People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 47

November 20, 2011

What Is The European Economic Crisis About?

Prabhat Patnaik



THE standard view of the European economic crisis is that it consists in the loss of confidence of the “market” in the creditworthiness of several European governments which have piled up massive debts because of their past profligacy; the solution to the crisis correspondingly lies in their cutting back on their expenditures, and adopting austerity measures, so that apparently unexceptionable precepts like “one must live within one’s means”, and “one must cut one’s coat according to one’s cloth”, which are valued by the “market”, are not henceforth violated.


This standard view is an instance of the reification that characterises bourgeois theory in general. The “market”, which is an institution created by human beings, is seen not only as an entity independent of human beings, but even as having a wisdom and sagacity of its own that rectifies human follies and is therefore deserving of respect and obedience. Indeed when Mr Papandreou, the former prime minister of Greece, wanted to submit the austerity package, worked out by the European Union to restore the confidence of the “market” in the Greek government (so that it could roll over its public debt), for a popular referendum, on the grounds that it would have enormous adverse effects on the people and therefore had to have their sanction, there was a massive uproar from bourgeois circles everywhere. Even newspapers in our own country editorialised on the subject against Mr Papandreou’s decision. They were all aghast at this display of quixotic stupidity: surely the dictates of the “market” which were free of the follies of human beings, and of governments that tended “spinelessly” to defer to such follies, had to be obeyed, come what may, to avoid disaster. Mr Papandreou, needless to say, dropped his plan for a referendum.


In fact however the debt accumulation of the vulnerable European governments had little to do with any willful profligacy on their part. They were a product largely of two factors: the bail-outs of private financial institutions, effected from budgetary resources, in the wake of the collapse of the American housing bubble; and the fact that governments tended not to cut back on expenditures when their revenues fell as a consequence of the recession, as an act of restraining the recession itself, ie the fact that government policy tended to be “anti-cyclical” rather than “pro-cyclical”. These two factors did not of course operate with the same intensity across all the vulnerable countries (eg, the bail-out factor was less important in Greece), but among them they largely explained the predicament that most of the vulnerable governments found themselves in.


The “market’s” insistence upon “austerity” and “fiscal responsibility” therefore is a mere euphemism for the fact that financial interests want the governments to desist from continuing with their old ways of spending, including spending on what remains of the old “Welfare State”. There is no demand from financial circles that governments should cut back on their bail-out packages! The only “austerity” they insist on is with regard to expenditure that is targeted towards the working people. Finance capital wants these governments not to pursue anti-cyclical policies, but rather to pursue pro-cyclical policies, and to do so at the expense of the working people, by winding up whatever remains of the once-famed European Welfare State.




Put differently, what is called the European economic crisis is finance capital’s coup against European social democracy, and the Welfare State it had put in place in the post-war period. Those measures characterised a State, that, despite being a bourgeois State, stood apparently above classes, was not tied exclusively to the interests of the capitalist class or of the corporate-financial elements, and was responsive to an extent towards the needs of working people as well. The assault on that State arising from the ascendancy of finance, especially from the fact of globalisation of finance in a world of nation-States, has been going on for some time. What we are witnessing now is the final assault, the last push that will bring the entire edifice down. It is a final assault to substitute the old bourgeois State with its social democratic stamp, apparently standing above classes and solicitous to an extent even towards the working people, by a State that represents the virtual dictatorship of finance capital.


To say this is not to suggest a conspiracy. Financial magnates do not sit around a table to plot political strategies, let alone plot “coup d’ etats”  of the sort just suggested, though they do have remarkable co-ordination among them on several issues, and are united to an amazing extent by a commonness of  ideology. But an extrinsic reading of the European economic crisis, what it means and what it foreshadows, suggests the following: the origin of the debt crisis that is afflicting one European government after another lies in the global recession itself which has brought down government revenues more sharply than government expenditures, making the old bourgeois States vulnerable, far more than ever before, to the caprices of global finance capital; and global finance capital is utilising this opportunity to enforce changes in the nature of the State that are extremely far-reaching, and amount in effect to a significant attenuation of democracy that would necessarily accompany the “austerity” measures.


The rolling back of the legacy of European Social Democracy in other words would necessarily mean also a rolling back of democracy itself in Europe. The furore over Mr Papandreou’s proposal to submit the EU austerity plan for Greece to a referendum by the Greek people is indicative of this rolling back of democracy, a foretaste of things to come: important issues affecting the lives of the ordinary people are henceforth going to be decided behind their backs, without their consent or approval.


The very definition of the term “crisis” used in this context is instructive. The term “crisis” is used to refer exclusively to the inability of the governments to pay back or roll over their loans, an inability that arises from the unwillingness of finance to entertain their request for further credit; austerity therefore  is seen as the resolution of crisis. From the point of view of the working people however austerity marks a deepening of crisis. The EU plan for Greece that is supposed to “resolve” the Greek crisis does not say a word about how long the Greek people are to endure “austerity”, how, if at all, they are ever going to come out of the shackles of “austerity”, and how they are expected to cope with the impact of “austerity” during the period it lasts. In short, providing finance capital cover for the loans it has made to the Greek government, ensuring that it does not suffer through debt default is all that a “resolution of the crisis” is supposed to entail, but not any improvement in the conditions of the people, not a turnaround in their fortunes. Our vocabulary itself in short undergoes a transformation in the era of globalised finance, when the interests of society are made synonymous with those of finance, but not with those of the people who constitute it.


Many, including economist Paul Krugman, have been arguing that the problem of European government debt arises only in those countries where governments are forced to borrow from abroad, where they have lost the ability to borrow from within the economy, including in particular from their own central banks. There can of course be no two opinions about the fact that if a government can borrow from its central bank, ie, through printing money, then it will never get into a debt trap; but the problem with this argument lies in its implicit suggestion that it is possible for an economy to be thrown open to the movements of globalised finance, and yet to remain free of the vice-like creditor-grip of globalised finance.


In a very obvious sense, if the government borrows beyond what finance capital considers “safe” from its own central bank, then “confidence” of finance in that economy will go down, leading to financial outflows, including by its “own” residents, which would necessitate the country’s borrowing from abroad (to finance such outflows), and hence bring in its train similar austerity measures. But there is more to it than that.




The Krugman argument detaches the question of government debt in these vulnerable European economies from the context of the world recession. It is not a matter of whether a country’s government is free to borrow from its central bank; it is a matter of what a country’s government does in the context of the global recession. When there is a sharp fall in world aggregate demand, it has a greater or lesser recessionary impact on all economies of the world, greater in the case of those countries where the dollar wage rate (at the going exchange rate) is high relative to labour productivity (eg the US, or several southern European countries), and lesser (or even a negligible impact) where the dollar wage rate is low relative to labour productivity (eg China). The harder-hit countries can protect themselves from the impact of such recession in three possible ways.


One is through a depreciation of the currency, which, if their money wages do not rise (ie, their workers take a cut in their real wages), will improve their competitiveness (if other countries do not retaliate through their own depreciations) and boost their net exports, and hence output and employment. This is what is called a “beggar-my-neighbour” policy, ie, benefitting at the expense of some other country (through larger net exports). This however is not a very feasible option. Even when, unlike the Eurozone countries, a country is not on a fixed exchange rate, there is the possibility of retaliation from other countries (except for very small economies whose benefitting at the expense of others is too negligible to matter).


The second way, which is what several European economies actually tried to do, is by keeping up government expenditure even when government revenue goes down, ie, by enlarging their fiscal deficits. In such a case however even if the government does not borrow from abroad to meet its fiscal deficit, the country nonetheless will have to borrow from abroad. The very fact of protecting the economy from recession through a larger fiscal deficit would mean that the country’s imports will be kept up, even as its exports suffer because of the recession in the global economy. Hence the country will have to borrow from abroad even if its government does not; and this would bring the same set of problems that Europe is facing anyway.


The third way is for the government to boost domestic demand (through a larger fiscal deficit if necessary, as in the second case), but to impose simultaneously controls over capital  and  trade flows, ie, to effect a process of delinking, not only from “globalisation”, but even from groupings like the European Union (unless such Unions themselves protect their constituent economies from the global recession through a policy of internal expansion, combined with “de-linking” from “globalisation”).


Of course, if there is a concerted global action for increasing world aggregate demand, then that is a separate matter. But such action is not on the agenda. In its absence, the belief that an economy can be protected from the crisis even if it remains exposed to global financial and trade flows, ie, within a neo-liberal regime committed to “globalisation”, is mere illusion.