Home > crisis > Eurozone crisis enters new phase as ECB fights Europe for austerity

Eurozone crisis enters new phase as ECB fights Europe for austerity

Mark Weisbrot

The house is on fire and the owners are arguing about what kind of safety regulations should be implemented in the future so as to prevent these types of fires.  That is what appears to be going on in the eurozone right now, as European leaders try to reach agreement on a series of measures that would impose “fiscal discipline” on member states in the future.

Of course, these would-be fire marshals haven’t even identified the correct safety regulations, since it was not over-borrowing by governments that caused this crisis, but rather over-borrowing, bubble-driven growth, and other excesses of the private sector.  But the most urgent problem right now is the fire itself – the eurozone is already in recession, according to the OECD, and their financial crisis is already slowing the world economy. This includes Brazil, which today announced that GDP growth for the third quarter has been zero.

However, we have entered a new phase of the crisis — although it has been barely noticed by the media — which is mainly focused on the proposed fire safety regulations.  On Friday, the head of the European Central Bank (ECB), Mario Draghi, hinted for the first time that the ECB could play a bigger role in buying Italian and Spanish bonds.  According to press reports, he justified this on the grounds that the ECB had a responsibility to maintain price stability “in either direction.”

This is a 180-degree turn-around from the ECB’s prior insistence that such action would violate the treaty that established the Bank’s mandate.  In other words, he was saying that the ECB could intervene more with the rationale that it is preventing deflation, which is a possibility (though still remote) if Europe slides further into recession.  Of course this is just a not-very-credible excuse, but a very welcome one for Europe and the world, since Italian and Spanish bonds are at the heart of the current crisis. If the ECB were to commit to keeping these interest rates at low levels by buying these bonds, financial markets would stabilize and the eurozone could potentially recover.

But there is a catch:  the ECB will only do its job and end the crisis if it gets the austerity it wants from European governments.   Now we can see in clear daylight what is really going on:  the ECB – backed by Germany and some other governments —  can end the crisis at any time, at no cost to European taxpayers.  But it is prolonging the crisis in order force “reforms” — such as raising the retirement age, cutting spending, privatizations, even EU control over national budgets – that most Europeans would never vote for.

That is why the eurozone crisis is far from over:  not because of the difficulties of governance with 17 countries.  It’s because the ECB and its allies don’t really want to resolve the crisis as much as they want these unpopular “reforms.”   At best, the European authorities will do enough to avoid a financial meltdown, but risks will most likely return as they push Europe further into recession with unnecessary and harmful fiscal tightening.

  1. Merijn Knibbe
    December 8, 2011 at 1:15 pm

    Ireland is a case in point. It’s deficit is quite a bit larger than the deficit of Spain and about two to three times the size of the Italian deficit. It’s industrial base is weak and people are leaving the country at a rate of 50.000 a year. Interest rates on government debt are higher than in Italy. But it cuts social security and it Amerikanizes the labor market. As a consequence, Jurgen Stark, still employed by the ECB, praises this country as a shining example of economic progress. Even despite the fact that ‘markets’ seem to trust Ireland less than Italy.

    By the way – the consolidated government deficit of the entire Eurozone is about 5,3% of GDP (September forecasts were actually 4,3%, but I’m more pessimistic). The UK deficit is about 9,5%, at the moment and the USA deficit abut 8,5% of GDP. It’s clearly not about the deficits.

    • Alice
      December 9, 2011 at 10:16 am

      People will flee a sinking ship and that says more about the captains of the ship..so be it. They are not only leaving Ireland (again) they are shooting horses as they go.

      Yes – Ireland – shining example of sound austerity measures…not. So now we are trying to replcate austerity elsewhere – a growing number of countries by the day.

      Where will the Irish land? (or will the destination be just as bad)?

  2. December 8, 2011 at 2:08 pm

    While I have not done research to verify my theory, it may be worth mentioning. Austerity is about transferring wealth from the middle and even lower economic sectors to the wealthy NOT about reducing/controlling deficits and debts nor is it about setting the stage for growth.

    It is my impression that, since the mid seventies when Friedman won the so-called Nobel Prize for economics, a number of trends have occurred.

    The number of articles or mentions in the business press about inflation has steadily increased or at least been unabated. The demands for deregulating the financial markets has increased. The calls for lower taxes have increased. The amount of money borrowed by governments from their central banks has steadily declined and concomitantly the amount of money borrowed by governments from the private financial sector has steadily increased driving their debts to increase exponentially. The criticisms of civil servants and teachers have steadily increased in the general public. Anti-union rhetoric has increased in the press and hence the general public. The number of millionaires and billionaires has grown along with the amount of the income and wealth that they control. Criticisms of liberal thinking has increased while the religious right (Christian and Muslim) has gotten more press — both negative and positive. The business and political press has become one large monopoly of thought and ownership with few outliers. Monopolies are now acceptable and there is no anti-trust activity worth mentioning. Military spending has increased steadily in actual dollars and in percentage of the GDP. Health care spending and education spending has more or less flat-lined as a percentage of GDP. Wages of the middle class and lower classes have flat-lined or declined as a percentage of the GDP. Environmental degradation (toxins, emf radiation, carbon, extinctions, climate fluctuations, etc.) continues to accelerate.

    I am sure that there are other pertinent trends but my limited understanding of Chaos theory suggests that the variables are swirling about in an ever-increasing storm that will engulf the world in a perfect wave. And the lifeboats are gone!

  3. December 8, 2011 at 2:54 pm

    Austerity – higher punitive taxes on economic human action and less spending for human well being – is an attempt to continue the implicit subsidies to the landed interests at the expense of the non-landed poor as well as the merchants, even if it ruins the economy. This is because the establishment seeks to avoid the only salvation for Europe, a productivity tax shift to replace the punitive of production and consumption with the repayment to government of the land rent generated by its services. The replacement of VAT and income taxes with a land-value tax would generate dazzling economic growth and eliminate the deficits. It is obvious why conservatives oppose this, but it is ironic that “progressives” blindly support the mother of all subsidies – implicit land rent.

  4. Podargus
    December 8, 2011 at 6:53 pm

    It is rather amusing to watch the monkeys squirm as they try to withdraw their hand from the trap without letting go of the bait.
    The present European imbroglio is a classic study in the psychology of prior investment.
    Europe will have to go back in order to go forward.There are other roads but in order find them there must be a recovery from the EMU insanity.

    Napoleon and Hitler tried to impose pan European governments and we have seen how all that ended. More power to national sovereignty, independence and diversity.

  5. stearm74
    December 8, 2011 at 11:44 pm

    Today, the 8th of December, Draghi made clear that the ECB won’t intervene in any case.

    That is, even if huge austerity measures and German-imposed structural reforms will be agreed during the week-end.

    Things are much worse than this article suggests.

    Draghi, the whole ECB board, the Finance Ministers of Germany, France, Italy, Spain, Greece, Great Britain, Austria and all other European countries have no clue about BASIC ECONOMICS.

    All these people are making decisions against all historical experience and with no economic model whatsoever in their mind.

    And they have all at least a Ph.D. in Economics from one of the best University in the world.

    It must be a system failure, like when the dinosaurs disapperared, natural selection didn’t work. Political and social selection is not working in Europe.

    The brightest are the dumbest!

  6. December 9, 2011 at 10:36 am

    It seems to me that the OP is correct in saying that the will is not to solve the crisis, but rather to complete the project of destroying the “social democratic” state which expresses the democratic will of the peoples of europe. Despite decades of patient work to persuade the electorates to vote for that agenda (which has met with some success and has resulted in the “treason” of politicians of all stripes in transferring power from parliaments to board rooms) they have not yet managed to destroy people’s sense of where their own interests lie, completely. This crisis of the plutocrats’ making is a perfect excuse to finish what they started and to do by dictat what they cannot achieve through the ballot.

    This is the imposition of a one party state, so far as I can see. To me it does not really matter if there is a european government or many national ones: so long as there is democratic control and accountablity it is ok. (though I do accept that the economic differences require a lot of local decision making). But the legal imposition of “balanced budgets” etc is the death of democracy ,because it is a political position pure and simple. If that is enshrined in law then we no longer have politics: we have overt plutocracy and no political alternative.

    • Alice
      December 10, 2011 at 10:43 am

      But the legal imposition of “balanced budgets”

      It is not even a legal impsotion of “balanced budgets” they want in the middle of this economic downturn…the worst of all possible times for a balanced budget or a budget surplus.

      What they really want is to strangle the middle class and poorer classes further with budget surpluses in the middle of an economic downturn…so if all the job creators “businesses” and the gamblers share bets go sideways….so be it. The powermongers all come from banks and they all care only aboit banks (when the whole sector needs market rationalisation…and the el3ected representatives are listening only to banks…as if they are the sole source of growth and employment (they are not)…then

      we all get what we deserve to allow these bastards just too much influence in the political process. Moneyumltiplication = power but money does not = a sound economy. Good and services and jobs do – not the chimera of extrapolated bank gambling debts no matter how many people it takes to put together an engineering / financial sector algorithm. There is nothing real behind tha except some other persons loss and debt.

      • December 10, 2011 at 12:17 pm

        I rather think you credit “them” with too much intelligence and too much malice, Alice.

        They do not “want” to strangle the poor and middle classes: it is really just a side effect of their policy. There is not much evidence “they” even notice it, really. The very rich are no better at understanding other people’s lives and aspirations than anyone else. They have self interest, as most of us do; and they have the idea that their self interest is something altogether more noble than self interest, again as most of us do. As old as time: the “elite” must take all the decisions because they are cleverer or stronger or more virtuous than everyone else. That is a narrative as old as Plato. There is no evil in it: it is a failure of imagination and a failure of humility, really. Most people must believe themselves “good” so they can face their mirror. There are many strands to the narrative which allows them to do that. The variations of “noblesse obliges” are always in there. The narrative is always convincing to the powerful: they have had centuries to perfect it, and it never goes away

        The poor also have their narrative, and it persists too. Sometimes it is ascendant, and sometimes it is buried: that is true for the narrative of the rich as well, though it is buried less often, arguably, and that is a function of the power of wealth to command the terms of the public discourse. At present they are ascendant, but I think we are seeing a shift. You can manipulate people into error about where their interest lies: but only for a time. There comes a point when the adverse consequences of a partisan narrative, and the associated policy, on the lives of those whose interests it damages cannot be spun or denied. It is surprisingly far down the line, but it happens, I believe. And I think we are at the start of that realisation, once again.

        When that starts to happen the response is to attack democracy overtly. And this is what we are seeing. There is a reason for that. The point of democracy is to ensure that no group can be utterly exploited, because they have the means to prevent that. One can describe that in Marxist terms of class consciousness, if it pleases you. I don’t much care what you call it: it seems to me to be a process which will always go on, simply because the right wing tale that “we are all on the same side” is demonstrably untrue. But that does not necessarily imply that they know it is a lie. I think that many sincerely believe it.

        For me the attack on democracy is the essential point of resistance: for without it the poor cannot defend their interests effectively. I would add that this democracy is not confined to the ballot: that is open to the power of wealth as well. It is essential that there are other alternative power bases to set against the ones set up and controlled by the elitist wealthy: it is no suprise that they set about dismantling those whenever they are in control of the zeitgeist. Such power bases are most obvious in trades unions: but they also exist in “professional associations”, for example (trades unions for the middle classes, if you like). It is sad but not unusual for the wealthy to have some success in characterising those institutions as harmful to all. Such stories find purchase from time to time, because no institution is perfect and it is relatively easy to divide and rule when people come to take their hard won rights for granted and forget they are not secure without defence.

        The imposition of balanced budgets is one mechanism which undermines democracy and it is no accident that the european leaders have sought to find a way to impose them without a vote: they worked quite hard on that, as I understand it.

        I agree that what we are seeing the elite defend is their own position: but it is a mistake to think that we get what we deserve, because enormous wealth and patient reframing of the situation has led a great many people to mistake their interest in line with the idea that there is a “commonwealth” or an identity of interest. That is eroding, I think, and that is what the Occupy movement has fund a way to express. That the analysis is rather inchoate is merely a function of the success in suppressing the narrative of the poor: they cannot stand on the shoulders of giants for now: because the giants have been written out of the history that they know. But the history is there and the insights of the poor will be rediscovered: perhaps as a resurgence of the left, or perhaps in other terms and other words: but it will come.

        The wealthy have taken 30 years to establish their ideological hegemony and it is the water we swim in: it operates at many levels and it has many strands. A coherent opposition need to unpick it and to lay bare the premises on which it is built. Premises like ” we are all on the same side” and “the poor are a different breed who are the authors of their poverty” and ” rich people are the only source of wealth and the more they have the more wealth we wil all enjoy”. These and many other foundations are clearly absurd when we explore them: but they are the irreducible premises on which the logic of plutocracy is built. As with any other narrative if the premises are accepted the logic leads to their conclusions thereafter: so the premises need to be debunked. That will not be quick because by now they are quite hard to spot.

        In terms of what we can do now, however, it seems to me essential to identify and resist any dilution of democracy, even in the limited form it currently exists. For without that foundation it does not matter what else we wish to do: we will not have the means. We are nearly there now and yet there is little to show we will defend it, if we consider Greece and Italy and now this european plan

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