Britain and the Crisis of the European Union

David Baker, Pauline Schnapper

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137005205
• Topic: Politics & International Relations
• Subtopic: European Politics
• Index: Politics & International Relations

This book centres on the effects of the political and later economic crisis which seriously affected the European Union and its impact on the seemingly endless UK debate over Britain's position within the EU.

1

The Political Economy of the Eurozone Crisis

We begin with the wider context of our study, the economic crisis of the EU, since many of the recently heightened political and institutional problems relating to the UK which we cover elsewhere in the book have been exacerbated by the EZ’s economic crisis. We look at how it unfolded and how, in well under a decade, a Europe of growth and growing prosperity was replaced by one of insolvent banks, austerity, mass unemployment, street protests and sluggish or negative growth. Together this has encouraged the growth of negative attitudes towards the EU, expressed as political extremism, and (especially in the UK) euroscepticism and hostility towards federalism, as well as reigniting the ‘German question’ – how to curb the excessive influence of a state too powerful for its geopolitical context (Stevens 2014). Jean Monnet famously remarked that ‘Europe will be forged in crises, and will be the sum of the solutions adopted for those crises’, but it is doubtful that he envisaged such a traumatic and dangerous crisis, or such a Germanic solution (Bergsten and Kierkegaard 2012: 1).

The meltdown of the global economy in 2007–2008 sparked by the subprime lending disaster in the USA and transmitted globally by the seizing up of the interbank lending system was the product of a number of intersecting factors. These included the under regulation of increasingly globalised finance; lax credit facilities which encouraged high-risk ‘smart’ investments with associated excessive high-risk borrowing and lending; dangerous trade imbalances both within the EU and internationally; real-estate bubbles which European banks became major players in funding; and insufficient non-financial economic growth and questionable policy choices relating to government revenues and expenses.

The EZ’s sovereign debt crisis, which began in 2010, represents the second stage of this global financial meltdown, bringing with it serious repercussions for the EZ and EU. This secondary crisis arose from the transfer of private debt into public debt on an enormous scale as all member-states, but especially the weaker EZ economies, sought to bail out their bankrupt banks and service rising interest payments on their pre-existing sovereign loans while interest rates rose to penal levels. Global hedge funds and investment banks responded to perverse incentives in financial markets by refusing to purchase the government bonds of the debtor states, in part to raise interest rate returns on future loans and in part to force sovereign defaults in order to claim Credit Default Swap insurance payments (Blyth 2013: 78–93). Thus, as one shrewd commentator ruefully observed of the EMU system, ‘the euro’s architecture makes bond markets master of national governments’ (Palley 2013: 43).

This secondary impact of the wider global Great Recession also undermined the community solidarity of member-states, creating a ‘beggar my neighbour’ negotiating stance and, through harsh austerity measures, led to the geographically and socially selective impoverishment of millions of EU citizens, while capital flight protected and even enriched their wealthy fellows, ensuring that many definitely didn’t feel that they were ‘all in it together’. The huge costs of bailing out unrepentant banks and unappreciative debtor states also outraged Northern European taxpayers in particular. Meanwhile, in the debtor states fierce anger exploded onto the streets aimed against those foreigners and their local proxies who had forced their countries into bearing the burden of paying down sovereign debt, at the cost of haemorrhaging of jobs, housing and social provisions and selling off of state assets. Finally, the crisis accelerated economic migration across the EU, with the UK in the front line of this process, provoking widespread anger in local communities subject to competition for low-paid jobs, housing, education and social provision (Ford and Goodwin 2014: 141–182).

The initial response of the EU authorities was to continue to pump increased capital and liquidity to the insolvent national private banking systems, while enforcing ever deeper austerity on the debtor states imposed through the ‘troika’ (Commission, IMF and ECB) in exchange for bail-out loans (Krugman 2012, Blyth 2013, Fazi 2014). Austerity measures included state cutbacks, shedding labour to restructure the economy, selling off state assets and privatising the economy and reductions in pensions and state welfare entitlements. This led to unprecedented levels of unemployment in the debtor states, reducing tax takes, helping to further transform an insolvent private banking crisis to a sovereign debt crisis. The weaker EZ economies (Portugal, Ireland, Italy, Greece, Spain, the so-called PIIGS, joined later by Cyprus) were unable to borrow by selling sovereign bonds in global markets to service their debts because of high interest rates with credit-rating agencies downgrading their ratings. PIIGS came close to default and were forced to seek loans from the emergency funds administered by the ‘troika’, the quid pro quo for which was further austerity measures, creating further mass unemployment, and further undermining social welfare provisions, so further reducing the tax take (Patomaki 2012: 28–56, Fazi 2014: 1–37).

At best the EU’s response appeared sluggish, fragmented and fractious, based on improvisations agreed in closed and sometimes secret meetings, with leaders of the weaker economies reduced to pawns in an EZ game dictated by Germany and its proxy instrument, the ‘troika’. The European Parliament (EP) was also sidelined with decisions made by unelected officials, finance ministers and heads of the most powerful states reinforcing long-running perceptions of a deepening democratic deficit, with remote officials running the EU/EZ, with Germany, ‘the paymaster of Europe’ calling the shots, whilst itself profiting the most from the EZ and single-market rules. The crisis had also awoken powerful forces in Germany pushing for a fully federalised core EZ to stabilise the fiscal and monetary systems, preventing a recurrence of this economic imbroglio and (they assumed) restoring the steady growth of prosperity on which the EU depended for legitimacy.

Crucially, as we develop in the following chapters, the crisis also opened up even greater economic and political distance between the EU and the UK, further emboldening British eurosceptics and silencing pro-EU sentiments, threatening to tip the UK into leaving the EU entirely, or at best drive it further towards the outer circle of semi-detached membership for decades to come (Baker and Schnapper 2012, Geddes 2013: 252–260, Marsh 2013: 102–107).

Anglo-American debt-led financialisation was, of course, deeply implicated in the EZ debt crisis, by creating what Warren Buffet referred to as ‘financial instruments of mass destruction’ which, along with excessive risk taking and easy rewards infected the European banking system to its core (Buffet 2002, Blyth 2013: 21–56). In the wake of the banking and sovereign debt crises the EU, along with the USA, was the most indebted economic bloc. In the first financial quarter of 2013, government debt in the 17 states in the EZ reached a record average of 92.2% of GDP despite large-scale austerity measures. Total debt stood at $11.4 trillion (8.75 trillion euro), rising from 8.34 trillion euro in 2012, a rise of 4.0% year-on-year (Eurostat 2013). And herein lay the roots of the present crisis.

The Eurozone: A crisis waiting to happen

The causes which underlie the crisis in the EU rest upon a number of political, ideological and institutional pillars, stretching back to the early 1980s with the ‘Paris Consensus’, which launched an insidious process of political and institutional path dependency which has propelled the EU/EZ into a long-term crisis from which they show little sign of emerging (Gamble 2014). The chief causes centre on a number of interlinked processes: the flawed institutional architecture of the euro system itself, creating monetary without fiscal union, and lacking a state lender in the last resort; the ‘neoliberalisation’ of the EU’s economic integration process which ignored the increasing exposure of European banks to global market practices; and since the crisis a slavish adherence to an ordoliberal austerity solution and the amplification of the already adverse terms of trade between most of Europe and the neo-Mercantilist German economy.

High-risk speculative financialisation (casino capitalism) spread throughout the mainland European banks via an insidious mechanism in which the euro system reduced the weaker states’ borrowing costs almost to German levels, encouraging reckless lending of surplus capital by northern European commercial banks via the purchase of high-risk sovereign debt bonds in the southern EZ states and funding their inflated private property markets, while cross-investing in high-risk sub-prime ‘assets’ and other ‘innovative’ financial assets (CDS, CEOs, etc.) through the ‘Repo Markets’ in London and New York. In short, risky secondary bank-to-bank borrowing on short contracts lent over longer periods at higher rates of interest (Blyth 2013: 78–86, Palley 2013: 33–41).

This led to the development of massively over-leveraged European banking conglomerates and regional banks, which became individually and collectively ‘too big to bail’ across the EZ, as Mark Blyth explains:

The top two German banks had assets equal to 114 percent of German GDP. In 2011, these figures were 245 percent and 117 percent, respectively. Deutsche Bank alone had an asset footprint of over 80 percent of German GDP and runs an operational leverage of around 40 to 1 … The top four UK banks have a combined asset footprint of 394 percent of UK GDP. The top three Italian banks constitute a mere 115 percent of GDP … In the periphery states the situation is no better. Local banks weren’t going to miss out on the same trade, so they bought their own sovereign debt by the truckload … No sovereign, even with its own printing press, can bail out a bank with exposures of this magnitude.

(Blyth 2013: 82–83)

In the immediate aftermath of the global crash this caused a huge rise in public debt as Germany refused to allow an EZ-wide funded bail-out, fearing ‘moral hazard’ would occur if individual states did not stand by their national banks. In the USA the fully federal system ensured that the weaker states like Wyoming were partly bailed out by the tax dollars of the strongest states, such as California and Texas. In contrast, weaker European states were forced to bail out their own banks by borrowing at rapidly rising rates to pay off their creditors, so transferring private debt into national public debt.

Contrary to the standard myth that the levels of EU-wide public (sovereign) debt were largely due to years of state mismanagement, corruption and excessive expenditure, much of the sovereign debt was actually the result of this necessary bailing out of the private banks. Thus, as Krugman and Layard suggest: ‘the large government deficits we see today are a consequence of the crisis, not its cause’ (Krugman and Layard 2012: 63). The one clear exception is Greece where state corruption and profligacy added greatly to rapidly rising private debt and bank malpractices (Blyth 2013: 62–73). The widespread political and electoral success of this false premise, which turns a manifest crisis of private debt into a simple trope of profligate state spending and management, was described by Mark Blyth as the ‘greatest bait and switch [misdirection trick] in modern history’ (2013: 73–74).

The fatally flawed architecture of the EMU created a European Central Bank (ECB) forbidden (through Germany’s insistence) to act as a true lender of last resort. In addition, falling borrowing costs occurred across all the EZ states because they were now valued in line with the strength of the German economy, encouraged German and French commercial banks to lend to banks and investors in the increasingly less competitive southern EZ states. These states set about employing the funds to artificially inflate their economies, consuming German goods, building grand projects and, in the case of Ireland and Spain, stoking property booms. With interest rates across the EZ converging, investors and private individuals in PIIGS were able to borrow from northern commercial banks at low interest rates often to buy German goods and expertise. This in turn boosted the German export-led economy much more than a higher valued Deutschmark would have permitted. Finally, these fatally interwoven developments secured for Germany (whether it sought it or not) first economic supremacy and, after the global collapse of 2008, political hegemony over the EU and its future direction.

The EZ banking system is perceived by many EU leaders and officials as too big to bail-out a second time. Another banking collapse, whether precipitated by a state leaving the Euro or another external financial shock, could take the still indebted and overleveraged German and French banks and therefore the whole system down with it. Hence the huge pressures applied to PIIGS to rapidly put their houses in order and reduce their sovereign debt levels, through the strict application of ‘Sado-Monetarist’ solutions. They were informed that to default and leave the EZ would be catastrophic for their economic growth and social cohesion (Blyth 2013: Ch. 3, Marsh 2013: Ch. 6, Fazi 2014: Ch. 4).

As Heikki Patomäki has observed:

The difficulties facing the European Monetary Union have been primarily caused by the asymmetries in the formation of overall demand in the European political economy as a whole, and also by the institutional arrangements and restrictions that were put in place by the Maastricht Treaty. Global financial markets have intensified these difficulties by first causing the 2008–09 financial crisis, and then by dramatically increasing the costs of debt of the worst-hit countries.

(Patomäki 2013: 79)

Patomäki’s reference to the impact of global financial markets refers to those hedge and other ‘vulture funds’ which engaged in speculative attacks on PIIGS, and cynically loaded up with their public debt in anticipation of debt failure, thereby collecting insurances they had taken out to protect against this, in the full knowledge that the insolvent countries couldn’t escape by devaluing currencies inside the EZ. On top of this the deeply flawed EZ financial architecture institutionalised a situation in which the member-states remain locked into an uncomfortably high-value euro currency largely dictated by the powerful low wage, high productivity, high capital value, export-orientated German economy, so further reducing the competitiveness of their goods and services and increasing the costs of servicing their huge debts (Palley 2013: 42).

A potential economic ‘death spiral’ of stagnation and deflation has been reinforced by a series of ‘rescue’ bail-outs by the ‘troika’ made contingent upon the imposition of harsher and harsher levels of austerity, which has impoverished many vulnerable citizens and led to further capital flight and falling tax takes, weakening economies still further and leading to years of negative, or at best stagnant, growth (Patomäki 2012: 57–81, Blyth 2013: 82–93, Palley 2013: 33–45). The causes of this sorry turn of events have been succinctly summarised by Dyson:

The result of this process … was an EMU project that Europeanized German monetary power on strict Ordoliberal conditions … from the outset, the asymmetry between economic and monetary union added to the sense of a precarious imbalance at the heart of the project. It was vulnerable to asymmetric shocks, to cross-national banking crises, to fiscal indiscipline and to divergences in competitiveness [between its member-states]. Monetary union [also] lacked the supportive infrastructure of a political union.

(Dyson 2012: 197)

The sense of interstate solidarity and shared European purpose was undermined by the creation of clear winners (creditor states) and losers (debtor states) while exacerbating differences within the Franco–German alliance (as France struggled to endorse German solutions which undermine its own free market economic position). It also revealed Germany’s growing position as the unrivalled hegemon within the EZ/EU. As Paterson suggests, the crisis has ‘made Germany much more of an awkward partner, much less able to operationalise the Franco–German relationship to deal with the Eurocrisis … Chancellor Merkel has increasingly stressed the Franco–German relationship, but this emphasis remains more at the level of presentation than substance’ (Patterson in Hayward and Wurzel 2012: 247).

Equally damaging, Germany and other creditor states view the debtors as profligate, lazy, inefficient and hooked on support from the creditor’s tax payers. In response, many in the debtor states see their former European partners as little more than self-interested dictators, profiteering from their misfortunes and allowing their own wealthy citizens to export their wealth abroad and buy up former state assets at ultra-low prices.

Solidarity has also been fractured within the debtor states, distancing themselves from Greece, as well as selectively from each other. Several states, Ireland in particular, vie to be the poster child for the success of austerity, claiming to have successfully restructured their economies and become ‘competitive’ again; while others, especially Greece, but also Italy and Spain, chafe against the destruction of their social solidarity under austerian measures, which they see as destroying their societies and threatening the future prosperity of all Europe. In July 2011, Italian Finance Minister Giulio Tremonti observed that creditor states, by demanding unreasonable levels of austerity, were risking becoming first-class passengers on the Titanic (Dyson 2012: 193).

The Eurozone crisis: An analytical chronology

The EZ crisis developed in two overlapping periods. The first, although stretching back to the foundations of the EC, began in earnest with the signing of the Maastricht Treaty in 1992, formalising the ‘road map to Monetary Union’ and ended with the EU’s initially sluggish response to the global economic meltdown of 2007–2008; the second phase began in 2009 with serious attention being paid to bailing out the European banking sector, and shifted up another gear in 2010 with the appearance of the sovereign debt crisis in the EZ. This second phase has been marked by a mixture of crisis management and austerity applied inside the EZ and wider moves in the EU to transfer to a still ongoing ‘more Europe’ solution.

Phase one: From Maastricht to Meltdown

A full currency union always represented the Holy Grail for committed European federalists, representing the last and arguably most significant building block in an ongoing teleological process designed to propel Europe towards a prosperous fully federal state and economic super power. Thus, Article 2 of the Treaty of Rome made explicit the long-term goal:

The Community shall have as its task, by establishing a common market and progressively approximating the economic policies of member states’. [Privileging] the free movement of persons, services, goods and capital … The market being based on the principle of free competi...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures
• Acknowledgements
• Introduction
• 1. The Political Economy of the Eurozone Crisis
• 2. British Preferences in the European Union: Unsung Success
• 3. Euroscepticism in Britain: Cause or Symptom of the European Crisis?
• 4. The Crisis of Democracy in the United Kingdom
• 5. Britain and the Political Crisis in the European Union
• 6. Britain and the Economic Crisis of the European Union
• Conclusion
• Notes
• Bibliography
• Index