Europe: Eurozone Myths and Global Crisis (Jon Kofas, Greece)

Posted on February 7th, 2010

 

The economic crisis of 2008-2010 has exposed several Eurozone myths and weaknesses that would require political decisions if the EU is to remain a progressive interdependent union and not result into a tiered (geographically unequal) “dependency model” like NAFTA, with wide gaps between members. First myth, the Eurozone’s common currency will remain strong even in times of recession because its members have pledged not to exceed budgetary deficits above 3% of GDP. Second myth, the EU unlike the US is not as concerned about pursuing a monetarist course (strong reserve currency) at the cost of growth, which the IMF has been advocating and imposing on borrowing members throughout its history. Third myth, the EU inter-dependent integration model as compared with the US “dependency” model as expressed through NAFTA for example, will remain the key feature to attracting new members and expand into the largest economic bloc with the strongest economy and currency in the world. Fourth myth, integration into the Eurozone will lessen informal economies and strengthen legitimate trade to the benefit of all, owing to steady growth for the union. Final myth, Eurozone members are shielded from global contracting cycles more than the rest of the world. The current crisis has brought to the surface the reality that the Eurozone is a bloc captive to its strongest members, determined to compete with other dominant economies who have their own regional blocs, especially the US and Japan.
Along with private banking houses and rating firms, the IMF is optimistic that 2010 will be a year of recovery not just for China and India but for many of the advanced countries like US and Germany. That optimism is based on corporate growth of large businesses, and does not trickle down to small businesses, the middle class and labor. Within the EU, growth prospects are even worse for Europe’s “PIGS” – Portugal, Italy, Greece and Spain (Ireland also belongs in this group), all of which are targets by bond speculators and partly responsible for the euro’s and stock market slumps since January 2010. With 11.5% of the EU’s GDP, Spain is the fourth largest Eurozone economy confronting a budgetary deficit that is 9.3% of GDP (lower than the US percentage) and cumulative public/private debt that amounts to 207% of GDP (equal to Japan’s), while European average currently runs about 180%. As of December 2009, Eurozone’s private debt as a percent of GDP was divided as follows: Businesses–73.6%; Households–61%; Mortgages–44.5%; and Credit card & consumer–16.5%. Credit will become much tighter as interest rates will be rising and banks will be reluctant to float loans. Because banks receiving bailout public funds reinvested to consolidate by strengthening their own and/or purchasing other banks, credit tightening has already choked the real economy and in 2010 interest rates will be going higher according to several EU central bank forecasts.
At the same time, to bring their budgetary deficits down to the Eurozone maximum of 3% of GDP, the public sector will undertake drastic cuts in the next three years. This means that for most countries, not just the “PIGS” whose public sector accounts for half of GDP, there will be substantial bleeding of the economies at the expense of labor and the middle class. Strikes and social unrest are inevitable for many countries in 2010, but more significantly, the loss of confidence in the political economy and in the political and financial elites will continue to erode. The absence of mostly “two-party” choices that represent the same financial elites against the reality of no Communist revolution to fear any longer, translates into a relative free hand for political elites to ask the masses for sacrifices. To deflect responsibility from themselves, many EU political leaders are blaming profiteers for the euro’s current slide. Some analysts are suggesting that the US with UK as its European proxy, want a weaker EU. All indications, however, are that the real beneficiaries are German investors buying bonds to finance Eurozone bonded debt. Just as the state has stepped in to help financial elites regain their strength, the European Central Bank could have just as easily developed a “crisis fund” with central bank subscriptions for bailout emergencies like the current one facing the “PIGS” (Ireland included). Now that the Eurozone myths are exposed, the question is what action EU leaders wish to take to shape the regional bloc’s future. Is the Eurozone role solely to remain competitive with US and Japanese regional blocs by strengthening finance capital at the expense of the broader social classes and uneven geographic growth and development within the union? Or is the EU’s mission to close the geographic and social gap in order to foster a more democratic regional bloc that will remain attractive for associate members to join?