FacebookTwitterGoogle+RedditEmail

The European Debt Crisis Myth

by MIKE WHITNEY

 No one opposes unity. And no one opposes a stronger, more unified Europe. What people oppose is policy; policies that slash workers wages, privatize state assets, increase unemployment, and prolong recession. That’s what people oppose. The people who are burning cars and fighting police in Athens aren’t doing so because the hate unity. What they hate is a policy that shifts all the burden of the financial crisis onto their shoulders. The issue is fairness, not unity.

For over a year we’ve been hearing about a debt crisis that’s spread from one EU country to the next. But, keep in mind, the crisis was predicted long before problems arose in Greece. From the very beginning, experts warned that structural flaws in the make-up of the monetary union would eventually lead to disaster. And so it has. So why is everyone acting so surprised? And why are the politicians and central bankers so eager to blame Greece? This is a structural problem. It has nothing to do to profligate spending, huge budget deficits, or “lazy Greeks”. Those are all just red herrings. The one-size-fits-all currency was bound to end in catastrophe unless steps were taken to level the fiscal playing field. What does that mean? 

We’ll get to that, but first, here’s an excerpt from a post at Delusional Economics that helps put the problem in a larger context: 

“…the European model is based on the fact that Germany is an industrial powerhouse which has suppressed its wages in comparison to its production compared to its neighbours. This has made it a large net exporter into Europe and therefore appear to be running a sustainable economy. But for that to be the case then other European nations needed to be net importers. Given the common currency, countries within Europe with differing productive capacity had a choice between labour markets or debt markets as their response mechanism. Given the liberalisation of the banking system and the illusion of credit risk symmetry across Europe many nations took the path of least resistance. Debt. By doing so they allowed Germany to continue to export into Europe under the illusion of sustainability, but as we have now seen this was a fool’s game. Weak political will in fiscal policy, the loss of national monetary control, de-regulated cross-border banking and the single currency created an environment of massive imbalance.

We have now reached the point where that imbalance has lead to a crisis. The debt that accumulated in the periphery based on this model has now reached a point where it is unserviceable. But this has been a symbiotic relationship. The net exporters need the net importers to continually take on debt or they cannot finance the purchasing of their manufactures or maintain their banking systems that are based on loans to the indebted nations to continually fund those purchases. Demand that the periphery stop spending and down goes the whole ship. That is what we are now seeing.” (“Europe must Choose” Delusional Economics) 

So, ask yourself this, dear reader, how is it that the bigwigs at the ECB couldn’t figure out that humongous capital flows and account balances were going to create a crisis? 

It’s inexcusable, especially since they’d been warned about this very thing over and over again. So, now the markets are in turmoil, workers are rioting in the streets, and the eurozone is careening towards the cliff. Wouldn’t it have been cheaper and less hassle just to pay attention to what the experts were saying at the time? 

Anyone could see that there were going to be imbalances between the deficit countries and the surplus countries. So, when the banks and and other financial institutions started loading up on bonds from the deficit countries–believing that they were just as safe as German bonds– that should have been a red flag for Brussels, right? They should have anticipated that if Greece got in over its head, it wouldn’t be able to repay its debts and the banks would lose billions. But no one said a thing. Why? 

Was it because the banks were raking in the profits off of the slightly higher rates on PIIGS bonds? Is that why the ECB just looked the other way? 

There’s no way of knowing for sure, but the bottom line is that the banks bond-buying binge actually contributed to the present crisis. Just take a look at this from the Streetlight blog:

“The factor that crisis countries have in common is that, without exception, they ran the largest current account deficits in the EZ during the period 2000-2007. The relationship between budget deficits and crisis is much weaker; some of the crisis countries had significant average surpluses during the years leading up to the crisis, while some of the EZ countries with large fiscal deficits did not experience crisis. This is one piece of evidence that a surge in capital flows, not budget deficits, may have been what laid the groundwork for the crisis.” (“What Really Caused the Eurozone Crisis?, The Streetlight blog)

That means that the budget deficits didn’t cause the crisis, in fact, many of these countries were actually in surplus at the time. The problem was the ocean of foreign capital that kept pouring in. Once the capital stopped flowing–BOOM– the crisis began. Here’s more from the Streetlight blog that helps to clarify the point: 

“Putting it all together, it seems that the EZ crisis is more consistent with the systemic causes view than the local causes view. In other words, while they didn’t necessarily make the right decision every time, the peripheral EZ countries were up against powerful exogenous forces – capital flow bonanzas and sudden stops – that tended to push them toward financial crisis. They were playing against a stacked deck.

It’s useful to reevaluate the macroeconomic history of peripheral Europe in light of this interpretation. Rather than large current account deficits being the result of fiscal mismanagement or excessive consumption, the current account deficits were the necessary and unavoidable counterpart to the surge in capital flows from the EZ core.” (“What Really Caused the Eurozone Crisis?, The Streetlight blog)

Oh my. So the crisis wasn’t really caused by “profligate spending” or “lazy Greeks” after all, but by capital flows? Then why haven’t regulations been put in place to control the disruptive movement of foreign capital? 

Well, because that would mean smaller profits for big finance, so the topic hasn’t even come up for debate.

And why are policymakers levying punitive measures against workers in the debt-stricken countries when it’s clearly the job of regulators to prevent monstrous imbalances from developing in the first place?

That’s easy, because workers have no voice in government so the losses can be transferred to them without a lot of fuss. It’s just a matter of lowering wages, slashing benefits and eviscerating pensions. Eventually, the debts get repaid and the bondholders are rewarded for their crappy investments. It’s just plain old class warfare euro-style. 

So, tell me, why would anyone want to be a part of a union like this?

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

 

 

 

 

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
February 24, 2017
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Exxon’s End Game Theory
Pierre M. Sprey - Franklin “Chuck” Spinney
Sleepwalking Into a Nuclear Arms Race with Russia
Paul Street
Liberal Hypocrisy, “Late-Shaming,” and Russia-Blaming in the Age of Trump
Ajamu Baraka
Malcolm X and Human Rights in the Time of Trumpism: Transcending the Master’s Tools
John Laforge
Did Obama Pave the Way for More Torture?
Mike Whitney
McMaster Takes Charge: Trump Relinquishes Control of Foreign Policy 
Patrick Cockburn
The Coming Decline of US and UK Power
Louisa Willcox
The Endangered Species Act: a Critical Safety Net Now Threatened by Congress and Trump
Vijay Prashad
A Foreign Policy of Cruel Populism
John Chuckman
Israel’s Terrible Problem: Two States or One?
Matthew Stevenson
The Parallax View of Donald Trump
Norman Pollack
Drumbeat of Fascism: Find, Arrest, Deport
Stan Cox
Can the Climate Survive Electoral Democracy? Maybe. Can It Survive Capitalism? No.
Ramzy Baroud
The Trump-Netanyahu Circus: Now, No One Can Save Israel from Itself
Edward Hunt
The United States of Permanent War
David Morgan
Trump and the Left: a Case of Mass Hysteria?
Pete Dolack
The Bait and Switch of Public-Private Partnerships
Mike Miller
What Kind of Movement Moment Are We In? 
Elliot Sperber
Why Resistance is Insufficient
Brian Cloughley
What are You Going to Do About Afghanistan, President Trump?
Binoy Kampmark
Warring in the Oncology Ward
Yves Engler
Remembering the Coup in Ghana
Jeremy Brecher
“Climate Kids” v. Trump: Trial of the Century Pits Trump Climate Denialism Against Right to a Climate System Capable of Sustaining Human Life”
Jonathan Taylor
Hate Trump? You Should Have Voted for Ron Paul
Franklin Lamb
Another Small Step for Syrian Refugee Children in Beirut’s “Aleppo Park”
Ron Jacobs
The Realist: Irreverence Was Their Only Sacred Cow
Andre Vltchek
Lock up England in Jail or an Insane Asylum!
Rev. William Alberts
Grandiose Marketing of Spirituality
Paul DeRienzo
Three Years Since the Kitty Litter Disaster at Waste Isolation Pilot Plant
Eric Sommer
Organize Workers Immigrant Defense Committees!
Steve Cooper
A Progressive Agenda
David Swanson
100 Years of Using War to Try to End All War
Andrew Stewart
The 4CHAN Presidency: A Media Critique of the Alt-Right
Edward Leer
Tripping USA: The Chair
Randy Shields
Tom Regan: The Life of the Animal Rights Party
Nyla Ali Khan
One Certain Effect of Instability in Kashmir is the Erosion of Freedom of Expression and Regional Integration
Rob Hager
The Only Fake News That Probably Threw the Election to Trump was not Russian 
Mike Garrity
Why Should We Pay Billionaires to Destroy Our Public Lands? 
Mark Dickman
The Prophet: Deutscher’s Trotsky
Christopher Brauchli
The Politics of the Toilet Police
Ezra Kronfeld
Joe Manchin: a Senate Republicrat to Dispute and Challenge
Clancy Sigal
The Nazis Called It a “Rafle”
Louis Proyect
Socialism Betrayed? Inside the Ukrainian Holodomor
Charles R. Larson
Review: Timothy B. Tyson’s “The Blood of Emmett Till”
David Yearsley
Founding Father of American Song
FacebookTwitterGoogle+RedditEmail