Europe’s Austerity: A Grimm’s Fairy Tale
Dispatches From The Edge
March 16, 2011
* In the Greek town of Aphidal, people have stopped paying road fees. In Athens, bus and metro riders are refusing to cough up the price of a ticket. On Feb. 23, 250,000 Greek protesters jammed the streets outside the nation’s parliament.
* The Portuguese nominated the protest song “A Luta E’ Alegria” (The Struggle is Joy) for the Eurovision song contest and, when judges ignored it, walked out in protest. They also put 300,000 people into the streets of the country’s major cities on Mar. 12.
* Liverpool bailed from a Conservative-Liberal scheme to supplement government funding with private funding when it found there wasn’t any of either, and the British Toilet Association protested the closure of 1,000 public bathrooms across the country.
In ways big and small, Europeans from Greece to Portugal, from Britain to Bavaria are registering their growing anger with the relentless assault inflicted by government-imposed austerity programs.
Wages, working conditions and pensions that unions successfully fought for over the past half century are threatened by the collapse of banking systems caught up in a decade-long orgy of speculation that the average European neither took part in, nor profited from. Even the so-called “well off” workers of Bavaria, Germany’s industrial juggernaut, have seen their wages, adjusted for inflation, fall 4.5 percent over the past 10 years.
The narrative emanating from EU headquarters in Brussels is that high wages, early retirement, generous benefits, and a “lack of competition” has led to the current crisis that has several countries on the verge of bankruptcy, including Ireland, Greece, Portugal and Spain. Now, claim the “virtuous countries”—Germany, the Netherlands, and Finland—it is time for these spendthrift wastrels to pay the piper or, as German Chancellor Andrea Merkel says, “do their homework.”
It is an interesting story, a sort of Grimm’s fairly tale for the 21st century, but it bears about as much resemblance to the cause of the crisis as Cinderella’s fairy godmother does to the International Monetary Fund (IMF).
While each country has its own particular conditions, there is a common thread that underlines the current crisis. Starting early in the decade, banks and financial houses flooded real estate markets with money, fueling a speculation explosion that inflated an enormous bubble. In climate and culture, Spain and Ireland may be very different places, but housing prices rocketed 500 percent in both countries.
The money was virtually free, with low interest rates on the bank side, and cozy tax deals cut between speculators and politicians on the other. That kept the cash within a small circle of investors. While Bavarian workers were watching their pay fall, German banks were taking in record profits and shoveling yet more capital into the real estate bubbles in Ireland and Spain. The level of debt eventually approached the grotesque. Ireland’s bank debts, if translated into dollars, would be the equal of $10 trillion.
The Wall Street implosion in 2008 sent shock waves around the world and popped bubbles all over Europe. While nations on the periphery of the European Union (EU) tanked first—Iceland, Ireland, Latvia, Romania, Hungry, and Greece, economies at the heart of the EU—Britain, Spain, Italy, and Portugal—were also shaken. According to the Financial Times (FT), total claims by European banks on the Greek, Irish, Italian, Spanish and Portuguese debts alone are $2.4 trillion.
The European Union’s (EU) cure for the crisis is a formula with a long and troubled history, and one that has sowed several decades of falling living standards and frozen economies when it was applied to Latin America some 30 years ago. In simple terms, it is austerity, austerity and more austerity until the bank debts are paid off.
There are similarities between the current European crisis and the 1981 Latin American debt crisis. “In both cases debts were issued in a currency over which borrowing countries had no control,” says the FT’s John Rathbone. For Latin America it was the dollar, for Europe the Euro. Secondly, there was first a period of easy credit, followed by a worldwide recession.
Bailouts were tied to the so-called “Washington Consensus” that demanded privatization, massive cuts in social services, wage reductions, and government austerity. The results were disastrous. As public health programs were eviscerated, diseases like cholera reappeared. As education budgets were slashed, illiteracy increased. And as public works projects vanished, joblessness went up and wages went down.
“It took several years to realize that deflating wages and shrinking economies were inconsistent with being able to fully pay off debts,” notes Rathbone. And yet the “virtuous” EU countries are applying almost exactly the same formula to the current debt crisis in Europe.
For instance, the EU and the IMF agreed to bail out Ireland’s banks for $114 billion, but only if the Irish cut $4 billion over the next four years, raised payroll taxes 41 percent, cut old age pensions, increased the retirement age, slashed social spending, and privatized many public services. When Ireland recently asked for a reduction in the onerous interest rate for this bailout, the EU agreed to lower it 1 percent and spread out the payments, but only on the condition of yet more austerity measures and an increase in Ireland’s corporate tax rate. The newly elected Fine Gael/Labor government refused.
To pay back its own $152 billion bailout, however, the Greek government took the deal. But the price is more austerity and an agreement to sell off almost $70 billion in government properties, including some islands and many of the Olympic games sites.
But the “deal” will hardly repay the debt. Unemployment in Greece is 15 percent, and as high as 35 percent among the young. Wages have fallen 20 percent, pensions have been cut, and rates for public services hiked. Growth is expected to fall 3.4 percent this year, which means that Greece’s debt burden is projected to increase from 127 percent of GDP to 160 percent of GDP by 2013. “Your debt will continue to increase as long as your growth rate is below the interest rate you are paying,” economist Peter Westaway told the New York Times.
Austerity measures in Portugal and Spain have also cut deeply into the average person’s income and made life measurably harder. In Spain, more than one in five workers are unemployed, and consumer spending is sharply off, dropping by a third this past holiday season. Portugal is actually in worse shape. It has one of the slowest economic growth rates in Europe, a dead-in-the-water export industry, and a youth unemployment rate of over 30 percent.
In Britain, the Conservative-Liberal government has cut almost $130 billion from the budget and lobbied for what it calls the “Big Society.” The latter is similar to George H.W. Bush’s “thousand points of light” and envisions a world in which private industry and volunteerism replaces government-funded programs. The actual result has been the closure of libraries, senior centers, public pools, youth programs, and public toilets. The cutbacks have been most deeply felt in poorer areas of the country—those that traditionally vote Labor, as cynics are wont to point out—but they have also taken a bite out of the Conservative Party’s heartland, the Midlands.
Conservative voters have organized demonstrations to save libraries in staid communities like Charlbury and to protest turning public woodlands over to private developers. According to retired financial officer Barbara Allison, there are 54 local voluntary organizations that run programs like meals on wheels in Charlbury. “We’re already devoting an awful lot of our time to charity and volunteers,” she told the FT. “Am I not doing enough? Is [Conservative Prime Minister] David Cameron going to volunteer?” In any case, as Labor Party leader Ed Milliband points out, how does Cameron expect people “to volunteer at the local library when it is being shut down?”
U.S. Treasury Secretary Timothy Geithner strongly endorsed the Cameron program last month and said that he “did not see much risk” that the cutbacks would impede growth. But even the IMF warns that the formula of treating debt as the central problem in the middle of an economic recession has drawbacks. This past October an IMF study concluded “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”
But a massive program of privatization does mean enormous windfall profits for private investors and the banks and financial institutions that finance the purchase of everything from soccer fields to national parks. Those profits, in turn, fuel political machines that use money and media to dominate the narrative that greedy pensioners, lay-about teachers, and free loaders are the problem. And austerity is the solution.
But increasingly people are not buying the message, and from Athens to Wisconsin they are taking their reservations to the streets. The crowd in Charlbury was a modest 200, and the tone polite. In Athens the demonstration drew 250,000 and people chanted “Kleftes,” or “thieves.” But the message in both places is much the same: we have had enough.
A bus driver in Athens told Australian journalist Kia Mistilis that his wages had been cut from 1800 Euros ($2500) a month to 1200 Euros ($1660). “There are more cuts coming into effect in the next three months, that’s why the protests are heating up. I am worried that my wages will be cut to 800 Euros ($1110) a month, and if that happens I don’t know how I will survive.”
But he has a plan. “The situation is reaching a climax,” he told Mistilis, “because working people know that the austerity measures go too far, and with the final rollout, they can’t survive. So there is nothing to do but protest,” adding, “You wait until next summer. The situation in Greece will explode.”
It is unlikely that Greece will be alone.