Europe's economic ideology has failed

The bailouts are for only the banks and they are deepening the crisis of democracy at the heart of the European Union, writes Seamus Milne.

You might think that giving people a say in the most crucial decisions affecting their country would be second nature for a union of states that claims democracy as its most sacred founding principle. But George Papandreou’s announcement that Greece would hold a referendum on the EU’s latest shock therapy “rescue” plan was greeted with outrage across the chancelleries of Europe.

The Greek prime minister has now been summoned to the G20 summit in Cannes by Angela Merkel to be “read the riot act” over such reckless ingratitude. Last week’s dose of new loans, 50% voluntary bank debt write-offs and yet more savage cuts and privatisations was supposed to have settled the matter and halted the threat of eurozone contagion - even if the deal’s flakiness had already become painfully clear.

Papandreou’s manoeuvre is, of course, a last-ditch attempt to save his political skin after months of mass street action over previous helpings of failed austerity that have driven Greek society to the brink. His government may fall and the referendum never be held, and even if it goes ahead Greeks will certainly be subjected to a barrage of threats and blackmail.

But the controversy goes to the heart of Europe’s problem with democracy. It’s not just fear of the risks of delay on febrile bond markets that has caused apoplexy, but the danger that Greeks might vote the wrong way. Voting is not how things are done in the EU. And whenever a state does actually consult its people - Denmark and Ireland had a go - they are made to vote again until they get it right.

But the democratic deficit has now tipped over into a democratic crisis. To protect the banks that lent to Greece and protected its elite from unwelcome tax demands, the country is being systematically stripped of its sovereignty, as EU and IMF officials swarm over its ministries drafting budgets, setting policy deadlines, “advising” on tax and pushing through state selloffs.

No wonder nationalist anger is growing. And all this to deliver a death spiral of spending cuts and tax increases that are sending Greece ever deeper into slump and debt. It makes no sense. Unless it’s understood that it’s not the Greek economy that’s being rescued, but European and US banks exposed to Greek debt. To protect the rentiers and prevent their own failures from seizing up the European credit system, Greece has undergone the deepest ever fiscal squeeze in a developed state without the possibility of any compensating monetary stimulus or devaluation - because of its euro membership.

As a result its economy is collapsing and its debt is mushrooming. Papandreou’s referendum proposal at least should raise the question of an alternative. Without a bailout of the Greek economy, any “orderly” default will be on the creditors’ terms, and the country faces decades of stagnation. In those circumstances, an Argentina-style default and exit from the euro increasingly looks like the better option.

But Greece is only the extreme end of the eurozone crisis. Portugal and Spain, the other two EU members ruled by fascist dictators until the mid-70s, have also been reduced by stringent bailout conditions to the status of a protectorate run from Brussels, Frankfurt and Washington - with dire economic and social consequences.

Now the contagion threatens Italy, and Europe’s crisis risks tipping the global economy back into recession. Last week’s rescue package has already been recognised as a failure, EU leaders have resorted to lobbying China to back a wider bailout, and the International Labour Organisation is warning of a worldwide explosion of unemployment and social unrest.

But as in Britain, the eurozone’s debt and stagnation crisis isn’t about state profligacy. It’s mainly the result of the recession-induced slump in tax revenues triggered by the 2008 crash feeding back into the banks that caused it. Private investment has collapsed, and until eurozone governments start bailing out the real economy, rather than the banks, with public investment for growth, the rescue packages will go on failing.

But that would require a radical shift in the politics of the core eurozone states, and there isn’t the slightest sign of it. As a result, the eurozone faces potential breakup, and is highly unlikely to survive in its current form. It’s not as if the dangers and flaws at the euro’s heart weren’t clear from the beginning, though, to critics on both left and right.

To tie together 17 countries with widely different levels of development and productivity around a single currency without large-scale tax and spend transfers, and underpin it with a rigidly deflationary central bank without full monetary powers, or any kind of credible democratic control, was always a disaster waiting to happen.

The aftershocks of the 2008 crash have now triggered that disaster. For the euro’s architects, the currency was to be the catalyst for the deeper integration they always regarded as essential for European corporations to grow large enough to compete on a global scale. Now they see the eurozone crisis as a springboard to create the fiscal union and economic government they have long wanted, among a smaller group of countries.

But the loss of credibility created by the crisis goes beyond the eurozone to the economic ideology that has shaped the whole European Union for decades: of deregulation, privatisation and the privileging of corporate power, regardless of the modest employment rights introduced to limit social dumping.

That is exactly the model that is now in deep crisis across the western world. British Tory eurosceptics are, of course, all in favour of such an unaccountable free-for-all and only balk at the prospect of the pre-eminence of the City of London - whose role has skewed the British economy and deepened the impact of the crash - being undermined by EU meddling.

But, while Merkel last week raised the spectre of war if the eurozone goes down, none of the mainstream political parties across Europe is facing up to the failure of that model or the crisis of democracy it has sparked. It has been left to the archbishop of Canterbury and the Vatican to demand serious reform of the financial system. But everywhere the crisis is turning the orthodoxies of the past generation on their head - and it’s going to be a different world by the time the debris has cleared.

Urgent Appeal