This review was published by The Weekly Standard under the title "Unlearned lessons from the Greek financial crisis".
“In Defence of Europe”, by Loukas Tsoukalis, Oxford University Press 2016, 238pp, ISBN 978-0-19-875531-9, £18.99
There is hardly a member of the European Union whose past is not more prosperous, secure, expansive and influential than its present. During every age of European civilisation someone has held the upper hand, and lost it. Perhaps thanks to the maturity that comes of rising and falling, this neighbourhood of high pedigrees and inflated egos managed, after its last great conflagration, to settle into the idea of sharing its croquet lawns. That idea is now in retreat. Was the European Union a passing whim?
In Defence of Europe is a work of controlled anger. Professor Loukas Tsoukalis, who chairs Greece’s pro-EU think-tank, ELIAMEP, argues that the Eurozone’s sovereign debt and refugee crises exposed potentially fatal design weaknesses and third-rate political responses, creating winners and losers. He writes from the Europe’s periphery, the ultimate loser, bringing forth incontrovertible economic data that back up a stinging accusation of the north, especially Germany. “Democracy is not a given, nor is peace,” he ominously warns three pages before the end.
Tsoukalis focuses on European Monetary Union as an inequality machine. Assumptions that EMU would encourage everyone to enjoy Germany’s high trade surpluses proved wrong, because when they adopted the euro member states had diverging levels of competitiveness. In the decade preceding the financial crisis of 2008, “unit labour costs in Ireland rose by 46 percent in relation to Germany. The corresponding figures were 33 percent for Greece and 24 percent for Portugal,” he says. Exchange rate fluctuations between EU members had made up for much of the competitiveness gap by lowering the cost of exports. By nailing everyone to a fixed currency, the euro amplified Germany’s essential competitiveness, but made it much more difficult for less competitive economies to export goods and services.
Nor is it only the periphery that suffers from currency overvaluation. In a recent interview, France’s far-right leader, Marine Le Pen, called the euro “a suit that fits only Germany.” She would ditch the common currency for the same reason that Greek leavers would: “The IMF has just said that the euro was overvalued by six percent in France and undervalued by 15 percent in Germany. That’s a gap of 21 percentage points with our main competitor in Europe,” she said. If she wins the presidential election next spring, an anti-establishment vote that seems all the more likely after Donald Trump’s success, Le Pen plans to recreate the “currency snake” of 1972 – a band of exchange rates 4.5 percentage points wide, within which EU members had some room for devaluation.
When financial markets collapsed in 2008, they started pricing risk into sovereign bond purchases and Greece, with its high deficits and debt, was soon unable to borrow. It asked its Eurozone partners to set up a distress fund. Greece got its sovereign loan on what Tsoukalis describes as “punitive and economically unrealistic terms”. As government cut costs it created a deepening recession. Greeks began to talk of a deliberate deconstruction of their economy as part of a northern European plot to reduce them to a cheap worker class and buy up their companies.
This dubious narrative had its northern counterpart. Germans talked of how the fiscal profligacy of the periphery threatened hard-won German budget surpluses should the EU allow the wealthy states to subsidise the less well off, as in the US economy. But with the exception of Greece, none of the sovereign debt crises that followed (Ireland, Portugal, Spain, Cyprus) were due to overspending, says Tsoukalis. They were caused by private debt bubbles leading to bank bailouts. The fiscal profligacy narrative, however, enabled German politicians to claim credit for German economic success as a product of political virtue, blame the periphery for its woes and justify the austerity wrought on it.
There was a more ominous financial reason for austerity, though. Northern European banks, grown fat on the savings of workers in strong economies, had financed a borrowed prosperity in the periphery, and were now in danger of going under should the periphery have trouble honouring its bonds. Tsoukalis puts a precise price tag on this. In the third quarter of 2009, “total claims of French and German banks on the countries of southern Europe plus Ireland had reached astronomical figures: $824bn for the French banks and $733bn for German banks.”
Europeans on the periphery have long held that Eurozone bailouts were entirely selfish: not to bridge the wealth gap, but to save northern banks and the euro. Tsoukalis tells it by the numbers: “Approximately 70 percent of the total financial assistance provided to Greece… has been spent on servicing, repaying and restructuring old debts, and another 20 percent has been spent on the recapitalisation of banks following sovereign debt restructuring… Politicians [in Germany] have never dared to tell their citizens the bitter truth, namely that the money they lent to other countries in the Eurozone was also money to save their own banks and some of it, at least, may never be paid back.”
Had even this been done in a burden-sharing fashion, with, say, part of the periphery’s debt being mutualised through a euro-bond, or by forcing creditors to accept at least some responsibility for their lending decisions, the political consequences of bailouts might have been less poisonous and European unity might have been preserved. But the Germans, Dutch, Finns, Danes and Belgians, with trade and budget surpluses, did it with an authoritarian, punitive and morally superior tone, partly as an example to others. Never before had European relationships been defined by the raw power of money.
In this process, financially strong countries destroyed the consensus politics traditional to the European Union, and took over control of what were purportedly councils of equals. On page 93, Tsoukalis momentarily drops his academic sangfroid to ask, “Is [austerity] a fiscal virtue in legal clothes or a kind of policy straitjacket in a European system that is turning into a madhouse?”
A weakened Union
It is a maxim that Europe has lurched forward during crises, but Tsoukalis believes the Eurozone crisis ultimately weakened European institutions because they came across as uncaring about people. “The losers turned to the nation state for protection, because they had nowhere else to turn. Europe did not offer any kind of protection.” Thus the EU came to be seen by many Europeans purely as the instrument of capital, and “an integral part of the globalization process in an era of neoliberalism.”
European institutions were also weakened by legal sleight of hand, says Tsoukalis. Europe’s fiscal rules expressly forbid government bailouts, so the institutions created to offer them operate outside EU law.
Finally, bailouts came off as a German diktat to national parliaments, which are still the bedrock of European democracy. Austerity bills hundreds and in some cases thousands of pages long had to be considered in periods as short as 24 hours. Lawmakers were in each case told by German and EU officials that failure to pass a bill would result in emergency loans being stopped, and national bankruptcy. “How much economic sovereignty (or democracy) can you afford if you are bankrupt?” has become a key question in Europe.
Tsoukalis’ consternation by numbers supports the periphery’s view of European economic policy with data and argumentation. In effect, he tells the losers of Europe that they are right to be angry - and why. Despite its shortness, this is a dense work, but the student and observer of Europe will find it an invaluable resource.
In retrospect, Germany’s comportment in Europe - forcing acquiescence upon others to divisive and often questionable policies – goes back to German reunification. At the European Summit of December 1991, Germany muscled through recognition of Croatia and Slovenia, which had declared their independence, ignoring warnings that this would prompt the breakup of Yugoslavia, which it did. After an eight-year civil war, which Europe did nothing to stop, Germany participated in the NATO-led bombardment of Serbia and Kosovo – its first military action abroad since the end of the Second World War. Germany’s Yugoslavia policy marked the first manifestation of her new persona – more assertive, prepared to take a leading role in Europe, but in the national rather than the collective European interest. Now Germany, along with other creditor countries in Europe, has hijacked European economic policy with purely national priorities.
It is tempting these days to think of the EU as divided along cultural lines. Germany can put herself at the heart of a resurgent Holy Roman Empire consisting of her supply chain countries and Teutonic affiliates. It is a Standard of Living Union, fundamentally different in outlook from countries like Italy, France, Greece, Cyprus, Spain, Portugal and Malta, which thanks to good climate and rich history can claim only a Quality of Life Union. If the EU is to have force on the world stage as a political entity, fiscal union, greater redistribution of wealth, a defence and foreign policy and a constitution must be on its agenda. In reality, both the self-proclaimed federalists and the new wave of populist separatists are pulling in the opposite direction.