EDITION: Bad New Times.
The Coronavirus crisis has seen a return to the familiar EU deadlocks. This can best be understood through how the EU represents and organises (and disorganises) class fractions.
As financial markets panicked amid the chaos of the Coronavirus pandemic in mid-March, it looked at first as if the EU was bent on self-destruction. The governor of the European Central Bank, Christine Lagarde, announced at a press conference that it was not her institution’s job to ‘close spreads’ between bond yields (the interest rate gap on eurozone member states’ debt). The effect was to further increase the sense of panic in European markets, while providing little in the way of ‘solidarity’. With their own ban on exports of medical equipment, France and Germany had not done much in this department either. The most imperilled states in the eurozone – Italy, in particular, with the backing of countries like Spain, France and Portugal – raised the urgent need to share responsibility for the crisis and pool the countries’ debt into a single instrument that would raise emergency funds to combat the crisis: the so-called Coronabond.
The worst of the financial panic was abated after the US Federal Reserve re-adopted crisis measures from 2008 to pump dollars into world markets and to allow central banks access to dollar supplies. After a fumbled start from the Europeans, it fell to the European Commission to effectively suspend the European Growth and Stability Pact (which imposes limits on state debt and deficits) and to grant maximum flexibility over state aid rules (effectively allowing governments to subsidise the private sector during the crisis). The crux of the crisis was not, as in 2007-8, in financial markets, but in sharply curtailed demand and the enforced shuttering of business. Only fiscal interventions on the part of national governments and European institutions, above and beyond what the European Treaties mandated, could hope to keep the basics of the economy ticking over while the virus was contained.
Following these moves, the ECB finally announced a new programme of Quantitative Easing (the purchase of government and corporate debt to inject liquidity into strained markets) and a suspension of its rules on how much of each member state’s debt it can hold. What this amounted to was a mobilisation of the full range of measures that were first assembled during the credit crunch and the subsequent sovereign debt crisis of 2010-12. The uncertain constitutional status of these measures and the endless exploitation of ‘flexibility’ in European law by the official institutions inevitably made more conservative groups nervous. Familiar disagreements emerged over the response to the crisis with the Dutch, Austrians, Finns and (at least initially) Germans arguing against any pooling of sovereign debt to finance crisis measures and the French, Italians and Spanish arguing for just such pooling as the only way to finance necessary, large scale public spending.
The joint endorsement by German Chancellor Angela Merkel and French President Emmanuel Macron of a €500 billion recovery fund - raised by the European Commission and repaid from the EU’s joint budget - should strengthen the Commission’s hand as it pursues a more extensive pan-European fiscal response. Yet the Austrian prime minister has continued to resist unconditional support to member states and it is likely that the proposals will be watered down during negotiations. It remains unlikely that the proposal will resolve the long-term structural problems of the EU.
The EU has relapsed into unresolved national arguments that divide a ‘frugal’ north from a supposedly profligate south, while ‘fudged’ solutions (often brokered by Merkel, who has acquired an uncanny ability to pose as neutral while conceding virtually nothing) delay real reform. The latest moves by the French and German leaders and the Commission are likely to encounter predictable resistance from the smaller national governments as well as from within their own governments. Arguably, however, it is not national divisions as such that are preventing an adequate resolution to the crisis, but the emergence of an assertive and powerful conservative social bloc that stretches across Europe’s northern states. This conservatism has been fed by crisis and poses an increasing challenge to the concentration of technocratic decision making in the EU’s elite institutions.
In the context of this unresolved crisis, the recent decision by the German Constitutional Court on the legitimacy of the ECB’s 2015 bond purchasing programme has led to renewed speculation about the impending demise of the European Union. The Court ruled that the ECB’s 2015 interventions (by which it bought up sovereign debt and other financial assets to maintain prices, bring down yields, and offer some measure of support to indebted eurozone member countries) had overstepped its mandate by straying from monetary into economic policy territory. Perhaps more explosively, the German court rejected an earlier ruling by the European Court of Justice which had supported the ECB’s actions. In doing so the German court has apparently set the stage for a wave of rejection of European authority by member states. This could not come at a worse time for the European project as its leading institutions attempt to battle the Coronavirus crisis.
A Conflict of Bureaucratic Rationalities
The German Constitutional Court’s decision imposes some degree of pressure on Germany’s central bank – the Bundesbank – which now finds itself torn between domestic conservative demands and the expectation that it will continue to support the ECB’s Coronavirus crisis measures. Economists were quick to point out the economic incomprehension of the ruling: in modern advanced economies, monetary and economic policy are inseparable. Nowhere is this truer than in the EU, where fiscal integration has failed to make progress and the ECB has, consequently, taken the lead in managing both financial conditions and government borrowing capacity. Others pointed out the political lop-sidedness of the ruling: it did not question the previously conservative political orientation of ECB policy (when it raised interest rates at the onset of the 2008 crisis), but took issue only with actions that were perceived as detrimental to German savers and conservative business groups. Little wonder, given the plaintiffs who brought the case included a former leader of the hard-right, Eurosceptic Alternative for Germany party. European authorities made it predictably clear that they would not be immediately changing course.
The court’s ruling favours conservative savers in Germany who have long chafed at the bruising effect of low interest rates on their returns. Fortunately for them, these same savers have not had to fear the erosion of their savings by the kind of inflation that might have been expected to follow from a decade of low interest rates – the decimation of Europe’s organised working class, the trans-nationalisation of production, and the rise of China have effectively broken that relation. In this instance, the court is harking back to an older form of juridical rationality, which has been present in capitalist states throughout their history but has existed in a relation of tension with other forms of bureaucratic rationality. In this tradition, states and other official institutions are supposed to constitute a social order that is conducive to the maximisation of wealth. The mandates by which these institutions are supposed to act are given strict legal definitions and the separation of powers provides scope for rebuttal of any market distorting interventions. The state is supposed to build and maintain the basis of optimal market competition, not to guarantee the success of certain sectors at the expense of others.
The German Constitutional Court sits in Karlsruhe, deep in Germany’s conservative south-west and not far from Freiburg, the home of German Ordoliberalism, the theory which managed to chase Keynesian demand management out of postwar Germany, propagating in its place a descendant of theories of social and economic order derived from an era of competitive capitalism. Its success has lent a specific juridical inflection to German economic conservatism that distinguishes it from the more activist neoliberalism of the ECB. In theory, neoliberalism substituted many of the substantial aims of Keynesian demand management with quantitative targets (output and employment were replaced with money supply and inflation targets). In practice, especially after the 2008 financial crash, substantial economic outcomes (the management of asset prices, the flow of liquidity, the ability of governments to borrow, and the make-up of bank balance sheets) were pursued in the guise of formally mandated quantitative targets. Thus, the ECB’s mandate to ensure monetary stability (with inflation kept at or below 2 per cent) has provided a pretext for a range of economic (and potentially highly political) forms of intervention. A system of managerial technocracy that constantly improvises around constitutional norms cannot but appear as outrageous to the defenders of a codified Rechtstaat. This latest bust up is inseparable from the strains once again being placed on the EU’s technocratic elite institutions by the fallout from the Coronavirus crisis.
The threat to the EU now is that conservative social groups in Europe’s north gain increasing influence through decisions taken by bodies like Germany’s Constitutional Court and embolden hard right governments in eastern member states like Poland and Hungary. If the supremacy of the ECJ over domestic court rulings can be questioned in Germany, it may be questioned elsewhere. Moreover, the victims of this ruling are likely to yet again be the indebted and struggling countries of the southern periphery including Italy, Greece, Portugal and Spain. If past form is anything to go by, the EU’s technocratic elite are not likely to live up to their promises of ‘solidarity’ to the struggling south. Crisis management in the past has reflected the organised power of conservative social groups over the needs of Europe’s working class - and the indebted south has suffered most.
Structural Crisis
The structural weaknesses of the EU have once again been thrown into sharp relief by the Coronavirus crisis. The effect of monetary union has been to compound rather than diminish divergences between countries. Import-oriented, debtor countries like Italy cannot rely on currency devaluation to boost their export competitiveness, while export oriented, creditor countries like Germany benefit from other countries’ consumption, a weaker currency, and – crucially – low domestic price inflation. In a currency union, price competitiveness can only be achieved by repressing labour costs and thereby restraining domestic inflation (so-called internal devaluation). This model of wage restraint has allowed Germany to undercut more consumption oriented eurozone member states and maintain an edge in export markets. But it has also made German debt inherently more stable than that of, say, Italy, which tends to drive up spreads as investors seek out German assets in times of uncertainty. Since the sovereign debt crisis of 2010-12, these structural weaknesses have been used as a stick by conservatives in the north – often finding expression through brutally austere northern governments – to beat their southern neighbours with.
When German pensioners and small savers react against the ECB’s low interest rates, they are challenging the only functioning pan-European institution that has kept the system together. By buying up debt and keeping interest rates low, the ECB has managed to avoid Italy crashing out of a union that is structurally inhospitable to it. They may not like low interest rates (which lead to low returns on their savings), but they do benefit from being in the core of a union that favours the German export model.
These structural imbalances are offset on an ad hoc basis by the monetary power of the ECB and the until-now limited powers of the European Commission. Though supposedly temporary, ECB bond purchases and interest rate interventions have been hard to roll back due to the absence of joint fiscal action. Into this vacuum, the Commission has proposed a Green New Deal as well as a new investment strategy that would direct German and Dutch surpluses towards productive investments – both to little avail. A narrow consensus among the top representatives of member state governments and federal institutions has allowed for these interventions – and some measure of cooperation – to continue, even as broader consent for the European project has faltered. In fact, elite attempts at greater coordinated investment appear to be precisely what alienate more conservative groups across the EU.
The economic and political power of nation states like Germany has led many to conclude that power in Europe is mainly intergovernmental. That is to say, what has driven austerity in the bloc in recent years is the transformation of key nation states into bastions of neoliberalism rather than some inherent neoliberalism of the EU per se. The oft-proposed solution is, therefore, to build an intergovernmental counterpower – an alliance of leftist states - that is anti-neoliberal. Most mainstream theorists understand European integration as either the product of determined – but always limited – governmental efforts or as the unintended ‘spillover’ effect of benign economic cooperation. In this sense, aspects of the approach of many on the left are dependent on a highly conventional analysis of the EU. But there is a more critical approach, of mostly marginal impact, which prioritises neither states as ‘agents’ of history nor economies as functional systems, but conflicting social forces –or social classes – which exert power in, through and beyond governing institutions. The EU may not be a state in the sense that it lacks the power to raise revenue through taxation – indeed, this is one of the reasons that Coronabonds are so difficult to introduce – but it has often performed one of the key roles associated with states in the Gramscian tradition: it organises the ruling class while disorganising the subaltern. This process of ruling class organisation has privileged – for historical reasons – the big German exporters, the needs of the big banks, and a structure of accumulation that relies on the dampening of inflation and the suppression of working-class wage demands. In recent years, however, contradictions have started to emerge within European capitalism as a result of the permanency of supposed crisis measures.
The Coronavirus crisis has seen the return of a familiar deadlock in both the European Council (composed of heads of member state governments) and the Eurogroup (the assembled finance ministers of eurozone member states). What leadership there has been has come from an under-resourced European Commission and the expenditure of dwindling political capital by the ECB. The European Parliament, which lacks meaningful powers of initiative, remains a charade. This has helped boost the popularity of a right-populist protest bloc, while blunting any momentum for a mostly pro-EU left in recent elections. As political consensus has frayed, the job of reproducing European capitalism has become increasingly difficult. The joint fiscal response called for by southern European governments threatens – through the introduction of widespread wealth transfers – to send the whole thing over the edge as conservative northern Europeans increasingly look to outright withdrawal from the project.
Demands from the Left?
There has never been much of a cohesive European left project. Programmes of reform of existing European institutions such as that advanced by the Greek Syriza government in 2015 have often distracted the left from more obvious forms of class struggle. But purely domestic anti-austerity programmes have also had limited appeal to electorates, who see them as untenable given the EU’s broader commitment to austerity, balanced budgets, and harsh measures against dissenting states. This debate has also contributed to a failure of vision on the European left, which has constrained its internationalism to European borders, while developing countries face an unprecedented debt crisis of their own.
With the left far from power in all but Spain and Portugal, the chance of an electoral breakthrough resulting from this crisis is limited. It is also unclear if there is enough democratic leverage within the EU to allow for a re-balancing of class forces at the transnational level. But a possible second Great Depression could be about to sweep the world and it is likely that this will affect politics in volatile and unpredictable ways in the months and years to come. Key to a left revival will be its ability to organise alongside workers and other social movements and to demand solidarity across borders – both within the EU and beyond it. If it is rooted in left of centre and radical left parties, workers movements, and the social movements that arise in the coming months, socialist demands may be able to carry some weight. First, socialists should demand unconditional support for sovereign bond markets by the ECB, including direct monetary financing if necessary. The European Stability Mechanism (ESM) and the European Investment Bank (EIB) should be bolstered with further funds and their money should come with no strings attached. The left should demand joint debt issuance in the form of a Coronabond for an indefinite period. And where necessary the left should call for the cancellation of existing debt. Once these measures are accepted, concrete demands for wage rises, expansion of public services, and green investment can be advanced to help countries get out of the slump. And finally the immediate closure of refugee camps, debt cancellation for the developing world, and reparations should be minimal internationalist demands. Yet progress in any of these areas would make the fragmentation of the EU more rather than less likely, as conservative-dominated countries may choose to withdraw altogether.
Given the extreme vulnerability of the European project to fragmentation from the right, socialists should not expect positive results from this crisis. European institutions will likely encounter growing pressure from the right – and from powerful European governments – to moderate the scale of monetary and fiscal support they are currently providing. The EU will either fragment or there will be a protracted struggle over the scale of future austerity. In these circumstances, cross-border solidarity among socialists and working-class movements will be all the more important.
Postscript: The Limits of Recovery
Since this article was first written, the plan for recovery in the EU has started to take shape. Following five days of ‘marathon’ debates, EU leaders agreed a scaled back recovery fund (reduced from the €500 billion pushed by the European Commission, France and Germany to €390 billion) that would be used by the Commission to raise funds from financial markets. The Commission has been granted the power to raise up to €750 billion on financial markets, which will be distributed in the form of grants and loans to member states to help them deal with budgetary imbalances arising from Covid-19 crisis spending. These funds will be distributed only on the condition that member states submit plans that contain clear commitments to reform their economies. In a nod to fiscal constraint, member states will be able to raise objections against other members when it is felt that reform measures are not being implemented speedily enough.
The recovery fund contains the seeds of future conflict between member states over the speed and depth of national economic reform that must accompany the distribution of grants and loans. The ability of member states to raise formal objections to the reform efforts of others leaves open the possibility of ongoing inter-governmental conflict. National parliaments will have to approve the plans along with the EU Parliament. The debate over national economic reform plans – including the usual recipes for labour market liberalisation, cuts to social spending and state pensions and privatisation – will be intensely polarising. Frugal state like the Netherlands will no doubt have harsh words for debt-encumbered countries like Italy. Germany has so far managed to position itself in the political centre of these rows, arguing for extensive help to struggling countries while allowing the smaller, more conservative northern states to push for greater conditionality.
But, as this article argues, these political conflicts are being driven as much by conflicting social blocs – mediated through national and transnational politics – as by conflicts between governments. Assuming they are granted by national governments, the enhanced borrowing powers of the Commission will merely open up a new front in the war being waged by conservative middle-class savers and their political representatives in the EU’s north on the patchwork of institutional fixes that has allowed the southern states to survive as members in recent years.
The proposed national reform plans can easily be converted into a stick with which to beat southern member states. Short of an elusive working-class political unity that demands reflation, public investment, and social justice, the medium-term political outcome of the recovery fund process is likely to be punishing for southern members.
So far, socialists have had a negligible effect on the politics of the Coronacrisis. As the focus of politics moves from grand negotiations by national leaders to parliamentary and extra-parliamentary struggles over recovery fund spending and future budget cuts, there is an opportunity for socialists to cut through the debate with concrete social demands. Indeed, this is more or less what happened in the long fallout of 2008 crash, when Syriza, Podemos and others first emerged as popular (and populist) left voices in the EU. Whether a second left revival is possible – and whether, this time, it can survive a conservative onslaught and win substantial reforms – is an open question.