Following the 2007-08 financial crisis, Greece, Portugal, Ireland, Spain and Cyprus begged for support from the European Central Bank (ECB), the eurozone finance ministers and the International Monetary Fund (IMF), to finance both their government debts and their insolvent banks. The weaker economies had huge debts which have had to be recycled against uncertain taxes or the sale of assets. The current collapse of profitable capital accumulation means that state spending is indispensable to provide access to basic commodities for a huge section of the working class. The ruling class daily calculates the provision of credit to businesses sufficient to prevent mass protests.
Italy: the weak link
As the third largest EU economy, Italy’s debt levels caused regular panics in the bond markets, even before Covid-19. Since the 2008 financial crisis, Italy’s economy had stagnated. Its banks and state finances are in a precarious state. The average annual stock market return over 20 years is only 1.25%. After Greece, with a national debt over 196% of GDP, Italy’s debt position is the worst in Europe and is likely to rise to 155% of GDP by the end of this year.
Hit first and hardest by the virus, Italy’s pleas for more credit caused ruptures in the eurozone. Its higher debts meant more costly loans and a less sustainable position. So, Italy’s ruling class pleaded for charitable Covid-19 credit.
German and French states and banks own the largest foreign debt holdings in Italy. Italy’s unemployment has averaged close to 10% over the last 20 years, its small firm productivity is low. The country’s average income per head was 22% lower in 2019 than in 2008, compared to growth in Germany of 9.8% and 9.4% in France. Emigration is near a 50-year high. It has one of the highest student dropout rates among the developed capitalist countries. One in four Italians aged 15-34 are neither in work nor education, the worst rate in the EU.
Italy does not have its own currency to devalue, and so cannot raise the cost of imports while trying to pay off its debts by selling cheaper exports. Other than selling off its assets, it can only increase the exploitation of labour. The European Central Bank, with a bigger balance sheet than the US Federal Reserve, is prohibited from directly buying new individual state debts. The northern eurozone states Germany, Austria and the Netherlands won’t tolerate any more purchases by the ECB of outstanding Italian debt. They don’t want the Italian bourgeoisie’s debts placed on a collective balance sheet.
Only a more severe discipline of the Italian working class will resolve this impasse. This is what Christine Lagarde, president of the ECB, meant when, on 12 March 2020, she threatened, ‘We are not here to close spreads [effectively giving Italy easier credit terms] … This is not the function or the mission of the ECB. There are other tools for that, and there are other actors (emphasis: JM) to actually deal with those issues.’ For as long as migrants are available to exploit after they flee from imperialist wars and plunder elsewhere, why should the ECB worry about the health of Italian workers? China, Russia and Cuba helped Italy more in its Covid-19 crisis than France, Germany, or the other EU countries. Lagarde quickly tried to cover her bluntness, promising that the ECB would use the flexibility of a new €120bn Quantitative Easing programme, ‘to prevent the fragmentation of the euro area’. However, these funds would be spread across the eurozone countries and, by themselves, would not be enough to stop the Italian rot.
The obvious ‘European’ solution to Italy’s combined cash crisis and lack of creditworthiness was to issue debt jointly to fight the crisis together, an idea rejected by Germany during the last eurozone crisis. Finally, on 25 March, nine states, headed by France, Italy, Spain and Portugal, called for a ‘common debt instrument’ to fund a crisis response. The ECB supported the scheme but the Netherlands and Germany again refused to budge.
The German ruling class’s hand is forced
On 5 May, Germany’s constitutional court – reflecting a narrow nationalism – asserted that the European Court of Justice had seemed to act outside its mandate, by approving ECB Quantitative Easing measures. In order to allow Germany’s central bank to keep participating in this Quantitative Easing, the German government was ordered to ensure that the ECB quickly reviewed whether its ‘economic and fiscal policy effects’ overstepped their monetary policy objectives. The ECB’s main deposit rate is now minus 0.5%, a subsidy for the banking system. This raised questions about both the ECB’s independence and the credibility of the EU’s highest court. On 8 May, the European Court of Justice made a rare statement, insisting it was the only institution that could judge other European institutions.
On 18 May, Chancellor Angela Merkel and President Emmanuel Macron proposed to create a yet further €500bn of spending power, via collective EU-level borrowing to provide grants, a first hesitant ad hoc form of genuine ‘fiscal union’. The European Commission warned that the EU faced permanent economic fracture between its north and south. Merkel announced that the EU was facing the ‘gravest crisis in its history, and such a crisis demands appropriate answers’, and ‘there is a risk that the EU’s cohesion will be endangered by the economic effects of this virus’. She had already thrown out German debt and deficit rules in March, and was finally forced to recognise that European imperialism demands common fiscal handcuffs to hold it together. This was the final shift in the German position to meet France’s long push for further European financial integration. Covid-19 had broken German nationalism’s resistance.
Next Generation EU
On 27 May, Brussels announced plans to borrow up to €750bn on the private capital markets to proceed. So, along with the 2021-27 EU Budget, agreed on 21 July – €1,074.3bn – comes this new ‘Next Generation EU’ (NGEU) fund – €750bn. The European Council president, Ursula von der Leyen, wants to transform the EU’s finances. Together with the €540bn of funds already in place for the three safety nets (for workers, for businesses and for member states), the overall EU recovery package currently amounts to €2,364.3bn.
An ‘Own Resources Decision’, allows the NGEU fund to provide €672.5bn as loans and grants through the ‘Recovery and Resilience Facility’ to the economically weakest states, plus €77.5bn in loans (at 2018 prices) to six other schemes, to promote EU ‘investment and reform priorities’. Payments will be complete by 31 December 2026, with repayments completed by 2058. This survival plan will further centralise the ownership and concentration of European capital. The ECB’s call for €17bn of this money from private lenders started on 20 October, and saw 14 times the necessary bids by financiers desperate at the failure of private investment markets, and prepared to accept a minus 0.26% yield on state backed ECB ‘Covid-19 related’ bonds.
Since launching its Quantitative Easing programme, from 2014 to May 2020, the ECB has bought more than €2.2 trillion of public sector debt aimed at stimulating private investments in a stagnating economy. New EU ‘green’ taxes and levies are proposed to pay off this debt mountain, all to come from the increased exploitation of the working class in Europe and elsewhere. The required reduction in living standards through unemployment and the closures of unprofitable businesses has to be managed without provoking deeper resistance from the working class.
The EU Parliament wants to bolster the Union’s tax-raising powers significantly, both to pay back the €750bn in common borrowing and to encroach on individual state’s tax powers, levering the new ‘recovery’ fund to create an effective EU-wide tax policy. On 27 September, Germany’s finance minister Olaf Scholz said, strikingly, that the EU recovery fund was ‘only the beginning of fiscal union’.
These huge sums have been decided upon on top of the immense spending of individual states to stabilise their market economies. A week after the EU’s May €750bn announcement, the German government announced a €130bn domestic budget boost, on top of its previous €1.3 trillion in emergency aid measures for the economy. Its budget for 2021 foresees a deficit of €96.2bn. On 3 September, the French government announced €100bn pro-business spending (4% of GDP). It now spends more public cash as a percentage of GDP than any other EU country. Every other EU state has spent – outside of periods of war – unprecedented sums.
On 30 September, the ECB imitated the Federal Reserve’s (27 August) promotion of inflation through a more ‘accommodative’ monetary stance, to further lower real interest rates. The aim of inflation is persistently to reduce both the real debts of private corporations and the real living standards of the mass of workers as steps to stabilise capitalism. At its 19 October AGM, the IMF, reversing its post-2008 budget cut attitude, urged the G20 ‘to spend their way out of the pandemic’. Globally, some $12 trillion has been spent in the nine months to October. The average global state debt to GDP will soon hit 100% – with the UK at 106%. Across the EU huge debts are the essential glue holding markets together.
The struggle over debt
Left to their own devices, the European ruling class would never have partly closed their economies as Covid-19 spread, nor even been forced to discuss a ‘trade off’ between lives and profits. Neither the working class nor much of the middle class in western Europe, however, are prepared to accept this ‘trade-off’. The bitter shouting match within the ruling class between ‘open up’ and ‘close down’ continues because it wants to maintain private wealth making but faces the working class’s demand to life. A deadly compromise has resulted, and state debts amassed to tie over the system in the short run.
Each European state is managing the ‘trade off’ between Covid-19 infection and deaths and the return to work, depending on the local class struggle. In this struggle new credit will dry up as doubts grow about the ability to pay back. World Bank president Malpass is already blaming ‘a lack of participation by private creditors’. Debts incurred in this pandemic will have to be repaid by the working class. The reduction of the living conditions of the working class has much further to go than this pandemic has yet seen, and by more ruthless methods, but will now be managed in a new and urgent collective sense by the European ruling classes.
The degree to which continued private ownership and control of society’s production and distribution continues at the expense of the health and well-being, and other basic rights of the mass of working people, depends entirely on the class struggle. The nature of the ‘recovery’ from the EU’s deepest economic downturn in its history is the central class question today. It will only be resolved in the battle between the ruling class and the working class.
