The Stability Pact
The key measures to solve the Euro crisis according to the treaty recently adopted by most of the EU are to establish a balanced budget or a budget surplus for the state sector.
BEARING IN MIND that the need for governments to maintain sound and sustainable public finances and to prevent a general government deficit becoming excessive is of essential importance to safeguard the stability of the euro area as a whole, and accordingly, requires the introduction of specific rules, including a "balanced budget rule" and an automatic mechanism to take corrective action;1;
The drafters of this treaty imagine that it is possible, by an act of international law to impose a unilateral constraint on one item in a mutually dependent complex of relations. The surplus or deficit position of the government sector in the Eurozone depends upon the net positions of all other sectors.
In Table 1 we reproduce in summary form the latest data on the surplus deficit positions of all financial sectors in the Eurozone. All sectors other than the state sector run a surplus - ie, they are building up their financial assets. The change proposed by the treaty is drastic. It proposes in effect to wipe out all net financial transactions between the sectors by changing the net borrowing position of the general government sector from a quarterly deficit of €122 billion to a deficit of 0 or even a net surplus.
But the implication of this would be that the net savings of the household sector, the compnay sector and the rest of the world would have to be reduced to 0, effectively eliminating out all net financial transactions as they exist today.
In the abstract this is possible. If by some means the savings of the household sector could be completely eliminated, if the whole company sector could be made to run at a break even position with no net financial surplus, and if the Eurozone's trade deficit with the rest of the world could be wiped out, then the government sector could run a balanced budget.
At the level of accounting it is possible, but is such a measure compatible with the continuation of a functioning capitalist economy?
Suppose the governments attempt to achieve this by austerity measures - essentially cutting public expenditure. How does this affect each of the other sectors?
The 'household sector', is an amalgum of different social classes. It includes households from the propertied classes who are wealthy enough to have a substantial financial surplus, but it includes far more households who have little or no savings and are more likely to be net debtors. The neo-liberal government austerity measures in the EU today primarily target those on low incomes who have no financial surplus. As such they only have a slight impact on the fiancial surplus of the household sector.
In principle, austerity measures that would reduce the financial surplus of the household sector: for instance steep increases in income tax on higher incomes or a progressive tax on large houses and landed property. The Stafford Cripps austerity policies in the late 1940s were effective in this way. Since such policies - top rates of income tax above 90% are not being followed, the prospect of eliminating the financial surplus of the personal sector is negligable.
In principle it would be possible, for a while at least, for non commercial companies as a whole to run without a financial surplus, or even with a financial deficit, if they were carrying out a large programme of credit financed capital investment. But this scenario is not very likely. Investment by non financial companies tends to be self financing taken accross the sector as a whole. Investment by one company may require external funding, but its purchases boost the profits of suppliers, which means that the sector as a whole tends to self finance.
Firms will only voluntarily seek external finance to expand if they anticipate a high rate of profit on investment, which implies among other things a rapidly expanding market for their products. It is hard to see how this expanding market can be anticipated during a period in which austerity measures are curtailing consumer demand. Beyond that, we have argued earlier that the rate of profit in Europe has only been held up since the 1980s by a reduction in the accumulation rate. An increased investment rate would thus be self curtailing.
Involuntary deficits by industrial and commercial firms are of course possible in the short run when faced with a slump in demand. But their response to this is likely to be to quickly cut costs by shedding labour, so even involuntary deficits induced by austerity would be short lived. Attempting to force industrial and commercial companies as a whole to run at break even point, which the treaty implies, would mean, given the spread of rates of return within the sector, putting a significant fraction of them on the path to bankruptcy. This again is not sustainable.
Table 1 shows that on an annual basis financial companies in the Euro-zone are running a surplus of some €160 Billion and that they are thus responsible for 1 3 of the total deficit of the general government sector.
There is almost nothing that the individual nation state governments can do to eliminate this surplus with the framework of the Euro-zone. Indeed the whole thrust of economic policy in the capitalist world since the banking crisis broke out in 2008 has been to protect the interests of financial companies. They could of course levy heavy taxes on financial firms, but this is greatly complicated by the location of the firms. The countries in the Euro-zone whose governments are in the worst financial position are not necessarily the ones whose financial firms are running the biggest surpluses.
A general reduction of interest rates would cut the surplus of the financial sector, but that, under Euro system, is outwith the power of the nation states. Only the ECB could systematically force down interest rates by buying up national and local governent bonds. This would reduce the cost of re-financing and over time would, to an extent, reduce the financial surplus of the private banking sector.
The whole structure of the treaties governing the ECB has been designed by the Financial sector to prevent the ECB from acting in this way.
The surplus of the rest of the world with the Euro-zone might be reduced and even eliminated by neo-liberal austerity measures. A sufficiently strong recession in the Euro-zone might cut imports sufficiently to eliminate the trade deficit of the zone with the rest of the world. But this of course would only succeed to the extent that the rest of the world itself did not slip deeper into recession.
One effective tool that national governments have traditionally been able to exercise is now out of reach for the Eurozone. They can no longer devalue to bring their trade back into balance. The ECB again could force a devaluation were it to act as the Bank of China used to, and systematically buy up large quantities of dollar securities. But the national governments can not instruct it to do so.
The structure set up under monetary union effectively makes it impossible for national governments to meet the obligations that they have undertaken in the pact. Any serious attempt to impose balanced budgets by austerity measures will be ineffective in its professed aim, and would as a side effect engender a downward spiral of bankruptcies, rising unemployment and deepening economic ruin.