European crisis about much more than finance

The magnitude of Europe’s sovereign debt crisis goes well beyond finance. It goes to the heart of the globe’s dominant governance system of representative democracy in partnership with free market capitalism. Even classical Marxism is getting a re-look as the world seems to be poised for epoch making fundamental changes that are bound to see some serious turbulence over the next decade or two.

Four euro zone governments have already fallen by the wayside as a result of the financial crisis. In two instances, Greece and Italy, there have been an effective suspension of democratically elected representative governments and the installation of technocratic governments.

In Greece prime minister George Papandreou resigned after effectively being denied the democratic route of a referendum on EU imposed financial policies. He was replaced by the vice president of the European Central Bank Locas Papademos.

In Italy prime minister  Berlusconi had to make way for a coalition government of non-elected technocrats, lawyers, bankers and diplomats led by Mario Monti – a man with a degree from Yale University, an academic who has  served in various capacities as European commissioner, who was appointed life long senator in Italy only weeks before his elevation to the position of prime minister.

Some of the loyal members of ousted prime-minister Berlusconi’s party complained of a coup d’etat engineered by bankers and the European Union.

Under the headline The day European democracy died Janet Daley of The Telegraph wrote with reference to developments in Greece: “The plan to tackle the euro zone crisis will only render ordinary people more powerless. Democracy went down in a blaze of glory last week.”

After the installation of the technocratic government in Italy, Marcello Musto, professor of political theory at the York University of Canada, wrote in an article for Global Research: “The separation between economics and politics that differentiates capitalism from previous modes of production has reached its highest point. Economics not only dominates politics, setting its agenda and shaping its decisions, but lies outside its jurisdiction and democratic control – to the point where a change of government no longer changes the direction of economic and social policy.”

Musto wrote that  recent events in Greece and Italy are a striking illustration of these tendencies. Behind the facade of the term ‘technical government’ – or ‘government of all the talents,’ as it was known in Marx's day – we can make out a suspension of politics (no referendum, no elections) that supposedly hands over the whole field to economics. In an article of April 1853, “Achievements of the Ministry,” Marx wrote: “The best thing perhaps that can be said in favour of the Coalition ["technical"] Ministry is that it represents impotency in [political] power at a moment of transition.” Governments no longer discuss which economic orientation to take; economic orientations bring about the birth of governments.

At the end of last week the president of the European Commission, José Manuel Barroso warned that in his estimation there are only three weeks, until the scheduled EU leadership summit on 9 December, left to save the euro.

In line with the v’iew punted by Germany’s chancellor  Angela Merkel, with apparent French support, he said that without greater European integration, convergence and financial discipline it would not be possible to save the common currency. “The moment of truth has arrived.”

Greater integration, with the accompanying loss of some sovereignty it implies, will however not be all that easy. Apart from popular resistance that can be anticipated,  in Germany it would probably require a change to that country’s constitution.

The two big players in Europe, Germany and France might also not be as sound financially as is generally believed.  Jean-Claud Jucker, present chair of the euro zone and premier of Luxemburg warned that Germany should not be too arrogant about the troubles of others and pointed out that proportionally that country’s debt is larger than that of Spain.

Ironically Italy’s budget deficit of 4.6% of GDP last year is similar to that of Germany and less than France’s 7.1% and the UK’s 10.3%. It has a surplus on its primary budget, excluding debt-interest payments, and its debt is set to start declining from next year. About half of government bonds are owned by domestic investors and the country has one of the highest savings rates in Europe while its banks passed two rounds of EU stress tests.

In recent weeks there  hasalso  been a lot of volatility surrounding France’s sovereign bond markets, while its banks are probably the most exposed to what increasingly seems like a likely Greek default.

Behind the market volatility surrounding French bonds lie concrete problems. Even Prime Minister François Fillon has spoken openly about the risk of bankruptcy. "The word bankrupt is not an abstract term anymore," he said as he presented the country's second cost-cutting programme a week ago Monday. In total, he wants to save almost €65 billion ($86 billion) between 2012 and 2016. He plans to raise value added tax and levy a tax on the rich while cutting state expenditures.

Meanwhile, the country's mountain of debt is likely to grow. Currently, France has debts totalling €1.7 trillion ($2.3 trillion), representing around 85 percent of its total economic output. The European Commission forecasts suggest that figure will swell to 90 percent of GDP in 2012.

And the fallout of an implosion in Europe, would be felt well beyond. In the words of The Telegraph’s Jeremy Warner: “A eurozone implosion would amount to the biggest bankruptcy in history. There could be no benign outcome to such an event. To reapply to the eurozone what Larry Summers, the former US Treasury secretary, said about the prospect of an American debt default, it would be “like Lehman’s on steroids”. Banking systems would collapse, credit would dry up, and world trade would go into freefall. The consequences would be felt everywhere, including in the US and China.”

So acute has the fear of the sustainability of the present Western model of a governance partnership between representative democracy and free market capitalism become, that even among the most conventional of economists we suddenly see Karl Marx’s theory being dusted off again – if it can ever rid itself of all the baggage that Soviet style communism has loaded on its back, is debatable but dire need to find alternative guiding principles is undoubted.

Representative democracy got itself inextricably intertwined with capitalism as practised in a free market economy. Along the way fixed values like the independent measurability of wealth (a la a gold standard) fell by the wayside. Over the last at least four decades or more representative democracy allowed itself to give in to the temptation of buying votes under the false belief that each generation could boost its standard of living by creating debt that a next generation will repay. The assumption was that the economy could sustain perpetual growth.

The chickens are finally coming home to roost as we discover increasingly that under the dual strain of ever mounting debt and depleting natural resources, the heaven on earth that we were promising ourselves has become unsustainable. The system’s problems are further exacerbated in the West or so-called developed world by factors like aging populations and climate change – the convergence of which is making for a perfect storm.