If the European Left Doesn’t Step Up to Take on Capitalism, the Right Will Pounce

The left must respond to the economic crisis to defeat the right-wing lurch towards nationalism and racism.

Conn Hallinan June 15, 2017

The front page of Le Figaro shows the percentage of the vote earned by Macron (23.7%) and Le Pen (21.9%) after the first round of the French Presidential election, according to near-final results from the interior ministry. Far-left candidate Mélenchon (Chesnot/Getty Images)

This sto­ry first appeared at For­eign Pol­i­cy in Focus.

Capitalism went through another structural crisis at the end of the 1970s, and it is the fallout from that one that currently plagues the EU—and the U.S.

The good news out of Europe is that Marine Le Pen’s neo-Nazi Nation­al Front took a beat­ing in the May 7 French pres­i­den­tial elec­tion. The bad news is that the pro­gram of the win­ner, Emmanuel Macron, might put Le Pen back in the run­ning six years from now.

Macron pledges to cut 120,000 pub­lic jobs, reduce spend­ing by 60 bil­lion Euros, jet­ti­son the 35-hour work­week, raise the retire­ment age, weak­en unions’ nego­ti­at­ing strength and cut cor­po­rate tax­es. It’s a pro­gram that is unlike­ly to revive the mor­bid French econ­o­my, but it will cer­tain­ly wors­en the plight of job­less youth and seniors — and hand the Nation­al Front ammu­ni­tion for the 2022 election.

Europe is enmeshed in an eco­nom­ic cri­sis brought on by the struc­ture of the Euro­pean Union on one hand and the nature of cap­i­tal­ism on the oth­er. That con­ver­gence has derailed economies through­out the 27-mem­ber trade group, impov­er­ished tens of mil­lions and helped con­jure up racist, right-wing move­ments that aren’t like­ly to be deterred by a few elec­tion losses.

Obscur­ing the roots of this cri­sis is the myth that debt is the result of spend­thrift behav­ior, the eco­nom­ic slug­gish­ness a con­se­quence of high tax­es and rigid labor rules that hand­cuff busi­ness­es and inhib­it growth. Ger­man Chan­cel­lor Angela Merkel is fond of say­ing that coun­tries should behave like a fru­gal Swabi­an house frau.”

Is Merkel’s obser­va­tion based on a myth or is it alle­go­ry? While an alle­go­ry is the fig­u­ra­tive treat­ment of one sub­ject under the guise of anoth­er,” a myth is an unproven or false col­lec­tive belief that is used to jus­ti­fy a social insti­tu­tion.” While the dif­fer­ence may seem pedan­tic, it’s any­thing but.

And because myths are par­tic­u­lar­ly hard to dis­lodge once they become wide­spread, it’s essen­tial to unpack exact­ly how the EU got itself in trouble.

The Nest­ed Crises of Capitalism

Part of the prob­lem is cap­i­tal­ism itself, an eco­nom­ic sys­tem that gen­er­ates both enor­mous pro­duc­tive capac­i­ty and eco­nom­ic chaos.

Cap­i­tal­ism is afflict­ed by two kinds of cri­sis: cycli­cal and struc­tur­al. The cycli­cal ones — reces­sions — tend to occur pret­ty much every 10 years. The U.S. and Europe went through reces­sions in the ear­ly 1980s, ear­ly 1990s and the first years of 2000. They are painful and unpleas­ant but gen­er­al­ly over in about 18 months.

Every 40 or 50 years, how­ev­er, there’s a struc­tur­al cri­sis like the 1929 crash and the ensu­ing Great Depression.

When a struc­tur­al cri­sis hits, cap­i­tal­ism re-orga­nizes itself. In the 1930s, the solu­tion was to cre­ate a redis­trib­u­tive cap­i­tal­ism that used the pow­er of the state to prime the eco­nom­ic pump and alle­vi­ate some of the chaos that accom­pa­nies such re-orga­ni­za­tions. Unem­ploy­ment insur­ance and Social Secu­ri­ty took some of the edge off the pain, pub­lic works absorbed some of the job­less and unions got the right to orga­nize and strike.

Cap­i­tal­ism went through anoth­er struc­tur­al cri­sis at the end of the 1970s, and it is the fall­out from that one that cur­rent­ly plagues the EU — and the U.S. Using the 1979 – 1981 reces­sion as a screen, tax­es on cor­po­ra­tions and the wealthy were slashed, busi­ness and finance de-reg­u­lat­ed, pub­lic insti­tu­tions pri­va­tized and unions assault­ed. Cap­i­tal­ism also went global.

Glob­al­ism did spur enor­mous growth, but with a deep flaw. With unions weak­ened — in part by direct attack, in part by the enor­mous pool of cheap labor now avail­able in the devel­op­ing world — wages either stag­nat­ed or fell in Europe and the U.S., and the gap between rich and poor widened. A 2015 study by Oxfam found that 1 per­cent of human­i­ty now con­trols over half the world’s wealth, and the top 20 per­cent owns 94.5 per­cent. In short, 80 per­cent of the world gets by on just 5.5 per­cent of the world’s wealth.

This isn’t just a prob­lem for the devel­op­ing and under-devel­oped world. Ger­many has the biggest econ­o­my in the EU, and the fourth largest in the world. In 2000, Germany’s top 20 per­cent earned 3.5 per­cent more than the bot­tom 20 per­cent. Today that num­ber has increased five times. For the bot­tom 10 per­cent, income has actu­al­ly fallen.

If that Swabi­an house frau is among that 10 per­cent, it doesn’t make a whole lot of dif­fer­ence how fru­gal she is — she’s broke.

Bail­ing Out the Speculators

Glob­al­iza­tion gen­er­at­ed insta­bil­i­ty by cre­at­ing a cri­sis of accu­mu­la­tion. A few peo­ple had lots of mon­ey, but far too many had very lit­tle, cer­tain­ly not enough to absorb the out­put of the glob­al econ­o­my. Glob­al cap­i­tal­ism was awash with cash, but where to use it? The answer was finan­cial spec­u­la­tion — espe­cial­ly since many of the restraints and safe­ty mea­sures had been removed through deregulation.

For Europe, most of that spec­u­la­tion went into land. Land prices in Spain and Ire­land rose 500 per­cent from 1999 to 2007. In the case of Ire­land, it was almost unre­al. Irish real estate loans went from 5 bil­lion Euros in 1999 to 96.2 bil­lion Euros in 2007, or more than half the GDP of the Irish Repub­lic. Over the same peri­od, Euro­pean house­hold debt increased on the aver­age by 39 percent.

That this was a bub­ble was obvi­ous, and all bub­bles pop soon­er or lat­er. This one explod­ed in the U.S. in late 2007 and quick­ly spread to Europe.

What’s impor­tant to keep in mind is that the EU coun­tries that got in trou­ble were hard­ly spend­thrifts. Spain, Por­tu­gal, and Ire­land all had mod­est debt ratios and bud­get sur­plus­es at the time of the crisis.

The prob­lem was not prodi­gal gov­ern­ments but a sud­den hike in bor­row­ing rates, which made it expen­sive to finance gov­ern­ment oper­a­tions. That was cou­pled with a deci­sion to use tax­pay­er mon­ey to bail out banks that had got­ten them­selves in trou­ble spec­u­lat­ing on real estate. Essen­tial­ly, ordi­nary Por­tuguese, Spaniards, Greeks, and Irish picked up the debts of banks they had nev­er bor­rowed any­thing from.

Irish tax­pay­ers shelled out 30 bil­lion euros to bail out the Irish-Anglo bank, a fig­ure equiv­a­lent to the Republic’s tax rev­enues for an entire year. Since none of these coun­tries had that kind of mon­ey on hand, they applied for bailouts” from the Inter­na­tion­al Mon­e­tary Fund, the Euro­pean Cen­tral Bank, and the Euro­pean Com­mis­sion, the so-called troi­ka.” Some 89 per­cent of those bailouts went to banks. The day the Greek bailout was announced, French bank shares rose 24 percent.

It was not that EU coun­tries were debt free. But in 2014, the Com­mit­tee for a Citizen’s Audit on the Pub­lic Debt found that between 60 and 70 per­cent of those debts were due not to over­spend­ing, but instead to tax cuts for cor­po­ra­tions and the wealthy, and increas­es in inter­est rates. The lat­ter favors cred­i­tors and spec­u­la­tors. The com­mit­tee found that most deficits were the result of polit­i­cal deci­sions” that shift the wealth from one class to another.

In the long run, some of that debt will have to be for­giv­en because it is sim­ply unpayable. The 1952 Lon­don Debt Con­ven­tion that cut Germany’s post-war debt and ignit­ed an eco­nom­ic revival could serve as a template.

We Can­not Pos­si­bly Let an Elec­tion Change Anything”

Con­verg­ing with this cri­sis of cap­i­tal­ism is the way the EU is struc­tured, although the two are hard­ly inde­pen­dent of one anoth­er. Many of EU’s stric­tures were specif­i­cal­ly designed to favor cap­i­tal and finance and to mar­gin­al­ize the con­trol that the Union’s 500 mil­lion mem­bers have over eco­nom­ic matters.

The first prob­lem is that all eco­nom­ic deci­sions are made by the troi­ka,” an unelect­ed body that answers to no one. There is a Euro­pean Par­lia­ment, but it has lit­tle pow­er or con­trol over finance. The same is true for EU mem­ber gov­ern­ments. When for­mer Greek Finance Min­is­ter Yanis Varo­ufakis told Ger­man Finance Min­is­ter Wolf­gang Wolf­gang Schauble that his left-wing Syriza Par­ty was elect­ed to resist the aus­ter­i­ty poli­cies of the EU, Schuable replied, We can­not pos­si­bly let an elec­tion change anything.”

The sec­ond prob­lem is that nation­al gov­ern­ments have no con­trol over the val­ue of the euro. Of the EU’s 27 mem­bers, 19 of them use the com­mon cur­ren­cy and make up the Euro­zone. Germany’s con­di­tion for giv­ing up the mark and adopt­ing the euro was that Euro­zone mem­bers were required to keep bud­get deficits to no more than 3 per­cent of nation­al income, and debt lev­els to no high­er than 60 per­cent of GDP. While that for­mu­la works well for Germany’s pow­er­ful export mod­el, it doesn’t for a num­ber of oth­er Euro­zone economies.

The Euro’s val­ue is set by the Euro­pean Cen­tral Bank, which means that mem­bers can­not deval­ue their cur­ren­cy — a com­mon strat­e­gy for deal­ing with debt, and one near and dear to the U.S. Trea­sury. As long as it’s smooth sail­ing, this rule works, but when a finan­cial cri­sis hits, the com­mon cur­ren­cy and the debt restric­tions can mean big trou­ble for the small­er, less export-cen­tered economies.

When the finan­cial bub­ble popped in 2008, coun­tries like Italy, Spain, Por­tu­gal and Ire­land — and to a cer­tain extent, France — saw their debts soar, with strate­gies for deal­ing with it ham­strung by the Euro­zone rules.

And that’s when the third prob­lem with the Euro­zone kicked in. While there is a com­mon cur­ren­cy, there is no shar­ing of debt through tax receipts. In a sin­gle cur­ren­cy sys­tem like the U.S., pow­er­ful economies in Cal­i­for­nia and New York pay for bills in poor­er places like Mis­sis­sip­pi and Louisiana.

Some 44 per­cent of Louisiana’s state bud­get is paid for by the fed­er­al gov­ern­ment, which col­lects tax­es in wealthy states and doles out some of it to regions whose economies are either too small or inef­fi­cient to meet their bud­get needs. If you get into trou­ble in the Euro­zone, on the oth­er hand, you’re on your own.

While the EU has been good for banks and coun­tries like Ger­many and Aus­tria, it hasn’t been so good for many oth­er mem­bers. Apply­ing aus­ter­i­ty as a cure for debt doesn’t cure the prob­lem, it just cre­ates a spi­ral of more debt and yet more aus­ter­i­ty. As Rana Foroohar, busi­ness colum­nist for the Finan­cial Times put it, No nation can grow when the con­sumer, the cor­po­rate sec­tor and the pub­lic sec­tor stop spending.”

Because most of Europe’s cen­ter-left par­ties bought into the aus­ter­i­ty-as-a-cure-for-debt for­mu­la, they have been dev­as­tat­ed at the polls. The Dutch Labor Par­ty was crushed in the last elec­tion, the French Social­ists got less than 7 per­cent of the vote and the Span­ish Social­ists are bare­ly keep­ing ahead of the much more left-wing Podemos Par­ty. The Ital­ian Social­ist Par­ty has dropped over 15 points in the polls and is now run­ning behind the rather bizarre Five Star Move­ment. The Greek Social­ists are a footnote.

Signs of Life on the Left?

The les­son for the left would seem to be that mov­ing to the cen­ter or the right is a pre­scrip­tion for elec­toral disaster.

True, Macron’s new cen­trist par­ty, En Marche, did win big in France’s recent leg­isla­tive elec­tions — but most­ly due to the anti-Le Pen vote. His pro­gram of aus­ter­i­ty, restraints on unions and cor­po­rate tax cuts is not embraced by most French peo­ple. Though he appears like­ly to win a deci­sive major­i­ty, he plans to push the mea­sures through by decree if he doesn’t.

It’s unlike­ly that such a cen­trist pro­gram will do any­thing to reduce France’s unem­ploy­ment rate — 9.6 per­cent over­all and 25 per­cent among youth aged 18 to 29 — or lift the econ­o­my. Labor reform” and aus­ter­i­ty don’t jump­start economies, and tax cuts have an equal­ly drea­ry record.

Indeed, as Foroohar points out, there’s not a sin­gle exam­ple in the last 20 years where tax cuts for busi­ness­es or the wealthy stim­u­lat­ed an econ­o­my. Indeed, the eco­nom­ic surge in the 1990s hap­pened while tax rates were on the rise.

If the eco­nom­ic sit­u­a­tion wors­ens, or even stays the same, the right will be wait­ing to pounce with their easy answers to eco­nom­ic cri­sis: nation­al­ism and racism.

The clock is tick­ing. Ger­many will hold elec­tions in Sep­tem­ber, and it looks as if Italy will also go to the polls this fall. In Spain, the right-wing minor­i­ty gov­ern­ment is look­ing increas­ing­ly frag­ile and anoth­er elec­tion is a strong possibility.

Cen­ter-left par­ties are doing well in Por­tu­gal, where the Social­ists have made com­mon cause with two more left­ist par­ties. In Britain the Labor Party’s sharp break with Blairite cen­trism upend­ed the Con­ser­v­a­tive Par­ty, deny­ing it a major­i­ty in Par­lia­ment. A recent YouGov poll found that a major­i­ty of Britons sup­port­ed Labor’s left-wing plat­form over the Con­ser­v­a­tives’ aus­ter­i­ty program.

The Por­tuguese coali­tion is demon­strat­ing that there are suc­cess­ful eco­nom­ic mod­els out there to deal with debt and growth that don’t impov­er­ish the many for the ben­e­fit of a few. The ques­tion is, can the left in Italy, Spain and Ger­many put togeth­er pro­grams that tap into the seething unrest that globalism’s inequal­i­ty has generated?

Conn Hal­li­nan is a colum­nist for For­eign Pol­i­cy In Focus. His work can be read at dis​patch​es​fromtheedge​blog​.word​press​.com and mid​dleem​pire​series​.word​press​.com.
Limited Time:

SUBSCRIBE TO IN THESE TIMES MAGAZINE FOR JUST $1 A MONTH