Monday, November 22, 2010

Will the European Union survive?

Der Spiegel provides a very German take on the Euro zone crisis that inadvertently is revealing of how the monetary crisis is ultimately a political crisis for the very soul of the European Union:
A deep divide between two almost irreconcilable camps runs through Europe. German Chancellor Angela Merkel heads one camp, consisting of the northern European countries. Merkel sees herself as the defender of a culture of stability of the sort that Germany has maintained since the days of the deutschmark. Her goal is to prevent the monetary union from becoming a kind of transfer union, with Germany as paymaster.

The second camp consists of the so-called PIIGS states, which have accumulated too much debt in the past and are now hoping for help: Portugal, Italy, Ireland, Greece and Spain. They want the thing that Merkel wants to prevent: a union in which the strong pay for the weak. Europe's institutions are now maneuvering between these two camps.
Certainly, that's how Berlin would like to portray the issue: as a bunch of lazy, profligate Southerners who are trying to get the industrious Germans to pick up the tab for years of spendthrift freeloading.

Of course, there's an alternate perspective of the underlying causes of the Euro zone crisis, namely that the real driver was the actions of German and French bankers, who after providing the credit that fueled a mad speculative bubble, now want to make the taxpayers and social service consumers of the South bear all the burden of the shared folly. Naturally, this is the narrative preferred in Rome, Madrid, Lisbon, and Athens.

From the perspective of the PIIGs, in other words, the question is whether the Germans can get away with imposing what amounts to a vicious structural adjustment program (SAP) on their fellow euro-zone members. In other words, are the Germans going to be allowed to do to PIIGs what the US did to Latin America in the aftermath of the 1983 debt crisis?

That story is worth remembering in some detail. What happened in that case was that US banks, flush with petrodollars from the Middle East, had gone on a huge lending spree in the 1970s to Latin American governments, which used the money on a mixture of corrupt payoffs for rich elites and promises of social welfare for the middle classes. By the early 1980s, as interest rates skyrocketed, these countries were no longer able to service their debts. Mexico declared in 1982 that it was not going to pay, several other Latin American countries followed suit, and for a few months that winter it looked possible that the entire global capitalist banking system might implode.

To make a very complicated story short, what happened next was that the U.S. and the IMF agreed to restructure the Latin Americans' debts, in exchange for the imposition of "structural adjustment." The SAPs contained a number of critical elements, which in principle were designed to ensure the fiscal health of the debtor governments, but which also entailed a de facto form of national and transnational class warfare: the rolling back of state ownership of key industries; the lowering of tariff barriers; the restriction of the autonomy of unions; the curtailing of price controls on food, water and other life essentials; and the scaling back of social welfare promises.

This process of economic restructuring is most often remembered as having been responsible for producing a so-called "Lost Decade," in which economic growth rates plummeted across Latin America. But arguably what went lost was something much bigger than a mere decade of productivity. In fact, the SAPs ultimately involved the wholesale abandonment of an entire social-political vision, namely the promise of "development" as a process of building a "social modernist" welfare states akin to those enjoyed in the Global North. In other words, it spelled the end of a certain kind of social dream, a certain kind of political ideal -- the dream that they would one day converge with the wealth and lifestyle of the North.

Now, the U.S. bankers and politicians could get away with destroying this dream in part because they themselves didn't really believe in that dream any longer (if indeed they ever had); in part because the U.S. people felt no political or social solidarity with the Latin Americans; and in part because Latin American elites were disunified in their response to the demands of Washington and New York

By contrast, the whole point of the European Union is supposed to be about pan-continental political solidarity in the name of building social welfare states. Furthermore, the social democratic nature of all the European governments means that throwing the middle classes under the banking bus is anathema - especially if it's "our" (Greek, Spanish, etc.) middle classes and "their" (German, French) banks.

So that's the key question: Is the European Union a fundamentally socially democratic institution? a collection of social and political equals who will stand together in a time of hardship? If that's the case, then the Germans will have to pay. Or alternately, will the Germans succeed in getting the taxpayers and social service consumers in the PIIGs to pay? In which case the beautiful dream of pan-European solidarity will be revealed as a lie, and it's hard to see how the European Union survives as a political project.

Milton Friedman famously predicted that the European Monetary Union would not survive the first recession. The political assumption underpinning this prediction was that the Germans ultimately did not feel political and social solidarity with Italians, the Greeks, and so on, and that in a crisis, the Germans would refuse to pay for the Southerners and the Southerners would refuse to take the German medicine. We're about to find out if Friedman was right.

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