Debt, Discipline And Democracy In Europe

Engelbert Stockhammer

On the 5^th of July one of two things will end: either Greek democracy as regards economic policy or Greece’s Euro membership. Not a pleasant choice. Negotiations between the left-wing Greek government and the Troika had made little progress over the last months. When prime minister Alexis Tsipras announced a referendum on the Troika’s final offer, the reaction was swift. Democratic decision-making is not part of economic policy making in Europe. Fiscal policy has to follow the rules and debt has to be serviced.

According to the European Commission the Greek government has unilaterally left the negotiating table. The German finance minister, Wolfgang Schäuble, and the head of the Eurogroup and Dutch finance minister Jeroen Dijsselbloem, thus concluded that the Greek rescue plan ends on Tuesday. The ECB is pulling the plug and has announced that it will not increase the size of the Emergency Liquidity Assistance (ELA). Less technically: no further short-term money for Greek banks. Greek banks are in intensive care. The ECB’s doctors haven’t switched off life support, but they have powered it down. Greece’s Euro membership has effectively been suspended. As a consequence Greek banks have been shut down and cash withdrawals have been rationed. The Greek people should experience, before the referendum, what life is like without the Euro.

This a disaster for Europe, both in terms of democracy and its economics. The message to the Greek people, and indeed to all Europeans, is that they have to accept the German finance ministry’s right to guide national policies and that austerity and deregulation is the only way to conceive of economics. This is a distinctly Germanic kind of neoliberalism and it is brutal. Syriza is a challenge to European elites and it has to be silenced. The ongoing depression in Greece and the desperation of the Greek population are just collateral damage in a Holy War of economic orthodoxy against a left-wing alternative. For the German government and European elites these negotiations have always been about regime change as much as they were about economics.

While it is a tragedy, it is not entirely surprising. What else would one expect a conservative government in Berlin to do? It skilfully used the negotiations to expose the contradictions of Syriza’s economic strategy and it mercilessly used the debt rollover and Greece’s fragile banks to pressurize the Greek government. It is clear to any economist, even the German ones, that Greek debt will not be repaid in full. The reason it has not been cut is that it’s useful because it means that every month the Greeks have to come back, asking for an extension of the debt. Debt, here, is about discipline and service, not about repayment. The main constraint on the neoliberal strategy was contagion. In 2010 and 2011 financial markets quickly spread the sovereign debt crisis and banking crisis across southern Europe. That made it difficult to punish Greece and no one knows if the ghost of contagion will return in a week’s time; but for now the German and the Dutch finance ministries have convinced themselves that the fallout will be manageable.

The German neoliberal strategy of austerity and regime change makes sense – within its mindset and aims. But the German government is a coalition government and the German social democrats have, despite some opposition from their trade union wing, supported this line, as have the French and Italian social democrats. Their behaviour is shameful and, ultimately, self-destructive. In their urge to punish the party that has electorally wiped out their Greek sister party, PASOK, they have signed up to tightening the straightjacket on fiscal policies. Balanced budgets have become the Holy Grail of economic policy. Balanced budgets are to be written into national constitutions, they are to be supervised by the European Commission and deficits need to be automatically reduced if debt is too high. Never mind if capitalism creates mass unemployment or occasional financial crises. Just balance the books.

By agreeing to this the social democrats have signed a pact with the devil. It was not Syriza that killed PASOK, but an economic crisis that has, for Greece, the dimensions of the Great Depression. What social democrats should have done, and what most of their voters expect them to do, is strengthen social safety nets and use the state to create jobs via spending. In fact they have signed up a to economic policy regime that makes that impossible.

The ECB played a vital part in establishing the new policy regime. As an independent central bank it is itself a child of the neoliberal spirit, that wants economic policy to follow rules and distrusts democratic decision-making. It is also wedded to fiscal orthodoxy, but it was one of the few players that had a genuinely European perspective. The survival of the Euro, in its current form, and the survival of southern European banks always featured higher on the ECB’s priority list than on Germany’s. The ECB also saw an enormous increase in its power. Unlike other central banks, it does not face one state, but several of them. As some of these states were cut off market finance and had lost their own central banks, the ECB gained a key role. For months now, it has been the ECB’s ELA program that kept Greek banks alive.

The ECB position is unique for a central bank as it is able to decide whether (or with what haircut) it will accept its member states’ government bonds as security. It is unthinkable that, say, the Fed, announces that it will not accept US bonds anymore. The Fed is part of the American state; it can’t opt out of US government bonds. Not so the ECB. The neoliberal claim of central bank independence here has been inverted. Not only does the ECB suggest fiscal policy as part of the troika, but governments with vulnerable banking systems can easily be blackmailed by the ECB. And it has played the role of keeping the pressure on the Greek government, without pushing it over the brink. That was left to the Eurogroup and Germany.

Next weekend the Greeks have the choice between a rock and a hard place. The Eurogroup has made clear that there is no Euro without austerity. And there is no negotiation with Syriza. In Euroland, it seems, people have a choice of parties, but no choice of policy. An exit of the Euro will be painful, both in economic and political terms. It will lead to a fully blown banking crisis and the Greek middle class will lose much of their modest financial wealth (the rich have probably transferred most of theirs out already). The choice is between a certain crisis with dignity and isolation and a prolongation of the present crisis with ECB life support for the banks. Whatever the Greeks decide, the real victim is democracy in Europe. On 5 July we will learn whether democracy will henceforth take place outside the European Union, or whether we give up on it in exchange for the Euro.