EUROPE IN CRISIS This book analyzes the European Great Recession of 2008–12, its economic and social causes, its historical roots, and the policies adopted by the European Union to find a way out of it. It contains explicit debates with several economists and analysts on some of the most controversial questions about the causes of the crisis and the policies applied by the European Union. It presents the cases of Iceland, Greece, and Ireland, the countries that first declined into crisis in Europe, each of them in a different way. Iceland is a case study for reckless banking practices, Greece of reckless public spending, and Ireland of reckless household indebtedness. At least seven other countries, mostly from the peripheries of Europe, had similarly reckless banking and spending practices. In the center of the book are the economic and social causes of the crisis. Contemporary advanced capitalism became financialized, de-industrialized, and globalized and got rid of the “straitjacket” of regulations. Solid banking was replaced by high-risk, “casino-type” activity. The European common currency also had a structural problem—monetary unification without a federal state and fiscal unification. The other side of the same coin is European hyper-consumerism. A new lifestyle emerged during two super-prosperous periods in the 1950s to 1960s, and during the 1990s to 2006. Trying to find an exit policy, the European Union turned to strict austerity measures to curb the budget deficit and indebtedness. This book critically analyzes the debate around austerity policy. The creation of important supranational institutions, and of a financial supervisory authority and stability mechanisms, strengthens integration. The correction of the euro’s structural mistake by creating a quasi-fiscal unification is even more important. The introduction of mandatory fiscal rules and their enforcement promises a long- term solution for a well-functioning common currency. These measures, meanwhile, create a two-tier European Union with a fast-track core. This book suggests that the European Union will emerge stronger from the crisis. This book will be of particular interest to students and researchers of economics, history, political science, and international finance, but will also prove profitable reading for practitioners and the interested public. Ivan T. Berend is Distinguished Professor in the Department of History at the University of California, Los Angeles, USA. EUROPE IN CRISIS Bolt from the blue? Ivan T. Berend First published 2013 by Routledge 711 Third Avenue, New York, NY 10017 Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Ivan T. Berend The right of Ivan T. Berend to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Berend, T. Ivan (Tibor Iván), 1930– Europe in crisis : bolt from the blue? / by Ivan T. Berend. p. cm. Includes bibliographical references and index. 1. Recessions—Europe—History—21st century. 2. Europe— Economic policy. I. Title. HB3782.B47 2012 330.94—dc23 2012016014 ISBN: 978–0–415–63722–0 (hbk) ISBN: 978–0–415–63724–4 (pbk) ISBN: 978–0–203–08470–0 (ebk) Typeset in Bembo by Keystroke, Station Road, Codsall, Wolverhampton CONTENTS List of tables vii Preface ix Introduction: “Unprecedented freedom from cyclical instability” 1 1 Variations on a theme: Iceland, Greece, and Ireland’s road toward the crisis 7 Variation no. 1: Iceland 7 Variation no. 2: Greece 13 Variation no. 3: Ireland 22 2 The fall—of 2008: from the financial crisis to the crisis of the euro27 The exploding financial crisis 27 Portugal 31 Italy 32 Spain 34 Do the “transition” Eastern peripheries have a special crisis? 36 vi Contents Hungary and Latvia: lost in transition? 42 The all-European crisis 46 The decline of the real economy 49 The crisis of the euro 52 3 The economic causes: contemporary European capitalism:The financialized, deregulated market system in the globalized world economy and partially integrated Europe 60 The financialized capitalist system 63 Financialization and globalization 66 The deregulated market system 68 The structural tribulations of the European Union and the euro-zone 80 The “original sin” of the euro’s construction 85 4 The social causes: living beyond our means 91 The new dream: consumption 91 A new social setting for consumer society 95 Consumerism 99 Consumer infrastructure and stimulus 104 Credit consumerism 108 Will “Social Europe” be rebuilt? 112 5 Which way Europe? Managing the economic crisis and the way out 115 Crisis management: stimulus packages and bailouts 115 Crisis management: austerity measures 118 The return to a regulated market system 122 Structural-institutional changes in the European Union 127 Future alternatives for the European Union and the euro-zone 131 Notes 140 Index 166 TABLES 2.1 GDP/capita in the South European periphery—compared to Western Europe, 1913–2006 29 2.2 GDP/capita in Central and Eastern Europe as % of the West 37 2.3 Main economic parameters of the European Union 51 PREFACE The shock that the European Union is endangered inspired me to write this book. I belong to those generations that had dramatic and bitter personal experiences during World War II. I found personal happiness in the founda- tion and development of the EU, since it has been based on solidarity and eliminated the most dangerous conflicts within the continent. I considered the integration of Europe one of the greatest achievements in the entire history of the continent. In recent years, politicians, economists, and journalists have made dramatic critical remarks about the inner cohesion of the EU and proposals for a lasting solution that would save the common currency and the Union. The solution strongly depends on a deep understanding of the roots and causes of the European crisis. This book, evidently with several other similar works, wants to serve this goal. I am in debate with many other analysts on the topic and convinced that the confrontation of views helps create a better understanding. There are very few world problems today that attract more public interest, and generate more questions and emotions than this crisis. This book also offers a complex description and analysis for the interested public. The crisis is not ended yet and I finished the manuscript in early 2012. During the technical preparation of the publication in the summer of 2012, I was able to add only a few sentences to the text. I still hope, however, that the analysis and conclusions of this work that are based on the lessons of long historical developments are well-founded and will stand the test of time. x Preface I am in debt to the History Department of the University of California Los Angeles. My Department organized two panel debates on the European crisis. As a member of these panels, I profited from the preparations and debates and got further incentive to write this book. I am most grateful to the only reader of the manuscript, my wife Kati, who, as always, contributed a lot to the final version of this work through her questions and critical remarks. Lastly, I should like to thank Routledge, and personally the Editor, Robert Langham, and the Copy-editor, Ian Critchley, for their excellent work that made possible the exceptionally fast publication of this book. Ivan T. Berend June 1, 2012 INTRODUCTION “Unprecedented freedom from cyclical instability” The half-century after World War II exhibited cyclical trends in Europe. Beginning in the reconstruction years, Western and Southern Europe experi- enced history’s most exuberant boom until the late 1960s–early 1970s. This was based on a new technological revolution, imported from the United States, signaled by atomic energy and the opening of the age of computer, transistor, and chips. Troubles started gathering from the late 1960s, with increasing inflation and slowing down. Two oil crises and a marked structural crisis generated the new phenomenon of stagflation and an economic down- turn until the mid–late 1980s. Since that time, the communication revolution, signaled by the start of the personal computer age and followed by an endless wave of electronic inventions and innovations, generated a new boom period that lasted for an additional quarter-century. This last period became the age of globalization, characterized by an exceptional increase of three-and-a-half times in trade from $1.7 trillion to $5.8 trillion between 1970 and 2000, and a unique financial and credit expan- sion. Foreign Direct Investments totaled $2.5 trillion by 2004, and daily financial transactions jumped from $15 billion to $1.3 trillion in the quarter- century after 1973.1 Deregulations changed “the rules of the game” and the characteristics of the capitalist market economy. The morals of solid banking, together with trust in institutions, were lost. Gambling replaced a solid business attitude and increased both gains and risks. The boom culminated in the first years of the twenty-first century. The Gross Domestic Product of the most advanced EU-15 countries increased by nearly 58% between 1992 and 2 Introduction 2005, while the per capita income grew by more than 60%.