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We face a dire threat. And it’s time to ditch the euro

Night view of Euro neon sign outside European Central Bank in Frankfurt

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Seumas Milne summarises the dire threat to our economy in today’s Guardian: forcing austerity down the throats of fragile economies, in Britain and across Europe, risks years of stagnation and slump:

More than £30bn was wiped off City shares on Tuesday, as investors panicked at the prospect of sovereign debt defaults, bank crashes and a double-dip recession. The threat of another potentially disastrous market failure is hanging over Europe. But this was the moment Britain’s self-proclaimed progressive coalition saw fit to announce £6bn of immediate cuts to the public spending that has kept the economy afloat – and that the Liberal Democrats pledged only a few weeks back they would resolutely oppose.

The picture could not contrast more with the picture of Gordon Brown in response to the credit crunch, who, in the words of Nobel-winning economist Paul Krugman answering the question “has Gordon Brown… saved the world financial system?”, says he “defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up” and was shown uniquely “willing to think clearly about the financial crisis, and act quickly on its conclusions“.  We may have been cynical about his conversion to Keysianism after ten years as a neo-liberal Chancellor, we may have criticised aspects of his policy and his planned future cuts, but he was undoubtedly leading the world in the opposite direction to that of the Con-dem nation.

Seumas describes how:

the crisis that has brought Greece to its knees now threatens the entire eurozone, as it ricochets back and forth between private and public sectors. What began as a worldwide financial crisis in 2008 morphed into a crisis of sovereign debt as governments bailed out bankers and borrowed to stave off economic collapse. Now it has rebounded on Europe’s banks, themselves major holders of government debt. Even as the “markets” demand fiscal cutbacks, investors are simultaneously spooked by the impact of those cuts on growth. But across Europe, cuts mania has gripped the elites just as it has been shown to threaten to send vulnerable economies into reverse.

He goes on to draw lessons primarily for Britain and Labour:

For Britain, the combination of Cameron and Clegg’s cuts with crisis in Europe and a devalued euro undermining its competitive edge, the prospects look alarming. Labour should be challenging the City-driven media and political consensus that the deficit, rather than stagnation, is the country’s greatest economic problem. But the party is compromised by its own cuts commitments in government, and none of the leadership frontrunners has yet confronted the need to break with the neoliberal dogma of the New Labour years.

However, there are lessons too for socialists and social democrats accross Europe. Today, the Spanish Socialist Workers Party (PSOE) won parliamentary approval (by a single vote majority) for a €15b austerity plan, which will involve, amongst other things, a 5% average pay cut for public workers this year and the abandonment of inflation-adjustments for pensioners.  It is treading the path already trodden by PASOK in Greece in the face of riots and general strikes. Those social democrats who are in government in Euroland, it seems, are part of the consensus, “slashing incomes and welfare to protect banks and corporate profitability” rather than pursuing further stimulus packages to stimulate recovery like Obama.

Professor Costas Lapavitsas sets out the three options for peripheral eurozone countries:

  1. The first is austerity accompanied with further liberalisation. This is the preferred choice of the eurozone and of the ruling elites across the periphery. It is also the worst option. It will achieve stabilisation through recession, imposing huge costs on working people. It offers little prospect of sustained growth in the future since productivity is expected to rise spontaneously following liberalisation. And it does not address the structural bias at the heart of the eurozone.
  2. The second is radical reform of the eurozone. It would involve greater fiscal freedom by member states; a substantially enlarged European budget; fiscal transfers from rich to poor; protection for employment; support for wages; and cross-European investment in sustainable industries. The strict regulations applying to ECB purchases of state debt would also be relaxed. This might be called the “good euro” option. Political problems aside, this strategy is likely to threaten the international role of the euro by leading to a fall in its value. It could thus threaten monetary union itself.
  3. The third is radical exit from the eurozone. There would be devaluation followed by cessation of payments and restructuring of debt. Banks would have to be nationalised and public control extended over utilities, transport, energy and telecommunications. Industrial policy would be introduced, including strategies to improve productivity. Infrastructure and environmentally sensitive investment could support equitable growth. This option requires a decisive shift in the balance of political power in favour of labour. To avoid veering toward national autarky peripheral countries would need to maintain access to international trade, technology and investment.

The first way lies disaster.  The second was politically impossible in relatively good times – the reason why monetary union without fiscal union and greater political union was never a sensible project. It is difficult to see how a switch from policies of austerity to one which would require a significant switch of public spending to a federal European government (as well as an increase in total public spending) is any more politically credible.  So, there we have it, breaking up the eurozone is the only way forward for the European Left.

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