Regardless of whether we need a treaty amendment to set it up, the debt crises which hit Greece and Ireland and threatened other European Union countries show that Europe needs its own version of the International Monetary Fund. And that should be just a small part of a wider package of reforms to the way the eurozone is governed. Since autumn 2010, the Socialist group and its allies in the European Parliament have been working on the first significant reforms to the Stability and Growth Pact since economic and monetary union was established in the Maastricht Treaty. With the Socialists strong in argument but weaker in numbers than the right, we are in danger of seeing this package of reforms turn into a neo-liberal charter – one in which the gap between Europe’s rich and poor nations increases and which enshrines the principle of austerity if a country falls into recession. Although this is primarily a eurozone issue, it has knock-on effects on Britain. Fifty per cent of our trade is with the eurozone. Given that our markets are so inter-linked, an economic boom or recession across the Channel is bound to impact on us.
Arguably, we face the most important ideological battle within the EU for a generation. The left and right have fundamentally different approaches to the way we deal with an economic downturn. For the left, in times of economic uncertainty, governments should use stimulus measures to create and protect jobs and then unwind these measures when we see a return to solid growth. This approach was working in Britain until the Tories came to power, propped up by the Liberal Democrats. It is working in the United States, where the Keynesian strategy of Barack Obama’s administration has led to the strongest growth in five years.
The debt crisis in Europe, which was made worse by market speculation against Greece and other Mediterranean countries, led to collective austerity measures by most European governments. Some were needed, but most were not. In this country, the Tories have reverted to their mantra that deep and swift cuts are the only option. We are now seeing the devastation this is causing to our society, public services and economy.
Deficit hawks contend that if a country breaches the rules of the Stability and Growth Pact (whereby countries must keep their debt levels below 60 per cent as a proportion of gross domestic product and their budget deficits 3 per cent or less), it should immediately pay a deposit of 0.2 per cent of its GDP. However, this deposit is repaid with interest when the country recovers. This idea is not wholly misguided. The SGP has been ignored by many countries for years and it needs some teeth. Besides, countries with low debt and balanced budgets are able to spend more money on public service investment. The big dividing line is what to do when a country breaches the SGP, but cannot recover quickly. The Socialist group and its allies argue there should be a set of rules that a country should be allowed to keep to in such times – to control its debt, but also protect public investment, social welfare and jobs. For the right, if you don’t cut your debt immediately, you’ll be fined a minimum of 0.5 per cent of GDP and be expected to rip up collective bargaining agreements and national minimum wages into the bargain.
A fine of 0.5 per cent of GDP is a massive sum. It is like wiping out a country’s entire international development budget. This is economically illiterate. You are essentially telling a country that the solution to indebtedness is to pile on more debt. This is likely to lead to a nation getting further indebted and forced to make massive cuts with no guarantee that any of this will work.
The logic of the right about the cause of the crisis is perverse. As Bank of England Governor Mervyn King has acknowledged, the crisis was not caused by too much public investment. It was caused by the financial sector, which has still not been reformed. European banks still have an enormous level of exposure to hundreds of billions in debt. It is wrong that the debts incurred as a result of financial speculation should be paid for by wage cuts and reduced pension rights. As King told MPs: “The price of this financial crisis is being borne by people who absolutely did not cause it.”
The Socialist group says the pro-cyclical approach of the right and free-market liberals will make matters worse. It is no solution, in times of recession, to rule out stimulus measures and hope that the market will sort things out. The SGP must be as much about economic growth as it is about stability. This cannot happen if a country is told to rip apart its economy in order to deter the bailiffs.
That is why Britain and the US, the two countries whose financial services sector collapsed so spectacularly in 2008, invested to stave off the worst effects of the recession. This meant their budget deficits grew. But they ensured that a crash did not become a 1930s-style depression. The IMF has estimated that 500,000 jobs were saved by the Labour Government’s Keynesian approach. Mass unemployment imposes huge costs on the state. Keeping unemployment to a minimum allows you to return to balanced budgets and good living standards rather quicker than a dose of economic shock treatment.
The ideological fight, which will shape the economic future of Europe, is just beginning. Despite being in a minority position, albeit a strong one, this is one battle the left cannot afford to lose.
