EU steps up pressure for austerity measures

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EU steps up pressure for austerity measures
By Peter Schwarz
30 October 2010

The European Union has intensified pressure on its highly indebted member states
to reduce their deficits by drastically cutting public expenditures. The driving
force is Germany, which is ruthlessly using its economic power to dictate terms
to weaker countries.

In the early hours of Friday morning, the European heads of state and government
agreed to tighten the Euro Stability Pact. In the future, states that breach the
deficit ceiling of three percent of GDP will be punished sooner and more harshly
than before. The penalties range from depositing “collaterals” running to
billions of euros, to substantial fines.

In addition, the EU summit decided to establish a permanent crisis mechanism for
the euro zone. This will replace the €750 billion rescue package that had been
set up during the Greek debt crisis to fend off speculation against the euro.
President Herman Van Rompuy was commissioned to draw up corresponding changes in
the EU’s treaties by December.

The goal is a kind of insolvency law for the euro-zone countries. It should,
according to the German Chancellor Angela Merkel, ensure that private creditors
have to take responsibility for losses when a state can no longer finance its
debts. In reality, however, it will not be the private banks and investors, but
highly indebted states that will be the victims of the new rules. They will only
be able to raise government bonds at extremely high interest rates or not at all
if investors lose a portion of their claims when a state goes bankrupt. This
measure serves to increase the pressure for debt reduction as well.

Ahead of the summit, Germany had literally blackmailed the other EU members to
force through its austerity diktat. Chancellor Merkel demanded that sanctions
against deficit offenders should apply automatically in the future, without
requiring any prior decision by European finance ministers. She also demanded
that continued breaches of the deficit rules by an EU member would lead to the
suspension of their voting rights. She threatened that Germany would refuse to
agree to the reform of the Stability Pact if the Treaty of Lisbon (the EU’s
constitution) was not changed accordingly at the same time.

Merkel also used the €750 billion rescue package as leverage; making it clear
that as the largest donor, Germany would not renew it when it expires in 2013.
If no new crisis mechanism were in force by then, Greece, Portugal, Ireland,
Spain and other highly indebted countries would face bankruptcy.

The German ultimatum sparked violent tensions. While Merkel’s demand for
automatic sanctions was supported by several countries in central and northern
Europe, she met with resistance in France and southern Europe.

The loss of voting rights for deficit offenders was almost unanimously rejected.
Even Commission President José Manuel Barroso, not known usually for plain
speaking, unequivocally discarded Merkel’s proposal. It would require that the
Treaty of Lisbon, which only came into force a year ago, be re-negotiated and
confirmed in some countries through a popular vote. This is widely regarded as a
futile exercise. Nevertheless, Merkel reiterated her demand in a government
policy statement before she left for Brussels on Wednesday.

A week earlier, on the fringes of a Franco-German-Russian tripartite summit in
Normandy, Merkel and French President Nicolas Sarkozy had agreed on a joint
course of action. Merkel made slight compromises regarding her demand for
automatic sanctions, while Sarkozy accepted changes in the EU Treaties and
tougher sanctions against deficit offenders.

For Sarkozy, who was at the highpoint of the conflict over pension reforms, the
alliance with Merkel was of great value. While millions of workers were
protesting on the streets of France against an increase in the retirement age,
he received Berlin’s endorsement for his austerity policies.

The alliance between Sarkozy and Merkel is facilitated by the nationalist
politics of the trade unions, who support the policies of their respective
governments. While the French trade unions are seeking to restrain the
opposition to the pension reforms, and categorically reject an offensive to
overthrow Sarkozy, the German unions have not raised a finger to support the
French protests.

The support by the unions also explains why Merkel can adopt such an arrogant
stance in Europe. Many German companies are emerging from the crisis
strengthened because they can enjoy record profits and a stronger competitive
position thanks to years of wage restraint imposed by the unions. For example,
auto manufacturer Daimler has raised its profit forecast for this year from 2.3
to 7 billion euros. At the same time, the unions have supported the development
of a low-wage sector, in which millions now toil on minimum wages.

In Brussels, the German-French agreement met with outrage. The President of the
Euro Group, Luxembourg Prime Minister Jean-Claude Juncker, described it as
“unacceptable”. Merkel and Sarkozy had reached an agreement without consulting
him, he told Die Welt. “The style is simply impossible.”

But after Merkel put pressure on all 26 EU leaders in personal phone calls, she
was largely able to prevail in Brussels. Apparently, the threat of withdrawing
the euro rescue package proved effective. Not a single European government is
willing or able to stand up to the dictates of the banks and corporations, whose
interests Merkel represents. Even Spiegel Online called her actions “pure
blackmail” and stated: “Her hegemonic actions provoke criticism across Europe.”

Merkel has prevailed at the EU summit in her key demands—strict austerity
measures, and the anchoring of a permanent crisis mechanism within the EU
treaties. She moved away from her maximum demands for a withdrawal of voting
rights and automatic sanctions, but these were bargaining chips to increase the
pressure on her opponents.

The change to the EU treaties will be carried out in such a way that it can be
implemented without requiring parliamentary approval or a referendum. No
European government currently believes it could gain a majority of voters for
such a proposal.

http://wsws.org/articles/2010/oct2010/eusu-o30.shtml

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