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The Berlin Consensus

Europe’s blind march forward to depression

by Philip S Golub

Le Monde diplomatique (December 12 2011)

Last week’s decision of European heads of state and the European Commission to establish a fiscal union based on permanent quasi-automatic disciplinary mechanisms to secure balanced budgets in the midst of the worst world economic downturn since the 1930s will go down as one of the greatest collective policy errors in post-1945 history. Hailed by self-congratulatory leaders as a sign of political will and a new step forward in unification, the Berlin Consensus forged by conservative elites will more likely lead to the breakdown of Europe.

Despite ample evidence that generalized austerity is generating a vicious cycle of low or negative growth, lasting mass unemployment, declining incomes and hence falling tax revenue, the Europeans have chosen to purge debtor countries through “internal deflations” designed to reduce relative costs and to suppress demand. Deep expenditure cuts affecting welfare, health, education and other public services are thus being coupled with wage cuts and increases of indirect taxes on consumption.

While limitless cheap funding is being made available to private creditors through the European Central Bank (ECB), debtor countries are being compelled to compress their peoples’ living standards, sometimes drastically, and downsize their welfare states. The distributional costs of the crisis are being exclusively shifted to the poor and the middle classes, which depend on the public services that are being slashed.

This choice has nothing to do with external constraints. Rather, global market speculation on sovereign European debt has become a convenient excuse to enforce an ideologically driven agenda to curb labour and roll back the welfare state. Austerians in the United States are advocating the same medieval bleeding cure, as Paul Krugman has pointed out {1}. There was and still is an alternative: the federalization of sovereign debt through Eurobonds, the creation of which would put an end to speculation on national debt and reduce global market volatility, and the restoration of progressive tax policies to generate revenue.

That option was never seriously considered by the German chancellor or other surpluses countries however, no more than the less ambitious proposal to have the European Central Bank act as a lender of last resort. Instead of a collective exit strategy based on growth, European solidarity and a gradual rebalancing between surplus and deficit countries, we now have a rigid pan-European austerity regime enforced from on top, without democratic control or consent. The UK, which is engaged in its own harsh internal deflation, has decided to opt out. It decided to so for all the wrong reasons, most notably to avoid the City of London being put under external regulatory constraint.

The real question is whether a durable and sharp social regression dictated from on top is sustainable in democratic societies? If history is any guide, it is not. As Barry Eichengreen and Peter Temin have shown {2}, in the early 1930s leaders on both sides of the Atlantic, who were wedded to a “hegemonic ideology” of self-regulating markets and automatic budget balancing through the Gold Standard, responded to the 1929 crisis by engaging in draconian policies of reduction of domestic prices and costs. The main instrumentality was curbing wages and crushing the trade unions. Like today, they were “supported by a rhetoric of morality and rectitude”, exemplified by US Treasury Secretary Andrew Mellon’s well known call to “liquidate labor, liquidate stocks, liquidate the farmers” and to get “people to work harder and live a more moral life” by purging “rottenness out of the system”. Balanced budgets and fiscal rectitude led to deflation on both sides of the Atlantic, which “magnified the burden of outstanding debt, forcing creditors to curtail their spending still further”.

Ultimately, the disciplines of the Gold Standard proved unsustainable in the face of the extreme social distress they produced. In the US, with unemployment running at 25 percent, Roosevelt pulled the US off the Standard in 1933, leading to significant recovery. He later erred by reinstating a policy of budgetary rigour in 1937, which plunged the US into recession once more. Sustained recovery occurred only during World War Two. Germany experienced two years of extreme austerity and “authoritarian democracy” under Chancellor Bruning in 1930 and 1931, paving the way for Nazism. The rest of Europe was likewise swept up in the vast social and political turbulence that culminated in tragedy.

Today’s apparently self-confident European leaders, who want to bend reality to their preferences, either have not read their history or have too much faith in their own powers and competence. True, it’s unlikely and probably unthinkable that the path chosen by the EU will usher in war. But like their predecessors in the 1920s and 1930s whose adherence to the Gold Standard led to deflation and social chaos, current leaders are marching blindly towards depression. The Berlin Consensus will fail as surely as the obstinate effort to maintain the Gold Standard. But after a decade or so of deflation, what will remain of Europe?

Links:

{1} Paul Krugman, “The Bleeding Cure”, New York Times, 18 September 2011.

{2} Barry Eichengreen and Peter Temin, “The Gold Standard and the Great Depression”, Contemporary European History 9, 2 (2000): 183-207.

_____

Philip Golub teaches at the American University of Paris; he is the author of Power, Profit and Prestige: a History of American Imperial Expansion (Pluto Press, London, 2010).

More by Philip S Golub at http://mondediplo.com/_Philip-S-Golub_

(c) Le Monde diplomatique – all right reserved

http://mondediplo.com/blogs/the-berlin-consensus-europe-s-blind-march-forward

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