The Coronavirus is exposing the failure of a neo-liberal EU. Sergi Cutillas analyses the current situation.
Sergi Cutillas is an Economist Researcher at the Ekona Economic Innovation Center and Member of the EReNSEP
In recent days, many societies around the world have been shocked by the steps being taken to combat the spread of the Covid-19 virus, a highly contagious and aggressive virus that causes respiratory problems, especially among the elderly and those who have previous health problems. The disease threatens to collapse health systems, because of the rate at which it is spread, which could cause greater harm by putting population that would need to be treated for other causes at risk.
Containment and mitigation measures are ultimately aimed at reducing our personal interactions to a minimum, which needs the halt of the economy: in Spain the government has declared the state of alert accompanied by a general lock down to confine the population, which means that only basic services such as food and health will remain open during this period. The million-dollar question is, ‘What are the economic consequences of such a stop?’
Although there have been significant supply disruptions coming from China and some global value chains have been stalled, the main problem may be caused by lack of demand due to loss of revenue and rising of unemployment that will occur in this period of stoppage. The reason why a lack of temporary demand can multiply its effects and cause greater problems is because we enter into this crisis stepping on the foundations of the bad resolution of the previous crisis: a devalued and temporalized labor market; fragile financial balance-sheets of households (despite the reduction in mortgage debt, it is still very high), non-financial companies and banks; a sharp fall in foreign investment since the end of 2018; and a great dependence on tourism, a sector that will be affected for months or years.
The only way to prevent the shock from becoming a deeper economic crisis is for the public sector to intervene strongly so that losses do not multiply. The main risk in these situations is taking too long to act or acting timidly and gradually, generating little confidence. We could say in some way that the economic crisis that can be generated has some similarities with the spread of the virus, in terms of systemic evolution: it begins with a localized event, which can spread generating a contagious effect, or domino effect. If stopped in the early stages it can have a minor impact, but if left to grow, as we saw in 2008 when Lehman Brothers was left to blow up, things could become massive.
We were already given the first examples of how things should not be done with the measures proposed by the Spanish government before the lock down was established. Although President Sanchez expressed in Draghi’s style (in reference to his historic speech in July 2012, that stopped speculation against the euro by stating that he would do ‘whatever it takes’ to save the euro) , that “we will do what is needed, where it is needed, when it is necessary” this statement was accompanied by timid measures: an injection of € 3.8 billion extra for the health services, and € 14 billion for moratoriums and deferment of tax payments and social security contributions by companies and freelancers, lines of credit for companies, greater coverage for sick leave and help for parents who stop working to care for their children during the closure of schools. The underlying reason for this shyness, as always, is the reason of state of the European Union: compliance with deficit targets and debt reduction.
The health sector is facing a great challenge, which will need all available means, public and private, to increase its capacity to care for the population. The situation somehow corresponds to a state of war, so the government should invest according to the needs of each moment and in excess, and not according to budgetary restrictions or deficit limitations. History tells us that public debt (or monetization of the deficit) at these critical times in history allows the public sector to take the lead in coordinating and driving the economy, and to prevent society from degrading due to fear and the impact of the crisis on health and the economy. To do this, governments need to convey that no one will be left alone. It is normal for people to not trust the public authorities in neoliberalism, because what has been transmitted over the last decades is that we are alone in the face of our success or failure. The digestion of the 2008 crisis was very hard and the lack of trust in the system and its politics has continued to grow since. This lack of confidence is the first thing that needs to be addressed.
In a sense, therefore, this is an opportunity to regain the confidence of the population, which has been sharply lost since 2008. This confidence can only be restored by combating fear with protection, which cannot be rhetorical or postmodern, which is what characterizes politics in post-crisis neoliberalism, but rather material, ensuring with economic measures that the population will not be alone in front of what happens.
In fact, in recent days, in addition to widespread fear, I have personally felt great signs of solidarity and collective spirit, not only with friends and family, but also with strangers with whom I have exchanged smiles and affectionate words of support in everyday situations. Fear has these things, on the one hand it can isolate and separate us, but if we succeed in avoiding it blocking us and realizing that we are all suffering together, it can unite us, and this can be transformative. Governments need to take up this latent social force and take the lead in uniting society and make it emerge in the form of solidarity that will help build a healthier society. To do this means to leave behind neoliberalism forever, which must begin with establishing basic temporary incomes for the population; moratoriums on the payment of mortgages, rents, consumer credit and electricity, water and heating; credit and subsidies to the industrial and service sector, especially to the more informal sectors with smaller support network; support and employment programmes for those who become unemployed. If this is not done, the economic impact of the lock down for the poorer strata in society might be worse for their health than the disease.
Walking this path that leaves neoliberalism behind would require governments to regain the fiscal sovereignty needed to tackle the current crisis, questioning the EU’s austerity treaties and the EU’s institutions, which have been calling systematically for years for spending cuts in the health sector, and that extorted the Spanish government into changing the Constitution to prioritize creditors over the fundamental rights of the Spanish population (see here the famous letter from Trichet to Zapatero in August 2011 that led to the change in the Spanish Constitution days later, in which he demanded that Zapatero impose austerity if he wanted the ECB to avoid the bankruptcy of Spain, in a context of maximum pressure with the uncontrolled rise of the interest rate of the sovereign debt).
In her statement last Thursday, Lagarde, the new ECB president, stated, referring to the public health and economic crisis in Italy, a situation that is again starting to caust doubts in the euro and is causing interest rate spreads to widen again, that “the ECB is not here to close the spreads“. For those who may not be aware, the coronavirus crisis in Italy has hit hard and the country is in a state of general lock down and confinement. Italy, in addition, has a very bad economic situation since the crisis of 2008, and the risk of default on the state’s debt is real. In fact, there are discussions of the possibility of it having to be rescued to avoid bankruptcy, which would probably require hundreds of billions of euros, an astronomical figure. This is the meaning of Lagarde’s statements, making it clear that the ECB will not intervene by buying Italian public debt in a discretionary manner with the program designed to do so, the OMT, until Italy has signed a bailout agreement with the ESM, the European bailout fund, as the treaties set out, in return, of course, for the usual conditions of austerity, privatization and liberalization. The situation in Italy has the potential to create a new crisis of the euro and thus a global financial crisis. Italy has no good cards in this game.
For Italy, in the face of the possibility of a bail-out of this magnitude (it is not clear that either the IMF or the ESM could provide so much money) and the new commitments of neoliberal reforms that this would entail for the country, which could be devastating in this context, the best option is to prepare for the exit of the Eurozone and to be the leader in the creation of a new European monetary regime based on cooperation and a more flexible coordination of exchange rates between the European states. In the face of the continued extortions and attacks on their sovereignty by European authorities in situations where solidarity and co-operation are needed, the most indebted countries of the Eurozone, along with France, should consider following Italy and regaining fiscal and monetary sovereignty, restructuring their economies and rethinking their international relations framework.
In this sense, facing the current crisis and the challenges related to social and ecological crises requires a reconfiguration of the global order, leaving behind international relations based on war and the free market. This necessarily involves greater degrees of decentralization and pluralism, and a European internationalism based on regional cooperation and peace, which promotes peaceful coexistence between the US and China, in the manner similar to that proposed by Polanyi in ‘The Great Transformation’ , replacing market-based foreign policy and the arms race. Recall, in this sense, that the ‘more Europe’ Europeanists are entrusting the integration project to the construction of a European army, which would make the EU the first military power in Europe far ahead of Russia to, supposedly, defend us of an external enemy, which would be Russia in principle, but increasingly also China and even the uncontrolled protectionists US. This political strategy for creating a European supranational state is extremely dangerous because it requires the elites to find an external enemy that ‘threatens the European way of life’. This road inevitably leads to nationalism and imperialism (in this case, European), madness and war (see here Streeck’s interesting proposal, from which I drew ideas for this article, ‘The International State System after Neoliberalism: Europe between National Democracy and Supranational Centralization’). In fact, in Europe we are again witnessing the rise of ultranationalism and fascism, which are driven by competition between states through the market and of the ‘soft’ imperialisms imposed by Germany and the US through EU institutions, that broadly speaking serves the interests of the German industry and the financial sector of Wall Street and the City of London.
This is the main sovereignty debate: how to overcome the current financialization regime that is failing. European banks are bankrupt, large companies are very indebteded, states too and stock markets are inflated. Also, central banks have narrow margins for intervention without resorting to fiscal policies, not to mention the dysfunctionality of political systems, which is caused by the lack of credibility of these systems among the population. The situation is grave. This health crisis may be the beginning of the end of financialization, and a new opportunity for states to regain degrees of sovereignty that were handed over to large capital-dominated institutions, to build a new more democratic international order. However, it is also a dangerous moment in which attempts on democracy and scams similar to those of 2008 and the Eurozone crisis could be repeated if we are not on alert.
In short, without being naive about the difficulty of the task, we can take advantage of this crisis to find the strength emerging from belonging to a collective that relies on inclusive and strong public leadership. This can only be done if we urge our institutions and our governments to protect us from new scams and act in the direction of what has been said, helping us to become stronger, more united and supportive locally and internationally, in the face of the enormous challenge of transforming the world in a short period of time.
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