Debt and austerity are now in Europe

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Debt and austerity are now in Europe

As the creditors get fatter, the innocent suffer. Susan George tells us that European leaders only want to help big businesses.

Like plague in the 14th century, the problem of debt has moved slowly from South to North. Our 21st-century plague isn’t from rats but from neoliberals. In the past the neoliberals had names like Thatcher or Reagan. Now they have names like Merkel or Barroso. But their ideas are really the same and the big problems they have caused are the same. There are probably fewer deaths in Europe today from debt than in Africa sixty years ago. But there is probably more harm done to European economies, which were doing well before.

Northern creditor countries have made things difficult for Southern countries. Many countries in the South borrowed too much money for ideas which did not make money. Sometimes the leaders of these countries like Mobutu or Marcos put the money from the loans in their private bank accounts and put their countries in debt. Paying the debts in pesos, reals, cedis or other money was not possible: the creditors wanted dollars, pounds, or deutschmarks…



The people from the South had their loans at variable interest rates. At first the interest rates were low but later very high. They were high from 1981 when the Federal Reserve said there is no more cheap money. When countries like Mexico couldn’t pay, the finance ministers in the creditor countries and top bankers and international bureaucrats were suddenly very worried. Nothing changes. Many years later there are still meetings about the big problems. Now the meetings are in Brussels and the answer is the same: you only get a bailout if you follow some very strict rules. They are called ‘austerity packages’. Sign here, please, in blood.

For the countries in the South, the contracts said: Make less food and grow crops which make money. Privatize your State enterprises. And open activities which make money to foreign companies, especially raw materials and mining, forestry and fisheries. Limit credit, cancel subsidies and social benefits. Make health and education into businesses. Save money and earn money through trade. You must answer first to your creditors but not to your people.

Now it’s Europe’s problem. The countries of southern Europe, plus Ireland, are told: ‘You have been spending too much. Now pay. Governments accept orders and their people often think that their debt must be paid immediately because the debt of a State is like the debt of a family. It is not – a government makes debts by selling bonds on financial markets. The bonds are bought by institutions like banks and they receive an annual interest payment. The interest is low when the risk of not paying the debt is low. The interest is high when the risk of not paying the debt is high. It’s normal and even necessary for a country to have a debt which will make many benefits if the money is invested carefully for a long period on positive activities such as education, health, social benefits, and infrastructure.

The more the public spending is in a government budget, the higher is the standard of living and more jobs are created – including private-sector jobs. This rule has been proved time and again. The link between public investment and national well-being was first seen in the late 19th century.

Of course, borrowed money can be wasted and spent stupidly and benefits can be shared unfairly. The big difference between family and State budgets is that States don’t disappear like bankrupt companies. Good, well-organised investment financed by government borrowing is normally A Good Thing.

The magic numbers

In 1992, European countries voted Yes to the Maastricht Treaty, which thanks to Germany had two magic numbers, 3 and 60. Never allow a budget deficit greater than three per cent; never make public debt greater than 60 per cent of your Gross Domestic Product (GDP). Why not two or four per cent, 55 or 65 per cent? Nobody knows, except perhaps some old bureaucrats who were there, but these numbers have become the Law.

In 2010, two famous economists said that with more than 90 per cent of GDP, debt would be a serious problem for a country and its GDP would go down. That sounds right because interest payments take more out of the budget. But in April 2013, a North American PhD student tried to repeat their results and he found he couldn’t. Using their figures, he got a positive result for GDP which would still rise by more than two per cent per year. The two famous economists had to say they had made a mistake!


Merkel in a wall painting in Lisbon, Portugal’ It shows the Portuguese Prime Minister and Foreign Minister as the German Chancellor’s toys. (Rafael Marchante/Reuters)

Even the International Monetary Fund has said it made similar mistakes, this time with the austerity cuts. We now know, because the Fund was honest and told us, that cuts would hurt the GDP two to three times more than it thought. Europe should be careful, says the IMF, and not ‘drive the economy with the brakes on’. The magic 60 per cent of GDP debt limit and the three per cent deficit limit are not important. But policies stay the same, because the neoliberal fundamentalists look for everything they can find to help their argument.

There are two questions. Why did the debts of European countries go up so much after the crisis in 2007? In four years, between 2006 and 2010, debts went up more than 75 per cent in Britain and Greece, 59 per cent in Spain, and by 276 per cent in Ireland. In Ireland the government said it would take responsibility for all the debts of all the private Irish banks. The Irish people would then be responsible for the Irish bankers. Britain did the same. Profits are for private business, losses are for the people.

So citizens pay with austerity and bankers and other investors pay nothing. After the 2007 crisis, the GDP of European countries went down by an average five per cent. More and more business failures and big unemployment also meant more money to pay for governments when they earn less from taxes.

The New Way of Thinking

A slow economy is expensive – more to pay and less to earn means one thing: borrow more. Saving the banks is the reason for the debt crisis and the austerity today. People were not the problem but the New Way of Thinking is: ‘Punish the Innocent, Reward the Guilty’.

This is not a defence of stupid or corrupt policies such as allowing the Spanish housing bubble to inflate or Greek politicians to hire a lot of new civil servants after each election. The Greeks spend a lot on the military and still do not tax the big shipping companies or the Church. The Church is the biggest property owner in the country. But if you have a problem with your bath and the dining room needs paint, do you burn down your house? Or do you fix the bath and paint the dining room?

The results of austerity for the people are real and well known. Pensioners look in rubbish bins hoping to find a meal. Talented, well-educated Italians, Portuguese and Spaniards leave their countries as unemployment for their age group reaches 50 per cent. There is stress for families. Violence against women increases as poverty and stress rise. Hospitals do not have enough medicine or doctors. Schools get worse, public services get worse. Nature suffers, too, as no money is spent on helping the climate crisis – it’s too expensive. Like everything else, we can’t do it now. We know all this. This neoliberal theory says that markets will be ‘reassured’ by strong policies and will put money in the countries concerned. This hasn’t happened. Pictures of Merkel with swastikas are appearing throughout southern Europe.


‘Hands up! It’s a robbery,’ students and teachers shout at the police during a march in Malaga against the Spanish government’s educational spending cuts. (Reuters/Jon Nazca)

Many Germans think they are helping Greece – but they don’t want to anymore. In fact, most of the bailout money has taken an indirect route: from EU governments to the Greek Central Banks and private banks back to British, German and French banks that bought Greek Eurobonds. It would be simpler to give European taxpayers’ money directly to the banks, except that the taxpayers might notice. Why make a drama over two per cent (Greece) or 0.4 per cent (Cyprus) of the European economy? You might say: ‘Easy. To be sure Ms Merkel is re-elected in September.’

The second question is: why do we continue with policies that are harmful and don’t work? We can look at this problem in two ways. Important economists like Paul Krugman or Joseph Stiglitz believe that European leaders are stupid. The leaders know nothing about economics and are committing economic suicide. Others say that the cuts are what the European Roundtable of Industrialists or Business Europe want: cut wages and benefits, make unions weak, and privatize everything. As there are more inequalities, the people at the top do very well. There are now more rich with more money than in 2008 when the crisis was worst. Five years ago there were 8.6 million very rich in the world with $39 trillion. Today, there are 11 million with $42 trillion. Many small businesses are failing, but the largest companies are rich and paying little tax.

This is not a crisis for everyone and the European leaders are not more stupid than other leaders in the world. But it is all to help the big companies. Certainly, neoliberal ideas play a large part and they make people think there is no other way. But the banks could have been socialized and turned into public companies like other organisations that run on public money. Tax havens could have been stopped There could have been taxes on financial transactions. But neoliberals do not like these ideas (but 11 Eurozone countries will start taxing financial transactions in 2014). I believe in Europe and want Europe to do well. But not this Europe. We are now in a class war that we do not want. The only answer for citizens is information and working together. What one per cent of the people have done, the 99 per cent can change. But we must be quick: there isn’t much time.

Susan George is Board President of the Transnational Institute. She is the author of 16 books. Her two new books are: Whose Crisis, Whose Future? and How to Win the Class War. They are on her website for download and print on demand with six other books.

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