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Debt Crisis or identity crisis? What happened to the European Project? Robert n/SSF

Debt crisis or identity crisis?

What happened to the European project?

Robert N/SSF

A Spanish man I met at 42 Balaam Street told me that back home he saw people rifling through the rubbish bins in supermarkets, of whom he would never have expected that. From a Portuguese friend, I heard that his government has privatised the secondary school system. Greek youth unemployment has peaked at 62%. Meanwhile, Germany is priding itself on its economic vibrancy, whilst Britain is for ever torn apart over wanting to be part of Europe, or not. The continent is divided and the shallow unity of the moment might well give way to new lethal conflicts.

There is only one story, we are told: the crisis is the fault of the southern countries (plus Ireland). And they have to shoulder the burden now. Although this is a very biased view of reality, it was almost uncontested during the German elections last year. Just as well, we could blame former Federal Reserve Chairman Alan Greenspan, Rating Agencies or German Ex-Chancellor Gerhard Schröder. From 9/11 until shortly before the crisis, the Fed left its target interest rate at a historically low 1%, completely ignoring the impact on financial markets. For many investors, this was not enough and a global race for rate of return/interest started. Trillions were invested in emerging markets in a rather uncritical fashion. Often the money was cheaply borrowed in New York (thanks to the Fed at 1%) and lent for higher interest to other countries. Investors blindly trusted Rating Agencies who failed dramatically in their job to assess risks accurately. They considered Greek bonds basically as safe as German ones. Yet Greece offered a considerably higher interest rate, so investors bought billions of its papers. After the crisis, the Greek borrowers got all the blame, though the international lenders are just as guilty. It is also worth reflecting on the fact that German banks held considerable amounts of Greek bonds, and were among the biggest winners of the bailouts.

We are told that the southerners borrowed too much. But one country’s deficit is always another country’s surplus. Consider this example: in 2003, the Schröder government adopted a series of neo-liberal labour market reforms. Welfare payments were cut, workers’ rights diminished and trade unions almost bullied into weak wage demands. The result was that labour costs rose steadily in every European country, except in Germany (see chart). Consequently German products were cheaper than anywhere else and German exports soared. But when a country like Greece buys more from Germany than it sells there, the Germans have little choice but to extend a trade credit to the Greeks (provided they want to sell their stuff). A trade deficit equals a capital deficit and vice versa. Whilst Greece collected unsustainably high debts, Germany made huge international savings.

When we speak about imbalances within the Euro Area we only think about the crisis countries. But it would be closer to the truth to speak about general imbalances. Some ‘strong’ countries had too high surpluses, whilst the ‘weak’ countries had too high deficits. Both sides should work together to correct the situation, rather than to place the entire burden on the ‘weak’ countries. By artificially keeping its wages low, Germany focused on exports rather than the domestic economy. For somebody in London who wants a haircut, it does not really matter that he would get it for half the price in Berlin. At the same time, Schröder policies facilitated a redistribution of income from workers to capital owners and thus a widening inequality. Germany should now allow higher wages and higher prices, thereby stimulating internal demand and allowing more imports from southern countries. Germany is by far the most important export market for these countries. This would considerably ease the burden of adjustment for the troubled countries and at the same time give back a larger piece of the cake to German employees. At the moment however, Germany seems to cherish its higher than ever trade surplus. Countries like Greece or Portugal are supposed to save and to export. But how can they do this, if Germany tries to out-compete them?

Even countries like France feel intimidated by Germany. There is a lively debate in France about the fact that its labour costs are about 20% higher than in Germany. Many politicians demand Schröder style policies as a response. It is easy to see where that would lead: recurring cycles of cuts in wages, workers’ rights and welfare, rotating even between the more developed countries in Europe. Winners and losers of that game could easily be identified.

One fundamental aim of the European Union is to achieve roughly comparable living standards throughout the continent. Every community will face internal bitterness and strife, if inequality within exceeds a certain accepted level (as any opinion poll in the north of Britain would confirm). Living standards in Europe were gradually adjusting to similar levels during the decades before the crisis. These achievements have been destroyed as the result of austerity policies. The results could have been easily predicted: unrest, coming close to civil war in the streets of Athens, and the massive rise of extremist parties, as the 2014 European Elections made obvious one more time. Also worrying, is the authoritarian way in which the solutions are imposed. They seem to be pushed through in great haste by an uneven Franco-German alliance, not allowing proper discussion in the affected societies. When Greece wanted to introduce a referendum about austerity measures, its government was forced to resign (referendum cancelled, obviously). All this makes Europe ever more bureaucratic and un-transparent. No wonder people can’t relate to Europe. And national governments find it easy to use Brussels as a scapegoat, despite the fact that national governments make most of the decisions there. Finally, the resentment against German hegemony awakens old prejudices from their long sleep, even in Britain. I would not dare to underestimate possible consequences.

It is often overlooked that Francis was at heart a peacemaker. He lived in violent times of international and civil war. Bishop Guido once tried to convince him to accept possessions, but Francis refused on the ground that his Brothers would then need weapons to defend their property. Poverty was a way to promote peace in his war torn country. I think Francis would have been deeply concerned about the growing factions in Europe, between countries as well as within them. The story about the wolf of Gubbio might show us how he would respond. Historians have come to believe that the wolf was actually a local knight terrorizing the town, a very common event in Francis’ days. Either way: before there were two parties at war, determined to kill each other. The solution of Francis was inclusion into a fraternity of love, where both sides were better off by looking after each other.

If we don’t want to risk that the European idea will finally shipwreck on a continent that is falling apart, Europe has to win the hearts of its people back. It has to convince them that the peaceful cooperation of all European countries for the common good is a worthwhile idea. This will include economic policies that are considered fair and to the mutual benefit of all. f


Robert N/SSF has spent the last year in London and is about to move to Newcastle. He is from Berlin.

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