The crisis, Europe and the left

May 14th, 2012 | By willb | Category: Articles, Frontpage, Lead

Successes for left parties in France and Greece are welcome signs of resistance to the right’s austerity measures. But the legacies of the economic crisis mean there are no easy choices for Europe’s social democrats, argues WILL BROWN.

Electoral advances for the left in Europe are long overdue coming after a succession of defeats and capitulations in recent years. But a review of the events of the past 18 months, and longer, show a world still in the midst of deep, intractable economic and political problems.

Indeed, it is a period that has left many people reeling on both left and right. No-one has come out of the crisis looking sure-footed, nor as if they can confidently ride out the storms around us. In every important area of politics the world has been either in flux or in crisis, either in revolution or locked in contradictions without easy solutions.

New ground is being broken in national political circumstances in almost every corner of the world, while fundamental and basic challenges have emerged to established approaches to economic policy, regulation and governance. It is also apparent that we are living through historic and potentially very perilous changes in the contours of international politics.

Each of these changes are the outcomes of longer-running processes, dominated by phases of political and economic liberalisation and integration, of resistance and reaction to those, and the consequent upheavals they have set in train.

So far, faced with these developments, the political right, at least in those areas where it has got its act together (and that is not everywhere by any means), has responded by renewing market fundamentalism. Though both transformative and extremely damaging, this looks unlikely on current forecasts to resolve problems of growth, to say nothing of some of the deep-seated social and environmental problems we face.Hollande speaking

The left, so far, has not articulated a clear response to the crisis. Hollande’s victory in France is the first sign of an electorally-successful response. For the left across Europe, a great deal rides on how his presidency pans out. Until now, it has been the right and not the left that has taken to heart Rham Emanuel’s quip that we should ‘never let a good crisis go to waste’.

In this review article, I will briefly flesh out the three areas of political change mentioned above – national change; economic challenges; and international politics. I will then set these within something of a longer time-span and examine them as the outcomes of longer processes of change. Finally, I’ll touch on the Euro crisis, which is not only of critical importance in and of itself, but exemplifies some of the many of the difficulties faced by us all, including the left.

Crisis and change in national politics

In almost every corner of the world we have seen accepted and relatively stable political systems thrown into question, either as a direct result of the financial crisis and its aftermath or as a consequence of the complex interaction between this crisis, the period of liberalisation and growth that preceded it, and longer-running social and cultural changes within different countries.

A partial and incomplete tour might include the following, though you will have your own additions to make to this list.

Perhaps most dramatically, we’ve seen the demise of two long-standing authoritarian regimes in the Middle East under the impact of sustained popular protest; the removal by armed force (national and international) of the 40-year rule of Libya’s Colonal Gaddafi; and a sustained insurrection against Syria’s President Assad. Add to those the removal of Yemen’s President Saleh and protests in Bahrain, Jordan and Iran, and the picture is of seismic change in the region, even if some of the wilder hopes for democratic change made in 2011 now look badly overstated.

Although much under-reported in the west, as the ‘Arab Spring’ unfolded in 2011, there were also anti-regime protests in a dozen African countries south of the Sahara, challenging incumbent, ageing rulers.

In Europe, a succession of more peripheral countries – Ireland, Greece, Portugal and Spain – came under sustained economic pressure while Italy and, potentially, at least, France, were no great distance from economic crisis. Indeed, since the onset of the Euro crisis we’ve witnessed the removal of governments or heads of government in Portugal, Spain, Greece, Ireland, Italy, the Netherlands, France, Slovakia, Slovenia and Finland.

The main country doing things differently is Belgium (who said it was boring?). Having had more than 18 months with no government, it finally resolved its long-standing political stalemate in December last year. The BBC news website noted dryly that ‘it is thought the crisis in the Eurozone prompted the politicians to act’!

As we know, mass protest has confronted governments in Greece and Spain, where youth unemployment is estimated at 50%, while in Ireland mass migration has resumed since its economic bubble burst, 1% of the population leaving in 2011 alone. Italy’s economic woes saw the end – for now – of the long-running Berlusconi governmental farce. In Germany, the Chancellorship has often seemed paralysed between the competing pressures of European stability and domestic politics, even while economic growth has been maintained. And in France we wait to see what the centre-left’s return to power presages: crisis and accommodation to the European orthodoxy; or the start of a wider rethink among Europe’s elite.

Even in the United States, where growth had returned thanks to Central Bank actions, currency devaluation and Federal stimulus, we find a country politically paralysed by deep divisions between conservatives and liberals. It is a country barely coming to terms with the meltdown of the neoliberal economic model championed over the previous three decades, where there have been persistent attempts by the Republicans, under the influence of an increasingly extreme right wing, to derail Obama’s already inadequate stimulus and reform package. What had been a deep cultural divide at the heart of American politics has hardened into an economic stand-off and, at its most extreme, division over the legitimacy of federal government itself.

In China, the world’s other leading economy, the Communist Party faces a growing political challenge as it approaches its 10-yearly change of leadership, as its sole remaining claim to popular legitimacy – that it will deliver growth and rising living standards – has come into question. The first signs of slow-down in growth, mounting inequality and deep problems of political corruption, plus growing political divisions, all suggest the regime has a lot to contend with.

And in the UK, we have an ideologically-driven attack on long-standing core institutions of collective social provision, from the NHS, to education, to welfare; an economy pitched into a renewed recession; and a revitalised nationalist challenge to the continuation of the UK as a unitary state.

To have political crises on this scale in one or two countries would be noteworthy; to have them across the leading economies of the world at the same time is remarkable.

Economic change and challenge

To the fore in most of these political crises – or at least in the more developed economies of the world – is a crisis of economic policy and economic management. In most developed western economies we saw a two-fold response to the financial meltdown.

First, an initial state-centred and quasi-Keynesian response bailed out banks deemed ‘too big to fail’ and stimulated the economy to stave off a full-blown depression. However, largely as a result of the government deficits thus created, in most economies (the USA was a partial exception) these measures were replaced by a commitment to austerity that has seen governments across Europe adopt severe public sector cuts and privatisation.

Under the tyranny of the financial markets, few sitting politicians dare to question the need to cut budget deficits. Yet, by acting in the same manner all at once, Europe and, increasingly we can fear, America, are fulfilling a classic fallacy of composition: for each individual country, deficit cuts seem rational, even unavoidable, yet for all countries to do this at once risks eliminating any prospect for growth, recovery, and ultimately any prospect of deficit reduction, ostensibly the purpose of the cuts in the first place.

The financial markets too, are increasingly schizophrenic – they demand belt-tightening from everyone, then, as output falls and debt remains high, panic because there is no prospect of economic growth.

Writing in New Left Review, the German academic Wolfgang Streeck argued that this policy cul-de-sac is the result of decades in which governments sought to buy off dissent by increasing debt.

For Streeck, there is a fundamental contradiction at the heart of western countries between democracy and capitalism. On the one hand, we have democratic pressures from the population pushing in some vague, general way towards social justice – at least in the form of demanding jobs, growth, and rising living standards. On the other, there is the logic of capitalism which, though it delivers growth, faces periodic episodes of crisis and adjustment. The capitalist response to economic problems is to drive down living standards and state provision, bringing it into direct conflict with democratic pressures.

In the post-Second World War era, says Streeck, ‘no democratic government dared to impose on its society another economic crisis of the dimension of the Great Depression of the 1930s, as punishment for the excesses of a deregulated financial sector’.

For a time they didn’t have to and combinations of economic growth, inflation, government debt and private debt all played a role in massaging this underlying conflict in liberal democracies.

According to this analysis, the immediate responses of governments to the financial crisis resulted in a mushrooming of public debt, followed by an imposition of austerity measures across the developed world and a severe decline in living standards. The political sustainability of this strategy remains in question, however, and suggests, according to Streeck, that ‘the political manageability of democratic capitalism [as a whole] has sharply declined’. If true, the long-term consequences are of the utmost importance.

As a result, a whole series of renewed conflicts have emerged. These include conflicts between governments and financial markets, as the former try to assure the latter of their fiscal rectitude in order for the latter to keep lending to governments to pay for the debts incurred in saving the banks; and they include conflicts between populations and governments over the adoption and implementation of austerity packages, not least in Greece and Spain.

On a wider stage, political tensions between countries worsen as they each face domestic political upheaval and find themselves locked in a cul-de-sac of economic orthodoxy.

Systemic change in international politics

The Financial Times columnist, Gideon Rachman, has argued that contemporary economic turbulence and political upheaval mean that the world is moving from an era of liberal optimism to an era of anxiety. He says:

‘…the economic crisis that struck the world in 2008 has changed the logic of international relations. It is no longer obvious that globalisation benefits all the world’s major powers. It is no longer clear that the United States faces no serious international rivals. And it is increasingly apparent that the world is facing an array of truly global problems – such as climate change and nuclear proliferation – that are causing rivalry and division between nations. After a long period of cooperation, competition and rivalry are returning to the international system. A win-win world is giving way to a zero-sum world.’

In his book, Zero-Sum World, Rachman argues that we have lived through three phases of domestic and international politics since the 1970s.

The first he terms ‘an age of transformation’ which ran roughly from 1978 to 1991. That is from the onset of liberalisation, through Deng’s ‘four modernisations’ China in 1978, to the rise of the new right with Thatcher and Reagan in the west, through to the end of the Cold War and the proclamation of a new world order after the Gulf War in 1991.

Within this period we not only saw programmes of liberalisation in the developed world, not least in finance, but also an increasingly rapid opening up of the communist bloc, and the first major moves towards economic liberalisation in India. Alongside these oft-quoted changes, Rachman also notes the rapid political liberalisation of Latin America, with 16 countries moving towards some form of liberal democracy within a decade.

The final demise of the Soviet Union left the world at the start of the 1990s in what has been termed its ‘unipolar moment’ with the USA as the leading economy enjoying unquestioned military dominance. This ushered in what Rachman calls an ‘age of optimism’ which ran from the early 1990s to the financial crisis of 2008. In this period there was more overt and widespread neoliberal dominance of policy, even if, under the third way of Clinton and Blair, this was tempered by greater attention to social problems than under Thatcher and Reagan.

The achievements were not negligible: growth in India and China meant some 200 million Chinese people were lifted out of poverty and the proportion of India’s population living in absolute poverty declined from 60% to 40%. Britain had its longest ever period of uninterrupted growth which allowed space for some important investment in public services. And yet, we also saw the corporate world increasing its reach deep into the heart of western states, while, as we know, the age of optimism in general was built on false foundations.

The origins of the financial crisis lay in changes that were put in place both by the centre-right in the age of transformation, and by the centre-left and right in the age of optimism.

Now, says Rachman, a new ‘age of anxiety’ is upon us as the economic crisis dovetails with a series of quite profound changes in the global balance of power. The rise of China and India are the most dramatic of these, but there are also a series of more regional, authoritarian challengers to western liberal dominance, from Russia and Iran to Venezuela. Even established democracies such as India, Brazil and South Africa are proving less reliable allies than they once were to western liberal states.

As a result, we have, according to Rachman, a coming together of regional and global problems at a time when the room for international cooperation has been squeezed. In the age of optimism, prolonged economic growth provided a permissive context for international cooperation. A plethora of new agreements of regional and international scope were formed as part of a burgeoning architecture for international economic governance, albeit of a distinctly neoliberal hue.

‘This was an era when there was plenty of everything to go around,’ Rachman claims, ‘plenty of economic growth, plenty of oil, plenty of scope to pump carbon dioxide into the atmosphere.’

Now, much of that is in question. It is not hard to see why. With a growing economy, all countries can expect a larger slice of the cake and worry less about what others are getting. In a stagnant or very slow growing world economy, the size of the cake is fixed and the potential for conflict grows. Gains for one state often mean losses for another, the very definition of a zero-sum conflict.

The Eurozone

Although many areas of international politics are now perilously poised, some of the difficulties I have covered are exemplified by the Euro crisis. Indeed, perhaps, nowhere better reveals the depths of pre-crisis liberal hubris and post-crisis political sclerosis than the European Union.EurozoneCrisis pic

Prior to the crisis, and in the wake of the launch of the Euro, some commentators claimed Europe represented an exemplar of modern international cooperation and liberalisation. As Rachman noted, Europe was transformed in the post-war years from a place that people fled from to a largely peaceful continent which a steady stream of new countries, and people, wanted to join. The EU as a whole became the largest economy in the world, the biggest market for Chinese exports and the biggest destination for US overseas investment. As with so many other areas, the crisis has cruelly exposed the weaknesses which lay behind these optimistic views.

Central to the Euro crisis is the struggle over what to do about government deficit and debt. In countries that have their own currency, these problems are resolved by spending less and earning more. The former occurs through government expenditure cuts, austerity, lower wages; the latter through improved competitiveness (which partly comes through wage cuts and efficiency gains), and through currency devaluation.

In the Eurozone, currency devaluation is not possible, and the alternative route – transfers of money from richer Eurozone countries to poorer ones – has been largely ruled out by Germany. This leaves Europe with a single policy response: austerity alone.

Indeed, as early as 2009, several countries – France, Spain, Greece, Ireland – were ordered by the EU to reduce their deficits by cutting public expenditure. All of these countries, partly for reasons to do with the crisis, and partly for longer-standing reasons, were breaking Eurozone rules on government deficit and debt levels.

EU scrutiny of government figures led to revelations about Greece’s national accounts which had hidden huge irregularities dating from Greece’s accession to the Euro. The first in a long-running succession of negotiations resulted in a bail-out package in 2010, funded by the EU and the International Monetary Fund, followed not long after by similar packages for Ireland and Portugal.

All of these attempts to shore up the Euro were based on austerity, meaning that dealing with debt problems was being laid at the door of the populations of these countries through reduced wages, lost jobs, less welfare and cut services.

By mid-2011 concern had spread to Spain and Italy where the European Central Bank intervened to help reduce the cost of government borrowing and later to supply cheap money to banks who were struggling to cover bad loans or raise finance on the money markets.

As noted, in Ireland, Portugal, Greece and Italy, dealing with the crisis, reassuring financial markets and pledging commitments to the IMF, EU and the ECB entailed the removal from office of elected leaders. Two of their replacements – Papademos in Greece and Mario Monti in Italy – joined Mario Dragi, head of the ECB as a triumvirate of former Goldman Sachs employees at the very top of European politics.

But the politics of the crisis has extended well beyond turmoil in the countries concerned. Although it has rightly been condemned as inept, the response of the EU to the growing crisis in Greece and other Eurozone economies has been hampered by genuinely difficult political problems.

The key problem for economies not in crisis – Germany in particular – is that they want to leave the responsibility for dealing with deficits to the countries concerned, and their populations, yet know that if those countries fail to act in the desired way, and default or exit from the Euro, it will have severe effects on their own economies causing falling exports and rising interest rates and unemployment.

Caught in this dilemma, the EU has lurched from crisis talks to crisis talks, with outsiders – the IMF’s Christine Lagard, the UK and even the US and Chinese governments – urging Europe to get its act together. At each stage EU leaders have pledged to be tough on recipients of bail-outs, at each turn knowing that commitments to austerity mean real sustained political conflict in the countries concerned, and at each stage knowing that default would have dramatic consequences on the whole world economy.

The consequences of all this affect the Eurozone as a whole: at its summit in December, 25 EU members agreed to a fiscal pact that, if implemented, will legally entrench austerity at the heart of the EU.

The on-going struggle over the deficits has seen repeated mass protests in Spain and Greece, in particular. In Greece’s case, European leaders eventually accepted that some of the debt reduction would have to come from the lenders – the banks – recognising the power of popular opposition to austerity. The BBC’s Paul Mason even claimed that ‘By hitting the streets, Greek people were able to force Europe to impose losses on the bankers’.

Nevertheless, the package of measures eventually agreed was draconian in its impact, ensuring that the population would bear the long-term brunt of changes. Advances by the left in the Greek election have put even this painfully-negotiated response in doubt. As one investment analyst put it in The Guardian on 8 May: ‘The irresistible force of German austerity has clashed with the immovable object of Greek popular resistance’.

Some sense of the visceral anger of the young unemployed in Spain is gained from this anecdote from the Open University academic, Georgina Blakeley. The Indignados movement has mobilised millions of Spaniards against austerity and in condemnation of a corrupt, unaccountable, remote political system. Showing typical arrogance and condescension, many in the political elite and media dismissed the protesters as having no relevance and no alternative proposals to put forward. Excluded from political influence and denied a voice up to that point, the retort from the protestors was telling: ‘Those who have never asked us anything, now ask us for proposals!’.

This is emblematic of a much wider sense of deep anger that exists in Europe and elsewhere. People who have had no role in creating the crisis are being asked to pay for the mistakes of others in lost livelihoods, jobs and welfare. Those excluded from circles of power are only allowed a voice if they can offer solutions to problems created by others. And entire populations – particularly in Greece – are condemned by outsiders in the most xenophobic terms for the faults of their corrupt leaders, a corruption in which those very outsiders, bankers, politicians and media, were themselves complicit.

Crisis and the left

The crisis in the Eurozone, and elsewhere, shows little sign of easy resolution. But elections in France, Greece and Italy on 7 May have moved the debate into a new phase. Up until this point, the political right had been entirely dominant, calling the shots and at each turn reverting to its default position of austerity, whipping up fear that anything else will spook the markets. So far this strategy has shown no clear way out of crisis as growth stalls and the markets remain jittery.

Until now the left has had few convincing arguments. Notwithstanding the indignation of Spanish protestors, critiques of austerity only really gain traction when alternatives become clearer – protests and saying ‘No’, however justified, are only the first step towards a more strategic view of political change.

Europe is pinned between the logics of financial crisis and democratic popular opposition to austerity. In such a political impasse, real, lasting social harm is being inflicted on living standards and life-chances of the young, and on public services and collective provision.

Without an alternative from the left, the danger from right wing extremism grows. The first round of the French elections was another reminder that bad economic conditions have rarely gifted the left an advantage in any straightforward way. Indeed, alongside gains for the left in France and Greece were gains for the right – a fifth of the electorate in France and Greece voted for extreme right wing parties.

Given the depths of the economic problems, and the intransigent position of Germany, the room for manoeuvre is extremely limited. The prospects for any emergent Greek government are most constrained. Unless the wider European consensus shifts, it is hard to see Greece remaining in the Euro.

For Hollande, a realistic assessment is that only modest change can be expected from ‘Monsieur Normal’ in the short term. Indeed, small successes may be the best hope, building a basis from which a more widespread shift in European policy can be argued for and, in the German elections of 2013, campaigned for.

By contrast, crisis and collapse in France, as happened under Mitterrand in 1983, will do huge damage to social democratic prospects elsewhere in Europe. The stakes are high indeed.

This is an edited version of a talk given at the ILP’s Weekend School, ‘Crisis, Markets and Protest’, in Scarborough on 5-6 May 2012.

Gideon Rachman’s Zero-Sum World is published by  Atlantic Books, priced £20.

Wolfgang Streeck’s article in New Left Review is available here.

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  1. A faultless and brilliant summary of the crisis, which, unlike some other socialist accounts, pulls no punches about how limited the choices are for the Left. However, there is reason to believe that Hollande’s administration may be more successful than Mitterand version one. His programme is based on tax cuts for small business and a national investment bank (tricky to set that up quickly without creating bad debt and corruption, but necessary) rather than socialist rhetoric. What may be more problemmatic are the sweeteners for the trade unions eg. lowering the civil service retirement age back to 60 (a counter Keynesian measure). He should drop that promise straight away. He must get the economy moving again and not choke off stimulus measures through unproductive spending.

  2. Thanks Jonathan,

    Though not faultless, I’ve just noticed it says May 7 not May 6! Better do an edit.

    On retirement, isn’t there a plus side to a lower retirement age, namely to free up job opportunites for the young, one of Hollande’s key priorities? And the young are more likely to spend their wages rather than save? I’m not sure what the net effect is overall…

    Will

  3. Stimulus measures can include both tax cuts and infrastructure spending. If the state is paying out to support civil service pensioners that may increase its on-going liabilities at a time when it requires money for discreet projects, thus limiting their number/ extent.

    I suppose on the other hand as one person leaves another takes over, but pensions are more expensive than unemployment benefits. If the pension schemes are performing well and can meet payouts without the need for state subsidy then that’s ok. But if the state has to support civil service pension schemes then it has less money to spend on schools, hospitals, wind and solar power stations etc. Until growth returns, it is a zero sum game.

    I accept I might be wrong about this and note that Lord Skidelsky believes that lowering the retirement age is a stimulus measure. But I need convincing. I think it would be much better to increase the minimum wage combined with significant tax cuts for small business, aggressive action to tackle improper tax avoidance, increase top rates of tax and invest heavily in bio industries, sustainable energy and grants for medium sized enterprises in the manufacturing sector.

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