The Telegraph
Tuesday , June 5 , 2012
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- This is a defining moment for the European Left

European integration is an old idea. It was discussed among Russian socialists even in 1915, when Lenin had rejected the slogan of The United States of Europe. His argument is instructive: while the slogan of a republican United States of Europe, formed on the basis of the destruction of the three monarchies, the Habsburgs, the Hohenzollerns and the Romanovs, appears politically unexceptionable, “a United States of Europe under capitalism is either impossible or reactionary”. It is “impossible” in so far as European powers continue to remain submerged in inter-imperialist rivalry; and if perchance they do unite, then that can only be “for jointly suppressing socialism in Europe or jointly protecting colonial booty against Japan and America”.

More than half a century later, the idea of European integration was again revived, and again with substantial support from the Left. But a European Union under the hegemony of finance capital is showing itself, in accordance with Lenin’s prediction (though naturally through mediations different from those emphasized by him), to be both “reactionary” and, for that very reason, unviable.

To be fair to the European Left, however, when the idea of a European Union was first mooted, support for it appeared eminently reasonable. European nations had fought two World Wars that had left millions dead. Putting that past behind, burying forever all ideas of intra-European “nations” — and hence, by implication, the Nazi apotheosis of the great German nation that had wrought such great havoc — had an obvious appeal for the Left. And the hegemony of finance capital was not even visible in the beginning: Keynesian demand management held sway in the individual countries of Europe through much of the 1960s, ensuring extraordinarily high levels of employment, which were assumed to last forever. Even when the Maastricht Treaty was signed, which limited the size of each country’s fiscal deficit relative to gross domestic product, without providing for any central or federal authority that could boost demand for the Union as a whole, it still did not seem to matter. The American economy could be the “locomotive” for the capitalist world as a whole, and since Germany had been a remarkably successful exporter, Europe, through Germany, could attach itself to the American “locomotive” to enjoy reasonably high levels of activity, without necessarily having to adopt Keynesian policies on its own.

The problem began when demand collapsed in the United States of America with the end of the “housing bubble”. True, there was a fiscal stimulus package provided by the Obama administration, but it was too minuscule to prevent an overall slump in the world economy. Any such slump in US demand — and, by implication, in world demand — has the immediate effect of reducing US imports, and hence of the exports of the rest of the world; but until such time that domestic consumption and investment, both public and private taken together, are not reduced in the rest of the world, its imports do not fall. Hence, a collapse of US demand has the effect immediately of worsening the current account deficit of the rest of the world, and in particular of the weaker economies within it.

The genesis of the current crisis in southern Europe lies in this fact, namely the recession and unemployment in the world economy, sparked off by its leading economy, the US. There is a widespread belief that the European crisis is a consequence of Europe’s profligacy. The Europeans, it is believed, lived beyond their means, which is why they ran up debts, and now have to put their houses in order by living within their means, through adopting austerity measures. The impression, in short, is conveyed that Europe’s crisis is of Europe’s own making. Nothing could be further from the truth. Europe’s crisis is a result of world developments, of developments occurring in world capitalism as a fall-out of the collapse of US demand.

A simple example will clarify the point. No matter what the unit cost of production (at the existing exchange rate) in any country, it can always achieve full capacity output if the level of world demand is large enough. Suppose this country’s full capacity output is 300 and is actually produced, and its domestic absorption — that is, consumption, investment and government expenditure — is also 300, then its current account must be balanced. Now, suppose the level of world demand falls, which reduces this country’s exports by 15; if its domestic absorption is kept unchanged at 300, and if imports depend on domestic absorption, then it will experience a current deficit of 15. If this deficit, which arises because of developments external to the economy, is attributed instead to the country’s lack of “competitiveness”, and its exchange rate is depreciated to make it more competitive, without any steps being taken to increase the level of world demand, then the country may well succeed in reducing its current deficit, but only at the expense of some other country; it would be pursuing a “beggar-my-neighbour” policy.

On the other hand, if it cannot depreciate its currency (as no single Eurozone country can) and is asked to reduce its current deficit by cutting domestic absorption, then, assuming that imports are 20 per cent of domestic absorption, such absorption has to be cut by 75, from 300 to 225, to eliminate current deficit, of which 60 will reduce domestic output. Hence, the country’s total output, which had fallen from 300 to 285 because of the world recession, causing a 5 per cent drop in employment, would have to fall further to 225, which means a 25 per cent drop in employment compared to the original situation. Moreover, such a drop in its absorption, which reduces its own import demand (and domestic demand) will, in turn, reduce the export demand of other countries, who would then have to reduce their absorption for reducing their current deficit, and so on. All over the world, including the country in question, the recession and unemployment will get greatly magnified if countries adjust to the initial slackening in world demand in this manner.

This, however, is precisely the manner in which finance capital wants countries in southern Europe (and elsewhere) to adjust to their initial crisis, caused by the slackening in world demand. Since current deficits cannot be financed because banks are unwilling to lend to these countries, the remedy is seen to lie in their adopting “austerity” measures, which reduce domestic absorption.

Matters are actually worse for these countries in two ways, compared to what our arithmetical example depicts. First, the problem they face is not just in financing current deficits, but in financing public expenditure itself. In any other country, the central bank can be called upon to finance public expenditure in excess of revenue, so that government spending is not necessarily cut, even as the country goes around finding ways of obtaining foreign loans to finance its current deficits. Southern European countries, however, do not have central banks, since they belong to the Eurozone. So, public expenditure itself depends upon the willingness of finance capital to hold government debt. Second, it is not just the deficit but the stock of debt itself that is seen as the problem, and “austerity” is demanded not just to eliminate the deficit but to reduce the burden of debt, which makes it even more harsh on the people.

The problem of southern Europe has a simple solution, which many have advocated. First, the European Central Bank simply takes over the debt of the countries so that they are not supplicants before a host of private banks. This debt, already incurred, can be rolled over with no harm to anyone, without in any way constituting “Ponzi finance”. Second, there is a pan-European expansion in demand through a fiscal agreement among the governments, which has the effect of reducing the current deficits of the southern European countries. Europe may not be able to do much about expanding world demand; but it can certainly undertake an expansion of European demand.

This solution, however, is anathema for finance capital, which is opposed to Keynesian demand management through State intervention, and which prefers austerity-based debt-repayment to a painless debt roll-over. The people over large parts of Europe have expressed their opinion on what economic policy should be adopted, by voting for Left governments. For the European Left, this is a defining moment: whether the EU should continue to be hegemonized by finance, or whether this hegemony should be overthrown so that the people’s will prevails. For the latter to happen, even a dismantling of the current European Union may become necessary.