What Future for Europe?

Will the Euro zone survive the next 12 months? If not can the EU survive? These questions, unthinkable 12 months ago, are now asked routinely in financial markets and in every major political forum across the world.

The purpose of this article is not to speculate on bailout mechanisms, or even new EU treaties, but to try and assess how the people are voting for political parties and particularly parties of the left and how these votes affect the unprecedented political crisis and the EU leaders message of no alternative to austerity.

The Roots of the Crisis

The problems affecting Europe are largely the latest manifestation of the Global Financial Crisis which broke in 2007. The Credit Crunch which threatened to shut down the world financial system, was temporarily alleviated by money being pumped into the financial system. Banks which had loaned money to speculative then bust property ventures had these “debts” taken over by national governments. Many bankrupt banks were nationalised and their liabilities assumed by Governments. Whilst in the UK and USA Governments could print money, “quantitative easing”, Countries which use the Euro as their currency cannot print Euros directly. Unlike Britain whose official debt is 1/3 what it would be if bailout funds were included, Euro zone countries bank bailout debt is largely on balance sheet.

Another root of the crisis was built in to the Euro Zone from its inception. Each country joining the Euro was meant to set budgets which over time “balanced”, that is Government income from taxes should within small limits be matched by government expenditure. These rules were to a large extent not enforced by the Euro zone monetary authorities and during a period of overall growth ignored by political leaders. Given that in a common currency region prices tend to equalise, and people need similar amounts of money to survive, then for balanced budgets you require a smaller state expenditure if you have a low tax base. Furthermore, weaker economies require a higher rate of economic growth than stronger ones.

Over time, productivity growth in a common currency is critical. Highly productive nations like Germany sell goods to less productive nations such as Greece. A balance of payments crisis emerges whereby money from the poorer country say Greece goes to the richer Germany. There is less money to pay taxes in Greece and given the inability of the Greek government to devalue, a government deficit arises and money has to be borrowed from banks. Once an economic downturn occurs, deficit governments find it difficult or impossible to repay their debts and eventually must refuse to pay.

In most nation states governments policy is designed to ensure a redistribution of wealth from rich regions to poorer regions in order to redress the problems of combined and uneven development which is a natural feature of modern capitalism. The EU and particularly the Euro zone has no such formal mechanism for redistribution of wealth between nations. Germany (and a few other countries) with high productivity sell goods to poorer states and have a balance of payments and fiscal surplus, the other states have a fiscal deficit and a big problem.

A Brief Recap of Events

2009 was the year bond markets began to focus on Government budget deficits across Europe, particularly Ireland and Greece. 2010 saw austerity programmes introduced across Europe, the beginnings of  resistance by worker and community organisations and renewed action by the IMF and European leaders to fund banks’ toxic loans to calm markets. Unemployment continued to soar.

In 2011 the crisis related to sovereign debt levels, swollen by recession tax reductions and bank bailouts, across the 17 country Euro zone and questioned whether the Euro could survive. Bonds yields soared not just in Greece, but in Spain, France and Italy. Germany and France, the largest Euro zone countries took unilateral action. In October Merkel, Sarkozy, the ECB and IMF, frustrated by the “democratic process” took the decision to remove the Governments of Greece and Italy and replace them with financial placemen. A new EU treaty was deemed necessary in 2012 to legalise ECB lending and impose austerity and fiscal discipline on recalcitrant Euro zone members.

At the end of 2011 this strategy is not working. Greek bonds yields are at an all time high (35% interest per year on 10 year bonds) and anticipate a default of around 90% of value, compared to 50% being negotiated with lenders by the ECB. European banks are still not lending to each other or to industry. A recession in many EU countries seems certain. Democracy Index at the end of 2011 now ranks no Euro zone countries in their top 8 democracies. Finland and the Netherlands are ranked 9 and 10. The UK is 18th.

A Ratings conspiracy?

In the first week of 2012, 9 EU countries including France and Italy have had their sovereign debt downgraded by Standard and Poor one of 3 ratings agencies. In theory, although less so recently in practise, this makes it more costly for these governments to borrow money. Over the last year, rating adjustments have coincided with attempts by European leaders to claim everything was under control. All the ratings agencies are based in the USA. Could the US government and Wall Street be trying to destabilise Europe? Their role in the Asian crisis, Russia, and the Middle East makes this plausible. The responses of Italy and France, of threatening to sue them suggests Europe’s leaders have not ruled this out. Finally, despite having been the main cause of the economic crisis, the US recovery is well under way, it expects to be energy self sufficient (thanks to environmentally appalling shale gas), has sharply rising productivity and falling unemployment. Destabilising its European competitors could well be part of the inter-imperialist conflict short of military action which is “globalisation”.

On the other hand Europe has created most of its own problems by participating in the deregulation of finance and neo-liberal agenda, as well as constructing an inherently unstable Euro zone.

Elections 2011

How are the peoples of Europe responding to the crisis? A survey of elections to National parliaments gives some insight.

Parliamentary elections were held in 10 EU countries, 6 in the Euro zone, representing 23% of the EU population.

February Ireland (0.9% EU pop). Fianna Fail was replaced by a  Fine Gael led government in coalition with  the Irish Labour Party following the passing of an austerity budget under intense pressure from the ECB and IMF (see SLR 64). Both Fianna Fail and its Green partner vote collapsed as they were perceived as having disastrously handled the economy. Critics of austerity including Sinn Fein and anti-capitalist coalitions got 13%, up from 8%.  Irish GDP shrank 1.9% in 3rd quarter of 2011, unemployment remains 14.5%. Despite this a new austerity budget is being introduced.

March Estonia (0.3%). The Reform Party and its pro-business partners retained power with 49% of the vote, up from 46%. This was despite a 2008 austerity budget (9% GDP cut in spending), leading to a GDP drop of 14% and unemployment reaching 19%. The message of: GDP growth of 6% in 2010 ; slowly falling unemployment to 14% (partly due to emigration); the adoption of the Euro on 1st January 2011; and that “the corner had turned” sufficed to convince voters. The Social Democrats and Greens took 21% up from 18%. GDP in 2012 is expected around 3.5% (World Bank) above the Euro zone average.

April Finland (1.1%). The election was noted by the dramatic rise in the right-wing populist True Finns party (19%  up from 4%). All other parties lost votes. The incumbent 3 party coalition could not form a majority and there is now a grand coalition of 6 parties including the left alliance, the Social Democrats and the Greens. Only the True Finns and the Centre Party who led the previous government were excluded. Finland is not in the Euro zone and unemployment is 7%. The coalition’s budget is for a deficit of 3% of GDP in 2012 slightly lower than now with a shift to environmental and health impact taxes.

May Cyprus (0.2%). The election result was for little % change from previous votes, however, the communist AKEL now leads a minority government. The election was affected by talks for a federation of 2 Cypriot states and the effect of these talks on Turkey joining the EU. Cyprus is in the Euro zone and its unemployment has risen to 8%. In December under ECB pressure it announced an austerity budget for 2012. It is forced to fund its deficit from Russian loans.

June Portugal (2.1%). The result was a defeat for the ruling Socialist Party which lost 8.5% of its vote, down to 28%, and the election to the rightist Social Democratic Party. The anti-capitalist Left Bloc also lost 4.6% of its vote, down to 5.2%. The election was dominated by an ECB demanded austerity budget, which failed to pass precipitating the election. In November a further austerity budget was passed, with tacit Socialist Party support, guaranteeing a deepening 2012 recession. GDP has fallen throughout 2011 and unemployment is 12.4%.

September Denmark (1.1%). A Red Alliance of 4 leftist parties, narrowly beat the Blue Alliance of 5 Centre Right parties by 50.2% to 49.8% to form the the new Danish government. The vote was seen as a reaction to the Austerity and anti-immigration stance of the previous right-centre government. Within the Red Alliance, the anti-capitalist Red-Green Alliance improved most to 6.7% from 2.2%; the Radical Left (or Social Liberal) party went to 9.5% from 5.1%, whereas the Socialist Peoples Party went down to  8.2% from 13% and the Social Democrats the largest party in the coalition got 24.9% down from 25.5%. The Red-Green Alliance whilst supportive is not part of the Government. Budget proposals for 2012 plan steady expenditure, with greater investment in renewable energy. Danish GDP was flat over 2011 with a slight fall towards the end, unemployment is 4.2%. Denmark is not in the Euro zone.

September Latvia (0.5%). Relations with Russia were prominent during the elections and post election discussions. The pro-Russian Harmony Centre party took most votes 28.3%, the newly formed Zatlers Reform Party was 2nd with 20.8% and 22 seats, though 6 MPs have since left. Eventually a right-nationalist coalition government led by Zatlers but excluding Harmony Centre was agreed to followed by massive protest demonstrations. The budget for 2012 envisages further IMF / EU induced austerity, to finish cutting its deficit from 10% GDP in 2008 to 2.5% in 2012.  Between 2008 and the start of 2011 GDP fell 22.5%, unemployment has fallen slightly but is still 16.2%. Latvia is not in the Euro zone.

October Poland (7.7%). The outcome of the election was for the first time in post Soviet times, a new Government with the same composition of the last, a christian-democratic coalition between the Civic Platform and the Polish Peoples Party who between them took 48% of the vote, down from 50.4%. Palikot’s Platform, a split from the Peoples Party standing on an anti-clerical pro abortion and gay rights basis took 10%. A third christian-democratic party Law and Justice was 2nd with 29.9% and the social-democratic Democratic Left Alliance fell to 8.2% from 13.2%. Poland has not fallen into recession since 1991. It is planning to cut its budget deficit in 2012 to under 3% by relying on projected GDP growth of 4%, similar to 2011. Its unemployment rate has remained around 12% for 2 years. Poland is not in the Euro zone.

November Spain (9%). The overwhelming winner was the christian-democratic Peoples Party which took 44.6% of votes and a majority of seats. The loser was the outgoing social-democratic PSOE, down to 28.7% from 43.9%, which was widely blamed for the economic and budget crisis and unemployment at 21.5%, the highest in the EU. Other parties gained from the PSOE decline. The anti-capitalist United Left attracted votes from many protesters getting 6.9% up from 3.8%. The newly legalised left nationalist Basque party Amaiur got the largest vote in the Basque region.

Both these parties had campaigned against the austerity budgets. The Peoples Party having been critical of the PSOE budget constraints, has announced on 3rd January 2012 that the deficit is worse than anticipated at 8% and is planning significant spending cuts and tax increases. GDP which fell 5% in 2008-10 had grown 1% since then. A Spanish recession and further unemployment rises look certain.

December Slovenia (0.4%). The election was called after the previous government lost a confidence vote largely over budget issues. The largest party was the newly formed centre-left List of Zoran Jankovic with 28.5% with most of its votes switching from the Social Democrats, down to  10.5% from 30.5%. A government has not yet been formed but it is likely to be a leftish coalition. Slovenia is not in the Euro zone. GDP slumped 10% in 2009 recovering 2% till a recent dip. Its budget deficit grew to 10.3% GDP mid 2011, from 8.8% in 2009 and it faces EU demands for budget cuts. Unemployment has grown to 11.5% from 10.5% a year ago.

What do the elections tell us about public opinion?

Firstly each country’s election was specific to that country’s economics and politics – there was no overwhelming EU wide issue. However, given 2 “electable” parties, and economic difficulties, voters consistently voted out the sitting government which had “caused” the problem. This was seen in Ireland, Portugal, Denmark, Spain and arguably Slovenia. By and large voters readily swap between social-democratic neo-liberals and christian-democratic neo-liberals. See also UK elections.

Secondly the economy seems less central for voting intentions for countries not in the Euro zone, although IMF and ECB threats about budget “discipline” abound. That said unemployment is an issue affecting voting in all countries.

Where the economy was deemed “on course”, as in Estonia, Finland and Poland either government’s were kept or some other issue dominated, such as immigration in Finland.

The left nationalist and anti-capitalist or at least non social-democratic left, picked up or retained votes in several counties e.g. Ireland, Denmark, Poland, Spain and probably Slovenia. The exception was Portugal. A clear vote against austerity is still very much a minority vote.

Other elections in Scotland and in German and Italian states bear out these conclusions.

A final point about the democratic process. In Ireland, the elections were postponed until after a budget was passed under threat of the IMF and ECB pulling the plug. In Greece and Italy, under pressure from Germany and France, the government’s were in effect replaced by technocrats and elections were significantly delayed. In Spain and Portugal, elections were held but only once the  ECB etc. were certain suitable austerity budgets would be immediately forthcoming. In Latvia, Poland and Slovenia, splits from parties occurred and new parties formed, which could pretend to be different so as to avoid voter wrath. There has been a serious erosion of real democracy throughout Europe, however, this has not gone unnoticed and could provoke a backlash.

The proposed new treaty as outlined by Merkel would remove yet more autonomy from elected governments who would be forced to have their budgets “approved” by a small group of financiers. In many countries it is inconceivable that such a treaty would be approved if put to a referendum. This European leaders will seek to avoid and hence democracy could become a uniting issue for the left across Europe.

Will the Euro Survive?

Decisions on new treaties and financial policy within the Euro zone are made at Council of Minister meetings. The exception being when Merkel and Sarkozy deem otherwise. The Council of Ministers is representative of European Governments, not public opinion directly. With the partial exception of Denmark and possibly Slovenia and Cyprus, all governments elected in 2011 are committed to an austerity agenda in their own country. Several though are all too aware they were only elected due to austerity imposed by their predecessors.

Elections will be held in 2012 in Italy, France and Greece and in 2013 in Germany. Given the experience of this year, most incumbent parties will lose. Only in Greece however, are things so bad that withdrawing from the Euro will be a significant issue. Even Merkel and Sarkozy, must modify their stance on fiscal discipline to hold on to office. Continued rising unemployment and recession are not vote winners.

So having said I wouldn’t speculate, I now will.  The Euro will survive, probably without Greece and possibly some other countries. There will be a new treaty setting out revised fiscal rules and creating a true Central Bank, however, these rules will differ from those discussed in December 2011.

What the fiscal rules and penalties should be both for the Euro zone and the wider EU and how we create a redistributive EU, mitigating uneven development  between rich and poor countries, is a task for the European left as a whole. The richest Euro zone country Luxembourg has a per capita GDP  between 5 and 7 times the poorest Euro zone country Estonia and 8 times EU member Romania. To paraphrase: How do we end poverty in the EU?

The European Left

Parties to the Left of Social Democracy, whether against austerity of explicitly anti-capitalist have not yet in any country got close to achieving majority support for their policies. That is not to say they are not influencing the political agenda. Given the financial crisis has several years at least to go, given historical parallels and the scale of hidden debt, a coherent left agenda could yet shape the future of Europe and the world.

Space and time prevent a detailed analysis of the state of the European left, however, I would urge further research by readers so that lessons can be learned for Scotland.

Several countries have established left parties which unite voters to the left of Social democracy. The Red-Green alliance in Denmark (6.7% vote founded 1989) is one such, the Left Bloc in Portugal (5.2% vote founded 1999) although having lost support is another. Both used to hold discussions with the SSP prior to its split. Across Europe, left parties with representation in the European parliament tend to be represented in the party of the European Left http://www.european-left.org . Other parties meet in the European Anti Capitalist Left, whose founding meeting the SSP attended in 2000. A recent book analysing the development of Left parties across Europe is “New Parties of the Left – Experiences from Europe” from Resistance Books http://socialistresistance.org

and more recent commentary on European Elections can be found in International viewpoint http://www.internationalviewpoint.org/

Gordon Morgan

(a shorter version of this article appears in the January 2012 issue of Scottish Left Review.)

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