The eurozone crisis was never resolved. It was merely conveniently forgotten. The dispute between Italy and the European Commission over the former’s budget was only the latest episode in an ongoing political and economic struggle between the northern and southern eurozone states.
After a fraught negotiation, EU leaders agreed last December to a deal aimed at making the currency union more sustainable.
The agreement included measures to bolster the European Stability Mechanism – the joint bailout fund created in 2012 – for use in future banking crises. But the deal leaves some defining issues – from collective deposit insurance to a separate eurozone budget – unresolved. The reality is that, while EU leaders tinker around the edges, the euro’s fundamental contradictions endure.
Since the 1990s, German wage restraint – based on a corporatist bargain between trade unions, businesses and the state – has made the country significantly more competitive than other eurozone members. “Restraint” is, of course, a euphemism – in reality, German wages have become decoupled from productivity, meaning that the wealthy are claiming an ever-greater share of pre-tax growth (as detailed in Oliver Nachtwey’s recent book Germany’s Hidden Crisis).
Strong profits have underpinned high levels of investment by German firms, enabling decades of sustained productivity growth. These trends have combined to make Germany a leader in specialised, high-value manufacturing, allowing it to meet rising demand from the rest of the world.
The low-productivity southern European states have fared less well. Indeed, in many EU economies, such as Greece and Spain, GDP is still smaller in per capita terms today than before the 2008 crash.
The rapid expansion of the euro exacerbated divergences between the eurozone’s northern core and its southern periphery. The loss of domestic control over monetary policy created two interlinked problems for the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain).
First, the euro’s overvaluation relative to these countries’ economies meant their exports became even less competitive. Second, during the pre-crisis boom, investors lent to these countries with little regard for their long-term growth prospects. Once the crash began, investors realised – all too late – that there was no safety net: national central banks could no longer purchase government bonds.
There was only one way forward: a dramatic Keynesian investment programme to boost productivity in the southern European countries, combined with commitments by all eurozone countries to guarantee one another’s debts.
This was, and remains, the only way definitively to resolve the crisis. But instead the reverse occurred: austerity was imposed on southern Europe and the European Central Bank took only timid steps towards a bond-buying programme.
The eurozone crisis is, at heart, a political one. The major obstacle to its resolution is the refusal of Germany and its northern European allies to countenance an inflationary macroeconomic policy – higher public spending and tax cuts – across the EU.
On the surface, this seems perfectly reasonable. Why should the sensible, industrious Germans pay for the profligacy of Europe’s periphery? The Spanish, Portuguese, Greeks and Italians must simply accept permanently lower living standards. Enforced austerity is the only way forward.
Yet this argument is myopic. Greeks and Italians, official data shows, work longer than their German counterparts. Far from promoting the collective good of the eurozone, the German state has used its hegemonic position for deeply irresponsible ends.
The fatal flaw of the Rhineland model of capitalism is that it is dependent on demand elsewhere, most notably China. And the slowdown in the world’s second-largest economy is already impacting Germany, where GDP contracted by 0.2 per cent in the third quarter of last year.
In 2019, the eurozone could return to recession. Another crisis may finally stir Europe’s leaders into action. Or perhaps their obstinate complacency will continue. At present, the latter appears far more likely, and the eurozone is still living on borrowed time.
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This article appears in the 23 Jan 2019 issue of the New Statesman, Who’s running Britain?