The old ones are sometimes the best. “Denial is not a river in Africa, but it is a state occupied by many eurozone politicians.”
This was how the Financial Times’s Lex column summed up the extraordinary disarray among European policy-makers over the Greek crisis.
Only a few years ago the European Union (EU) touted itself as a “normative power”, as committed to neoliberal imperialism as the US, but superior in its reliance on persuasion rather than coercion.
Now it is an absolute shambles. Its greatest achievement, Economic and Monetary Union, is threatened by a collective failure to solve the problems of a country whose economy represents between 1 and 2 percent of the eurozone.
The antagonists don’t disagree about everything. They agree the Greek budget should be balanced—at the expense of ordinary Greeks.
They also agree that Greece must not default on its foreign debt. As the commentator Wolfgang Munchau put it, “A Greek default will unleash a dynamic process that will threaten the eurozone’s financial stability, even its very survival.”
This is when the denial begins. Most economists agree that Greece cannot repay this debt. Many also recognise that austerity is making things worse. Cutting public expenditure reduces spending on goods and services and causes the economy to shrink. This increases the size of the debt relative to the economy.
The French and German governments have tried to prevent a default by persuading banks and others holding Greek government bonds to roll over their loans. In other words, Greece’s creditors should agree, when their loans fall due, to lend this money back to Greece.
There are three obstacles to this solution. The first is the rating agencies. Astonishingly, they are still trusted to assess the creditworthiness of states and corporations—despite giving a clean bill of health to various now worthless financial derivatives during the bubble of the mid-2000s.
One agency, Standard & Poor’s, announced last week that the proposed rollover would amount to a “selective default”.
The second obstacle is represented by the German government. Because of domestic opposition to the bailouts, it is insisting that lenders to Greece take a “haircut”—that they shouldn’t get all their money back.
This has brought German chancellor Angela Merkel into collision with the third obstacle, the European Central Bank (ECB). Its president, Jean-Claude Trichet, is dead against the schemes being proposed in Berlin and Paris.
He argues that they will lead to the financial markets targeting other weaker members of the eurozone. Two, Ireland and Portugal, have already been driven into the arms of the “troika” of the ECB, the European Commission, and the International Monetary Fund.
At the end of last week, it seemed as if this “contagion” was spreading to Italy, the third biggest economy in the eurozone. Sales of Italian government bonds pushed interest rates on them to the highest level for nine years.
Meanwhile, Trichet himself has tightened the vice around the necks of the weaker eurozone states. Last week the ECB raised its basic interest rate to 1.5 percent. Interest rates in the US and Britain remain at historic lows of 0.5 percent.
Trichet justified this move as a response to a rising rate of inflation. But it is a body blow to those eurozone economies labouring under a heavy debt burden since it will increase the repayments they have to make.
“Denial” is in fact too weak a term to describe the collective condition of the eurozone. It is paralysed by disagreements that amount almost to a self-destructive madness. The different players have a partial grasp of the situation but are unable to integrate these into an overall solution.
As Marxist philosopher Georg Lukacs pointed out in his classic book History and Class Consciousness, capitalism seeks to organise individual parts of society as rationally as possible, but the system as a whole remains incoherent and irrational.