First came the pandemic recession, caused by the decision to shut down entire societies via lockdowns; then came the largest energy and commodity shock in 50 years, caused by the decision to sanction Europe’s largest supplier of gas to the continent. In recent years, EU governments have resorted to massive deficits to paper over the ruinous effects of these elite-engineered crises, much as they did in the aftermath of the 2008 financial crisis. In doing so, they have succeeded in racking up some of the highest levels of public debt in post-war history — and, just like a decade ago, they are now asking workers and ordinary citizens to foot the bill.
With no small irony, the European Commission has just unveiled its draft plan for reducing public debt across the bloc — debts which the Commission previously encouraged. In early 2020, for instance, the EU suspended its notoriously tight budgetary rules in order to, as Commission President Ursula von der Leyen declared, allow countries to spend “as much as they need”. The ECB also stepped in, launching a trillion-euro bond-purchasing programme to help governments finance their ballooning fiscal deficits. The following year, member states also agreed on a much-vaunted, €750-billion Europe-wide “recovery plan”.
At the time, observers heralded these unprecedented measures as evidence that the EU had finally learned from its past mistakes and overcome its pro-austerity bias. Some even described it as the EU’s “Hamiltonian moment”, which signalled that the bloc was finally evolving into a fully-fledged federation. This was wishful thinking. It was only a matter of time before old conflicts re-emerged between Europe’s fiscal hawks — first and foremost Germany — and the high-debt countries of the periphery.
Moreover, for all the talk of the EU’s integration-through-crisis approach, it should be apparent by now that no crisis will be big enough to muster support — among Europe’s national elites or, even more so, among ordinary citizens — for a move towards full-blown federalism. History has its rules, and the economic, political and cultural conditions for that simply aren’t there, and won’t be for a long time. More importantly, such starry-eyed analyses betrayed a fundamental misunderstanding of the true nature of the EU. European economic and monetary integration is a fundamentally anti-democratic project — one that is aimed at placing economic policy beyond the control of voters. Depriving nations of their currency-issuing powers was a fundamental plank of this project, because it meant that governments had little choice but to go along with the policies dictated by the new currency issuer — the EU — regardless of their democratic mandate.
National elites, eager to escape the pressures of their own electorates, embraced the process only for the dramatic consequences of doing so to become apparent in the aftermath of the euro crisis. At this point, the EU employed its powers to subvert democracy and impose crushing austerity across the continent, even against the wishes of elected governments. (Just ask Greece or Italy.)
In this sense, the suspension of the EU’s fiscal rules and the ECB’s transformation into a lender of first resort were extraordinary precisely because they made euro countries somewhat “sovereign” again, whereby democratically elected governments could choose their budgetary policies without the constant threat of retaliation from the ECB or the European Commission. But this is also why it was only a matter of time before these measures were curtailed; after all, they defeated the very purpose of the EU’s project.
The first step in the restoration of the status quo came last summer, when the ECB ended its bond-buying programme and began raising interest rates. The second is the European Commission’s debt-reduction plan, which is little more than a rehash of the old Stability and Growth Pact, first conceived in 1997. According to the proposal, countries with a deficit-to-GDP ratio above 3% or a debt-to-GDP ratio above 60% — the thresholds decided in the 1992 Maastricht Treaty — will be required to implement a fiscal adjustment programme; the higher the deficit/debt, the faster countries will required to bring those ratios down.
Today, around two dozen countries would fall under the scope of the new deficit and debt-reduction plans; the ones required to make the most stringent action would be Greece, Italy, France, Spain and Belgium. These nations would have to commit to a minimum deficit reduction of 0.5% of GDP every year, which could increase to 1.5% in some cases, mainly through budget cuts amounting to several billions of euros every year. In other words, austerity.
For Germany, however, this is still too soft; its finance minister, Christian Lindner, wants a binding and inflexible minimum debt-reduction trajectory of 1% of GDP per year for the worst transgressors. But despite their disagreements, Germany and the Commission ultimately share the same underlying assumptions: that the deficit and debt levels of some countries — depending on how much they exceed a set of arbitrary limits decided more than 30 years ago — are “unsustainable” and that growth depends on “sound public finances”. This is an exact replay of the debate that dominated the euro crisis of the 2010s. Even then, after relaxing fiscal rules to allow for the massive bailout of the banking system, Germany and the EU insisted that there was no alternative to the imposition of harsh fiscal austerity on the great majority of European countries, especially those at the periphery.
These policies didn’t just raise unemployment, erode social welfare, push large portions of the population to the brink of poverty and, in the case of Greece and other countries, create a genuine humanitarian emergency — they also completely failed to achieve their stated aims of kickstarting growth and reducing debt-to-GDP ratios. On the contrary, they drove economies into recession and increased debt-to-GDP ratios. Meanwhile, democratic norms were dramatically upended, as entire countries were essentially put into “controlled administration”. The result was a “lost decade” of stagnation and permacrisis which led to a profound divide between the eurozone’s north and south, and brought the monetary union to the brink of self-implosion.
The whole austerity experiment was such a catastrophic failure — as even the IMF later admitted — that one cannot help but despair at its revival. But ultimately, this is just another reminder that none of the underlying problems of the euro have been resolved: the cultural outlook and economic interests of member states continue to be irreconcilable, and the fate of nations and democratically elected governments continues to be in the hands of unelected technocrats in Frankfurt and Brussels. Yet it’s hard to see how Europe could survive a second round of austerity, which would come at a time when the state of the global economy is far bleaker than it did a decade ago: we are facing high inflation, supply-chain disruptions, global fragmentation and a war with no end in sight at Europe’s border with Russia.
Here, though, is the greatest paradox of the present situation: while the EU is devising a plan to get states to cut their overall budgets, it is also calling on governments to increase their defence budgets to at least 2% of their GDP to comply with Nato’s spending target. And among those countries expected to drastically increase their defence spending are some of the bloc’s most indebted nations (which therefore also face the harshest debt-reduction requirements): Portugal (whose spending stands at 0.8% of GDP), Spain (1%), Belgium (0.9%) and Italy (1.4%).
Just last week, the European Commission announced its billion-euro plan to increase Europe’s capacity for producing ammunition to send to Ukraine, for which member states will have to contribute up to a billion euros — yet another step in Europe’s “switch to war economy mode”, as commissioner Thierry Breton put it. In other words, European countries will soon be required to cut back on social welfare and crucial investment in non-defence-related areas in order to finance the EU’s new defence economy — we might call this military austerity — in the context of the bloc’s increasingly vassal-like subordination to US foreign policy.
All of which points to the inevitability of Germany’s return as the EU’s “economic policeman”. For the past year, the country has been trying to redefine its role in light of the massive tectonic shifts brought about the war in Ukraine — especially Europe’s geopolitical pivot from the West to the East. Perhaps it has finally found one: in the form of a renewed “special relationship” with the US as its primary Western European proxy, particularly when it comes to foreign policy. As Wolfgang Streeck has argued, this would entail re-establishing a position of economic leadership within the EU, on the provision of managing it on Washington’s behalf and of “tak[ing] responsibility for organising and, importantly, financing the European contribution to the war”.
This combination of austerity, renewed German hegemony and aggressive militarism makes the Europe of the past decade look positively benign. But this simply confirms the old adage that, when it comes to the EU, there’s always a way for things to get worse.