What are the Alternatives? Part Three: Capitalist Alternatives – A new European Union

Joe Carter

13  December 2010

A mixture of all the policies (excluding leaving the Euro) examined in these articles is possible, indeed has already been applied to a limited extent as we have noted.  The EU created its bail out fund instead of relying on the IMF and forced it onto the Irish State.  The ECB has bought Irish debt when no one else would at affordable interest rates and provided loans to Irish banks when no one else would.  It has thus in effect ‘printed money.’  It has however also claimed that it has ‘sterilised’ this operation by in effect reducing the money creating aspect of it by nullifying its effects through selling bonds elsewhere.  Even the EU has allowed the Irish state to pass some losses on to some subordinated bond holders of the banks.  All these also demonstrated that austerity is the key to all solutions.

The crisis has thrown into the foreground the fact that the EU as it currently exists cannot continue.  That default can come to represent a credible alternative to the Irish State and to other PIIG economies is in itself an indictment of its current situation and calls into question its future.  Relatively secondary measures compared to those discussed above are not being implemented despite their obvious attraction.  This includes the creation of a Euro bond with which all Eurozone countries could borrow, pooling the ability of the strong states to borrow cheaply with the inability of the weakest to currently borrow at all at affordable rates.

Such a policy would cost the stronger states a higher interest rate than they could command if they financed themselves on their own, an extra cost estimated to be €17 billion per year for Germany, but the benefits of commanding a larger market may be seen to outweigh this.  Commanding the market however is what would be required.  Germany will only defend the weaker Euro states if it has more control over the Eurozone.  Thus when Brian Lenihan complains that it was Angela Merkel who spooked the bond markets, and caused the interest charged on Irish debt to rise, by talking about measures to make bond holders suffer loss in the future the German attitude is essentially – tough!  The creation of common borrowing only ultimately makes sense if there is some common, i.e. German, control over spending.  This means increasing fiscal union; that is increased centralisation over how money is raised in each Eurozone state and how it is spent.

The crisis has demonstrated the fault lines in the Euro.  It either goes forward to cement these or it ultimately falls apart.  A common market ultimately needs a common currency and a common currency ultimately needs common controls (that work) over how that currency is spent.  The Irish State’s bluster about its corporate taxation policy is ultimately irrelevant in this larger EU agenda.  The ECB/EC/IMF deal spells it out.  Weekly reports, monthly reports and quarterly reports on economic performance by the Irish State to the EU and IMF and no more money unless you do as you are told.  It could not be clearer.  Those who complain about ceding no more power to the EU have failed to notice that it has already gone.

Nationalism

All the measures touted as answers to the debt crisis require enlarged central control by the EU.  A stronger European Central Bank with resources from the states to back bigger interventions including quantitative easing requires the fiscal resources of the Eurozone states and funding from the biggest states would only come with their greater say over how their money is used.  Increasing the intervention fund also increases the potential losses that would result upon default and those states funding it would therefore demand greater control to ensure the possibility of default is reduced.  The German State has not ruled out default but the destination of losses is obviously something every state will want a say in, with the biggest having the biggest.

For the smaller states the future promises further erosion of what sovereignty they possess, although erosion to too mild a word for the loss inflicted on Greece and Ireland.  For those would-be nation states looking on the European Union as a means of furthering ‘independence’ all this does not bode well.  The reactionary sections of Scottish society for example, who have thought that Scottish ‘independence’ within the EU was a credible alternative to a British State now have a difficulty in explaining exactly what the ‘independence’ part of the formula would amount to.  When one considers that Royal Bank of Scotland and Halifax Bank of Scotland were at the centre of the financial meltdown the policy of an independent Scotland within the EU looks like that of the Irish state which Scottish nationalists declared was their model of an alternative.  That is before it collapsed and the tartan nationalists were reduced to playing the old Brit card of the stupid Irish by blaming the demise of the Irish model on Irish ‘incompetence’.

The Irish state is now under the tutelage of the EU and to a lesser extent the IMF.  It is committed to selling off its banks to foreign control and also of selling its profitable state controlled assets.  With foreign control of the banking sector there is in theory no need for any national financial regulation so regulatory control of the banking system also goes abroad.  The name of Pat Neary, the old head of Irish regulation; plus those of Sean Fitzpatrick and Michael Fingleton, of the two worst financial institutions, would cause even the greenest Irish nationalist to pause for breath before declaring the benefits of native capitalist control of the financial system.  Not that foreign control would not have a deleterious effect.  It’s just that it is impossible to say that it would have a worse outcome than the complete collapse of the Irish owned and run system.

If ever nationalism has been discredited in practice, if not yet in theory for many people, this is it.  It is testament to the Marxist adage that consciousness lags behind events in the real world.

Radical

The point in this series of articles on the various capitalist solutions to the financial crisis is partly to determine whether the consciousness of the left also lags behind the real world.  The potential capitalist programme to provide a solution to the crisis can be quite radical, even without including leaving the Euro as the objective.

The ‘Financial Times’ columnist Wolfgang M?nchau has presented a possible capitalist alternative that looks very radical.  He proposes that the European Financial Stability Facility take over control of the banking system, that it shrink the size of the European banking system and that the Irish State revokes its bank guarantee and defaults on at least part of the debt on the grounds it cannot be paid anyway.  This amounts to effective state control of the banking system and reducing the power of a section of financial capital including imposing losses on it.  All this would require a radically reformed European Union with a new European Treaty to bring it into force.  It would require a radical new institutional architecture at the European level to enlarge the role of the EU institutions so that Euro-bonds could be issued on behalf of the whole Eurozone.  Like all radical proposals he has been challenged as to its realism and responded with the observation that the realism of his proposals stand favourable comparison with the realism of supposing that continuation of current policies will result in anything but failure.

There should be no confusion that this is indeed a capitalist alternative.  Effective state control of the banking system is not socialism, although some on the left go about with all the appearance that they believe it is.  Control by the capitalist state is always control in order to defend the system, if necessary against individuals or sections of the capitalist class who, in their recklessness and greed, imperil its future.  Nor is imposing losses on bondholders an anti-capitalist measure.  Indeed the most rabid defenders of capitalism on the right are vehemently in favour of such a policy since reward for risk and punishment for failure is for them what makes capitalism the dynamic and most desirable economic system possible.  The policy of shrinking the banks so that they are no longer too big to fail but also too big to bail out has been in discussion since the credit crunch revealed that the losses an unrestrained financial system could run up threatened the stability of the whole system.

As we have noted there are undoubtedly political obstacles to achievement of such a radical capitalist alternative, which nevertheless we have seen real and important steps taken towards the realisation of over the last period.  Certainly the nationalist objections of small nations like Ireland, whose State cannot even formally speak for all its people in all its territory, will be no insuperable barrier.  Of much more significance will be the stronger nationalism of Germany and other bigger powers, which will thus perhaps impose greater costs on smaller states.

The alternative to even the most radical of capitalist solutions is not to relapse into nationalism, even while for socialists any democratic content to national demands must be addressed.  The power of the nationalism of the PIIGS can only be as strong as that of the state muscle they wield, which hardly tips the scales against the power of the German and other big states.  The United States has also shown itself to be a supporter of closer European integration and revealed obvious concern at the prospect of a break up of the EU.

Deficit

The most radical policies of the capitalist class will still require the working class to pay, even if this can be better managed or even spread to other classes through such means as monetising the debt, ‘printing money’, and inflating away the real value of the obligations.  Even default, while imposing losses on the banks of other countries will see the states of these countries bail out these banks with funds provided by taxing its working class.  Nationalist solutions are thus against the interests of Irish workers because they shut them off from unity with those suffering exactly the same exploitation and who have exactly the same interest in ending the attacks on their living standards which are required to maintain an irrational financial system.

Whatever solutions are applied to the banking problem or the crisis of sovereign debt would still leave that of the underlying budget deficit, which in Ireland continues to be about 12 per cent of GDP or around €19 billion.  Even the inflationary consequences of a policy of monetising the debt would still leave a huge gap between what the capitalist state raises in revenue and what it spends.  All the various capitalist solutions that envisage a return to business as usual are understandably based on the economy functioning the same way.  In other words the working class continuing to provide the means to economic growth through competitive restraint of wages, reduction of pensions, elimination of services and tax increases etc.

Ultimately all capitalist solutions involve the exploitation of the working class and an intensification of this exploitation when the capitalist system erupts in its inevitable periodic crises.