Most European countries have begun to relax quarantine. The level of spread of the virus have begun to decline, but the economy has continued its downward curve. The eurozone contracted by 3.8 percent in the first quarter compared to the last three months of 2019, what leads to an annualized drop of 14.4 percent, sharply exceeding the decline in the United States itself.
The largest declines occurred in France and Spain. In the case of Germany, the eurozone's strongest economy, a 6.3 percent contraction is expected for the year, as data shows that retail sales fell at the fastest rate in more than a decade, despite the increase in online sales and food purchases.
For the second quarter, a further decline is forecast, as the quarantine took effect in the first weeks of March. Given the optimism that some circles have begun to express about how the European economy would recover fast after the lifting of the lockdown, the head of the European Central Bank (ECB), Christine Lagarde, has put a halt to their expectations by warning that “the eurozone economy could contract by up to 12 percent this year and the shape of any recovery is very uncertain. The eurozone economy has contracted at a magnitude and speed unprecedented in peacetime” (Sin Permiso, April 25). A second wave of massive contagion cannot be ruled out, and the situation could get worse.
Crashes and disputes
There is talk of an EU’s ambitious stimulus plan for May, but the truth is that the rescue policies that have been adopted for the region until now have fallen far short of the demands of the most affected countries. Critics claim that the ECB did not expand its 750 billion euro Pandemic Emergency Purchase Program (PEPP) aimed to buy government debt and corporate bonds. The ECB's reluctance to improve the PEPP has raised doubts among investors about the EU's commitment to act as a guarantor for debt at the current situation.
So far, the controversy over the extent and nature of such aid has not been resolved. Although Lagarde has been more flexible in reaching a settlement, Austria, Germany, the Netherlands and Finland ‑countries with stronger economies- refuse to shoulder the cost of bailing out weaker nations. This has frustrated the plan of issuing the so-called eurobonds or coronabonds, which should be supported by the whole of the EU. The leaders of the region had already agreed on a 540 billion euro emergency package that would take the form of loans from the European Stability Mechanism -an intergovernmental organization for crises management that serves as guarantor of the eurozone’s financial stability-, loans that include strict conditions on spending and repayment for the member states that apply for them. Only 38 billion euros have been offered unconditionally to support the health system of the whole euro area. So far, community aid has consisted only of loans, but those are a time bomb. Guy Verhofstadt, former Belgian Prime Minister, said that the accumulation of more loans by countries in danger could cause a “new sovereign debt crisis”: “Transfers are like water in fire-fighting, while loans are like petrol”. Instead, direct cash transfers are called for.
German leaders circumscribe the recovery plan through loans and more guarantees, in exchange for more investment from private sector companies. But this poses insurmountable limits to any prospect of recovery, as companies are reluctant to invest amidst so much uncertainty.
Meanwhile, depressive tendencies are beginning to make themselves felt. An illustrative example is that of Italy. Coronabonds could help keep the country's finances afloat during the immediate period, but they do not serve to restore the economy, employment and investment. The IMF expects that the annual primary surplus of public finances will be transformed into a deficit of 5 % of GDP, while the debt will increase to 155 % of GDP. This is why the interest demanded by those willing to buy Italian government bonds has increased, especially in relation to Germany, where the interest is, in practice, negative. On this note, the consulting firm Ficht has just downgraded Italy's sovereign debt rating.
Italy has highlighted the insuperable limits of the capitalist integration process. Under the common umbrella of the European Union, the imbalances and inequalities among its members have not only not lessened but they accentuated. The eurozone has become a German protectorate at the expense of the most vulnerable countries. German capital has taken advantage of the free movement of capitals, goods and workers enshrined by the EU to strengthen its penetration of the region. Integration under capitalism is unfold by the methods that are characteristic to it. It does not cancel out but rather exacerbates national rivalries and capitalist competition.
All this confirms very clearly the laws of unequal exchange, which is inspired, in turn, by the law of value. Germany has a higher organic composition of capital (OCC) than Italy, because it is more technologically advanced. Therefore, in any trade between the two, value will be transferred from Italy to Germany. “This explains why the core countries of EMU [European Monetary Union] have diverged from the periphery since the formation of the eurozone. With a single currency, the value differentials between the weaker states (with lower OCC) and the stronger (higher OCC) were exposed, with no option to compensate by the devaluation of any national currency or by scaling up overall production. So the weaker capitalist economies (in southern Europe) within the euro area lost ground to the stronger (in the north)”. (Michael Roberts, April 25).
In this context, while the German economy grew an average of 2.0 % in real terms and the eurozone 1.4 % annually during 2010-2019, real GDP growth in Italy was only 0.2 % in the same period. This has put the banking system in an extremely tight spot as it holds many uncollectible loans.
Interest on debt has become an increasingly unsustainable burden. Contrary to what is often pointed out, Italy has been applying permanent austerity, reaching primary annual surpluses (e.g. tax revenues exceed expenditure) in the last decades, but they turn into deficits when debt service payments are incorporated. These cuts have affected all public services, in particular the health system, which has been cut by 37 billion euros in the last four years and it is what explains its current deterioration and the difficulties that Italy is facing in the fight against the pandemic. In general, this is the path that all European countries have followed after the financial crisis of 2008. The initial stimulus packages, implemented in 2008 and 2009, were followed by severe budget cut plans, including even the powerful German economy. Now, without waiting for the solution to the pandemic, the weight of the crisis is already being unloaded on the workers with salary cuts, layoffs, lack of income for the most precarious sectors and the risk to the health and life of the population. Most resources have been destined to save capitalists, and only in a residual way to face the social and health crisis. But, unlike 2008, this capital rescue will not be able to avoid massive bankruptcies and layoffs.
Alternatives at stake
The coronavirus has the potential to accelerate the disintegration of the European Union. The mirror image of Italy, Spain and the weaker nations of the continent could be found in Greece. The real GDP is even 25 % lower than in 2010. Greek banks have the highest level of late payment of loans in Europe.
However, nationalist tendencies are far from offering a way out. The British Conservative government, which embodies the Brexit open transition, is not implementing any different recipe than its former European Union partners, as it prioritizes the rescue of big capital. And it remains to be seen what the economic effects will be once the separation from the EU, which has only just begun to be implemented, is consummated. The way out may be even more traumatic for the countries that make up the eurozone. The abandonment of the common currency and the return to a currency of their own, for the time being, would imply a devaluation of workers' salaries, which would become established in the new currency, while debts to creditors would continue to be denominated in euros. A rupture could be a leap in the dark, depriving the country in question of its free access to the European market, without this being counterbalanced by the competitive advantages of having a currency devalued against the euro, all the more so when we are heading for a new global depression. This is what explains the reservations of the local bourgeoisie in taking this step. In any case, we should not rule out a scenario in which a split between the North and the South may occur. To the capitalist options at stake, both Europeanist and nationalist, we oppose a reconstruction of Europe on new social bases, based on workers' governments on the continent, and a concentration of national savings and resources in the hands of the State, taking control of the banks and the great springs of the economy and industry in order to put them at the service of social needs, and to wage a battle in order to properly confront the health, social and economic crisis that has deepen with the pandemic.