Largely because of electoral reasons, French President Nicolas Sarkozy has suggested recently that Europe is “turning the page” in its financial crisis. At a European summit at the beginning of March, he declared that it was the first summit since August 2011 not to have been a “crisis summit”. A few days ago, he declared the financial crisis over.
There is certainly a sense that the urgency and the gloom of 2011 has lifted in early 2012. The risk premium demanded by investors to hold the government bonds of countries like Italy and Spain has fallen considerably and stories of bank runs and Eurozone atrophy have fallen away. It is worth asking then what has been Europe’s approach to its crisis and whether we right to think it has been an adequate response.
Two features stand out. The first is the emphasis – policed by European institutions and formalized in the EU fiscal pact – on budgetary austerity and labour market reforms. Cutting government spending has become the prime goal of national governments across Europe, closely followed by reforms of national labour markets. Budgetary austerity runs across all the Eurozone: from the Netherlands where pressure to cut budgets looks like it will bring down Mark Rutte’s coalition government, to the UK, France and elsewhere, not least in Greece where it has been the basis for a fundamental assault on the country’s social fabric. National labour market reforms have been pushed mostly in the southern European countries: Greece, Italy, Spain, Portugal. There has been some change in Northern Europe: in France the retirement age was raised and the Sarkozy government has argued for shifting the burden of social security contributions from employers onto taxpayers in the form of a “social VAT”. Elsewhere, labour market reform is deep and painful and may yet lead to an unravelling of the alliance between national technocrats and EU-backed reform. But the sense in Italy, where Monti is fighting the unions, and in Spain where Rajoy faced down a general strike yesterday, is that changes will go through.
The second feature is the backdoor use of taxpayer Euros to prop up the continent’s financial system. Whilst the public assault on spending programs and on labour market regulation is an explicit policy of European governments, this latter feature is more hidden. It is nevertheless a key element in the European approach to resolving the Eurozone crisis. It has two elements to it. One is the commitment to European sovereigns in the form of the “bailout bazooka”. In an angry letter to the Financial Times last Wednesday, Klaus Regling, chief executive of the Luxembourg-based European Financial Stability Facility, took issue with the description of his Facility as a “toy gun”. He pointed out that in fact the sum of the bailout provisions provided by European governments is considerable: almost 1 trillion Euros in total has been disbursed since the start of the crisis. This includes the two bailout packages for Greece, the write-down of Greek debt (the so-called Greek private sector involvement operation), the Irish and Portuguese bail-outs, the European Central Bank’s secondary market purchases, 250 billion Euros of uncommitted EFSF resources and promise of 150 billion Euros to the IMF.
The second element is something Regling didn’t include in his list, namely the ECB’s longer-term refinancing operations (LTRO). These operations have been in two stages, first last December and again in February of this year. In essence, LTRO has involved the ECB in providing cheap three year loans to banks. This was intended as a way of injecting liquidity into the European banking system so as to avoid any bank collapsing altogether. Over time, the hope is that this liquidity will work its way into the real economy in the form of bank loans to business. The amount of liquidity provided by the ECB is huge: 1.019 trillion Euros in total.
Taken together, the European approach to the crisis has been to mix frontdoor assaults on government spending and labour laws with a backdoor taxpayer-funded bail-out of banks and of embattled sovereigns. There are two, deeply troubling elements contained within this approach. The first is the hypocrisy: a focus on austerity on the one hand and the provision of largesse on the other. The only way to understand this is as a massive wealth transfer away from taxpayers. It isn’t as simple as saying that cuts to social security provision are being used to fund the bail-out of banks since some the bail-out money has gone to pension funds who have faced serious losses on investments in southern European countries. But there is a wealth transfer at work that reflects a balance of forces within society and the transfer is not towards European labour.
The second is the doubt about whether throwing more money at the financial sector can really solve a more endemic problem. Debt-fuelled growth was a characteristic of the years leading up to the crisis: either government-debt in the case of southern European societies or private debt in places like the UK. The idea that issuing more debt can lift Europe out of the crisis seems ungrounded. More likely is what we are seeing: banks that have taken up the offer of the ECB’s loans have parked them back at the ECB rather than using them as a basis for a renewed round of lending to business. The economics of the European approach seem naïve, the politics are just plainly anti-labour.