Is the Austerity Treaty an answer to the economic crisis?

The 'solution' to the crisis proposed by the political establishment across Europe - namely the Fiscal Treaty - is a cure for a wrongly diagnosed disease. By Paul Murphy, MEP.

Eamon Gilmore launched the Government’s campaign for a Yes vote in the Dáil by arguing that this is a “vote for economic stability and economic recovery”. Frances Fitzgerald in the Blanch Gazette on 8 March put a bit more meat to the bones of this argument by suggesting that by voting yes, “we will be putting an end to the excesses of domestic and international boom-to-bust cycles and sending a clear message of stability and fiscal responsibility internationally.”

Apart from the scaremongering that is the dominant feature of the Yes campaign, it seems the centrepiece will once again be  arguments about economic growth and, implicitly, about jobs. This is based on the suggestion that this Treaty provides a fiscal discipline that is an answer to the excesses that caused the crisis.

Nothing could be further from the truth. The facts demonstrate that even if the Treaty had been in place in advance of the economic crisis, Ireland would have met all of the strict targets contained within it. Frances Fitzgeald argues that “If this Treaty were in place in 2007, for example, the then Government would not have been able to introduce the measures which over-stimulated the property market and were part of their General Election campaign promises.”

This is simply not the case. In 2007, Ireland’s debt to GDP ratio was 24.8% (Eurostat) - far less than the 60% dictated in the Treaty; our general budget was in surplus of 0.1% compared to a target of a deficit of 3%; and our structural balance was estimated by the EU Commission in spring 2008 to be in surplus of 0.2% compared to a target of a maximum deficit of 0.5%. Later on, the structural balance was revised downwards, with the Commission in 2011 saying that Ireland had a structural deficit of 1.4%. However, hindsight could hardly have prevented the crash.

So having the strictures of the Fiscal Treaty in place would not have meant we avoided the economic crisis. In fact, the government would have been congratulated on having met the targets so effectively and with such high growth rates! The same is largely the case for Spain and Portugal, which had relatively low levels of public debt in advance of the economic crisis.

So this Treaty is not an answer to the economic crisis – in fact, as has been explained elsewhere, the savage synchronised austerity it requires will dramatically worsen the crisis. However, the line of argument suggesting that this Treaty is an answer to the crisis is not simply unfounded propaganda by the Yes side. It is part of a generalised attempt to rewrite the causes of the economic crisis. In the immediate aftermath of the Lehman Bros crash and the spread of the crisis internationally, even capitalist economists and right-wing politicians were forced to blame “casino capitalism” and call for more regulation of the financial sector.

However, with the passage of time, there has been a conscious attempt to rewrite what caused the economic crisis; rehabilitating the image of capitalism and attempting to blame excessive public spending. In this way, the proponents of this idea want to both absolve the capitalist system and neoliberalism from blame, and then also to use the crisis to go on a further neoliberal assault against the public sector.

German Finance Minister, Wolfgang Schauble made a statement last August that encapsulated this approach:

“It’s actually undisputed among economists worldwide that one of the main causes – if not the main cause – of the turbulence – not just now, but already in 2008 – was excessive public debt everywhere in the world.”

But of course this is something that is hotly disputed. Keynesian economist Paul Krugman challenges this frontally:

“.. let’s look at the full list of countries that got into trouble because of high debts accumulated before the crisis, as opposed to those that have developed large deficits as a consequence of the crisis.

Here’s the full list: Greece.

Spain and Ireland had low debts and budget surpluses on the eve of the crisis.”

There is no question but that huge levels of public debt is now the primary expression of the deep economic crisis that exists across Europe. However, the question is why has this debt been built?

The Irish example of the ballooning of debt is a graphic illustration of the real roots of this crisis. It was at a low, sustainable level, and then exploded from 2009 onwards. This was due to the bailout out of the banks and the nationalisation of large amounts of private debt. With the collapse in tax revenue due to the collapse in the economy, and the massive over-reliance of the tax structure on the construction sector, a significant yearly deficit was also incurred.

The reason for the explosion of the debt is slightly different in the various so-called PIIGS countries. However, nowhere was excessive public spending the problem. Rising government debt levels are a result, rather than a cause of the crisis. They flow from the nationalisation of private debt and the decline in tax revenue due to the crisis, as well as the decline in competitiveness of the peripheral European economies relative to the core economies.

What are the roots of the crisis?

So if this is not a crisis of excessive public spending, what is it? It is a crisis rooted in the capitalist system, in particular the explosion of speculation and the massive expansion of credit – what is referred to as financialisation. This is a process that began in the 1970s as a result of the declining rate of profits for capitalists in manufacturing. The result was a shift away  from investment in producing goods and services towards increasing speculation on the financial markets. (These ideas are explored in length by Robert Brenner in The Economics of Global Turbulence and by Andrew Glyn in Capitalism Unleashed: Finance, Globalization and Welfare.)

Linked to this expansion of speculative activity was a significant increase in the extension of credit, which served to maintain demand in the context of stagnant real wages in much of the advanced capitalist world. This credit, together with increasing speculation, resulted in bubbles like the dot.com bubble that burst in the early 21st century; as well as the massive bubble in housing prices that we saw in Ireland and in the US. It served to paper over the the underlying contradictions and problems facing capitalism - a lower rate of profit compared to the post-war period, a linked decline in investment by the capitalist class in manufacturing, and stagnant wages, which together resulted in a low level of aggregate demand. With the bursting of these bubbles, and the transfer of much of the debts to the public sector, these came to the fore and explain the protracted and deep nature of what is now referrred to as the 'Great Recession'.

In Europe, this crisis of 'financialisation' was added to by the structural problems facing the Eurozone, which had also been papered over by the extension of credit. Instead of convergence in competitiveness between the stronger Northern and weaker Southern economies, in actual fact there had been divergence. The propagandists for capitalism like to claim that this is because of the greater productivity growth of German capitalism. This is simply not true, as, as Costas Lapavistsas et al explain, German productivity growth has been slower than either Ireland or Greece.

Instead, it comes down to a simple question of a race to the bottom in workers' wages and conditions, which German capitalism won by applying severe wage restraint and by weakening trade union organisation. It was through this suppression of wage growth that Germany was able to build on its pre-existing competitive advantages over the southern European economies. This divergence in competitiveness resulted in persistent current account deficits for the peripheral economies and surpluses for the core. These deficits, both public and private, were financed by the easy credit that was swilling around and led to the illusion that Eurozone membership had been successful for these peripheral economies. The economic crisis shattered that illusion – dramatically exposing the reality of reduced competitiveness and mounting levels of debt that were, in many cases, transferred from the private sector to the public.

The wrong cure for a misdiagnosed disease

So the 'solution' proposed by the right-wing political establishment across Europe is a cure for a wrongly diagnosed disease. The result, if strictly implemented, would be disastrous economically, not only for working people across Europe, but also for the capitalist classes, including in Germany.

There would appear to be three reasons why this agenda is being pushed regardless – the political need for Merkel to be seen to be 'hard' on southern Europe, the fact that much of the capitalist class is ideologically blinded by neoliberalism to the impact of these policies, and the influence of the short term needs of finance capital – the banks and speculators.

A fundamentally different solution is needed for Europe's economic problems – one that goes in the opposite direction to the Fiscal Treaty. I will set out in more detail in a later article what this would mean, but the key elements in brief are: a refusal to pay the bondholders; massive public investment to create jobs; increased taxation of the super-wealthy and corporations to fund that investment; and a transformation to a different economic model, whereby democratic public ownership of the key sections of the economy would enable rational democratic planning for sustainable growth. With radical change on a European level, public investment would be used to ensure development of the weaker economies and relations of equality between the various European states. {jathumbnailoff}

Paul Murphy is Socialist Party MEP for Dublin. paulmurphymep.eu

This article is part of our Fiscal Treaty Files series. For more of our coverage of the Fiscal Treaty click here.

Image top: European University Institute.