EU rescue deal: crisis, cuts and class struggle on the order of the day

The leaders of the EU have come to an agreement on a new rescue package for the ailing trading bloc. But this is a show of mutual weakness, not solidarity; and the working class will be asked to foot the bill. Crisis and chaos continue to loom on the horizon.

After four months of paralysis, the leaders of the EU’s 27 member states came to an agreement last week over how to address the deepest crisis Europe has faced since the Second World War.

Under the proposed agreement, which has still to be agreed by the European Parliament, in addition to a proposed EU budget of €1.074 trillion, a new “rescue package” worth €750 billion will be distributed in the form of grants and loans to assist struggling European economies with their post-Covid recoveries.

Following four days of tense negotiations and frantic backroom deals, the European leaders emerged all smiles and elbow bumps as they announced the news. French president Emmanuel Macron hailed the agreement as “an historic day for Europe”, while the Spanish Prime Minister, Pedro Sanchez, announced, “One of the most brilliant pages in EU history has been written”.

But while the agreed rescue package may succeed in delaying the breakup of the EU, which had emerged as a real possibility, it is more significant for what it has not solved than what it has. The deep cracks in the foundation of the European project have only been papered over, and will widen as the real impact of the economic crisis begins to be felt.

Merkel shifts position

Previous attempts to create a unified solution to the crisis had foundered on the increasingly fractious North-South divide that first burst to the fore during the Eurozone crisis in 2009 and resurfaced in the early stages of the Covid crisis. On the one hand, more heavily indebted southern states such as Italy demanded that a Europe-wide stimulus should take the form of grants funded by commonly issued debt in the form of “Eurobonds”. But this proposal was indignantly rejected by “frugal” northern states, led by Germany, who insisted that relief should come in the form of loans, contingent on a programme of economic “reforms”.

EU agreement Image NATOHaving dismissed common debt as illegal, Merkel discovered another “solidarity clause” in the Treaty that would allow for it. This only goes to show flexibility of ‘constitutional’ principles / Image: NATO, Flickr

The divide over this question was so bitter that the previous summit of EU leaders, on 23 April, had broken up amidst mutual recriminations, without even a joint statement of conclusions to show for it. Macron even threatened: “Europe has no future if we cannot find a response to this exceptional shock.”

And yet the turning point came on 18 May, when Macron and the German Chancellor, Angela Merkel, released a joint statement, proposing that the European Commission borrow €500 billion and distribute it in grants to member states. This united front deprived the “frugal four” of their most powerful member, and shifted the balance towards a deal, albeit a less generous one. But why the sudden rapprochement between the bloc’s two most powerful countries?

Certainly, one thing that would have been on the minds of the German and French leaders was the fraught political situation in Italy, which had been hardest hit by the pandemic and was facing economic catastrophe. The complete failure of the EU or its member states to provide support in Italy’s time of need had pushed anti-EU feeling to an unprecedented and dangerously high level, raising a genuine possibility that Italy would crash out of the union. But this was not a new factor in the situation, and if the problem was just Italy, some watered-down concessions could have been thrown Italy’s way covered in a mountain of phrases.

Merkel’s sudden change of position overturned over a decade of German resistance to common European debt. In 2012, she even announced that there would be no Eurobonds “as long as I live”. As late as March this year, she maintained her opposition to the idea, arguing that it would violate a “no bailout” clause in the EU Treaty.

And yet the €750 billion rescue fund, which was agreed last week, will be financed from the issuing of bonds from the EU itself, which will be repaid through future budgets. While this does not equate to the pooling of Eurozone debt and will not directly affect member states’ cost of borrowing, to all intents and purposes this is a common European debt instrument, which until recently had been fiercely opposed by the representatives of German capital.

Having previously dismissed common debt as illegal, Merkel suddenly discovered another “solidarity clause” in the Treaty that would allow for such a move. This only goes to show flexibility of ‘constitutional’ principles when the interests of the major players are at stake. But in reality this is not the product of a new interpretation of the Treaty of Lisbon. What changed between March and May was the true depth of the economic crisis became much more clear, particularly in relation to Germany.

Deep crisis

Germany has entered a deep recession. German GDP fell by 2 percent in the first quarter of 2020, and the figures for the second quarter, released today, show a further slump of 10.1 percent. A recent report from the European Commissioner predicted that over the whole of 2020 the German economy will shrink by roughly 6 percent, with the economy still smaller at the end of 2021 than in 2019.

These figures are only the tip of the iceberg. The EU economy as a whole is expected to shrink by over 8 percent in 2020 – a slump twice the size of the Great Recession of 2009. But even this is the best case scenario. The Commission’s report makes two important assumptions: that a second wave of the pandemic will not cause major economic disruption, which is extremely unlikely; and that trade with the UK will remain unchanged, which judging by the progress of Brexit negotiations also seems over-optimistic. It is therefore possible that EU GDP could fall by as much as 15 percent this year.

Even before Merkel’s epiphany on the road to Brussels, the most sober strategists of German capital had already begun to shift their position, as the true depth of the crisis came into view. In late March one of Germany’s leading economists, Michael Huther, who had long been a fierce opponent of common European debt, joined six other German economists in calling for the Eurozone to issue joint “European crisis bonds” worth €1 trillion to finance the recovery.

The sudden conversion to European brotherhood and solidarity reflects the simple fact that Germany is set to face its deepest crisis since reunification, and as a heavily exporting nation its recovery will depend almost entirely on selling goods to the European Single Market. The growth of protectionist tendencies in the USA and China will only make Germany’s situation more acute.

The thinking of the German capitalists was expressed astutely by Franziska Brantner, of the German Green party, who said, “We can’t revive our economy after this crisis when half the single market is no longer functioning”, adding, “It’s an existential issue.” Having become increasingly dependent on Germany the weaker European economies are now threatening to drag Germany down with them. In such a situation, its former frugality has flown out of the window.

Another important factor has been the role played by France and its president, Emmanuel Macron. The deal is widely perceived as a political victory for Macron who has presented himself as not just a French but European leader, and a committed defender of the struggling southern states. But behind the declarations and dramatic gestures there is hard-nosed national interest.

It is interesting to compare France’s position today with that of the Greek crisis of 2015. In 2015 the “Socialist”, Francois Holland, may have been more sympathetic to the Greek situation than his German counterpart, but he ultimately supported the crushing of the Greek people by austerity. Today Macron, a self-proclaimed Liberal, who has spent the last three years trying to strip back labour rights and welfare for French workers, is now at the forefront of calls for Eurobonds and generous grants to struggling member states. What can explain such a strange transformation?

Clearly, economic and fiscal collapse in Italy and Spain, which are considerably bigger economies than Greece, would surely make itself felt across the Alps and the Pyrenees. But even more significant is the fact that France itself has become a “Southern” country. French state debt is projected to be 115 percent of GDP by the end of the year, while the French economy is predicted to lose 10.5 percent of GDP this year in a best case scenario, only slightly less than Italy and Spain (both set to lose 11 percent). France itself needs aid.

This new, unified response is therefore a product of mutual weakness, not solidarity. The powers of Europe have opted to hang together, for now, for fear of all the more surely hanging separately.

Bitter pill

Rather than strengthening the EU and marking a step forward in European integration, as some have argued, the compromise reached last week will actually serve to weaken EU institutions in favour of national budgets, and is preparing the ground for even more bitter conflicts over future budgets.

Orban Image EU2018BGIn a typical EU fudge, a clause linking access to EU funds with respect for the “rule of law” had been dropped by the European heads of state in order to secure the support of Hungary’s Viktor Orban and the right-wing Law and Justice Party government in Poland / Image: EU2018BG

In order to win support for grants and loans to individual member states, large chunks of the proposed EU budget were cut out, including funds intended to support green industries, healthcare and medical research across the bloc. This means the EU as an organisation will be less-well-equipped to combat two of the biggest crises facing the world over the next seven years.

This attack on the EU budget in order to justify borrowing for member states was immediately picked up and condemned by members of the European Parliament, who have the formal right to reject the proposal of the European Council, leaving the rescue plan suspended in mid-air.

European Commissioner, Ursula von der Leyen, had to concede that the proposal was “a bitter pill to swallow” during a debate on Thursday 23 July, in which a large majority of MEPs voted in favour of a resolution stating that they “do not accept” the terms of the deal and may “withhold their consent”.

This is not the only area of dispute. In a typical EU fudge, a clause linking access to EU funds with respect for the “rule of law” had been dropped by the European heads of state in order to secure the support of Hungary’s Viktor Orban and the right-wing Law and Justice Party government in Poland for the deal. MEPs are now demanding that this “rule of law” clause be included after all, a move which would provoke a major conflict with Orban in particular, who has threatened to veto any deal that included such a clause. So much for European unity!

There is also the vexed question of who pays for the huge extension of borrowing by the EU commission. The EU’s debts are guaranteed by its budget, but the budget is almost entirely funded by member states. By the time the next budget is to be agreed, in 2027, interest payments on the EU’s €750 billion debt will either have to come from further cuts to the budget, a large increase in EU-wide taxes, or by increased contributions from member states. This is sure to become a major point of contention in the future, with richer states like Germany, the Netherlands, Austria and Sweden all securing increased rebates on their budget contributions, while poorer states are likely to be even less able to pay in future. In short, this deal could well prove to be little more than robbing Peter to pay Paul.

Attacks on the working class

Finally, perhaps the most important question of all is what effect the rescue package will actually have in the states worst hit by the crisis, and whether it will be sufficient to hold the European project together over the coming years.

Certainly, the prospect of billions of euros in grants has been welcomed by the Spanish and Italian capitalists, and their leaders have declared this an important victory. But they too have had to accept conditions which may turn this into a somewhat Pyrrhic victory. First, of the €750 billion, only €390 billion will take the form of grants, of which €312.5 billion will go directly to member states. The rest will take the form of loans, which will offer cold comfort to Italy, with its unaffordable and expanding €2 trillion debt pile.

Further, before the money arrives in 2021, recipients will have to submit grovelling applications to the fund, setting out how they plan to “reform their economies to stimulate the recovery”. Whilst the process may not be as brutal and demeaning as the memoranda forced upon Greece, the fact is that in order to access the €81 billion grants promised it under the terms of the deal, Italy for example will still have to pledge to cut social services, pensions and workers rights before it sees a single euro of so-called rescue cash.

In Spain there is already talk of the EU demanding a reform of the pensions system (read a counter-reform) and for the Spanish government of PSOE and Unidas Podemos to abandon its stated intention of reversing the labour counter-reform of the previous right wing PP government. This will put the coalition between Sanchez and Iglesias under strain, as well as their credentials as a “progressive government.”

Sanchez Image EU Parliament FlickrIn Spain there is already talk of the EU demanding a counter-reform of the pensions system / Image: EU Parliament, Flickr

To make matters worse, if any member state (such as the Netherlands) feels that another is failing to follow through on its promises of “reform”, it will have the right to object, which will have the effect of freezing further payments from the Commission for up to three months.

These conditions guarantee that for the talk of solidarity and aid, it will be the workers who pay for this rescue package in the form of lower wages, worse conditions, and cuts to pensions and social services, while southern bosses protect their profits with EU-funded subsidies. Rather than alleviating the suffering of the masses, this “solution” will only exacerbate the crisis for millions, and pave the way for even bigger political explosions in the future.

Either southern governments will do as they’re told and carry out cuts, which will provoke a revolt on an even bigger scale than the strikes that have gripped France over the last couple of years. Or, under pressure from the masses and threatened by the nationalists to their right, those governments will not carry out the cuts, provoking major confrontations with the EU on a level surpassing the revolutionary events in Greece in 2015.

The only other alternative is that northern countries, i.e. Germany, pay more to maintain the status quo. But as we’ve seen with the rise of the nationalist “Alternative for Germany” party (AfD), this cannot go on much longer. The dominant wing of the German ruling class still sees its only salvation in preserving the Single Market, but a vocal minority is demanding that Germany must not pay for the spending of other countries, regardless of the consequences. This will gain traction as the crisis continues, and in the absence of a genuine socialist alternative. In short, as long as the crisis of European capitalism continues either the southern nationalists will gain, or the northern nationalists, or most likely, both. Come what may the workers will be made to foot the bill.

No solution under capitalism

Those on the reformist left who have hailed this deal as a “return to Keynesianism”, a “battle for the soul of the EU” or even a “New Deal for Europe” are completely deluded. First of all, to present Keynesian policies or the New Deal as a gain for the working class is totally misleading. These measures were implemented by the capitalists solely in order to save the capitalist system at a time of deep crisis, while the workers continued to suffer poverty and unemployment. Why should anyone in the left want to save capitalism when it is dragging humanity into barbarism?

Further, the measures agreed do not represent a lasting change of heart on the part of the capitalist governments from “neoliberal austerity” to “social keynesianism”. Rather, the debt which the EU is now issuing will go to bail out the capitalists and will have to be paid eventually by the workers, as we have explained. This is not dissimilar to what happened after the 2008 crisis. At that time there was also grandiose talk of “stimulus plans” and billions were poured into the bank bailout in an attempt to prevent the wholesale collapse of the system. That led to a massive increase in the national debt, which two years down the line transformed into massive austerity cuts in all countries, as the capitalists made the workers pay for the price of bailing out their system.

What is urgently needed is an socialist, internationalist, working class alternative to the EU. The emerging struggles of the workers against their own capitalists at home must be united across national lines into an international fight to overthrow the EU and its institutions, which are nothing more than an alliance of the ruling classes of Europe.

Not EU-wide debt and austerity but a European planned economy is the only solution to the crisis and the only foundation capable of uniting the people of Europe on the basis of genuine solidarity. Not the capitalist European Union but a Socialist United States of Europe offers a better future for the masses of Europe and the world.