Why it’s misguided to treat the eurozone crisis as a morality tale about “lazy” southerners

As southern European countries rack up record debts, Helmut Kohl has told friends “Merkel is destroying my Europe”.

On 1 December, a 13-year-old girl died after inhaling carbon mon­oxide fumes in the Greek city of Thessaloniki. She and her un­employed mother had been trying to use a makeshift stove to heat their freezing flat, having had their electricity cut off several months earlier. In Greece, austerity continues to kill.

The Greeks have few friends in our part of Europe, however, as I discovered at a recent Intelligence Squared debate on Germany and austerity at Cadogan Hall in London. “Why should hard-working northern Europeans pay for the Greeks?” asked a Dutch member of the audience. “The Greek railway is so inefficient that it would be cheaper to move everybody by taxi,” sneered a German. There is a sense in southern Europe, suggested another audience member, that “money just grows on trees”.

Isn’t it odd that there is always money available to bail out banks but not people? As my fellow panellist Euclid Tsakalotos, a Greek economist and member of parliament for the left-wing Syriza party, put it to me afterwards: “Public debate has suffered a dumbing-down process.” How, he asked, could “a world economic crisis of such proportions that has affected so many economies ... be put down to differential work efforts”?

Work, or jobs, is what Greece lacks. One in four Greeks is unemployed; more than half of the country’s youth cannot find work. Suicides are up; the birth rate is down. On a visit to Athens in 2012, I met Nikitas Kanakis, the chairman of the Greek branch of the charity Doctors of the World. “If the people cannot survive with dignity,” he told me, “we cannot have a future.”

It is dangerous, misguided and mendacious, as countless economists from the New York Times columnist Paul Krugman to the Financial Times commentator Martin Wolf have pointed out, to treat the eurozone’s ongoing debt crisis as a modern-day morality tale. It isn’t.

Record debts were caused by post-crash bank bailouts and a crisis-induced collapse in tax revenues. Take Spain. That country’s downturn was the result not of excessive government spending or public debt but of the explosion of private debt, particularly in the real estate and banking sectors. Because of the crash, Spain’s public-debt-to-GDP ratio morphed from being one of the lowest in the eurozone to one of the highest.

Overspending didn’t cause the crisis but underspending is exacerbating it. Austerity isn’t working. Don’t take my word for it: a paper published in October by the European Commission’s Directorate-General for Economic and Financial Affairs revealed how the cumulative cost of fiscal self-flagellation across the eurozone was 6 per cent of GDP between 2011 and 2013. Crucially, the paper also pointed out that the catastrophically contractionary consequences of austerity in the southern debtor countries were “aggravated” by Germany and other northern creditor countries simultaneously cutting spending and raising taxes.

Another reason why we shouldn’t moralise about debt is to avoid the charge of rank hypocrisy. After all, why pick on the Greeks, rather than the Germans? In the years before the crash – for example, from 2003 to 2004 – Germany persistently breached the budget deficit rules laid down in the EU’s growth and stability pact; the then chancellor, Gerhard Schröder, demanded that his country be exempted from any penalties. In 2006, while Spain and Ireland were running budget surpluses, Germany was in deficit.

Then there’s the German private sector. In 2008, as an investigation by Bloomberg subsequently revealed, over-leveraged German banks and financial institutions received secret loans from the US Federal Reserve.

Now go back 60 years. In 1953, Germany’s postwar debt trap was lifted in London, at a conference of creditors in which the enormous amount of money the country owed was cut in half and the repayment period spread out over 30 years. One of those creditor countries was ... Greece.

Few historians would dispute that the astounding growth of the postwar German economy and the ascent of Germany to world economic power status wouldn’t have happened without the London Debt Agreement. So why such a different attitude now? Why the mocking, demonising and punishing of debtor countries such as Greece, Spain and Portugal? Why the pretence that debt forgiveness isn’t effective or doable or that it is without precedent?

It is perhaps because such a strategy would require bold and far-sighted leaders. What Europe needs right now is a Konrad Adenauer or a Charles de Gaulle, but the leaders it has to make do with are Angela Merkel and François Hollande.

Writing in these pages in June 2012, I attracted the ire of Germanophiles and deficit hawks alike by accusing Merkel, who was elected for a third term as chancellor in September this year, of “destroying the European project, pauperising Germany’s neighbours and risking a new global depression”.

But this isn’t merely the prejudice of a nasty British journalist picking on poor, defenceless Mutti. Listen to the former German chancellor, Helmut Kohl, who, according to Der Spiegel, has told friends: “She [Merkel] is destroying my Europe.”

A break-up of the eurozone may be where we are headed if spending cuts take precedence over debt defaults and if the financial crisis continues to be cynically portrayed as a morality play. What the continent needs is a debt jubilee and a halt to austerity. Oh, and some solidarity. Otherwise, a second Great Depression beckons.

To borrow a line from the US economist Michael Hudson: “Debts that can’t be repaid won’t be repaid.”

Mehdi Hasan is a contributing writer for the New Statesman and the political director of the Huffington Post UK, where this column is cross-posted

Members of the public relax in Athens in 2012. Photo: Getty.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

This article first appeared in the 04 December 2013 issue of the New Statesman, Burnout Britain

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.