Cause of Eurozone debt crisis

[bailey_187]

So i been doing reading of papers on this site: http://www.researchonmoneyandfinance.org/

Here is a general outline of the reasons for the debt crisis, as far as i can understand



The root cause of the crisis is the imbalence between the Eurozone core (Germany, Austria, Netherlands primarily) and the periphery (Portugal,Ireland, Greece, Spain)

The inclusion of the peripheral countries into the Eurozone has turned them into a market for the core. This is the because the core tends the relativly industrialised, while the periphery is not.

Inclusion of the periphery countries into the Eurozone has removed many potential policies for the Eurozone economies ot promote industry. The EU means there can be no industrial policy in any of these countries. The other way to promote industry would be currency devaluation, but a single currency in the Eurozone and controlling of such matters by the ECB has meant this is also not an option.

Therefore the only way to promote industry in your economy for a Eurozone state is to lower wages an deregulate. Therefore wages have be depressed in most EU states over the past years, and labours share of income as a percentage has fallen. However this was most aggresive in the core, and the core overall has been a more attractive place for industry.

However, with the suppression of wages in the core, there is a lack of domestic agregate demand for the goods produced by the industry the low wages attracts. Therefore the destination for the increased production of goods has been the periphery. This has resulted in the core all running high current acount surpluses (exporting much more than importing), at the expense of the periphery running large current account defecits (importing more than exporting).

In the periphery then, this gap between production and consumption, created by high imports and low exports, has been filled by private debt (i think Spain is the most accute example of this) and public debt (Greece and Portugal?)

Also, i am not sure about this but, to promote domestic industry in the absense of an industrial policy or exhcnage rate mechanisms, peripheral countries such as Spain have spent massive amount on internal infastructure, e.g. the spending on highways in Spain, which are now some of the best in the EU. Or is this a case of the state feeling the need to invest, to create employment to fund the gap mentioned earlier between production and consumption?

Also, unable to engage in industrial expansion, the peripheral economies have focused on "bubbles" e.g. the housing bubble in Ireland and Spain. This has meant the recession has been more severe in these countries (both are still in recession, while the core is not), increasing the cyclical defecit


could people in htis thread criticise the arguments, expand on them or correct were i am explaining them wrong

People in Eurozone Periphery countries obviously have the political task of creating a resistance ot the massive cuts they face, but having an explanation contrary to ones like "Greeks and Spanish spend to much, are lazy, dont work etc" is also important.

[Dean]

could people in htis thread criticise the arguments, expand on them or correct were i am explaining them wrong

People in Eurozone Periphery countries obviously have the political task of creating a resistance ot the massive cuts they face, but having an explanation contrary to ones like "Greeks and Spanish spend to much, are lazy, dont work etc" is also important.

I'm not 100% clear on what you mean by the last point. The earlier points you made destroy the "lazy, overspending" model you mention here.

I would make the point that aggregating the capitalist markets of consumers and laborers across uneven economic models (creating free market zones) overemphasizes the demand of wealthier consumers and de-emphasizes demand of poorer consumers. The same is true of laborers with more or less favorable conditions (infrastructure and labor markets).

In fact, this "overemphasis" is really a normalization of the demand as it occurs across national boundaries and other market barriers. It is more than sufficient to point out that locations poor in infrastructure or robust labor / production markets ultimately have less economic leverage, so free trade zones will realign government policy (often by elimination of protections) in order to emphasize the interests of wealthier consumers and workers in favorable labor markets.

Ultimately, this will often have the effect - especially in cases of shocks on the market - to actually decimate labor and consumer markets where weaker interests are represented.

[Paul Cockshott]

bailey's initial analysis is spot on. The key issue is how to respond politically to this.

[Dimentio]

I think the main problem is political and economical. You cannot manage monetary policies on the federal level and financial policy on the state level. That has led to growing discrepancies between a Central Bank which is pursuing fiscal discipline and state governments which are using expansive financial policies.

But that's the EU. Its deliberately designed to fail.

[Devrim]

People in Eurozone Periphery countries obviously have the political task of creating a resistance ot the massive cuts they face, but having an explanation contrary to ones like "Greeks and Spanish spend to much, are lazy, dont work etc" is also important.

I don't think that austerity measures are confined to the periphery. Germany and the UK are also experiencing massive cuts. In fact the debt crisis is worldwide.

Devrim

[Die Neue Zeit]

I think the main problem is political and economical. You cannot manage monetary policies on the federal level and financial policy on the state level. That has led to growing discrepancies between a Central Bank which is pursuing fiscal discipline and state governments which are using expansive financial policies.

But that's the EU. Its deliberately designed to fail.

Isn't that the point behind pre-neoliberal monetary theory derived from Samuelson's Bastard Keynesianism? The conflict between monetary policy and fiscal policy is supposed to facilitate the smoothing of the boom-bust cycle.

[Dimentio]

Isn't that the point behind pre-neoliberal monetary theory derived from Samuelson's Bastard Keynesianism? The conflict between monetary policy and fiscal policy is supposed to facilitate the smoothing of the boom-bust cycle.

The problem in the Eurozone is different and quite unique for currency unions.

Ordinarily, if a country has a floating currency and is starting with expansive financial policies, the currency will appreciate and lead to investments instead going into a neighbouring country.

If Greece or Italy is having an expansive budget, the bill would go to the countries which are following the EMU rules. Since the temptation for breaking the stability pact in order to win elections will be too big, it will lead to the collapse of the stability pact and the eventual establishment of a continental-wide financial policy.

In short, classic EU style federalism. First you create an area which should be commonly administrated. You make it full of flaws intentionally, so then you will need to regulate other areas on the federal level as well. The founding fathers of the EU knew that the peoples of Europe did not want to abolish their nation states, so their goal is to sneak in a federation through the back door.

[ckaihatsu]

The problem in the Eurozone is different and quite unique for currency unions.




In short, classic EU style federalism. First you create an area which should be commonly administrated. You make it full of flaws intentionally, so then you will need to regulate other areas on the federal level as well. The founding fathers of the EU knew that the peoples of Europe did not want to abolish their nation states, so their goal is to sneak in a federation through the back door.


I don't think it's so much from *intentional* doing, in any kind of conspiratorial or racketeering kind of way, as much as it's an *emergent* dynamic, as from material historical development (like capitalism itself).

Note that the U.S. has the same kind of problem, and here's a similar dynamic in China:





http://wsws.org/articles/2010/aug2010/econ-a13.shtml


Signs of Chinese slowdown add to global market fears


By Mike Head
13 August 2010




According to the Financial Times, 20 percent of Chinese local governments are likely to default on their share of the $1.1 trillion lent by banks to local authorities as part of the stimulus measures announced in November 2008.

[Dimentio]

I don't think it's so much from *intentional* doing, in any kind of conspiratorial or racketeering kind of way, as much as it's an *emergent* dynamic, as from material historical development (like capitalism itself).

Note that the U.S. has the same kind of problem, and here's a similar dynamic in China:

How strange it might sound like, its actually a strategy supported by neo-federalist scholars. Instead of beginning with central areas, like foreign policy, they start with federalising soft issues, in order to get larger and larger spheres of federalism in Europe.

Its a part of European theory.

[ckaihatsu]

How strange it might sound like, its actually a strategy supported by neo-federalist scholars. Instead of beginning with central areas, like foreign policy, they start with federalising soft issues, in order to get larger and larger spheres of federalism in Europe.

Its a part of European theory.


Okay, I have no reason to be contentious here -- certainly we know that the bourgeoisie has a class interest in territory, particularly for new markets abroad and domestic control "at home".

At the same time their control is *not* monolithic -- while they have certain plans and expectations their own market's dynamics, not to mention class struggle, often confounds their intentions.

[ckaihatsu]

The “Washington consensus”, the treaties of the European Union, from Maastricht to Lisbon, the multiple “reforms” - aimed at dismantling the gains of progressive reforms, therefore in reality counter-reforms – adopted by national parliaments made it possible to prepare the ground and to begin the transformation of society, to create the conditions so that “individuals are placed in situations such that they cannot do anything else but act in the direction which is precisely sought (…), to obtain from individuals by these incentives that they should act as it is desired that they act, without having to incessantly remind them and without having to incessantly tell them what to do. ” [4].

http://www.internationalviewpoint.org/spip.php?article1902


* The European Union is not a consummated state in the classical sense and the choices which have oriented the construction of this supranational apparatus take account of the fact that there are “European capitalisms”, that there are the interests of each capitalist class on the national and international levels, but not “a European capitalism” as such. Capitalist globalization projected directly on a world level the economies and the projects of each bourgeoisie. The biggest European companies and banks are allied with American companies or those of emergent countries in air transport, cars, pharmaceuticals… Although there exist some big properly European groups, such as EADS, they are the exception. The European ruling classes took advantage of the single European market to conquer new market shares in the globalized world rather than to build an economically, socially and politically integrated Europe.

* After the start of European mobilizations – the European marches at the time of the EU summit in Amsterdam in 1994, followed by several trade-union demonstrations in the following years, as well as the strike movement of December 1995 in France - and the failure of the attempt to legitimize a neoliberal political orientation on the level of the Union through the European Constitutional Treaty, the European governments took care not to provoke a generalized social response.

http://www.internationalviewpoint.org/spip.php?article1902