

The price of necessities, such as food and fuel, are on an upward curve, squeezing living standards. As a consequence, UK public borrowing for 2010-16, forecast in November 2010 to reach £470 billion, was by March 2011 revised upwards to £514 billion. The more unemployed you have, the lower the government’s income from taxes. Even those in work start spending less, again reducing state revenue from taxes such as VAT.  

Nevertheless, Chancellor George Osborne retains austerity as a core policy for the UK’s coalition government (see Institute of Fiscal Studies report ‘Child and Working Age Poverty and Inequality in the UK: 2010’ at http://www.ifs.org.uk/comms/comm121.pdf).   

A recent conference in London was also the product of a coalition, but this time a European Coalition Of Resistance to austerity, with a succinct slogan: ‘No Cuts’. The conference generated a range of analyses, but there was unanimity on tactics.

Campaigners from the UK, Germany, France and Greece, were all in accord. Strike action, protests and demonstrations in opposition to the cuts wherever they fall:  all were needed on a Europe-wide basis. After all, the current focus for the global storm is Europe. Greece today.  Ireland, Portugal, Italy, Spain tomorrow?  

Crisis for democracy
But the crisis is not just economic. French conference delegates saw substantial undemocratic elements unfolding. The IMF overriding democratically elected governments. The European Central Bank intervening in states but elected by nobody. Greek austerity implemented when supported by only an estimated eight per cent of the country’s population. What will be the implications for future political legitimacy and national sovereignty?  

Austerity could feed the growth of the Far Right, as people look for scapegoats  – immigrant workers, travellers, the unemployed, Muslims, even the disabled – for the difficulties they face.  With the upcoming French presidential elections and the strong showing last time of the Front National, French delegates feared austerity could usher in political authoritarianism. A chilling echo of the 1930s. 

For the speaker from the German Die Linke party, the focus was on the downward trend in wages. Despite the commonly held view that Germany is effectively riding the crisis, it is doing so with the largest proportion of low-wage earners in any European Union (EU) country. ‘Wage regression’ (holding down or cutting wages), started there. Employers pushed down wages following the fall of the Berlin Wall. German production expanded into former communist East Germany and the East European states, where labour costs were a fraction of those in one-time West Germany. 

Yet the position of Germany could deteriorate. Its economy, buoyed up by high-price luxury exports to China in particular, is threatened by a potential downturn in the Far East as demand from the West for their manufacturing industry falls.    

Meanwhile UK conference participants pointed out that amidst austerity, European military budgets have risen. Britain’s contribution to the ‘war against terrorism’  is already estimated at £120-140 billion. If cuts had to be made, withdrawal from Afghanistan, having cost the UK £4 billion to date and still running at £12 million a day, was surely one ‘un-productive’ area in which to start?  

Credit, not debt, crisis
But why, asked British economist Michael Burke, is a Eurozone 4.3 per cent GDP debt level causing such a crisis? After all, UK debt is running at twice that level and the US at 10 per cent.  The answer is that debt is a symptom, not the cause. This is a crisis brought on by a dramatic fall in investment from 2005 onward. That, in turn, derived from a fall in the rate of profit. Banks, already weakened by the collapse of the sub-prime housing market in the USA, consequently held back on loans and investments seen as ‘not profitable enough’.  

Hence the ‘credit crunch’. And large firms, many capable of financing investment from their own resources, also held investment back, sitting on cash mountains, hoping cutting costs such as wages, would push up profit levels. But falling wages reduce demand for company outputs – and a ‘vicious spiral’ begins. 

Workers are not just costs of production. They are also consumers of goods and services. They need decent wage levels from paid employment if demand in the economy is not to fall further. And further falls cause more unemployment and down we go. Austerity policies seem to be feeding this spiral (see ‘The relation of profits and austerity’, Michael Burke, Socialist Economic Bulletin 25 October 2011.

Remedies
The conference was not short of remedies for the crisis. Among them, a minimum legal EU wage level; the carrying out of national debt audits (identifying where exactly the debts stem from and then taking a selective approach to repayments – some being more legitimate than others); closing corporate and personal tax loopholes and addressing the problem of tax havens; nationalising the banks (since the European taxpayer appears once again to be about to bail them out, this time under the guise of ‘insuring’  their past reckless lending); and finally, if financial institutions and companies operate globally, it was time trade unions moved in response, to create trans-national links and even mergers – global unions to address global issues.  

The early 20th century American banker Andrew Mellon, declared that "During a depression, assets return to their rightful owners". He meant that economic crisis pushes weaker companies out of business and wage earners out of work. The former are forced to sell off plant, equipment, buildings and land. That’s when the wealthy – Mellon’s ‘rightful owners’, those with the financial might to survive – step in to purchase such assets at much reduced prices. So Mellon’s economic crisis favoured those who had and penalized those who didn’t. So do today’s austerity measures. 

It may be a salutary lesson from history that Andrew Mellon was appointed the American Secretary of the Treasury in 1921, the equivalent of a Chancellor of the Exchequer. His subsequent expenditure cuts were initially lauded for helping reduce the Federal public debt. Later his measures were condemned for having contributed to the Great Depression from 1929 onwards. 

Let’s hope that events such as the conference and actions of the European Coalition Of Resistance To Austerity can help to effectively draw attention to the very real dangers that austerity generates. If they cannot, then the recent agreement to shore up the Euro won’t be the last. And the spectre will move on to claim many more casualties, in Europe and beyond. 

Roger Rees 28 October 2011

Roger Rees is a Curriculum Manager in the Open University Faculty of Social Sciences