Why has the Eurozone emerged as the new epicentre of the global financial crisis, when its origins—the famous subprime mortgages—were American?footnote1 And why, within Europe, has Greece proved to be the weak link? The starting point for any adequate answer is the recognition that what we have been experiencing for the last five years, since the onset of the credit crunch in August 2007, is a single crisis of financialized capitalism. The Greek events are only a sequence within it. Despite the concerted efforts of the governments of the G20, the intervals of recovery have been no more than short-lived episodes; the political measures taken have proved powerless to overcome the strong depressive tendencies at work. The crisis has struck the heart of the financial system—the banks—but it is systemic, affecting every part of the economy: banks, firms, households, states.
Its origins lie in the massive global imbalances built up since the East Asian crisis of 1997–98, which marked the world economy’s entry into a new, inherently unstable, accumulation regime.footnote2 In the West—above all in the us, and to varying extents across the eu countries—this involved the intensification of the drive for shareholder value, which set high profitability thresholds for investment and exerted intense pressure on labour, delinking productivity and wage increases. With median wage growth depressed, and growing inequalities in wealth and incomes, the dynamic demand required by the shareholder-value agenda was provided by the expansion of credit, supported by low interest-rate policies; debt-based household spending allowed consumption to grow at a faster rate than incomes and wages. In the East, by contrast, the financial turmoil of 1997 and the imf’s subsequent ham-fisted interventions brought home the danger of relying on rent-seeking Western capital. Countries that had been burnt by the East Asian crisis—which rapidly spread to Russia, Brazil and Argentina, also affecting Germany and Japan—sought to defend their economic sovereignty by building up dollar-denominated balance-of-payments surpluses through export growth. The entry of China into the world market as a major exporter hugely amplified this trend. The historic direction of capital flows, from the West to the emerging economies, was now reversed: billions of dollars flowed from China and other exporting countries to the us, fuelling the vast expansion of credit that was further multiplied by the growth of securitization and derivatives trading, centred on the big banks.
These imbalances were equally present within the European Union, exacerbating the divergences between member states; large Eurozone banks were also laden with bad debts. In addition to this, however, the crisis exposed a series of deep structural flaws in the constitution of the European single currency. What follows will examine these imbalances and structural defects, before discussing the unravelling of Greek public finances, the options currently facing Athens and the spread of the crisis in the last quarter of 2011 to all the Southern countries—leading up to the deteriorating macroeconomic conditions across Europe in spring 2012. The twin sovereign and banking crises, dragging down economic activity, are slowly impinging upon the whole world. I will conclude with a characterization—and critique—of the German approach to the Eurozone, and raise the question of what measures would be required to place the eu on a path to sustainable growth. First, however, it may be useful to take the measure of the public and private debts that have mounted across much of the continent.
The eu single market created an integrated financial space, open to capital flows. The large European banks became global operators. They played an active part in the expansion of debt and toxic assets in the us and, when the crisis broke out in 2007, found themselves in a position comparable to that of the American banks. But the French, German and Spanish governments initially allowed them to freeze their bad debts, rather than forcing them to restructure. The banks also loaded up on Eurozone public debt in the years that followed—raking in considerable profits for themselves in the process, by borrowing at practically zero rates and buying government bonds paying 3 to 4 per cent interest at the time of the 2009 stimulus plans. During the first two years of the crisis, as the 2007 credit crunch deepened into the banking crisis of 2008, the fall of Lehman Brothers and the global economic contraction of 2009, the Eurozone states saw private debt as a percentage of gdp continue to rise, while gross public debt—that is, without factoring in assets—also soared with the recession (see Table 1).
In 2007, before the crisis began, France and Germany had comparable levels of gross private debt (196 and 200 per cent, respectively) and gross public debt (65 and 60 per cent), whereas in Italy gross public debt had reached 105 per cent, a particularly high figure; in Spain, gross private debt had reached the astronomical level of 317 per cent, essentially accounted for by real-estate developers, mortgage borrowers and regional savings institutions—the cajas—in the context of the property bubble, while public debt was a more modest 40 per cent. Two years later, it might have been expected that the transfer of debt to the public finances would have reduced private exposure. But by 2009, on the eve of the European crisis, quite the opposite had happened. In France and Germany, the supposed paragon of virtue, gross private debt was now 7 points higher than in 2007, while in Spain the figure had risen by 17 points. Of course, the contraction of gdp that took place during this period automatically increased the debt’s percentage; nevertheless it was clear that public debt had risen without private debt being absorbed. Meanwhile in Greece, by 2009 gross private debt stood at 173 per cent and gross public debt at 115 per cent, climbing to 145 per cent in 2010 (the Greek figures for 2007 are not reliable). In Ireland, the financial sector’s debt was entirely taken over by the state, with the result that total debt reached 806 per cent in 2009, of which 607 per cent can be ascribed to the banks.
In sum, for the Eurozone as a whole, the budgetary stimuli of 2008–09 did not result in a reduction of debt in the private sector. In the us, by contrast, where gross private debt stood at 300 per cent of gdp in 2007, the recapitalization of the banks enforced by tarp, in tandem with ambitious monetary and budgetary measures, brought the figure down to 260 per cent by the end of 2009. Here, then, lies a first distinguishing feature of European Union policy: it is the champion of half-measures, produced by tortuous political compromises. The eu is further hampered by a deep-rooted ideological conservatism with regard to fiscal measures to support demand and central bank mandates for growth. If this approach is problematic in periods of calm, it becomes disastrous in times of turbulence.
The Eurozone also suffers, however, from deeper-lying structural weaknesses resulting from the manner in which it was constituted. The decision to launch a European single currency was by no means self-evident: integrated economic and financial zones have operated successfully with flexible exchange rates—nafta, or the Benelux customs union, for example. The original proposal for a monetary union in Europe, the Werner plan, had foundered in the 1970s in face of the Bundesbank’s hostility; as an exporter, Germany was fearful of the monetary inflation it was importing from the us as its currency reserves soaked up a torrent of dollars. The impetus was renewed in the 1980s, on the basis of the Single European Act. The 1989 report of the Delors Committee proposed the creation of a single currency and a European Central Bank which would be a joint venture of all the national central banks. It is hard to say whether this project would have succeeded in the absence of German reunification. However, Helmut Kohl’s decision to push for this in 1990 led to a decisive expansion of the Federal Republic’s weight in Europe, altering institutional relations and directly affecting France.